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Monday, July 13, 2009
Sunday, June 14, 2009
Crude oil update
Crude oil is now in the final impulse of the corrective upmove that began in late Feb this year. Prices have now risen to level which are consistent with resistance level of previous lower degree corrective 4. In previous updates I had mentioned the probability that oil will peak out at $68 - $72 range and a final impulsive peak cab be expected at $76 if these price levels are breached.
Currently crude oil traded at $72.5 in after hours globex market. Current Elliott wave structure suggest that the final leg 5 of 5th of wave ‘C’ is in force. Wave ‘5’ is tracing out an expected ending diagonal pattern. Strategy should be to wait and sell crude oil short on a break below $70.5 on completion of this pattern.
Currently crude oil traded at $72.5 in after hours globex market. Current Elliott wave structure suggest that the final leg 5 of 5th of wave ‘C’ is in force. Wave ‘5’ is tracing out an expected ending diagonal pattern. Strategy should be to wait and sell crude oil short on a break below $70.5 on completion of this pattern.
Wednesday, June 03, 2009
‘V’ is the word for 2009
‘V’ is the word for 2009 so far. I don’t know many market participants who saw the current market rally to be so furious and so fast. Neither did I expect. At best many traders called for a 50% rally over a period of few quarters. Now with most of stock Indices hovering around their 200 DMA in western markets and all Asian indices much higher from their 200 DMA question still looms whether we have entered a bull market or not. In my previous updates on S&P CNX Nifty 50, i.e. the Indian stock index, I had mentioned that prices suggest a bottom when we crossed above the all crucial level of 3200. Asian market too looks like they have formed a strong base. The trouble is the western stock markets. There is no clear indication from these indices whether this is a bear market rally or beginning of a new bull market.
The US stock markets have risen sharply over the last two months. The S&P 500 has rallied to a new high for 2009 which is 39.6% above the March 9th low. There are sector which have rallied in excess of 50% like materials and financials. There are some important changes in different markets that have occurred in the current calendar year. The US yield curve has steepened significantly and commodity prices have staged a strong rally along with an incessant fall in USD. The rising bond yields in a deflationary expectation scenario gave an early signal that stock prices will rebound sharply over a period of time. Equity markets always lag the bond markets and this was true this time also. There are two distinct signals that come from rising bond yields. First is the clear expectation of market participants that the economy is going to recover and growth will lead to inflation. Bond yields would also rise if there is an expectation of inflation without growth. This is a rare phenomenon and can occur only in case of misallocation of capital. This may happen if there is demand for goods and services due to excess liquidity instead of rise in base aggregate demand. Now the current scenario has seen continued unemployment in the US, EU and other western markets. There is continued weakness in retail sales and housing markets in whole of the western world. With stocks rising steadily, the real economy has not thrown out numbers which should appear after such a market recovery. This means that the monetization of debt has lead to a dramatic rise in expectation of a high inflation environment just after a severe deflationary threat. If we see the trajectory of inflation for the last one decade, there has been a dramatic shift from high inflation expectation – just at the turn of the century, then a deflationary threat due to tech bubble, then a high inflationary scenario due to the oil shock and back to deflationary expectation because of the financial melt down. The rapid change in inflationary expectation has been due to the severe monetary policy measured taken by central banks all over the world. The central bank either cut rates too low too soon or remained stubborn over a period of poor growth environment with high interest rates.
With bond yield steadily rising in the western world there is another phenomenon that explains the rise in bond yields. The buyers of western agency and government debt, especially the Asian countries are now worried about the long term stability of most of the western currencies and economies. This is leading them to purchases short term debt and either selling or not buying the long term debt especially in the US. This is leading to a steeping yield curve and a seeming expectation of a rise in inflation expectation. However this theory suffers from a serious threat from commodity prices. Most of inflation sensitive commodities like oil and copper have risen sharply. Gold has lagged this rally but is still near its all time high. The commodity indices have rallied sharply and steadily with support from agricultural commodities which are not directly linked with inflation and are generally cyclical and seasonal. The USD has been another factor which has supported this rally in energy, metals and some agricultural markets. The markets are devaluing the USD and there is a seeming revaluation of commodity prices. It’s been seen time and again the social moods drive the economy rather than the other way round. The bear market of 2008 has left most of the participants fearful of a fall in stock markets. Even a slight correction triggers bad investor confidence and poor financial reporting. So it’s prudent to keep and eye on how the USD moves once equity markets correct. Ultimately investors and governments along with their central banks have always returned to USD in times of crises and it becomes the safe haven when there is a real panic in the market. The argument that USD is doomed in the long term have held but in times of crises investors fear for their funds to be in a place which is ‘too big to fail’ or with some real value like gold.
Rising bond yield combined with huge monetization of debt and an every increasing money supply is creating inflationary expectation. More than any where else the Asian markets with excessively low inflation, high money supply and growing economies are being targeted by all the excess liquidity in the markets. This massive money supply which is not being lent to consumers in the western markets is now travelling to emerging markets and to any other asset class which has some real value or growth expectation. Stock prices in Asia have exploded without any correction as foreign investors flock to these markets. This was augmented with a huge short covering that triggered the bottom in most emerging market equity indices.
Current intermarket relationships suggest that rising bond yields are indeed pointing to inflationary expectation. If bonds stage a rally from the current level, which looks like it would happen sooner than later, it is just a matter of time before the downtrend begins again as high inflation scenario is here to stay for the next few years.
For the next few weeks to quarters focus should be given to movements in the USD, Euro and JPY along with the strength in gold. If equity markets see strong falls on rising volumes and gold rises with ever increasing investment demand, it would be good to have your funds in commodities which have value. Asian and emerging market might be the bubble of the new millennium built of the highest money supply that was ever created.
The US stock markets have risen sharply over the last two months. The S&P 500 has rallied to a new high for 2009 which is 39.6% above the March 9th low. There are sector which have rallied in excess of 50% like materials and financials. There are some important changes in different markets that have occurred in the current calendar year. The US yield curve has steepened significantly and commodity prices have staged a strong rally along with an incessant fall in USD. The rising bond yields in a deflationary expectation scenario gave an early signal that stock prices will rebound sharply over a period of time. Equity markets always lag the bond markets and this was true this time also. There are two distinct signals that come from rising bond yields. First is the clear expectation of market participants that the economy is going to recover and growth will lead to inflation. Bond yields would also rise if there is an expectation of inflation without growth. This is a rare phenomenon and can occur only in case of misallocation of capital. This may happen if there is demand for goods and services due to excess liquidity instead of rise in base aggregate demand. Now the current scenario has seen continued unemployment in the US, EU and other western markets. There is continued weakness in retail sales and housing markets in whole of the western world. With stocks rising steadily, the real economy has not thrown out numbers which should appear after such a market recovery. This means that the monetization of debt has lead to a dramatic rise in expectation of a high inflation environment just after a severe deflationary threat. If we see the trajectory of inflation for the last one decade, there has been a dramatic shift from high inflation expectation – just at the turn of the century, then a deflationary threat due to tech bubble, then a high inflationary scenario due to the oil shock and back to deflationary expectation because of the financial melt down. The rapid change in inflationary expectation has been due to the severe monetary policy measured taken by central banks all over the world. The central bank either cut rates too low too soon or remained stubborn over a period of poor growth environment with high interest rates.
With bond yield steadily rising in the western world there is another phenomenon that explains the rise in bond yields. The buyers of western agency and government debt, especially the Asian countries are now worried about the long term stability of most of the western currencies and economies. This is leading them to purchases short term debt and either selling or not buying the long term debt especially in the US. This is leading to a steeping yield curve and a seeming expectation of a rise in inflation expectation. However this theory suffers from a serious threat from commodity prices. Most of inflation sensitive commodities like oil and copper have risen sharply. Gold has lagged this rally but is still near its all time high. The commodity indices have rallied sharply and steadily with support from agricultural commodities which are not directly linked with inflation and are generally cyclical and seasonal. The USD has been another factor which has supported this rally in energy, metals and some agricultural markets. The markets are devaluing the USD and there is a seeming revaluation of commodity prices. It’s been seen time and again the social moods drive the economy rather than the other way round. The bear market of 2008 has left most of the participants fearful of a fall in stock markets. Even a slight correction triggers bad investor confidence and poor financial reporting. So it’s prudent to keep and eye on how the USD moves once equity markets correct. Ultimately investors and governments along with their central banks have always returned to USD in times of crises and it becomes the safe haven when there is a real panic in the market. The argument that USD is doomed in the long term have held but in times of crises investors fear for their funds to be in a place which is ‘too big to fail’ or with some real value like gold.
