4
Dec
Posted in General Analysis & Commentary by Bob English |
A lot of people commented on the correlation between the USD with equities today (
including us), but ultimately, the inverse correlation is still holding now that we have an equities reversal. The USD is heavily driven by interest rates, and earlier this week, we wrote that we expected interest rates to be the next shock to this rally. It looks like that’s what happened today. Long term Treasuries have been sold all week…maybe by Japan…who knows. But the 30 year went from 4.194% to 4.439% since Monday (much of it this morning), which is a large move. This not only spooks existing USD shorts, but warns of eventual Fed tightening, which the Fed itself has been indirectly hinting at as well recently.
It’s a bit ironic that the appearance of a stronger US economy (in the form of an improving employment situation) spikes interest rates higher, which in turn brings down equities. A healthy equities bull market can shrug off a Fed rate hike after a day or two, but now, market participants are speculating about the mere possibility of the eventual tightening. This is probably one reason why it takes a lot to start a new bull market–because the various forms of accomodation (including low rates and fiscal stimulus) have to be removed strategically and can easily cause pullbacks in the stock market, even if the overall economy is improving. The central planners have proven less than adept at inflection points before, so caution is warranted here. And, as we wrote this morning, liquidity and credit outside the banks (in the general economy) remains poor.
Much as a large trader will dynamically sample supply and demand at support or resistance with large orders to see if other traders will bite, the Fed, in various ways (yesterday’s tri party repo and speeches by “dissenting” Fed personnel this week), is attempting to judge the markets’ reaction to removing accomodation. Better to do this at highs than lows. The signal so far is that it’s a bit soon, and hopefully (for the bulls anyway), the Fed will back off a bit.
Bottom line: with the USD at strong resistance and long term Treasuries extremely oversold, there’s a decent possibility of an equities comeback early next week prior to the 10 Year auction on Wednesday. However, we’re not as opptomistic about material new highs as we were earlier in the week. Action near the close today will be important.
4
Dec
Posted in Intraday Analysis by Bob English |
10:16 am EDT: The ES traded down to the value area (1108.00 to 1108.75) we wanted to see supported, though it did so ahead of the open. Trend line resistance from the prior two day’s highs has temporarily impeded the ES’ progress with 1119.00 the high. We would not be too quick to jump in long near highs as there will be some natural profit taking from the immense move, now that the markets have settled a bit. No shorts for us as long as 1108.00 holds.
An interesting development in the US Dollar is that it has rallied along with equities this morning, though it is backing off of downward channel resistance a bit. We are not quick to call correlation breaks, because they happen infrequently. However, the world appears to be buying into a fundamental recovery in the US. To confirm a correlation break, we would need to see the USD Index break out of its downward channel next week and trade above 76.00 with equities continuing to make new highs simultaneously. For now, this seems unlikely.
4
Dec
Posted in Pre-open Analysis by Bob English |
The Precise Take – ES needs to show strength after most bullish report of the year
Leaders Analysis: The EuroYen is shooting above its 20, 50 and 200 day moving averages and long term yields are following. The US Dollar Index has not moved much overall and continues to form a wedge pattern. We’ll look to it for ultimate confirmation.
Medium Term Analysis: The slide late yesterday was not completely unexpected ahead of today, but was a bit delayed as all the bad news was out in the morning with Bernanke’s reconfirmation hearings, the weak ISM non-Mfg reports and some bearish statements by the White House press secretary regarding unemployment. It looks like the White House has faked out the shorts, though, as there was an actual downtick in the household survey to 10.0%, while actual non-farm payroll losses are the best since Dec 07 at -11,000. If the ES manages another rally into early next week, watch out for a sharp correction possibly late Tuesday or early Wednesday ahead of the 10 Year auction. Long term yields have just exploded and the pattern in previous months has been for equities to struggle around important auctions, thus elevating demand. M2 money supply declined as reported by the Fed yesterday, so the long term liquidity problems in the general economy that we have been noting remain. Were we long term investors, we would be using equities strength to liquidate holdings this December.
Trading Today: The ES has rallied nearly 15 points to 1114.00, and we now want to see the value area of 1108.00 to 1108.75 supported early after the open. The ES should be able to rally to new highs today. If it closes below the daily pivot of 1104.25, then the rally is in jeopardy because…
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