All Eyes & Ears On Bernanke

[Quick Update]

It is Thursday the 26th of April. The US Dollar triangle seems to be breaking down despite FOMC not engaging into any further easing. The triangle is now breaking lower and short term support levels at 78.75 and 78.00 are the only major obstacles standing in the way of bears turning the US Dollar into a downtrend with lower lows and lower highs - chart below.

The Dollar bulls should be worried, because despite European recessionary news getting worse (Monday's PMI data) and no further Fed easing, the US Dollar is still acting weak. From my experience, whenever an asset acts weak during favourable news, something is not right.

As you might remember, back in middle of January 2012, our fund shorted the US Dollar via buying Swiss Franc exposure. Since than, we had to fight against amazingly strong consensus view favouring further US Dollar upside for variety of reasons. The amazing thing is, the US Dollar price has been telling us all along that it is in trouble, as it refused to make any new highs for months.

Having said all that, we are not yet certain the Dollar has started a downtrend, so a break below 78.00 on the DXY will definitely increase the probability substantially. As we always say... when it is obvious to the public, it is obviously wrong. There are no easy trades in the market, so you are always better off being a contrarian!

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[Original Post]
It is Wednesday night, the 25th of April here in Asia. We are in the last trading week of April. The week started off on a bad note, with European Manufacturing PMIs disappointing to the downside. German Manufacturing PMI was a real worry, coming in at 46.3 while consensus expected a reading of 49.0. On top of that French Business Sentiment and Italian Consumer Confidence strongly disappointed to the downside too.

All this data has definitely removed hopes of a EU recession ending quickly and has pushed Citigroup Developed Markets Economic Surprise Index into negative territory. Australian PPI and CPI data also surprised to the downside, creating a scope for RBA to cut rates at the start of May from 4.25%. Australian Dollar is still struggling.

Recent data that is out while I write this article comes from the UK, where the GDP has now posted a first double dip recession since 1970s. On top of that, US Durable Goods Orders fell over 4%, which is the largest drop since 2008.

Important economic data for the rest of the week includes:

• FOMC Statement & Interest Rate Decision
• RBNZ Statement & Interest Rate Decision
• UK Consumer Confidence & German CPI
• Japanese IP & Japanese CPI
• Italian 5 Yr & 10 Yr Bond Auctions
• US GDP & Weekly Jobless Claims
• US Michigan Consumer Sentiment 

It looks like it is a totally packed week of data, which provides a lot of clues on the state of global economy and creates catalysts to move prices in either directions for traders. One of the most important events is happening early morning in Asia (afternoon NY time) - chairman Ben Bernanke's speech, which in my opinion could finally trigger the US Dollar triangle movement as we can see in the chart above. I will refrain from discussing the Dollar any further, because the previous post covered the topic in-depth.

Looking at the recent sentiment surveys published today from SentimenTrader and Daily Sentiment Index, commodities sentiment has deteriorated further into bearish levels, which is contrarian bullish signal. Furthermore, sentiment on the following specific commodities is either close to or at bearish extremes:

• Energy: Natural Gas
• Grains: Corn & Wheat
• Softs: Coffee, Sugar & OJ
• Stock: Live Cattle & Hogs
• Indu Metals: Copper
• PMs: Gold, Silver & Platinum

I think opportunities exist in the whole commodity space or even in some of these specific asset classes as a trade. One particular area personally I am very excited about going forward is not the stock market, nor the bond market, but the Precious Metals market - especially Silver.

First of all, Silver's Public Opinion thanks to SentimenTrader website, is at very low levels of only 34% bulls. Historically, readings below 40% have been considered very extreme, where prices tend to make an intermediate bottom in coming days or weeks. Furthermore, this is the first time since May 2011 peak of $49 that Silver has an extreme amount of bears and yet the price has failed to make a lower low (below $26 in this case).