Rising bond yield combined with huge monetization of debt and an every increasing money supply is creating inflationary expectation. More than any where else the Asian markets with excessively low inflation, high money supply and growing economies are being targeted by all the excess liquidity in the markets. This massive money supply which is not being lent to consumers in the western markets is now travelling to emerging markets and to any other asset class which has some real value or growth expectation. Stock prices in Asia have exploded without any correction as foreign investors flock to these markets. This was augmented with a huge short covering that triggered the bottom in most emerging market equity indices.
Current intermarket relationships suggest that rising bond yields are indeed pointing to inflationary expectation. If bonds stage a rally from the current level, which looks like it would happen sooner than later, it is just a matter of time before the downtrend begins again as high inflation scenario is here to stay for the next few years.
For the next few weeks to quarters focus should be given to movements in the USD, Euro and JPY along with the strength in gold. If equity markets see strong falls on rising volumes and gold rises with ever increasing investment demand, it would be good to have your funds in commodities which have value. Asian and emerging market might be the bubble of the new millennium built of the highest money supply that was ever created.
Tuesday, June 02, 2009
Nickel Update
"If prices are able to close above 13700 for the week, it would be bullish. Nickel can rise to 17500 - 18000 range on a sustained breakout above this level" - Last update on Nickel.
The current picture on graphs looks like this -
Prices have come out of a range after nearly 8 months and look set to rise further. I see just one concern here that Nickel inventory remains very high relative to other metals. The LME inventory and other private warehouse stocks are still high. Weak demand combined with high availability of the metal has been able to cap prices for quite sometime. Look for a surge in volume for prices to confirm the current uptrend. Risk levels are now at $13000.
The current picture on graphs looks like this -
Prices have come out of a range after nearly 8 months and look set to rise further. I see just one concern here that Nickel inventory remains very high relative to other metals. The LME inventory and other private warehouse stocks are still high. Weak demand combined with high availability of the metal has been able to cap prices for quite sometime. Look for a surge in volume for prices to confirm the current uptrend. Risk levels are now at $13000.
WTIC and Copper wave count update
Last update showed how these two commodities are entering the 5th wave impulse. Copper prices have risen strongly and are now at fresh highs for 2009. The 5th wave of the wave '1' of new impulse is now in progress. Strong confluence resistance rests at levels of 242 and then 250 - 264 range. The triangle formation completion has invalidated the previous alternate count and emphasized the base count. See the following graph
Crude oil entered the 5th wave of wave 'C' of final corrective wave 4. The wave 3 of 5 is nearing completion and crude oil might take a breather before tracing out wave 4 and 5. Please see previous post for complete update. Following is the short term graph -
There is strong confluence resistance at $68 - $72 range. Look for rally to exhaust at these levels. Further resistance is at $76 if these levels do not hold.
Monday, June 01, 2009
USDJPY
USDJPY on weekly graph looks a good bet on the short side. 50 Week MA has capped the prices well. We got a nice bounce on daily graph.
Weekly MACD and Stochastic are now in sell mode and RSI (21-week) has broken down below 50.
This is a good long term short with a risk level of 101 and adding expected further weakness below 93 daily close. Expect prices to decline below previous lows of 87.
Weekly MACD and Stochastic are now in sell mode and RSI (21-week) has broken down below 50.
This is a good long term short with a risk level of 101 and adding expected further weakness below 93 daily close. Expect prices to decline below previous lows of 87.
Friday, May 29, 2009
Nickel is back in action!!!
Nickel prices went into a deep consolidation/basing out pattern for the last 8 months. Price is now above all significant DMA levels.
If prices are able to close above 13700 for the week, it would be bullish. Nickel can rise to 17500 - 18000 range on a sustained breakout above this level.
If prices are able to close above 13700 for the week, it would be bullish. Nickel can rise to 17500 - 18000 range on a sustained breakout above this level.
Natgas Jumps again!!!
Natural Gas prices very sharply up after retracing the previous rise. In the last post I had highlighted that Natgas is a buy on any weakness and this dip is an excellent opportunity to be on the long side of Natgas.
See these graphs -
Current prices have a strong support at swing low of $3.38 and pivot support is at $3.10. Natgas is expected to rise to $5 from current price levels.
See these graphs -
Current prices have a strong support at swing low of $3.38 and pivot support is at $3.10. Natgas is expected to rise to $5 from current price levels.
Thursday, May 28, 2009
Elliott wave Analysis - Crude oil nearing top
Taking previous view on crude oil forward it seems crude oil is now in a process of toping out. Yesterday’s price action is suggestive of price entering 3 of 5 of C.
Once this final 5 wave upmove exhausts price would reverse.
Current wave count suggest that price may top at around $68 - $70 range before beginning their down move to previous lows of $33 and further to new lows.
Once this final 5 wave upmove exhausts price would reverse.
Current wave count suggest that price may top at around $68 - $70 range before beginning their down move to previous lows of $33 and further to new lows.
The complete down wave 3 was from 128.6 to 32.4. We look for fourth wave to retrace 38.2% of this wave which is at about $70. The corrective ABC calls for C = 1.618 X A which is at $62.5 and C = 2.0 X A is at $70.
Lower degree fourth wave of an extended third ended at $71.6.
There is a strong confluence resistance at $68 - $72 price levels.
On a one hour graph the rally looks impulsive. Look for sign of exhaustion after price jumps above $65.
Wednesday, May 27, 2009
USD/AUD long term trend
Australian dollar made a significant H&S pattern on its long term graph against the USD. However this pattern failed and prices fell below the neckline which is at 0.80 currently.
Previous support has now turned to resistance.
Monthly 25 Years Graph
The bull market in AUD was broken decisively in July last year. Since then AUD got cut into half against the USD. This rebound can be seen as a bear market rally which has retraced 50% of the complete fall.
Weekly 10 Years
A significant turn can occur at the current price range of 0.80 – 0.85.
Incidentally 0.85 is also the target prices by measured move analysis of short term double bottom formed in USDAUD on a daily graph. RSI is diverging and current market action is now looking topish. If prices reverse from these levels we should look to go short on AUD against the USD for target of previous low of 0.60 and further.
Daily 2 years
Previous support has now turned to resistance.
Monthly 25 Years Graph
The bull market in AUD was broken decisively in July last year. Since then AUD got cut into half against the USD. This rebound can be seen as a bear market rally which has retraced 50% of the complete fall.
Weekly 10 Years
A significant turn can occur at the current price range of 0.80 – 0.85.
Incidentally 0.85 is also the target prices by measured move analysis of short term double bottom formed in USDAUD on a daily graph. RSI is diverging and current market action is now looking topish. If prices reverse from these levels we should look to go short on AUD against the USD for target of previous low of 0.60 and further.
Daily 2 years
Crude oil and copper wave count
Crude oil and copper has given an impressive rally in the past few months. Copper prices bottomed out before equity markets started the current uptrend and crude oil followed with a lag.
The current market picture in copper is impressive as elliott wave structure saw termination of the bear trend at the bottom. Now copper is in the process of forming the first impulse of the new bull market. The following graph will make it clear.
The current market picture in copper is impressive as elliott wave structure saw termination of the bear trend at the bottom. Now copper is in the process of forming the first impulse of the new bull market. The following graph will make it clear.
The alternate count shown above will have a very high probability if copper trades below 200 for a few days. Termination of wave 1 may occur at 245-250 range if the triangle completes.
