Overnight Market Action - Back To Square One!

Someone pressed the "RESET" button! 

5-DAY VIEW

Large caps in the US poised for a more substantial rally, soon.

Stocks 

When assessing equity valuations on a global level, we are (almost) back to the same levels from where the current advance has started only last week.  However, there are now strong regional divergences and the same goes for asset classes.  

US Small Caps support at higher level, less risky position.

In the Russell 1000 left (US small caps - 5-day view), we can see that the current support levels are comparatively higher than in the large caps above, as the decline in the last 2 days has only revisited levels of Friday.  Indeed, if markets suffer some extra volatility now, Small Caps have a secondary support level (red horizontal line) and could therefore be considered the less risky proposition. This supports our argument for a broader based rally, next time round. 

What is important to realise that the support levels we now see are very strong.  Only some adverse geopolitical event might disturb the balance short term.  There are of course quite a few such potential events in the air, like the Jasmine revolution gripping the Arab world.

Gold 

Gold prices pushing skyward

Gold prices moved exactly as envisaged in the previous blog.  Prices have raced above the top level of 1427, and should start a short pull back at anytime to the 1412-1415 level.  Silver, by contrast, has already broken out to new all-time highs decisively, with prices touching $35!

It is glaringly obvious to me that the latest advance in precious metal prices is funded by recent global equity sales. Prices need to retreat first, before starting the ascend to new yearly highs, probably targeting $1500 before too long. The timing should pretty tally with almost all connected markets. The next move will  also mark an overall sentiment change, in line with our theme of ASSET INFLATION.  

Currencies 

Currencies have played less of a crucial role of late (except for ever more strength in the S$), and it remains to be seen, how inflationary pressures in Asia will impact on our S$, - and whether or not it will have any impact on the advances in Asian bourses. Consensus, though questionable as always, seems to afford North Asia a better risk-reward setup.  Some even go as far as excluding markets like Malaysia and Singapore from their recommendation, - and I beg to differ.  But Indonesia & Philippines are probably oversubscribed. 

Analysis & Background Noise

As I have stated so often, events like the 'Jasmine Revolution' do not in itself upset the apple cart of professional equity investors medium term, though they may take some steps to safeguard their wealth.  Yesterday's market action should be seen in this light as the advance from last week's lows was blistering - and hardly sustainable.  The move was less than homogenous, comprising only a limited number of indices and asset classes.  The next advance will have to be broader and potentially less volatile intraday. That does not mean less upside potential, - in the contrary.

In analysing the latest rally attempt, you will note that it consumed mainly large caps around the world, where access and liquidity was subservient to speedy trades, - in - out - with profits, at the touch of a button, - with the help of pre-programmed computer trading. This is not the action of investors embracing a higher level of risk, - this is opportunistic, making money on the trades that have corrected the most (and that's fine).

Of course, the media will tell you now that investors have suddenly changed their mind - all at the same time in global harmony - last night: - having voiced a sanguine outlook last week - they have now become worried sick, just when it looks like it is the end game for Muamar Al Gaddafi! 

As if people with real responsibility and the money to boot can afford to be quite so fickle, getting scared at every market turn, or - be hoodwinked into buying yesterday's opportunities flashing across headlines.  Visionaries (that;s what I term such pragmatic big investors) are hardly ever ruffled by such external events, - and indeed are probably looking forward to the exhilarating opportunity that will present itself in a liberated Arab world. It will come about if we let events evolve based on its own strength, -  finding a way that is truly theirs. I would argue that any outside intervention does not help the people but - throw global equity markets into unnecessary turmoil.  Outside intervention, or worse military intervention, certainly won't create any form of good will as the Iraqi story will tell us.

I don't mean to suggest that the 'Jasmine revolution' has been or will be an easy, effortless transition to a new order.  But I can't see why it should have to have a negative impact on equity markets. - May be you know better.