The Daily Trading Report

We find ourselves in somewhat of a predicament, although we still have yet to see breaches of key pricing levels in the major asset classes we follow those “support” lines are getting way too close for comfort. Anyway let us assume for a minute that we do see beaches of “support” on the Wilshire 5000 and the Russell 2000 over the coming days (perhaps hours). What then, do we get bearish? Well yes one would logically think so but it is not that simple. Stocks are already in a very oversold condition. Based on the percentage of stocks trading above their 50 day moving average on the NYSE, the average stock in the US is already as oversold as it was in early March last year.  If the Wilshire were to break below the 11,000 level (about 2% away from where it is currently trading) then stocks would enter an extreme oversold condition challenging that of late October 2008! So in essence if one were to go short now then you are implying that markets are about to get significantly more oversold than they did at the very worst of the crash of 08! That is a very tall order but of course there is always that proverbial black swan!

An up trend is defined as a series of higher highs and higher lows, so far at least the up trends of the Wilshire and Russell remain in place. In fact the Russell 2000 still has some way to go before it breaks out of its up trend. But if one were to take the tone of commentary coming through on blog sites and the sensationalist media you could be forgiven for thinking that equity markets were already well entrenched in a bear market (having already made a series of lower lows and lower highs). At this stage we think that the market is still cleaning out the weak hands that “got onboard” in the last 6 months (well in the weeks leading up to the 1st of May). Just look at how linear the price behavior of the Russell was in March and April. Linear behavior is evidence of weak hands entering the market


If equity markets are in an extreme oversold condition then the opposite applies to bonds. We note that the flow of funds into bonds has reached extreme proportions. Well if there is one thing for sure, if shorting US treasuries was a crowded trade some 2 months ago it certainly isn’t anymore!

The behavior of junk grade bonds is also not fitting with a “bearish” view. Just how junk grade bonds have not already collapsed is puzzling, also how the likes of JNK and HYG (not to mention PCY and EMB) only fell by 0.5% on Friday when the Russell fell by some 5% does not add up. This is a very different situation from that which existed two years ago going into the “crash” of 2008.
Well although commodities (as per the old CRB) are not looking too healthy, “bear” in mind that much of the weakness in commodities can be attributable to the strength of the USD over the last month. If one looks at the behavior of the CCI in AUD, CAD, and European currency terms then commodities are not that sick, actually they still look rather bullish.

And one certainly cannot get bearish on commodities when gold continues head on up in multi-currency terms.

The USD is now as overbought as it was in 2008/early 2009. Furthermore it is about to run into very stiff resistance. Anyway for the life of us we cannot understand how a bad employment report can be positive for the USD…….taking this to extremes, so if the US goes bankrupt then the USD is going to all time highs and yields on US treasuries are going to zero! This is completely illogical!

Yes it is worrying how emerging market currencies have broken down. Again just how emerging markets as a whole are in worse financial condition than the US is beyond our rational thought processes.

So into the valley of darkness we go again. We remain bullish on equities, commodities, and bearish the USD and US Treasuries, needless to say that in the last 5 weeks we have absolutely nothing to show for our efforts. We are protected somewhat by puts on the S&P and AUD, but that is only to hedge incase we are very wrong, yes it has happened before.

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