Part II - Connecting the Dots
The long and short of things - the US dollar holds the trump card going forward:
Our primary focus will continue to be the US dollar - with the expectation that it will further strengthen from the May 2011 low. Positive momentum and relative strength divergences have buttressed the dollar to date. For most of our current comparative work to remain on their respective extrapolations, the dollar will need to firm and strengthen. Should the dollar audible and breakdown much further, the commodity and precious metals markets will likely begin to rally with much greater interest and performance.
Despite eroding sentiment, we feel silver remains vulnerable to another large leg down - with the expectations that the 2012 lows will be revisited and broken. We continue to focus on silver - and various timeframes and contrasts of the silver:gold ratio, because it has provided an excellent proxy for the overall health of risk appetites within the markets - especially the equity markets.
The Australian dollar is currently at long-term resistance with net speculative interest (long) near historic highs. The last instance the Australian dollar broke through long-term resistance was in September 2010. This breakout was accompanied with a broad rally in risk appetites across most asset classes - with the caveat, it was accomplished with significantly less speculative interest and momentum.
The Shanghai composite index continues to closely track the momentum and price comparative of the explosive August 1982 springboard low. While we are skeptical of its character, should the rally continue its unbridled ascent - it will likely eventually draw the CRB up in its wake.
Despite the exuberance in the equity markets, we favor large caps over small caps and make the ratio comparison to the downturn through 1997. However, overall we feel that the downside risks in the near term far outweigh the potential positive catalysts in chasing the equity markets here. The RUT:SPX ratio did begin to weaken last week.
As presented in the silver:gold and SPX performance series below, since the secular equity market high in 2000, the performance of the silver:gold ratio has closely followed the performance trend of the equity markets. It is also very interesting to note that this specific series to date has given excellent sell signals on the equity markets in various timeframes - when the performance of the SPX has exceeded the performance of the silver:gold ratio.
Each series begins from the respective timeframe's secular equity market (SPX) high in 2000.
The (weekly) timeframe has provided the most prescient sell signals since the weekly secular market high in March 2000. The SPX marginally exceeded the ratio at the end of August 2000, twice in October 2007 and directly before the equity market crash in September 2008.
The Australian dollar itself - and not the currency ETF (FXA) - was used to delineate long-term resistance.