Crude oil prices have rebounded sharply. As I had mentioned in the last post here that crude oil is still in the fourth wave of the wave 'A' correction, it has taken an expected amount of time to reach the current price levels. The current price picture is now calling for termination of the current uptrend in few weeks. Take a look at this graph. For previous posts see this link
Crude oil rally looks like nearing exhaustion. On hourly graphs we have entered the wave 5 of 5 of C. Look for reversal pattern in days to come, retracements can be very deep.
Tuesday, May 26, 2009
Elliott Wave Count on Gold - X
Looks like current price move is going to make new highs. I have highlighted this fact in the previous post.
View all posts on Elliott Wave Count on Gold - Click here
Please take a look at the graph below. Risk reward is now in favour of bulls. $860 is now a clear support for upside targets of $1200.
Long term trend now looks like this-
View all posts on Elliott Wave Count on Gold - Click here
Please take a look at the graph below. Risk reward is now in favour of bulls. $860 is now a clear support for upside targets of $1200.
Long term trend now looks like this-
Friday, May 22, 2009
Markets getting back to normal??
Gold prices are now rising relative to every currency and commodity. Gold is expensive in terms of energy, metals and other major currency. With the last elliott wave count in gold giving out the possibility that gold prices are entering a period of weakness and may test $700. However, in the short term it has completed a corrective pattern and is set to rise. I would update the count itself in the next post.
Now it looks like the money that has been thrown into the world markets by all central banks is doing a great good to the commodity markets. All currencies are falling relative to commodity markets especially the metals and precious metals indices. This is good news for the central bankers. The bad news is that stock markets are losing steam and some technical studies are turning bearish. But they have not given a clear sell as yet. Take a look at the following graphs -
Gold
Gold prices have come out of a strong flag pattern. The price study shows strong rise in volatility and with the trend up we can see gold benefiting strongly to the upside if stocks break down. With USD weakening, gold is getting the benefit.
S&P 500
Time and again I have seen seeming double top turn to double bottom. So wait for SPX to break below 875 to confirm a sell. But be cautious. Bands are signalling a sell.
Various other indices have given strong divergence. One important case in point is the US homebuilders ETF. It is forming a H&S on the neckline of an inverted H&S which will give an above average move is it breaks down.
XHB - Homebuilders ETF
Various risk gauge are turning positive. In the last one year there has been a serious discrepancy in the movement of certain markets in relation to the other. The USD and gold were moving in tandem, bond and stocks very moving opposite, USD and stocks were moving in opposite direction. These long term correlations were exact inverse of what they are in a normal market scenario. This was primarily due to the deflation expectation in the market. See this article from Marketwatch
A number of indicators are now showing that markets are getting out of this expectation and deflation expectation is actually abating. Certain markets like gold, metals and energy have started pricing in some inflationary expectation. This sounds very comforting but with rising unemployment and thawed consumer debt market, this could well turn out to be another nightmare.
The scenario that can now playout is a strong rally in commodities can lead to a rise in inflation. If this is combined with some money into the hands of consumer it could well buy some more time for debt implosion. Still its a mess that Central bankers have chosen to get into. If this fails then deflation spiral would be deep and would take years to go away. Markets are signalling some expectation of things improving but a reversal in stock prices would be the key to watch.
It is quite dramatic to observe the socio economic patterns as they turn out. The latest rally in stocks is actually helping companies to raise money, debt. It is not the other way round. So if stock prices fall again it would be just the test that is required to gauge the strength of economic improvement being witnessed. Bull markets don't emerge when we do less badly, they emerge when we can't do anything.
May would be interesting.
Comments are welcome.
Wednesday, May 20, 2009
USD holding on
USD index has broken all trend line supports and looks quite vulnerable. In my last Euro update I wrote that Euro might be entering the 3 of 3 which proved wrong. Euro remained in its previous range and is still unable to take out its previous high.
Now USD eliiott wave count on the index looks like this. I think the current structure calls for the termination of wave (ii) after which USD will enter wave (iii) to the upside.
This view will be negated below the USD index level of 76. Take a look -
Now USD eliiott wave count on the index looks like this. I think the current structure calls for the termination of wave (ii) after which USD will enter wave (iii) to the upside.
This view will be negated below the USD index level of 76. Take a look -
Market Mayhem - Index explodes
S&P CNX Nifty closed 17% up after the congress came to power again at the centre. It was largely an unexpected result. Especially for me as it defied the trend in other countries which voted out the incumbent governments due to terrorism and financial meltdown. However the verdict created euphoria seen never before and has thrown open the door for our markets to remain the best performing market for the next few years.
The elliott wave count now looks a bit easy to interpret as the rule violation of 3 being the shortest is over. We clearly saw an extension in the third wave and now are in wave 5 of the higher degree wave 1. This means we are about to end the first impulse of the next big bull run. I have been writing this again and again that this is the last leg of uptrend. But it has stretched beyond expectation and it would be wise to wait for it to turn. Meanwhile CNX IT index has formed a definitive reversal signal and looks set to lead on the way down.
The latest elliott wave count on S&P CNX Nifty looks like this -
Your comments and analysis is welcome.
The elliott wave count now looks a bit easy to interpret as the rule violation of 3 being the shortest is over. We clearly saw an extension in the third wave and now are in wave 5 of the higher degree wave 1. This means we are about to end the first impulse of the next big bull run. I have been writing this again and again that this is the last leg of uptrend. But it has stretched beyond expectation and it would be wise to wait for it to turn. Meanwhile CNX IT index has formed a definitive reversal signal and looks set to lead on the way down.
The latest elliott wave count on S&P CNX Nifty looks like this -
Your comments and analysis is welcome.
Monday, May 11, 2009
Thursday, May 07, 2009
Mometum Divergence
Nifty is witnessing strong divergence on various momentum oscillator. Yesterday Nifty formed an outside day which was preceded by a Doji Star pattern. These combination pattern signals exhaustion of the current move and combined with heavy divergence it would limit upside in the index.
This suggest long positions should either be exited or trailed. Selling pressure would be intensified below 3500.
This suggest long positions should either be exited or trailed. Selling pressure would be intensified below 3500.
Natgas Breaks out
Natural gas has broken out of a strong downtrend line. The prices surged yesterday closing above 50 DMA on NG continuous contract for the first time after it fell from its peak of 13.69.
Although US is swiming in Natgas with oversupply, the prices are now breaking out for the first time. This market is now clearly a buy on correction market.
Although US is swiming in Natgas with oversupply, the prices are now breaking out for the first time. This market is now clearly a buy on correction market.
Tuesday, May 05, 2009
Swift trade update!!
Last week I wrote that market may correct to lower levels. It proved dead wrong as markets regained strength. I have been counting the advance in five waves and last two weeks price range was looking like more of distribution in wave 'b'. However I have to revise the count to the wave 5 in progress of a higher degree wave (I) of a new bull market. A correction may take place once wave 5 exhausts. See the following graph -
In the above graph -
Wave 1 = 2539 to 3103 equals 564 points
Wave 3 = 2962 to 3511 equals 549 points
Wave 5 = 3309 to 3664 equals 355 points till now, may be its the high!!
Now wave 5 cannot be larger than 550 points as it will make wave 3 the shortest and negate the entire 5 upmove count of being a five wave upward impulse. So it looks clear that whatever is the extent of rise Nifty should remain capped at 3844. If it breaks that level too than the whole move becomes corrective. Overall the structure looks healthy and topish. Wave 1 will end with a surprise, overnight. Time projections still have room till mid of may. But Looks like a clear case of being very cautious with mid caps and some large caps.
In the above graph -
Wave 1 = 2539 to 3103 equals 564 points
Wave 3 = 2962 to 3511 equals 549 points
Wave 5 = 3309 to 3664 equals 355 points till now, may be its the high!!
