One of the on-going behavioral themes of the rally in equity markets since March last year has been the persistent outperformance of small caps. A “pure” definition of a bull market in equities is broad participation where the average listed stock makes new highs. OK that is a rather “loose” definition and of course open to interpretation. But a fact is a fact, last week the Dow World Small Cap index registered a multi-week high and continued to outperform the large cap biased Dow World. For whatever reason world equity markets are in a bull market and we see no reason as to why equities are about to fall over and “re-test” the lows of last year as many pundits continue to preach!
The US Treasury market continues to torment us. We have been bearish on the treasury market now for over 12 months and have little to show for our efforts. Anyway we continue to hold on to our shorts. Perhaps Christmas will indeed come in July. With articles like this: U.S., U.K. Move Closer to Losing AAA Debt Rating, Moody’s Says and this: China’s Wen Rebuffs U.S. Calls for Stronger Currency
we think it is only a matter of weeks (as opposed to months before US Treasuries breakdown. Of course there are other reasons why treasuries should break down. Have you seen the behavior of shipping stocks (SEA) and shipping rates lately (of the Baltic variety)?
Arguments in support of the world economy not improving are getting rather long in the tooth!
Junk grade bonds generally don’t advance unless there is growing confidence of less of a chance of default…..which is a function of better cash-flows (albeit a perception thereof). This should be added evidence towards higher rates (lower US Treasuries).
Our frustration with the lack of a breakdown in US Treasuries are being echoed by a lack of bullish conviction (seemingly) in the commodity market. Yes on the face of it commodity prices (as per the CRB Futures index) have gone nowhere. However, beneath the scenes spot commodity markets are trading at multi-week highs. We are in no doubt that we are in the midst of a commodity bull market, only conditions of contango and the lack luster performance of heavy weight commodities such as gold and crude (40% of the CRB) create a bearish illusion!
Of course a breakdown in the USD Index will help the plight of the CRB and Gold. Now it seems like we may well get that illusive breakdown in the USD Index. The Euro has started to breakout and if it manages to get above the 1.38 level it should spark a powerful short covering rally. A break above the 1.38 level in the Euro would coincide with a material close below the 80 level on the USD Index and generate a significant sell signal for trend traders at least.
It is said that Kennedy Senior decided to sell all his holdings of stocks in 1929 and go short a few more when a shoe shine boy or taxi driver told him all about what stocks to buy. Well how much of that is fact or fiction is a matter of conjecture. Anyway the story sounds cool enough. On a similar note, acts of stupidity like this; Hefty mum set to become super-sized ring a similar tune to bell boys talking about shares in elevators!
Oh my goodness! I don’t think buying USDs to support this sort of behavior will ultimately turn out to be a wise investment decision.
Perhaps on unrelated matters the USD Index starts to take strain. It has been interesting to note that if you look at the behavior of emerging market currencies relative to the USD the picture looks decisively bearish towards the USD. Where emerging market currencies go against the USD so too will developed currencies including the Euro and CHF.
It seems like the “carry trade” has seen better days, then again maybe it is merely in the process of taking a breather. We would get worried about the carry trade if junk grade corporate bonds (JNK & HYG) and emerging market bonds (PCY & EMB) were in trouble but of course they appear are far from looking bearish.
All in all a constructive week for equity market bulls and USD bears but a somewhat indifferent week for directional bets on commodities and US treasuries. We continue to be bulls of equities, commodities, and bears of the USD and treasuries……..a position we have had in over 12 months.
