Weekly Technical Analysis – “Rotation Bonds & Commodities into …
Here below please find the latest Swiss team’s technical report.
As its their first technical report for 2014 its a nice review of the year past and attempts to sign post where we have come from and we are going on their cyclical road maps.
Its an exceptionally thought provoking and therefore meaningful medium and longer term report. As well as covering the near term tactical issues.
They rightly pick up on the fact that this bull market has been:
“One of the longest/strongest bull markets since 1900″.
Who would guessed in early 2009 with the S&P at 666 that stocks were about to explode to the upside? Not many i would suggest. (I wrote an article in 2010 that suggested the Dow would soar to many multiples of her current valuation which seemed pie in the sky at the time but purely as a consequence of monetary meddling, i add). Yes we must accept that we probably have entered a secular nominal bull market for equities. Albeit, i believe, within a secular, real term, bear market for equities!
In a digital paper world nominal asset prices can be driven in any direction at the press of the monetary button it seems. Never in capitalism’s history have nominal asset prices been so easily and arbitrarily manipulated.
“From an Elliot wave perspective and with last years early September’s breakout, the MSCI World is trading in a classic impulsive wave 3, which represents the highest
momentum of a bull market.”
They cover extensively the potential comeback story in late cyclical themes and commodities inc the audusd. Its a theme I have also been watching carefully. This commodities bear needs a little longer to work its way through it seems. If the classic late cycle text book model comes to pass commodities will get a cyclical bounce as this bull market tires. But given how extended we are already on this market we most likely need a correction (-10%) move to reset the clock and enable a very selective wave five of the equity bull market which would provide for a commodities out performance during this period. This all makes sense I agree but we have to see real economic improvement and we have to start to see some inflation. Both have been missing thus far in this ‘recovery’.
Critical to the above road map is the extension in the US$ bear market. (From a fx perspective how can this be sustained is a very real question mark). The major two developed world trading partners ie the Euro and Yen economies require weaker currencies. The BOJ has a clear strategy to achieve this. The ECB’s is less clear and the Euro area seems in disarray on the matter but, for sure, the euro area will fall off a cliff without a weakening of the euro unless world demand booms for her products and services which is an unlikely forecast at best. Rate divergence between the US and Japan and Euro area is another tailwind for the US$ which doesn’t fit neatly with the text book late cycle equity wave 5 and commodity revival.
Can the cyclical road map hold true in a US$ strengthening move? This is a interesting question that i leave hanging for now. It seems likely in my view that we will need to revisit this issue.
Importantly, I want to say this. From a macro economic perspective its all too easy to get lost on the technical analysis models, is my,own view. There are lots of divergences in historic asset price valuation correlations from prior recoveries during this “recovery”. We have all sorts of unconventional fiscal and monetary policy tools in play that are extending nominal and relative valuations beyond their normal cycle valuations. Policy and reaction to, rather than economic data is what is driving allocators at present. The pure nominal asset prices increases are leading many to believe this is a classic text book recovery without building in to their models unprecedented fiscal and central bank actions. Did technical allocators in S.America and Zimbabwe more recently also believe their recoveries were intact when their asset prices rose?
We must all recognize we are in “un-chartered waters” as the New York Fed recently governor confessed. To expect asset correlations to hold to historical norms of relative appreciation is naive and wrong, in my view. From a technical perspective what does this mean to me? I think the best policy is to look for where the text book jigsaw correlation between asset prices starts to fall apart. That this recovery is different. It is a nominal recovery only created by central planning policies. We should expect therefore this recovery to fall apart. With this perspective in mind we do not necessarily expect a rejoin of classic assets from the book play of price cycle recoveries. Those that blindly follow these text book models without adjusting will eventually be toast, is my belief.
Enough on the big picture road map. Tactical near term issues i leave to the team but will return in the next few days to this issue. Yesterday we scored a Euro finance breakout (in telecos and travel) which appears meaningful and the Spanish and Italian markets have rejoined.
I will update with Yardeni and Capsyn from a technical perspective in the next few days.
Here the report
All the best
Rich
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Weekly Technical Analysis – “Rotation Bonds & Commodities into …
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