A considered and therefore excellent report from the Swiss team.
Lets get to the detail.
Cyclical model wise and strategically speaking therefore they are sticking to their model for a deeper h2 continuation of the equity bull market building to an important top for equity indexes, SP500 1920 to 1970. (These are bullish levels but read carefully the detail below, there are increasingly cautionary caveats). Commodities are a late cycle set of instruments so these should and are now out performing in this end phase of the 5/6 year bull market. The level “SPX” (S&P500 cash index) 1737 is given much weight by the team and needs to hold for the SPX to remain bullish biased. (I suggest this level is likely to come into play in the next 2 months again).
US Equity index wise they discuss sentiment to some degree. Worthy of note is they do pick up on the issues the CapSyn analysis raised on Sunday. Namely that although the AAII has swung around and the short term confirmed a market bottom the put call ratio has not significantly altered and remains in contrarian territory. The correction did not lead to much hedging! A personal comment, between the AAII and the (hard data) put call ratio I would weight the put call ratio data on a 3:1 weighting. This is a personal trade plan issue but I would encourage due diligence on the AAII research methodology.
Either way the team make a note of this contrarian sentiment via the put/call and say this on the subject:
“We shouldn’t forget that our strategic sentiment work such as the long-term put/call ratio is still at extreme levels, which in consequence implies that:
a) The upside in the market will be increasingly capped
b) It implies higher volatility and a more trading oriented market environment with increasing selectivity and
c) It still tells us that the US market is potentially on the way into a more important top, and our preferred timing for this top is later Q2.”
This perfectly mirrors the CapSyn comments on the same issue from Sunday.
& on the breadth issues:
“The number of sectors that are hitting new highs is deteriorating which is
something we usually see prior to important market tops!!”
I would add that near term price momentum is very weak. Since Wednesday of last week momentum has been failing badly. Of course equities can drift higher but the risk reward for near term continuation is not good, at all. I added near term tactical shorts on the SP500 today.
Sector wise the Dow transports should be watched. The Sox is on fire as they rightly pick up. Oil producers did sell off hard but vs crude they were a buy a few weeks ago as picked up on the forum pages. The team here suggesting a probable new high in sector negating the recent double top.
FX wise the DX is discussed at length. They fully expect a continuation of the eurusd trend ie euro strength and sight momentum and volatility coming back to pair. It needs to to sustain this euro move i would add. As volatility is so low the possibility of taking both sides of an option position on the pair is not so expensive at present especially over the 4 or 5 month time frame.
“A break of 1.3840 would also break the 2008 long-term downtrend in the EUR and in this case we could see a rally towards 1.44 to 1.45.”
Macro wise for a moment, a stronger euro would help everyone apart from the Europeans but the ECB is toothless so long as the Euro zone fails to agree issues like banking union and the legality of OMT and even the ESM bailout. It is hard to see how Draghi can act to weaken the Euro other than implementing a negative over night deposit rate. Is the Euro the new Japanese yen is the question speculators are starting to ask themselves. Relative to all other developed world currencies its plain to see it is, for now, in the absence of another euro crisis or euro consensus on “OMT”.
Also, from a macro perspective on the late cycle commodities price moves. It is plain that speculators need a hedging mechanism to debasement of the US$. The US$ is the world’s reserve currency and store of value. US$ debasement when equities were cheap helped to create this historic bull trend but as prices have got more stretched it seems positive fund flows to equities are stalling. If the US$ continues to lose value and equities stop rising, or rise more slowly then alternative instruments will see inflows. Inflows, for monetary reasons, as we have picked up on the forum before. This can lead to a late cycle rise in commodities even as economic demand starts to slow down. The 2008 oil peak was formed not from surging economic oil demand. It was monetary demand as the US$ interest rates went to zero and the US$ collapsed in value. Its worth recalling these events carefully as we are potentially entering a similar sequence of events here.
I’m out of time to comment here further but I will return to these issues in the next few days.
Without more delay here their report:
All the best
out of 5)