Status... Quo or No?
Maybe the title should be 'Go or No Go?' or 'Proceed With Caution?' but what today's market status should not be called is 'All Signs Point to [fill in the blank]' because if the current environment is characterized by anything, it is mixed signals. I will try to illustrate that point by highlighting various markets as follows.
The bond market is characterized by rising interest rates on the longer end of the curve even as data moderates in manufacturing, retail and especially housing and outright tanks in the notorious sub-prime sector. On the other side of the coin, commercial real estate, M&A and global consumption remain buoyant. We are of the opinion that the economic activity that remains positive is the result of scared money (aka Franken Money, Funny Munny) that has been inflated into existence looking for a home, any home besides the US Dollar or Japanese Yen. Hence our stance that the global bull markets will go as far as Dollar devaluation and the Yen Carry will take them.
Back to bonds... the yield curve is giving strong signals toward a major change in the making. Remember that a rising yield curve, contrary to what optimists who celebrate an end to inversion may think, is a signal that the bond market is withdrawing liquidity relative to the stance the Fed is taking. Although it cannot be seen on this monthly chart, the spread is potentially making a double bottom (see daily chart December 1 & March 1) in the short term. Even more interesting is the potential major double bottom dating back to the end of 2000. We have noted this before and will continue to do so since that time frame certainly did mark major changes in many markets. Note the bullish PPO divergence in force for over a year and the bearish one in force from 2000. Bear in mind that a rising curve will likely signal an oncoming contraction and a falling curve will signal once again that there is excess liquidity in the system and the appearance that inflation is under control will not be widespread. So which will hold sway, support or resistance... bullish or bearish divergence?
Is this not a picture of Funny Munny trying desperately to denominate itself in something, anything other than what it is, USD or Yen denominated debt? This Munny appears to believe the Shanghai meltdown was a one-off, the Yen will remain contained and the USD is heading straight to hell. OBV for the Dow is desperately strong even as oil remains in an uptrend and curiously, the Trannies hold their own as well.
If the Dow and other indices are able to clear the short term resistance noted by the top green line, it is off to a test of the highs. Sure, that looks like a bearish rising wedge but as vintage 2006 bears know, that may not count for much with Franken Market. It is notable that the major indices did not even register a break of the 200dma's before reversing course and lighting up the shorts, including yours truly to to the minor degree I was short. Desperate money indeed. Also notable is that bearishness was on a hair trigger as bulls far and wide couldn't give up the ship quickly enough. Perhaps the next time a negative market event takes place it will be accompanied by more bullish confidence which of course would be a potential bearish signal just as persistent bearishness was a nagging and negative asterisk to alert bears on this last go round.
It is getting harder and harder for we holdouts in the contraction camp, clinging to our rising yield curve as little evidence emerges that things are changing for the worse for the global casino. Note that base metals ($GYX) are actually at their highs of the entire bull market. Meanwhile the Fed does nothing more than allow various talking heads to admonish that inflation may still be a problem even as it quakes at the prospect of being forced to once again attempt to slow this train down.
What more can be said about the currency market? Everybody knows the USD is worthless, the BOJ will never step in and support the Yen and Europe is home of the future world reserve currency. Everybody knows that China is in ascendancy and will continue sucking up global commodities in uninterrupted fashion, supporting the likes of the Aussie and Canadian dollars. Everybody seems to know these things except me, a lowly market watcher and trader who simply wants to be right in the end and not predict the future. Incidentally, not shown on the chart below are bullish divergences for weekly USD by RSI, MACD and PPO. They are about all this paper has going for it outside of major support around 80 that has very long term implications. This is support one should not expect to be lost without a fight.
Gold & Silver
For the contraction case to become more solid, gold would likely need to reestablish up trends vs. silver, oil and industrial metals. At the beginning of 2007 it was indeed showing strong signs in that direction as contraction appeared to be a given. This was punctuated by the strong rise in the Yen and stock market mini panics the world over. In the short term however, gold has gone back to its its most common stance since 2003; underperformance vs. silver and other commodities and out performance vs. stocks, as one look at a long term chart of the Gold-Dow ratio would clearly show.
Since gold offers upside protection in a speculative environment where inflation expectations are rising and downside protection in a fearful environment when economies are slowing and central banks are pressured for easier policy, it is a unique asset class. I am watching closely however the relationships I have tried to illustrate above. My current stance - very heavy on gold miners - would be compromised with strong out-performance by the gold miners' cost inputs (commodities) vs. their product (gold). However, if the opposite holds true look for an HUI moon shot coming to a screen near you sometime soon. So what's it going to be? Let's let the market tell us.