Now wave 5 cannot be larger than 550 points as it will make wave 3 the shortest and negate the entire 5 upmove count of being a five wave upward impulse. So it looks clear that whatever is the extent of rise Nifty should remain capped at 3844. If it breaks that level too than the whole move becomes corrective. Overall the structure looks healthy and topish. Wave 1 will end with a surprise, overnight. Time projections still have room till mid of may. But Looks like a clear case of being very cautious with mid caps and some large caps.
Tuesday, April 28, 2009
A Swift Trade!!!
S&P CNX Nifty looks like a nice sell here. See the following graph -
Momentum oscillators have broken down and market will give a highly bearish close if it closes below 3280 to complete a double top pattern. Looks like we are heading to 3100 and possibly 2900. Risk is a new high above 3525.
Momentum oscillators have broken down and market will give a highly bearish close if it closes below 3280 to complete a double top pattern. Looks like we are heading to 3100 and possibly 2900. Risk is a new high above 3525.
Euro set up for three!!
An update for Euro.
The brutal down leg may just have started. Ride the three of three. Resistance is at 1.34, again reward is big till 1.25. See the following graph and see previous update here - Euro wave Count
Beware of the stocks as well. SPX and DJIA are forming impulsive downwaves.
The brutal down leg may just have started. Ride the three of three. Resistance is at 1.34, again reward is big till 1.25. See the following graph and see previous update here - Euro wave Count
Beware of the stocks as well. SPX and DJIA are forming impulsive downwaves.
Monday, April 27, 2009
The fallacy of oneness!!!
Market correlations sometimes become so strong that it is difficult to believe that they will cease to exist one day. From the 1st day of my watching the quote screen there has been news. I have seen news being bombarded on everyone from financial journalist some of whom have never seen a trading platform. They report that Market 'A' closed down or up due to Market 'B'. This is nonsensical to say the least.
As a student of intermarket analysis, it is difficult for me the explain the fallacy of correlation. To be a student of the markets one has to be a student of psychology. Mass psychology is difficult to analyse as it involves many individual. It is always dual in nature. False in its projection and true in its action. We are unable to respect the individuality of each market participant as a decision maker and the combined decision of the market as a whole. This dual relationship leads to the dispersion in prices. Think of prices as thoughts. Most individuals have their own thoughts, some use others' and yet someone have none. Or some market participants dictate prices, some use this dictation and yet some others use the product. From my own experience, I think there are just one in hundred individual who 'wants' to dictate the price. The one who has his own price. It can be right of wrong, low or high. But there is a price, which the market has to accept as an input. Out of this 1 percent there are some individuals who are able to convey the correct price to the market, through their actions. The force of action in the markets being the application of money.
Duality, leads us to perfection. But perfection will lead us to death. Market participants generally follow the direction of being 'guided by the price'. Ironically the tag line of this blog is the same - 'An unbiased view of the markets guided by prices'. Unbiased changes it all. Nonetheless, market participants are trying to get towards the third category of participants. Those who have no thoughts or to say prices of their own. They just take what is given to them. Most of the technical analyst and fundamental analyst fall in this category. They take the historical data of prices or any other parameter and practice a closed vision. Their trading methods become like a auto pilot with no 'sense' of the future but all the inventory of the past.
What is necessary is to move towards the progressive market participants. I call them the alpha. They are the beginning to the deep wealth that can be explored inside the daily pandemonium of financial markets. Alpha would always have the inventory and would know exactly what it tells. It would be ready to share and analyse(give and take) other's inventory of prices(thoughts). But the only difference it has from the other two forms that it would have its own prices.
I was curious to find out that whether current market conditions are as chaotic as they were in the last or the crisis before that. I realized that conditions are less chaotic today. History tells us that the current pace of economic degrowth is one of the worst, if not worst. Even the economic indicators are worse than they were in the most other recession or economic crisis. The public reaction to the events have not been same though. Human beings grow and evolve. People have evolved, they understand that economic growth and degrowth are part of the story, like joy and sorrow. These are the laws of nature so to say. But again as human progress is one phenomenon which is against the law, the change or progress in the market participants sentiment is too against the law of the nature. Market participants have grown. Today we may have very few people who belong to the third category I called the alpha, but they are very large in number than they were. I know this to be true. If it were to be any other way, we would have been at the same economic stand point as we were before alpha started rising.
I have mentioned this concept of rising ticks in financial markets. What it means is that with every passing day, there are more and more financial instruments being traded and added. This leads to a rise in number of ticks traded. Each individual in its own capacity trade more frequently than before. This has been possible due to decrease it transaction costs, increase in technology and a general progressive nature towards the understanding of the financial markets. I have been a critical of this rise. But now I believe this is the one of the few things that has added or raised the bar for rationality in financial markets. Though the concept is again dual in nature, that it involves an increase in lesser degree irrationality and a decrease in higher degree rationality. With a rise in higher degree rationality, meaning long term correctness of the prices the progressive nature of participants is realized. If market participants are evolving and are becoming more efficient than what is giving 'in'. There has to be something which has to given in. Again progress is the eddy. It cannot the explained. What just rises in the entropy. This doesn't mean that markets are progressing towards death, they are actually progressing towards being in a conscious state of correctness and still being away from it. 'The duality'.
Needless to say that my writing and communication skills are inferior to convey exactly what I believe. I still feel market participants who understands this duality would know. And a closing thought is to still know that life and death is a constant occurrence. It is not applicable more anywhere than the financial markets. We evolve every time we perish.
As a student of intermarket analysis, it is difficult for me the explain the fallacy of correlation. To be a student of the markets one has to be a student of psychology. Mass psychology is difficult to analyse as it involves many individual. It is always dual in nature. False in its projection and true in its action. We are unable to respect the individuality of each market participant as a decision maker and the combined decision of the market as a whole. This dual relationship leads to the dispersion in prices. Think of prices as thoughts. Most individuals have their own thoughts, some use others' and yet someone have none. Or some market participants dictate prices, some use this dictation and yet some others use the product. From my own experience, I think there are just one in hundred individual who 'wants' to dictate the price. The one who has his own price. It can be right of wrong, low or high. But there is a price, which the market has to accept as an input. Out of this 1 percent there are some individuals who are able to convey the correct price to the market, through their actions. The force of action in the markets being the application of money.
Duality, leads us to perfection. But perfection will lead us to death. Market participants generally follow the direction of being 'guided by the price'. Ironically the tag line of this blog is the same - 'An unbiased view of the markets guided by prices'. Unbiased changes it all. Nonetheless, market participants are trying to get towards the third category of participants. Those who have no thoughts or to say prices of their own. They just take what is given to them. Most of the technical analyst and fundamental analyst fall in this category. They take the historical data of prices or any other parameter and practice a closed vision. Their trading methods become like a auto pilot with no 'sense' of the future but all the inventory of the past.
What is necessary is to move towards the progressive market participants. I call them the alpha. They are the beginning to the deep wealth that can be explored inside the daily pandemonium of financial markets. Alpha would always have the inventory and would know exactly what it tells. It would be ready to share and analyse(give and take) other's inventory of prices(thoughts). But the only difference it has from the other two forms that it would have its own prices.
I was curious to find out that whether current market conditions are as chaotic as they were in the last or the crisis before that. I realized that conditions are less chaotic today. History tells us that the current pace of economic degrowth is one of the worst, if not worst. Even the economic indicators are worse than they were in the most other recession or economic crisis. The public reaction to the events have not been same though. Human beings grow and evolve. People have evolved, they understand that economic growth and degrowth are part of the story, like joy and sorrow. These are the laws of nature so to say. But again as human progress is one phenomenon which is against the law, the change or progress in the market participants sentiment is too against the law of the nature. Market participants have grown. Today we may have very few people who belong to the third category I called the alpha, but they are very large in number than they were. I know this to be true. If it were to be any other way, we would have been at the same economic stand point as we were before alpha started rising.
