Sunday, October 28, 2012

USD - Analog Update

The US dollar index continues to closely follow the structure and momentum profile of its last secular low. 
The comparative analog and current momentum signatures over the short-term, favor a strengthening dollar with an initial ST target of ~82.5. 
Of course a large difference today - compared to the mid 1990's - is the inverse correlation the US dollar and the SPX exhibit over an extended time frame. 

As traders have fought an outgoing momentum tide, the equity markets continue to recoiled further from a coincident rejection of the weekly meridians. Should the dollar continue to strengthen over the short-term - the SPX will likely continue to wilt and find support ~1375. 

Wednesday, October 24, 2012

Secular Tides

Below are two identical charts that I have been following this year, contrasting the US dollar index and the large cap/small cap ratio as expressed by the SPX:RUT. For purposes of expression, the first chart has been stripped of the actual monthly data - leaving behind each respective 50 month SMAs. 

You will notice that over the past two decades both series have trended together, with typically a lag between pivots - in what I refer to as the primary and secondary tides. In essence, just as an oceans tidal effects are delayed by the inlets of a bay, the pressure differentials in correlations between markets -  express a lag as well. The primary tide was determined by the first long-term moving average to pivot from trend. 
  • In the early 1990's (09/92') the dollar was the first to pivot higher - foreshadowing the American economic dominance (Irrational Exuberance) that was to follow for the balance of the decade. 
  • In April of 1999, the SPX:RUT ratio turned down following the 1998' sovereign debt crisis - foreshadowing the much broader economic dislocation that was realized a year later. 
  • Today, the dollar's long-term moving average appears to be once again trending higher as the primary tide. Similar to 1998, this pivot was made last year when the effects of the European sovereign debt crisis - hit the broader indices in the back half of the year. 
It is my suspicion that over the next several months, the effects of a stronger dollar - in the face of historic interventions by our monetary handlers, will once again initially have a disruptive influence on the broader markets; with higher beta stocks - such as the Russell 2000, leading the broader market lower.

This market perspective dovetails cleanly into my note from last week (see Here), describing the conforming pattern of the long-term moving average of the silver:gold ratio - that is now resting on its 20 year trend-line. 
As always - Stay Frosty

Tuesday, October 23, 2012

Break Point

Adding fuel to the equity fire - the currency markets are working themselves towards critical break points. 



Monday, October 22, 2012

Apples to Apple

Not quite an apples to Apple comparison, however, the expression of a top could definitely be made here. (Click on the respective chart to enlarge frame)









Saturday, October 20, 2012

Wednesday, October 17, 2012

Momentum Divergence

Add this to the list of bearish tea leaves the equity markets dance under. In fact, until it's resolved - put it towards the top of the list. 



Tuesday, October 16, 2012

Broke-Down-Under


Although I normally find it to be bad form to single out an analyst or firm regarding a questionable market call, I couldn't help but raise an eyebrow when I read the remarks out of PIMCO yesterday regarding the Australian dollar:
“We think those structural flows which have brought foreign holdings to such high levels are going to persist,” said Mr. Mather, adding that Pimco prefers five year and ten year Australian bonds.
That demand means the Aussie dollar has taken on the status of a new safe haven currency given the country’s robust balance sheet with net debt to peak around 10% of gross domestic product.
“It does deserve that safe haven status,” said Mr. Mather of the Australian dollar. “It’s like a new regime, it used to be a proxy for risk, everybody in the world jumped on to try and short the Australian dollar.
That correlation has broken down and with good reason,” he said. WSJ 10/16/12
Ignoring both Australia and China's deteriorating fundamental backdrops,  I just don't see the evidence in the charts that the dynamic has changed regarding the Aussie and its utility as a proxy for risk. Frankly, most times I hear that a "correlation has broken down", shortly thereafter - the divergence is resolved and the correlation reestablished. 

Monday, October 15, 2012

Knocking on Deflation's Door

Since I began publishing my work last year, I have referenced various versions of the following chart - as rationale to why I follow silver and the silver:gold ratio so acutely.  
Broadly speaking, the ratio and the SPX have trended together since the initial banking crisis in 1990. However, since the US dollar index peaked on July 5th, 2001, both the ratio and the SPX have performed very closely. In essence, when a currency sensitive and "emotional" asset proxy such as silver outperforms gold - traders risk appetites are heightened within the system - which is then expressed broadly across risk classes. 

