Since we last commented on the broader equity market picture, risk appetites have been nourished as the retracement bounce that began at the beginning of February has predominantly continued through this week. While the major indexes are still working on either accepting or rejecting their respective secondary highs - we offer the following thoughts going into next week:
- The Nikkei and Japan (EWJ) are nearing the top of their retracement ranges (as described by both comparative profiles) and point towards downside pressures reemerging next week - as well as firmness in the yen.
- 10 year yields will have a window to take another leg lower.
- Spain's IBEX - our high beta proxy in Europe, also appears susceptible to taking the next consolidating stair down. From an equity and currency perspective, we have looked at the Nikkei and the yen - circa 2003/2004 - as a prospective guide for Spain and the euro - as well as the IBEX itself coming out of the 2003/2004 reflationary pivot.
- The SPX has run up towards a complete retracement of the correction that began in January. Considering we have expected a consolidating equity range to develop this year above the long-term Meridian, a binary opportunity is presented next week. Although we had previously looked at the broader 2004 market environment last year as participants digested the telegraphed - then interrupted, change in monetary posture signaled by the Fed; we included a performance profile of the SPX that has closely tracked since last July the consolidating range of the SPX in 2004.
- Based on our comparative cycle work with both assets, an acceleration of trend higher in the euro and lower in the US dollar index is approaching.
- Both emerging markets (EEM) and Chinese equities (SSEC & FXI) have the potential to firm the broader equity market picture should they find a foothold next week. We continue to find positive divergences from the recent commodity market breakout that should be reinforced by a weaker US dollar and buttress the case that global growth is starting to perk up. While the economic data has been mostly mixed and uneven across the major global economies, we tend to put greater weight on the financial markets themselves as they typically are the tip of sword and forward looking.
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