I have mentioned this concept of rising ticks in financial markets. What it means is that with every passing day, there are more and more financial instruments being traded and added. This leads to a rise in number of ticks traded. Each individual in its own capacity trade more frequently than before. This has been possible due to decrease it transaction costs, increase in technology and a general progressive nature towards the understanding of the financial markets. I have been a critical of this rise. But now I believe this is the one of the few things that has added or raised the bar for rationality in financial markets. Though the concept is again dual in nature, that it involves an increase in lesser degree irrationality and a decrease in higher degree rationality. With a rise in higher degree rationality, meaning long term correctness of the prices the progressive nature of participants is realized. If market participants are evolving and are becoming more efficient than what is giving 'in'. There has to be something which has to given in. Again progress is the eddy. It cannot the explained. What just rises in the entropy. This doesn't mean that markets are progressing towards death, they are actually progressing towards being in a conscious state of correctness and still being away from it. 'The duality'.
Needless to say that my writing and communication skills are inferior to convey exactly what I believe. I still feel market participants who understands this duality would know. And a closing thought is to still know that life and death is a constant occurrence. It is not applicable more anywhere than the financial markets. We evolve every time we perish.
Saturday, April 25, 2009
Market Mayhem - The Big spike
Last time I wrote that prices are signalling an end to the bear market. I was rather interested in finding out whether the previous bear markets ended in the same manner that we witnssed this time. WIthout much delay, take a look at the following graph. It is very similar to the graph made by dshort.com. Actually I was interested in making one for the sensex.
There is a compelling evidence that the last bear market of 2000 is similar to the current move. The bottoming out process is quite similar and the subsequent rally is also significant.
Coming to the Elliott wave analysis, we are forming the wave '1' of a larger degree impulsive wave to the upside. The current move suggest that the wave '1' is in the final stages of formation and may end near the levels of 3500 - 3600. The subsequent wave '2' would be a zig-zag and would be deep.
Sensex - The Four Bear Markets
There is a compelling evidence that the last bear market of 2000 is similar to the current move. The bottoming out process is quite similar and the subsequent rally is also significant.
Coming to the Elliott wave analysis, we are forming the wave '1' of a larger degree impulsive wave to the upside. The current move suggest that the wave '1' is in the final stages of formation and may end near the levels of 3500 - 3600. The subsequent wave '2' would be a zig-zag and would be deep.
Tuesday, March 31, 2009
Market Mayhem: End of the mayhem?
I started writing this blog post with the headline 'market mayhem' with a view that stock prices in India had a huge room to fall. Back then markets were trading at 5000 Nifty Index level. Over the period of time we have seen periods of very high inflation where domestic CPI touched levels of 20% in some cities. With stocks being punished heavily due to risk aversion sentiment across the equity market there was little respite for any sector.
In the last few months little has changed in the sense of economic parameters other than some fiscal measures and another round of same old monetary medicine being administered by RBI in India.
Lets see what has really changed for India in the present scheme of things.
First is the change in the apparent value of Indian equity markets. The last few years were exceptional where foreign money scrambled for stocks in emerging markets with a view to make superior returns. In think this sentiment will not return for years to come. The very base of this capital flow was institutional money and lot of super HNI clients investing through the hedge fund route. That would stop as most of these so called alternate investment funds in western markets have gone under.
The basic foundation of the Indian growth story has been higher domestic demand. However, the real demand has to remain robust over the next few years in order to drive the economic growth. Indian central bank has blindly followed other banks to increase money supply in order to end the current credit crisis. In the short term it may work, but over a period of time, this would be a disaster in itself if not controlled. Fiscal measures is the need of a growing economy, if at all any measure is required for a free market to grow. Too much control in the hand of central banks have done nothing great in the past and would not help in the future.
Second, Indian growth story would get stronger with rising income levels as propensity to consume and produce increases. It should in no way be magnified with excess capital, read money supply, without considering its after effects. A proper mechanism for growth would be to reward growing sectors and reduce entry barriers in under performing sectors. Indian policy makers are know to do the opposite. Financial sector in no way should become the central and core issue in policy making. In the last few years, pricing issues, financial regulations and price controls have dominated the policy making in India. This trend is dangerous for the long term health of the economy. Rather policy making should focus on core sectors like mining, power and infrastructure.
Third, for any sustainable economic development to happen, domestic power generation has to rise multi fold. This would lead to increase in the standard of living in various small town regions and induce economic stimulant effect.
I would cut a long story short here. Lets just see what the markets have to offer here. Now, in the short term the stock prices are showing a strong trend. There is very little activity in other markets which shows similar price action.
Indian bond markets have given clear signals of loose monetary policy in the next few quarters. However other markets are not showing very strong signals. Indian rupee has not strengthened and remains a weak point to build a bullish case. Commodity prices in India are still falling and are expected to remain soft.
Indian growth story is going to rebound by the end of this year. This is apparent from relative strength in equity prices. However bond yields need to remain low for economic growth to get the necessary stimulant effect of fiscal measures. But market driven yields on the long end of Indian markets show expectation of strong economic growth.
Going to the elliott wave count that I had posted earlier. I think the wave '5' down of ABC has resolved in a truncation. Though markets have gone into a rectangular formation and there is actually a low probability of any view being right here, I feel markets have formed a cyclical bottom if not a major bottom. See the following graphs. A good strategy from here is to buy out performing sectors which are dirt cheap when index goes down to 2780 to 2850 levels. See the following graphs. I think there is risk to this count but this is the most probable count at present.
Nifty Daily
In the last few months little has changed in the sense of economic parameters other than some fiscal measures and another round of same old monetary medicine being administered by RBI in India.
Lets see what has really changed for India in the present scheme of things.
First is the change in the apparent value of Indian equity markets. The last few years were exceptional where foreign money scrambled for stocks in emerging markets with a view to make superior returns. In think this sentiment will not return for years to come. The very base of this capital flow was institutional money and lot of super HNI clients investing through the hedge fund route. That would stop as most of these so called alternate investment funds in western markets have gone under.
The basic foundation of the Indian growth story has been higher domestic demand. However, the real demand has to remain robust over the next few years in order to drive the economic growth. Indian central bank has blindly followed other banks to increase money supply in order to end the current credit crisis. In the short term it may work, but over a period of time, this would be a disaster in itself if not controlled. Fiscal measures is the need of a growing economy, if at all any measure is required for a free market to grow. Too much control in the hand of central banks have done nothing great in the past and would not help in the future.
Second, Indian growth story would get stronger with rising income levels as propensity to consume and produce increases. It should in no way be magnified with excess capital, read money supply, without considering its after effects. A proper mechanism for growth would be to reward growing sectors and reduce entry barriers in under performing sectors. Indian policy makers are know to do the opposite. Financial sector in no way should become the central and core issue in policy making. In the last few years, pricing issues, financial regulations and price controls have dominated the policy making in India. This trend is dangerous for the long term health of the economy. Rather policy making should focus on core sectors like mining, power and infrastructure.
Third, for any sustainable economic development to happen, domestic power generation has to rise multi fold. This would lead to increase in the standard of living in various small town regions and induce economic stimulant effect.
I would cut a long story short here. Lets just see what the markets have to offer here. Now, in the short term the stock prices are showing a strong trend. There is very little activity in other markets which shows similar price action.
Indian bond markets have given clear signals of loose monetary policy in the next few quarters. However other markets are not showing very strong signals. Indian rupee has not strengthened and remains a weak point to build a bullish case. Commodity prices in India are still falling and are expected to remain soft.
Indian growth story is going to rebound by the end of this year. This is apparent from relative strength in equity prices. However bond yields need to remain low for economic growth to get the necessary stimulant effect of fiscal measures. But market driven yields on the long end of Indian markets show expectation of strong economic growth.
Going to the elliott wave count that I had posted earlier. I think the wave '5' down of ABC has resolved in a truncation. Though markets have gone into a rectangular formation and there is actually a low probability of any view being right here, I feel markets have formed a cyclical bottom if not a major bottom. See the following graphs. A good strategy from here is to buy out performing sectors which are dirt cheap when index goes down to 2780 to 2850 levels. See the following graphs. I think there is risk to this count but this is the most probable count at present.
