Monday, January 21, 2013

Connecting the Dots - 01/21/2013

The long and short of things: Pressure builds on the euro and in the dollar 
  • Risk appetites in the equity and commodity markets have run strong in a rare window of diminished correlation between the US dollar and the euro that began in early December. The two comparatives (2008 & 1996/1997) suggest that the strength in the dollar and weakness in the euro that began last week should continue to build momentum - with long-term correlations realigning.    
  • Despite its recent strength, we feel silver remains vulnerable to another large leg lower - 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. Although the silver:gold ratio's performance spread to the SPX continued to blow-out last week, should silver once again fail with the euro - we would expect it to be of the cascading variety. Downstream, this could put the SPX in jeopardy of outperforming the silver:gold ratio (as measured from the start of the secular bear market in 2000); which in the past (2000 & 2007) has indicated the start of another cyclical bear leg lower in the equity markets.
  • The Australian dollar was rejected last week at long-term resistance with net speculative interest (long) near historic highs - even increasing over the previous week. 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 SPX springboard low. While we are skeptical of its lasting character, the rally has begun to draw the CRB up in its wake. Should the US dollar continue to gain momentum, we would expect this to mitigate and reverse those effects.  
  • The SPX continues to crawl up the weekly meridian - despite Apple's precarious posture below support and threatening to retrace the parabolic rally that took place after its founder and visionary's death. The NDX has also stalled at the equal retracement level of the 2007 SPX comparative.