Finally, few other interesting fact regarding sentiment in the PMs market. First, Bloomberg recently reported that Silver's ETP holdings have fallen by most since 2008, which is great contrarian indicator. Second, visitor interest in Gold websites has fallen dramatically as prices stopped rising 7 months ago. The website sharelynx.com is quite famous in the Precious Metals space, being full of historical charts and ratios. Nick Laird, who runs the site, recently stated in an interview the following:

"I have rarely seen my site so quiet. Normally I get at least a couple of visitors a day looking for a trail of my website. The last tend days, I've had two people asking."

The whole concept of investing is to participate in a secular bull market with an asset class that is showing strong fundamentals (e.g. like Silver) and constantly try to buy as low as possible while holding positions until the final bubble overvaluation. Remember, all secular bull markets end in bubbles and so will this commodity bull market. I do not know where Silver will go to eventually, but I do know the smartest thing one can do is accumulate when others are disinterested, bearish or selling out.

When we look at the performance of Silver over the last 12 months, we can notice that is has suffered with majority of other commodities like Natural Gas, Cotton, Coffee, Cocoa, Wheat and Corn in a cyclical downturn. Our fund is already overweight this metal, since it is one of the worst performers and we definitely plan to buy more in coming days or weeks, depending on the price action of the asset itself and the US Dollar triangle. For those that do not like Silver, Gold Miners look very attractive at current oversold levels.

Moving onto the stock market, Apple has been a poster boy of the cyclical bull market since March 2009 lows. In recent earnings results, Apple beat expectations by a staggering amount on stronger revenues and iPhone sales - especially in China. It seems that the recent parabolic correction has now ended in one single days of trading, with Apple shares jumping over 10% at the open. That has obviously pushed up the Technology sector higher today.

The most oversold sectors within the S&P 500 remain Energy and Materials, connected to the commodity price slump. The most overbought are Utilities, Telecom and Health Care - all on the defensive side of things. Risk off trade is still dominating for now. Currently 33.6% of the stocks within the S&P 500 are trading in an oversold position with one standard deviation below the 50 day MA, while 19.6% of the stock are trading in an overbought position with one standard deviation above the 50 day MA. These readings are now as oversold as November & December of 2011. I am not so sure if the current correction has now finished or not, but that is more of a concern to a trader, who has much better short term timing skills than I do. Readers tend to email me and ask why won't I buy any stocks?

For an investor like myself, I focus on the fundamental side of things and long term entry points, not so much the short term rallies. Looking at the chart above, I am definitely not interest to own equities with profit margins and earnings at record highs. I would much rather buy equities when earnings are depressed, which usually occurs during the bottom of recessions, similar to what we saw between November 2008 and March 2009.

Furthermore, the current business cycle is becoming over-stretched. Recessions tend to occur every 5 years on average, so if the last recession in the US started around December 2007, five year average period comes due around December 2012. That doesn't mean recession needs to starts straight away, and nothing might happen until 2013 or even 2014, but it is important to note that risks are constantly increasing as this bull market and the current business cycle ages. Awful fundamentals for the stock market are waiting in the not so distant future, so the last thing I want to do is buy and hold at elevated prices with record high earnings. What I might eventually do is short the stock market later down the track and therefore hedge my commodity longs.

Summary
All eyes will be on Bernanke's speech today. Disappointing the investment participants will most likely send stocks, currencies and commodities lower, while the Dollar goes up. Bonds could sell off if Fed does not engage in more easing too. However, sentiment on commodities and specifically Silver & Gold Mining stocks is quite bearish, as already discussed above. Any further panic selling will probably mark the final panic low where the smart money jumps in and starts to accumulate in a big way.

Those invested in Nikkei 225 or the Yen should be following onslaught of Japanese data coming out in the next day or two including Industrial Production and CPI readings. Finally, US Jobless Claims should give us further clues as to the way employment picture in the US is developing, while the Italian Bond auctions should give us a sense of credit risks within the Eurozone.