Nifty Daily
Nifty Weekly
Nifty Monthly
Prices suggest that index has bottomed out. Lets go with the prices and call this a bottom, which means new lows are highly unlikely in the near future.
Wednesday, March 25, 2009
Shanghai Above 200DMA
Shanghai's SSE has broken above its 200 DMA. Weakness is to be bought in this index and a weekly close above 2460 will indicate the beginging of a bull market.
Tuesday, March 24, 2009
Euro wave count
Euro is poised to decline from current levels. The following two graphs are self explanatory. 1.43 is the resistance to risk, rewards could be much larger, possible 1.16 euro levels.
Euro Long term wave count -
Short term -
Euro Long term wave count -
Short term -
Monday, March 23, 2009
Elliott Wave Count on Gold - IX
Gold prices have done nothing in the last six months. Gold is one of the few asset class which has not declined in price compared to massive decline in other asset classes. From being a long term bull in gold and maintaining the view that gold prices are headed to $1200 over a period of time, I have become cautious of the rising bearishness in the underlying gold market. I have expressed this opinion in my intermarket articles which called for a top in gold when it touched $1000 few weeks back. See this link
The continuous flow of funds to ETFs has been taken as a big positive for gold's bullish case. I don't share that view. The mass investments always don't do good in terms of returns. Gold price in terms of Asian currencies have been very strong and especially in terms of INR. Gold priced in INR terms has made higher highs continuously and still looks like it is forming a consolidation inside a flag. The INR depreciation has played a pivotal role in the current rise in gold prices in India.
My last elliott wave count involved the probability that gold was forming an ending diagonal in the double zig zag final upleg 'c'. However that proved dead wrong as gold first declined nearly $80 and then gave a strong upward rally negating the formation.
I am revising my long term wave count in gold. Primarily I think gold is still in the wave four forming the second leg of a ABC-X-ABC flat or an expanded pattern. Take a look -
The current move in gold being the intermediate corrective wave can rise disproportionately. The wave structure in gold prices is quite complex and the fall should happen in simple ABC correction once the intermediate 'x' completes.
The view that gold prices might break to new highs before declining comes from the fact that prices have again broken out of consolidation. A giant broadening formation has been successfully tested in gold which gives an expected target price of around $1210. See the graph below -
The short term wave count looks like we have entered the wave 'c' in the flat or an expanded abc wave. Take a look -
Gold has been viewed as safe haven and it has risen quite well relative to the financial sector in the US. The S&P Bank index relative performance to the S&P 500 has been quite useful in understanding the short term strength in the risk aversion sentiment. S&PBank Index/S&P500 has been moving inversely to gold prices since the crisis began and shows how market is pricing in the risk sentiment in two different markets.
The financial media and other market participants are focusing attention on making a bullish case for gold. When markets price in deflation expectation, gold prices are 'expected' to rise due to risk aversion and in inflationary expectation buildup it is the inflation hedge that makes gold attractive. However, gold prices have done very little to make that case for itself.
Gold prices stand at $950 at present and a blow-off rally can actually take place if investors run wild in buying all the gold they can. This might happen if gold pushes to new highs, but a large upmove sustaining its head for long looks less probable. From where the market stands, it looks an attractive counter to go short if it breaches $880 again. That would in time lead to the biggest sell-off that the current crisis has unfolded. Meanwhile, let the price resolve out of this trading band
Tuesday, March 03, 2009
Market Mayhem - The last breakdown !!
In previous posts I had mentioned the probability that markets were triangulating in the fourth wave of the wave 'c' decline. The S&P CNX Nifty has given a breakdown out of that range and is now set to conquer new lows. The wave 'e' of the triangle ended abruptly at the mentioned level of 2960. See previous post -
Current possibility has been thoroughly highlighted in my internal posts that market is forming a triangle which may take some more time to form. The graph below shows the current count on a one hour graph. It shows that current move is again corrective and in threes. 50 period EMA has kept price capped and the formation of 'e' in the triangle may end at 50 EMA which is currently at 2960
The triangle breakdown gives a measured move target of around 1900 levels. However from a market extension point of view there seems a likely hood that we may form a low at around 2079 - 2034 range.
The current breakdown in the market seems sharp and the index may decline strongly after testing the triangulation and giving us the point of recognition. Take a look at the graph for the current wave structure -
The current downleg in the market is largely driven by the fall in banking stocks. However stock market bottom and reversal are not congruent with a falling financial sector. This means that there is some more time left for India stock markets to reverse. The initial signals of reversal may come from an out performance in the financial sector stocks. Since we have entered the wave '5' of the down leg, there would be a lot of divergence on the momentum oscillator. The weekly structure is still trapped inside the corrective price channel. Take a look -
Indian markets might face strong selling pressure due to intense INR weakness. In the short term expect markets to take support at 2572 and 2490 levels. 2750 to 2770 remains a strong resistance range and would see a lot of selling in the market.
Current possibility has been thoroughly highlighted in my internal posts that market is forming a triangle which may take some more time to form. The graph below shows the current count on a one hour graph. It shows that current move is again corrective and in threes. 50 period EMA has kept price capped and the formation of 'e' in the triangle may end at 50 EMA which is currently at 2960
The triangle breakdown gives a measured move target of around 1900 levels. However from a market extension point of view there seems a likely hood that we may form a low at around 2079 - 2034 range.
The current breakdown in the market seems sharp and the index may decline strongly after testing the triangulation and giving us the point of recognition. Take a look at the graph for the current wave structure -
The current downleg in the market is largely driven by the fall in banking stocks. However stock market bottom and reversal are not congruent with a falling financial sector. This means that there is some more time left for India stock markets to reverse. The initial signals of reversal may come from an out performance in the financial sector stocks. Since we have entered the wave '5' of the down leg, there would be a lot of divergence on the momentum oscillator. The weekly structure is still trapped inside the corrective price channel. Take a look -
Indian markets might face strong selling pressure due to intense INR weakness. In the short term expect markets to take support at 2572 and 2490 levels. 2750 to 2770 remains a strong resistance range and would see a lot of selling in the market.
Monday, March 02, 2009
Intermarket Analysis
The US and other western markets are already down substantially from November lows. S&P 500 has fallen steeply and looks set to make new lows today. The Giant double top formation in S&P 500 on a monthly graph doesn’t augur well for stocks in the long term unless it trades above 850 for months.
As USD index edges up through the level of 89 there is strong wave of selling in various markets. Most of the stock market around the world has traded deep in the red today. As mentioned in the last article that gold forms its tops in the first quarter of a year, it is beginning to look that gold might actually be forming a short term top.
To come to a conclusion on any one market thorough different market signals we would need confirmation. The ‘safe haven’ bid which has been in the headlines for most part of the last six months is waning. The USD has risen in spite of a fall in the US bonds and a fall in the safe haven gold. If USD keeps its head above 89.25 on a closing basis this week, we would see a rather strong leg down in all the asset classes in the world other than bonds.
For this to happen we would need evidence that inflationary expectation is weak and is getting worse.
Take a look at the ratio of CRB commodity index to the US 30 yr bond prices.
In the previous market correction of 2000, this ratio declined to 1.4823 which is the low for the last 50 years. A rising ratio indicates the relative strength of commodity prices to bond yields. A rising ratio indicates a rise in inflation and is generally a leading indicator of inflation. Using this as a proxy for inflation expectation, there is little reason to expect that deflationary threat is waning.
Commodity prices generally lead CPI changes by a very small margin
This indicates that commodity prices can continue to remain soft for time to come and bonds are expected to do relatively well over the next few quarters. If we go back in history, the deflationary expectations usually run for 6 to 8 years. Since the fall in commodity prices is very steep we can see bouts of recovery and some volatility in the above ratio.
If the inflation expectation is very weak and markets are still factoring in strong deflationary trend then the underlying strength in the precious metal markets is nothing but a psychological euphoric buying for ‘safety’. As and when market participants start to see value in other asset classes such as equities, there would be a flight out of precious metals to equities.
