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Friday Market Review: Is Santa Coming This Year?

  • Written by Syndicated Publisher No Comments Comments
    December 17, 2011

    More of a technical market recap today and less about the overall trade thesis but remember “this is a credit event that equity will be forced to acknowledge.” Follow the currencies and stay focused. Stay on message.

    As for the trade thesis it is still intact. Below are a few notables and then the technicals.

    EUR basis swap rates (measures the demand for USD) did move higher from (140) on Thursday to (121) today which is a tad concerning but nothing moves in a straight line so unless we see a number of these moves higher I would not be too alarmed.

    Commodities did bounce a little today, nothing too special. Considering they have been sold pretty hard the past few days a bounce was expected. Key levels including the 200MA remain higher than the current price of gold, copper and oil which further confirms the bearish action earlier in the week.

    Martin Armstrong’s computer model has 1,405 as the year end target for gold. He’s pretty good at modeling (capital markets that is). If that plays out we have 10% more downside in gold in the coming two weeks. His 2012 models forecast even lower prices before finally putting in a bottom.

    Currencies look to simply be consolidating in a bear flag on the EUR and bull flag on the USD (charts below).

    Currencies

    Notice the intraday bear flag and bull flag on the EUR and USD respectively over the past few days. Right now it appears to be a simple pause before continuing their trends lower (EUR) and higher (USD). The USD tried to pop out at 80.40 but failed earlier in the session.

     

    Commodities

    The Powershares Commodity Index (DBC) did recapture the downtrend from the failure on Thursday. Which isn’t anything bullish other than to say it may bounce before moving lower as the “down” trend is down. Interesting it sits just 4% off the October lows while the SPX sits 13%. Talk about a divergence. DBC would say the SPX is 110 points rich.

    Treasuries

    Another big move in the treasuries today with the 30 year and 10 year moving 7 and 6 bp lower in yield respectively. Below is a 10 year yield chart (TNX) which has moved a whopping 21 bp in the past four sessions from 2.06% to 1.85%. The October 4 low in equities saw the 10 year at 1.72%, not very far from current levels. Yet another massive divergence.

    Equities

    As for the SPX the fact that price has stalled at the highs and sold off into the close the past two days is a sign that buyers are simply getting overrun by sellers. Whether that continues into next week is unclear but it does not look very bullish. Support comes in at 1190 range should this wedge pattern be in play.

    Longer term over the next few weeks a strong technical argument can be made for the 1050 range aside from the “credit event” which if plays out could mean far lower prices.

    Bottom Line

    Nothing has changed with this trade. Timing is still the unknown and we will get a better sense of how fast it plays out by watching the USD Sunday evening through early next week. A break of the $81.30 area would be very bullish and would signal the credit event is accelerating.

    There was some nonsense chatter today about the ECB and a “stealth QE” but that is all it was, nonsense.  The ECB announced new lending facilities two weeks ago and yet the market rumor mill was somehow trying to say that today it was considered stealth QE. Sorry but it’s just the national banks trying to use ECB lending to stop the capital calls by putting a bid under the junk collateral they own and are pledging in the repo markets.

    The big question now is will Santa bring some bids next week or will the Grinch via a French downgrade spoil the party. We will know soon.

    Images: Flickr (licence attribution)

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