The Daily Trading Report

It is a lonely existence being a bull in what seems to be a sea of bears! Now it would be very easy to throw in the towel and say that it is overs for the S&P 500 with its breach of the 1050 level, that we are destined for a double dip and that the US economy, and by default world economy, is about to re-enter a recession! But hang on a minute, there is a lot more to interpreting the mood or sentiment of the market than looking at a few major market indices. Instead of concentrating on what everyone else is analysing, notably the major market indices, which we refer to as the “front-end”……….we concentrate on the back-end of the market, that is, the places that few pay any attention to.

Anyway getting straight to the point. The market is suggesting to us (or at least our interpretation of its behaviour) that it is still in a primary bull trend and that the sell-off we are currently experiencing is merely a correction. That implies that the next move of significance will be to the upside not downside. Now let me walk you through my reasoning or at least what I am observing in the markets.

Let me first start with market internals. In short we have yet to see a breakdown in market internals. By breakdown the NYSE Advance Decline and the New Highs New Lows Indices are still trading above their May lows. Furthermore, there is now a divergence between market internals and the NYSE Comp which is essentially trading at a multi-week low. The behaviour we are observing now is very different from that which existed in 2007 and 2008 where market internals were persistently weak.


If the US economy was in genuine trouble, as implied by the equity market and the press of popular opinion why have junk grade bonds not broken down yet? It seems that junk bonds are one of the safer places to be invested right now, as bizarre as it may seem. Note what happening on the junk bond front in 2008 prior to the “crash”.

While junk grade bonds are the proverbial canary in the coal mine with respect to growth in the US economy, we believe that emerging market small caps are the canary of growth for the world economy. Why? Well in essence emerging markets are producing nations rather than consuming (primarily of the resource variety). If demand for resources dries up (indicating a slowing/contraction of growth) you don’t want to be invested in emerging market stocks and certainly not in the highly sensitive small cap variety. Note what was happening in 2008, emerging market small caps were heading down in a linear fashion well before the crash. And what is happening now? Well they are above their late May lows which is in clear divergence to what is happening to the major market indices in the US and Japan.

And if the world economy is slowing down then why have commodities not fallen out of bed as they did in 2008? For those of you who don’t know the CCI is the old CRB. The CCI is made up of 17 commodities all of which have an equal weighting. Accordingly it gives a representation of what the average commodity is doing. Yes you may argue that it is going to go down but as far as we are concerned seeing is believing and right now it remains in a bull trend and it isn’t too far from taking out its January high. Yes it is a bit hard to reconcile the behaviour of the CCI with what “deflationists” are touting right now.


So there we have it, as far as we can see the world economy is not about to fall into the abyss and neither is it about to enter a deflationary period. We remain bullish……against all odds!

§ Leave a Reply