In the last two articles I have repeatedly mentioned that US stocks might form a cyclical bottom in the next two to three months (may be as early as end of March). This would trigger a strong leg down for gold.
Meanwhile, the downward strength in the US markets is still unabated. Equities continue to remain a ‘sell’ unless the trend reverses i.e. the trend remains down unless proven otherwise.
Currency Markets
USD Index
USD index has broken to the upside. 89.25 is the level to watch for this week’s close. This would lead to USD index testing levels of 93 and 95 in the short term. It is important to mention here that USD is in a long term bear market and this multi year correction rally would take a lot of time to run its course.
EUR, JPY, GBP and all Asian currencies are trading lower against the USD for the last few weeks are the trend is now accelerating in some currency markets. USD index remains bullish on a short to medium term basis and will continue to remain a huge negative for Asian equity markets. Especially for a country like ours which has a huge energy import bill.
US stock market
US stocks are falling without any respite and the last few downticks have been on large volumes. This means that market remains poised to test further lows before starting to recover.
S&P 500 index would see a very strong support at 685 and 640 levels. It would be adventurous to add here that 640 – 685 might be a cyclical low for S&P 500 for a subsequent rally to 800 levels.
US Bond markets
US 30 yr Govt Bond
The US 30 yr Govt bond has broken down from the given levels in the last article. This strengthens the view that bonds made a top in December 2008. US bonds remain bearish in the short term and its long term picture is now starting to change.
Commodity Market
CRB index
Commodity prices have been rather sideways in the last few weeks. There was a strong rebound in the energy prices which led to a recovery last week. Commodity prices remain in a strong bear trend.
As mentioned in the previous updates and other view, S&P bank index is now outperforming the S&P 500. This is a telling sign that we are nearing some important support levels in US stock market.
The Amex Broker’s index has also held up relatively well and shows that market bottom signals are now emerging in the US markets.
The major theme emerging from this market scenario is that deflation threat is still strong but US bonds have started to indicate that markets are beginning to factor in some economic growth. However this has not been reflected into the commodity markets. In the short term, continue to look for weakness in the US equity markets and major commodity markets. S&P 500 would face strong support at 685 and then at 640.
Asian equity markets might break lower due to a stronger USD. Indian markets might face strong selling pressure due to intense INR weakness.
As USD index edges up through the level of 89 there is strong wave of selling in various markets. Most of the stock market around the world has traded deep in the red today. As mentioned in the last article that gold forms its tops in the first quarter of a year, it is beginning to look that gold might actually be forming a short term top.
To come to a conclusion on any one market thorough different market signals we would need confirmation. The ‘safe haven’ bid which has been in the headlines for most part of the last six months is waning. The USD has risen in spite of a fall in the US bonds and a fall in the safe haven gold. If USD keeps its head above 89.25 on a closing basis this week, we would see a rather strong leg down in all the asset classes in the world other than bonds.
For this to happen we would need evidence that inflationary expectation is weak and is getting worse.
Take a look at the ratio of CRB commodity index to the US 30 yr bond prices.
In the previous market correction of 2000, this ratio declined to 1.4823 which is the low for the last 50 years. A rising ratio indicates the relative strength of commodity prices to bond yields. A rising ratio indicates a rise in inflation and is generally a leading indicator of inflation. Using this as a proxy for inflation expectation, there is little reason to expect that deflationary threat is waning.
Commodity prices generally lead CPI changes by a very small margin
This indicates that commodity prices can continue to remain soft for time to come and bonds are expected to do relatively well over the next few quarters. If we go back in history, the deflationary expectations usually run for 6 to 8 years. Since the fall in commodity prices is very steep we can see bouts of recovery and some volatility in the above ratio.
If the inflation expectation is very weak and markets are still factoring in strong deflationary trend then the underlying strength in the precious metal markets is nothing but a psychological euphoric buying for ‘safety’. As and when market participants start to see value in other asset classes such as equities, there would be a flight out of precious metals to equities.
In the last two articles I have repeatedly mentioned that US stocks might form a cyclical bottom in the next two to three months (may be as early as end of March). This would trigger a strong leg down for gold.
Meanwhile, the downward strength in the US markets is still unabated. Equities continue to remain a ‘sell’ unless the trend reverses i.e. the trend remains down unless proven otherwise.
Currency Markets
USD Index
USD index has broken to the upside. 89.25 is the level to watch for this week’s close. This would lead to USD index testing levels of 93 and 95 in the short term. It is important to mention here that USD is in a long term bear market and this multi year correction rally would take a lot of time to run its course.
EUR, JPY, GBP and all Asian currencies are trading lower against the USD for the last few weeks are the trend is now accelerating in some currency markets. USD index remains bullish on a short to medium term basis and will continue to remain a huge negative for Asian equity markets. Especially for a country like ours which has a huge energy import bill.
US stock market
US stocks are falling without any respite and the last few downticks have been on large volumes. This means that market remains poised to test further lows before starting to recover.
S&P 500 index would see a very strong support at 685 and 640 levels. It would be adventurous to add here that 640 – 685 might be a cyclical low for S&P 500 for a subsequent rally to 800 levels.
US Bond markets
US 30 yr Govt Bond
The US 30 yr Govt bond has broken down from the given levels in the last article. This strengthens the view that bonds made a top in December 2008. US bonds remain bearish in the short term and its long term picture is now starting to change.
Commodity Market
CRB index
Commodity prices have been rather sideways in the last few weeks. There was a strong rebound in the energy prices which led to a recovery last week. Commodity prices remain in a strong bear trend.
As mentioned in the previous updates and other view, S&P bank index is now outperforming the S&P 500. This is a telling sign that we are nearing some important support levels in US stock market.
The Amex Broker’s index has also held up relatively well and shows that market bottom signals are now emerging in the US markets.
The major theme emerging from this market scenario is that deflation threat is still strong but US bonds have started to indicate that markets are beginning to factor in some economic growth. However this has not been reflected into the commodity markets. In the short term, continue to look for weakness in the US equity markets and major commodity markets. S&P 500 would face strong support at 685 and then at 640.
Asian equity markets might break lower due to a stronger USD. Indian markets might face strong selling pressure due to intense INR weakness.
Tuesday, February 24, 2009
Intermarket Analysis
The last one week has been eventful for the western equity markets. In the last article it was mentioned that there are four major trends emerging.
Long term US bonds have formed a top in the last quarter of the calendar year 2008. Commodity market are now in a major bear market which will last for many years including sharp bear markets upside rallies. USD will continue to strengthen, not on risk aversion though. Equity markets may bottom out by H209.
The equity markets declined sharply in the western world and have made new lows. Emerging markets have remained quite resilient and are far from their lows made in November 2008. Accelerating deterioration in the world banking industry may lead all markets lower in the very short term. Intermarket analysis shows that the current downtrend in equity markets is decelerating but is not reflected in the equity market averages. Momentum studies are oversold but the trend remains to the downside. Equity markets remain a sell as the trend remains down, unless proven otherwise. But caution should be exercised as diverging signals are emerging from bond markets and currency markets.
Gold prices have performed quite strongly in comparison to all other asset classes. Gold has continued to move up even with USD holding onto its strength.
Risk aversion sentiment has worked well in favour of gold prices. The USD has seen lot of inflows as it is the least unattractive of the collection of ugly sisters that populate the world’s major currency markets. Gold has a tendency to give trend reversal in the first quarter of a calendar year. This is quite evident from major market bottoms and top that has been formed over the years. The only thing that can work in favour of gold prices now is the continued selling in world equity markets and deteriorating condition of the world currency markets. Taking a cue from the strength in gold prices it can be inferred that market sentiment in equity markets has touched lows which have not been seen in the last ten years.
Dow Jones:Gold (Dow Gold Ratio)
Equity markets rally in 1999 made Dow Jones most expensive as priced in gold terms. Currently this ratio is off 3 points from its long term average of 10. This means equity prices are getting cheaper in real money terms. This also means as and when stock prices make a cyclical bottom a lot of money will flow out of gold and into equity markets. The first quarter is just the time that it can happen as bullish sentiment in gold scales new peaks and bearish sentiment in stocks makes new troughs.