Taking a broader macro perspective, and by removing the extremes of the ratio and expressing itself in a long-term moving average, one could argue that it has represented the great asset inflation (Irrational Exuberance) and reflations of the past two decades. I find this thesis strengthened by the rigid and conforming pattern of rising resistance and support. 
Not surprisingly - and as displayed in the strong performance correlations of the first chart, the secular decline of the US dollar since 2001 has played a pivotal role in providing the motivational propellant in the precious metals complex. This intern has driven risk appetites higher, against the correlating backdrop of reoccurring monetary interventions over the past decade. It is also apparent - based on the strongly trending negative correlation today of the asset relationship, that should the dollar continue to strengthen, the deflationary threshold I delineated by the ratio's long-term moving average - will be breached. 

This is why - in my opinion - Chairman Bernanke decided to embark on another round of monetary stimulus last month - despite the equity markets siting at recovery highs. The problem though appears to be that the dollar has made a secular low in 2011, inverting the variable in our monetary handlers reflationary equation. 
Should the dollar continue to strengthen, as recently expressed in the "spring" low comparative chart - assets such as silver and gold will continue to weaken. 

Bernanke knows the specter of deflation is out there - in fact it appears to be knocking on the door.  

Friday, October 12, 2012

Read between the lines

Not exactly a bearish bond picture (relative to stocks) - no? 


Tuesday, October 9, 2012

Qualifying the Quantitative

If you've followed my work over the past 18 months, there is a consistent theme towards the US dollar:

It's a relative game - global finance, and QE or not - the cycle points higher for the dollar.

Here is an updated chart from a few weeks back of that notion which compares the last time the dollar made a secular low. 
Helping things along appears to be a spring low taking shape along a tighter time frame. This is a much different structure than the bear market rally the dollar exhibited after QE2 was enacted. It is actually quite similar, both in structure and momentum - to the March 2009 low in the SPX. 
Considering my work with the Aussie points to the inverse of this dynamic, I feel quite confident in my longstanding expectation for the US dollar to continue to strengthen. 



 



Monday, October 8, 2012

Zen Slap

Don't look now, but after last weeks dramatic divergence in the Aussie and the SPX - everyone suddenly became an expert on the Australian economy and their important currency to foreign exchange markets. 

Markets have a way of lulling ones concerns to complacency - and then slapping them in a sudden moment of clarity. Generally speaking - its a good idea to take notice. 



Although the analog has recently strengthened its correlation proportions to the model, it would be a bit presumptuous to expect the middle of the move to unfurl with like distribution. As I have noted before, these models often replicate most acutely at pivots. Like a rock lobbed into a pond, the geometry will replicate with great congruency at the point of entry and dissipate as you move further away from the epicenter of disturbance. 

With that said - and as mentioned in previous notes,  I do have an initial target of ~ 84 for FXA. 

As always - Stay Frosty


Thursday, October 4, 2012

An Awakening

As expected, the Aussie has retraced ~ 50% of the move from the Monday afternoon low to 102.78 (intraday) today. Should the model continue to be prescient, it will once again roll over and take out the lows from early September. 
My suspicion is that the equity markets will begin to arrest the considerable negative divergence over the coming weeks - by rolling over as well. 


As always - Stay Frosty

Wednesday, October 3, 2012

SPX/FXA Analog Update

Overdue for a bounce on various timeframes - but still very much on script. 

Tuesday, October 2, 2012

The Chicken or the Egg

Last night the RBA decided to get behind what I have been following in the charts over the past several months: The commodity cycle has crested and the Aussie was carving out a massive top. 

The call to reduce rates was premised on the signs of concern over China evident in RBA commentary in October as well. According to the RBA statement, "Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago." RBA also said mining investment may peak at a lower level that previously expected. RBA are also of view that global slowdown represents domestic growth outlook weaker. CPI is consistent with target. 
Further cuts should not be ruled out. According to Stephen Koukoulas, Managing Director of Market Economics, "I reckon RBA has more to do. High risk of another 25 in Nov. Jobs data crucial." FXSTREET.com 

The commodity bellwether continues to follow the SPX topping model through the pivot and now down the face of the initial phase of the waterfall decline from last year.