Risk On Rally

There is a bit of a change on the blog. In recent times I've been posting topic related articles regarding either equities, bonds, commodities or currencies, plus an occasional focus on credit markets, property markets as well as business & economic cycles. This type of posts are very specific and in-depth regarding the actual topic itself, but at the same time, do not cover anything else happening within the broad financial market space. Therefore, what I will be doing from now on is putting it all together in one post, similar to a traders diary entry. I hope it will be a great summary, which will be posted several times per week depending on the action of the market. So I hope you enjoy the new format of the blog!

It is Friday the 13th of April. Bernanke is scheduled to talk today 1pm New York time. That is very late for some of us that live in Asia, but it might be worth staying up for. Operation Twist program is now three quarters complete and we seem to have a deja vu occurring similar to April 2010 and April 2011. Other important economic data releases for Friday include:

• German CPI
• Italian Industrial Production
• Brazilian Retail Sales
• United States CPI
• Michigan Consumer Sentiment

Yesterdays summary showed that Indian IP disappointed, while the Chinese IP as well as Retail Sales beat expectations. Also Chinese M2 broadest money supply measure grew above expectations. Italian 3 Yr bond auction printed a yield of 3.89%, which is quite high compare to the last auction ay 2.76%. South Korea kept its interest rates the same as before, at 3.25%. North Korean launched its rocket, but it failed. The Korean Won appreciated against the US Dollar. Aussie Dollar jumped a lot on the back of improved employment figures out of Australia. Finally, everyone is talking about the jump in Jobless Claims to 380,000 while consensus expected 355,000. The question on everyones mind is weather or not we have a real deterioration in the jobs market once again.

Onto the equity markets. S&P 500 staged a second day of its rally. As previously mentioned, price polarity should be in play, if this is a cyclical bull market break out to new highs. That means previous resistance between 1,350 to 1,370 should now act as a support within the context of a mild correction. If not, we will break down lower towards 1,300 support. Uptrend is still intact with higher lows occurring since 04th of October 2011.

Short term sentiment soured within the equity space as we saw bull readings enter negative 1SD, while bears entered positive 1SD readings. What is even more interesting is the speed that the bulls have scattered. One quarter of retail investors flipped out of the bullish side in just one week as S&P 500 fell only 4%.

Chris Puplava's recent breadth update shows that despite a stock market correction, two thirds of the S&P 500 is in an uptrend. Furthermore, it is also positive to see the Financial sector leading the way. It is a basic fact that in a de-leverging environment Financials will not lead the way higher if the bear market was due around the corner. If this was a top, we would see the current bull market experience sector rotation from cyclicals towards defensive sectors.

Over the last two days Materials, Industrials and Financials have rallied the most, with each sector gaining more than 3%. Having said that, these sector were also hit the hardest during the correction as well. What is important to note is that Utilities, Staples and Health Care have barley managed a 0.5% gain over the last 2 days, which indicates relatively weak demand for defensive sectors on behalf of investors.

Having said all that, I cannot get excited about investing in stocks at these levels. Sure, trading them for the next 3 hours or the next 3 days or the next 3 weeks is fine, but to invest for the longer term I think not. Moving onto commodities I think that is very opportunities lay going forward.

CRB Index was trading 2 standard deviations away from the 50 day MA as of yesterday. Oversold readings like that usually signal that an intermediate bottom is close. A strong reversal took place in yesterdays trade.

Commodities sentiment soured across the board in recent days, prior to the rally last night. Public Opinion on CRB Index got to the levels where we usually see a rally occur. Same is true for commodities like Natural Gas, Copper, Gold, Silver, Live Cattle, Cocoa, Coffee, Orange Juice, Sugar and Wheat.

I think Wheat, Coffee and Sugar look especially good here. Bloomberg article last night reported that "...sugar traders are bearish for a seventh consecutive week, the longest stretch since at least 2007, on prospects for the first supply glut in four years." We should all know what happened in 2007, when all the "gurus" were forecasting a huge Sugar oversupply (if you don't look at the chart above thanks to SentimenTrader.com website).

Intra day chart of Silver showed a break out from relatively quiet price action. I added to my position and also bought some Silver Wheaton Corp shares too - both through some CFDs on a  tight stop. They had a terrific move last night. I wouldn't take too much from this right now, because the last time Bernanke spoke, he manage to reverse the rally in both Gold and Silver. The market price has been flip flopping up and down on the prospects of further stimulus from the Fed & ECB. It is also worth noting that Gold Miners, Gold Mining Juniors as well as Silver Miners all had a great rally last night too, with strong volume backing.

Crude Oil has had two strong days of rallying just like the stock market, while Natural Gas hit levels not seen in at least a decade as it went into a $1 handle. Palladium also seems to be oversold, while traders have a great opportunity in buying Rough Rice as it broke out from a great rounding base formation above $15. Commercial COT positions, aka Smart Money, have been heavy buyers for months so it was only obvious that we were building a low from which a rally will take place.

Moving onto the currency markets, I have already mentioned the powerful move by the Aussie Dollar. What is even more encouraging for the risk on assets is the breakdown of the US Dollar against the SIngapore Dollar. Triangle inflection points within this currency are very helpful, because when they break in a certain direction we tend to get a powerful risk on / risk off move as can be seen in the chart above. Sing Dollar tends to be a great leading indicator of what the US Dollar will do across the board. Funny enough, while I have been a US Dollar bear since January of this year, majority are still expecting a spike in the USD to a new 52 week high.

Moving onto safe havens, Japanese Yen as well as Treasury Long Bond did not sell off despite a risk on rally. The prospects for a weak Dollar have turned carry traders back into the Yen, while bond investors seems to be bidding up the price of Treasuries yet again hoping for another round of QE. Others are buying Treasuries as they expect a recession.

Gary Shilling was on Bloomberg TV saying that S&P 500 will drop 43% this year as the global recession unfolds. To summarise, he thinks that a recession in Europe, stronger dollar and a slowing Chinese economy will tank earnings back to $80. On a multiply of 10 times, S&P 500 should be trading around 800 ($80 x 10). He is currently long treasuries, short stocks, short commodities and long the dollar.

Moving onto the Credit Markets LIBOR OIS rates continue to fall. Three month Euro Dollar Basis Swap rates also keep normalising since the trough in December 2011. Both the USD and EUR currency swap rates over 2 years (bank funding) slightly spiked in recent days as the stock market correction unfolded. While the USD swap rates are at solid readings of 28.4 basis points, European counterpart remains very elevated at 89.9 basis points.

While it is not here right now, trouble is coming down the road, as the European Crisis enters its final phase in my opinion. We also had the 2 Yr Yields on both Spanish and Italian government bonds rise over the last few trading days. They are still a far cry from the levels seen in late November, early December of 2011.

Summary
Oversold equity readings from the short term perspective are creating a bounce. I am not so sure that the correction is finished. Having said that, I have no position in the equity markets and remain neutral. Best opportunities lay in the commodity markets, most likely with PMs and Agriculture. Chinese economic data has been decent and the credit markets are still not signalling any major worries, despite their negative upticks in recent days and weeks. Singapore Dollar break could be the leading signal for the risk on trade, but I think Bernanke will have the final word tonight. Stay tuned!

I hope you enjoy the new dairy entry posts and enjoy your weekend!