Now for this to happen, an early indication can be seen from a rebound in banking stocks. If the markets are to rebound, the financials should bottom out first. This would lead to a return to relatively risky securities and lead the gold prices down. This would also mean the USD will strengthen further as faith in the currency markets return to normal.
Continuing with the assumption that US 30 yr govt bonds have started pricing in some growth expectation, US equity markets can well give a sharp upmove after the current selling is over. However there is little evidence of any price reversal in major market averages in the US other than some oversold readings. Some important indicators to be analyzed are the relative performance of market majors.
Johnson and Johnson (JNJ) to S&P 500 ratio
Clearly JNJ to SPX ratio made a high of 0.070 in the bear market of 2000s. The high of this ratio coincided with the bear market low with a lag of 2 months. The stock market did decline by 40% in that bear market and moved up to make new highs. Although the current bear market is much larger in economic deterioration, still the averages would always kick in on a relative basis. There are other sectoral ratios which have gone beyond all previous bear market lows. One such ratio is the relative performance of tech stocks like Qualcomm. In the bull market the major tech stocks like Qualcomm were the first one to make a lower high before the big break came.
2009 bear market non-confirmation
2000 Bull market non-confirmation
http://www.federalreserve.gov/releases/cp/
The current stats from the Federal Reserve show very little activity in the CP market for Financials. Only Non financial with investment rating of the highest quality has seen some takers. This is in contrast to the rebound seen for financial CP markets ahead to the Dow Jones rally to 9000. The credit market for financial and sub investment securities is still inactive and this is clearly weighing on the market sentiment.
Commodity markets have remained relatively flat in the last one week. Industrial metals have seen a lot of selling along with a fall in the agricultural commodities. Grain markets have seen lot of price erosion and are still looking weak. Commodity index looks set to fall further and make new lows.
30 Year US bonds are consolidating and can continue its downtrend on a break below 125. The activity in the bond market is suggesting that a reversal in stock market is imminent. Equity markets have a tendency to lag by two quarters on an average. This gives us and idea that equity prices in US may find a cyclical bottom in the next few months.
Triangle breakdown in S&P 500 has seen rapid price erosion. Though momentum indicators are quite oversold, there is no indication of a reversal and the trend remains ‘down’ unless proven otherwise.
S&P 500 is now trading well below 2002 lows. A giant double top is also forming which shows weakness for equity prices in the long term is it trades below this level for another quarter.
USD index looks strong. Though there has been some short term correction, the trend still remains up. The pivot trend reversal remains 84 for the USD index.
In the current scenario, continue to look for weakness in equity markets across the world. Short term caution is warranted as divergences in market averages are reaching extreme levels. It is important to note that we have conclusively entered the last leg down of the current bear market in emerging market equities and the last leg down for cyclical bottom for western market equities.
Commodity prices will continue to weaken with agricultural prices leading the way down along with industrial metals.
USD looks strong. USD/JPY will give a strong upmove on a daily close above 95. Look for 102 to be tested as market has formed a cyclical bottom.
US 30 Year bond looks set to fall further on a daily close below 125.
Long term US bonds have formed a top in the last quarter of the calendar year 2008. Commodity market are now in a major bear market which will last for many years including sharp bear markets upside rallies. USD will continue to strengthen, not on risk aversion though. Equity markets may bottom out by H209.
The equity markets declined sharply in the western world and have made new lows. Emerging markets have remained quite resilient and are far from their lows made in November 2008. Accelerating deterioration in the world banking industry may lead all markets lower in the very short term. Intermarket analysis shows that the current downtrend in equity markets is decelerating but is not reflected in the equity market averages. Momentum studies are oversold but the trend remains to the downside. Equity markets remain a sell as the trend remains down, unless proven otherwise. But caution should be exercised as diverging signals are emerging from bond markets and currency markets.
Gold prices have performed quite strongly in comparison to all other asset classes. Gold has continued to move up even with USD holding onto its strength.
Risk aversion sentiment has worked well in favour of gold prices. The USD has seen lot of inflows as it is the least unattractive of the collection of ugly sisters that populate the world’s major currency markets. Gold has a tendency to give trend reversal in the first quarter of a calendar year. This is quite evident from major market bottoms and top that has been formed over the years. The only thing that can work in favour of gold prices now is the continued selling in world equity markets and deteriorating condition of the world currency markets. Taking a cue from the strength in gold prices it can be inferred that market sentiment in equity markets has touched lows which have not been seen in the last ten years.
Dow Jones:Gold (Dow Gold Ratio)
Equity markets rally in 1999 made Dow Jones most expensive as priced in gold terms. Currently this ratio is off 3 points from its long term average of 10. This means equity prices are getting cheaper in real money terms. This also means as and when stock prices make a cyclical bottom a lot of money will flow out of gold and into equity markets. The first quarter is just the time that it can happen as bullish sentiment in gold scales new peaks and bearish sentiment in stocks makes new troughs.
Now for this to happen, an early indication can be seen from a rebound in banking stocks. If the markets are to rebound, the financials should bottom out first. This would lead to a return to relatively risky securities and lead the gold prices down. This would also mean the USD will strengthen further as faith in the currency markets return to normal.
Continuing with the assumption that US 30 yr govt bonds have started pricing in some growth expectation, US equity markets can well give a sharp upmove after the current selling is over. However there is little evidence of any price reversal in major market averages in the US other than some oversold readings. Some important indicators to be analyzed are the relative performance of market majors.
Johnson and Johnson (JNJ) to S&P 500 ratio
Clearly JNJ to SPX ratio made a high of 0.070 in the bear market of 2000s. The high of this ratio coincided with the bear market low with a lag of 2 months. The stock market did decline by 40% in that bear market and moved up to make new highs. Although the current bear market is much larger in economic deterioration, still the averages would always kick in on a relative basis. There are other sectoral ratios which have gone beyond all previous bear market lows. One such ratio is the relative performance of tech stocks like Qualcomm. In the bull market the major tech stocks like Qualcomm were the first one to make a lower high before the big break came.
2009 bear market non-confirmation
2000 Bull market non-confirmation
http://www.federalreserve.gov/releases/cp/
The current stats from the Federal Reserve show very little activity in the CP market for Financials. Only Non financial with investment rating of the highest quality has seen some takers. This is in contrast to the rebound seen for financial CP markets ahead to the Dow Jones rally to 9000. The credit market for financial and sub investment securities is still inactive and this is clearly weighing on the market sentiment.
Commodity markets have remained relatively flat in the last one week. Industrial metals have seen a lot of selling along with a fall in the agricultural commodities. Grain markets have seen lot of price erosion and are still looking weak. Commodity index looks set to fall further and make new lows.
30 Year US bonds are consolidating and can continue its downtrend on a break below 125. The activity in the bond market is suggesting that a reversal in stock market is imminent. Equity markets have a tendency to lag by two quarters on an average. This gives us and idea that equity prices in US may find a cyclical bottom in the next few months.
Triangle breakdown in S&P 500 has seen rapid price erosion. Though momentum indicators are quite oversold, there is no indication of a reversal and the trend remains ‘down’ unless proven otherwise.
S&P 500 is now trading well below 2002 lows. A giant double top is also forming which shows weakness for equity prices in the long term is it trades below this level for another quarter.
USD index looks strong. Though there has been some short term correction, the trend still remains up. The pivot trend reversal remains 84 for the USD index.
In the current scenario, continue to look for weakness in equity markets across the world. Short term caution is warranted as divergences in market averages are reaching extreme levels. It is important to note that we have conclusively entered the last leg down of the current bear market in emerging market equities and the last leg down for cyclical bottom for western market equities.
Commodity prices will continue to weaken with agricultural prices leading the way down along with industrial metals.
USD looks strong. USD/JPY will give a strong upmove on a daily close above 95. Look for 102 to be tested as market has formed a cyclical bottom.
US 30 Year bond looks set to fall further on a daily close below 125.
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