THE CAPITAL MARKETS ARE ‘MOVING HIGHER’ THIS MORNING AFTER YESTERDAY’S ‘SHAKE-OUT’:
We can sum up yesterday’s action quite simply; the long energy/long metals and short USD trade was taken off en masse – a move to reduce risk in back of recent news of hedge fund losses and so forth. We do not want to get into hedge fund blow ups, but by their nature hedge funds do lose money at times – at times those monies are quite large sums – and given many are in the same strategies…the door to the exit can be quite small as yesterday’s trading session can attest to We look for more of the trade to be taken off as rallies materialize in the days ahead; for the amount to be taken off could indeed to be quite large still. This opens up downside risk in the equity markets and in particular the energy and metals sector. We have been, and continue to be a longerterm bull on the energy sector – and look upon this decline as part and parcel of making it healthy once again for long positions that will in fact be very profitable in the future. Consider it a ‘gift’ of sorts, but we are accumulating shares on this decline for our retirement and other long-term accounts.
THE US DOLLAR IS NOW THE FOCUS ONCE AGAIN:
As it broke out above its 200-day moving average – all hell broke loose in the currency markets and this morning those USD gains are being extended. For the most part – many had put on USD short positions at the 200-day in lieu of lower USD prices. Once this didn’t materialize – they must cover, and this short covering rally and new buying should propel the USD far higher than anyone believes at this juncture given the ‘hedge fund’ community remains quite short of the USD given structural issues such as the US trade balance.
We don’t believe the trade balance has a wit to do with the USD – the correlations are theoretical in nature and surpluses do not forecast a stronger currency. However, perception is reality in the currency markets and we would do well to trade from the long side of the USD for the time being. The USD top will be seen when Mr. Buffet removes a material portion of his short position…which could be sooner rather than later.
ETF : CHART COMMENTS
OUTLOOK: We remain long-term fundamentally and technically bearish; with the short-term technical picture turning negative – thus we would expect the trend lower to reassert itself in the days ahead to new relative lows.
COMMENTS: Yesterday’s sharp decline took prices below our ‘make or break’ support zone at S&P 500 1163-1165 once again; which opens up an increasing probability this entire rise off the lows isn’t an intermediate-term bottom as some technical measures suggest...but rather a consolidation to lower levels.
This morning we are ‘betting’ this way by moving short; we understand we are being ‘reactionary’ in our stance rather than proactive. If prices reverse higher...our target higher of 1200-1220 is back on the table; with an acceleration developing once the 1180 level is broken above. We accord htis a low probability now that the USD is breaking out to new reactionary highs...thus we believe new lows below 1134 will materialize very quickly towards a lower target at 1050. Hence, we are positioning ourselves in this manner.
[Actual Positions, Specific Recommendations and Portfolio Summary Withheld for Subscribers only.]
About Richard Rhodes
