Frustrating Markets, Tough Choices!

Does this sound right?
"The German DAX suffered 3% losses yesterday (23rd April 2012), - because 

1. France's voters are yet to decide on their next president
2. Spain slips back into recession, even after successful bond auctions in both countries
3. The Dutch government collapses as it cannot find support for its austerity measures."

Even in an interconnected world like ours you would expect that the markets displaying the 'cause' (nominated as such by our media) of the sell off would suffer the greatest losses.  Instead, it was the financial market of the strongest economy in Europe, which suffered most.

Viewed scantily, investors may dismiss it as the kind of incongruity that so often seems to plague financial markets.  The real reason is more likely that foreign investors are focusing on Germany above all other European economies and then realise that her position is not insulated, let alone divorced of the problems of her neighbours. Germany is slowly waking up to the fact that - having enjoyed the benefits of the EURO currency most - she is now obliged to rebalance the economic scales of Europe as a kind of 'natural' or 'consequential' reallocation of wealth.  A hangover the morning after?

Reminds me of the story circulating in the German media recently: Making holidays in the Algarve, German tourists concluded that the luxurious pool they enjoy in Portuguese holiday villa has been paid for by German tax payer's money. Their logical next step: "Why should we pay for it then?"  This is about as ludicrous a story as the notion that...

"...this 3% loss is the start to an extended bear market."

Tough Choices
In recent months, financial markets have displayed this kind of splurge. alternating directions every 3-4 days. Then a complete retracement sets in to confound expectations of both the bears and the bulls.  These gyrations are made worse by the way they are reported, as every move is hyped to frenzy. In these emotive investment conditions, it is a rather tedious task to remain level headed.

If you have reduced your equity holdings like we did in mid-March, then the impact of this volatility is notably less, - easing the strain on the nerves. And yet, a few days ago we tried to reengage in gold funds, and selected equity markets after the low in March.  So far, the low has held and we really need to see an improvement in the markets right now in order to stay with current allocations!


So where to now?
My hope is that most of the negative momentum has been used up in the last 48 hours + some extra today, probably.  In the short term, there are several signs that this is a reasonable working assumption:

The US market last night

DJIA - the last five days to Monday 23rd April, 2012

I am showing a 5-day graph because it contains the necessary data that relates to the current short term outlook: From the last high on Tuesday, the markets have dropped into Thursday, which saw a intraday reversal (see orange point left). The next say, market prices 'gapped up' to previous day highs.  On Monday (last night), valuations open a gap down, BELOW the orange horizontal line I drew, tried to rise into the level but were rejected: the previous support had become resistance (see orange point middle). However, after an early intraday low, the market than gained momentum and increasing volumes, breaking through the resistance level, and - just to confirm the move - retested the orange horizontal line for support to end the day higher.

This is not a market in desperation.  More likely, this market will move higher within the next 48 hours.  One warning I should add.  The 'GAP UP - GAP DOWN' day on Friday, has created an 'island' technically speaking.  This means that these levels, 13038, will need to be tackled in the next move up and when it happens, many more investors will come back into the market.

Gold prices over the last few trading days

Gold prices

Gold is moving along a similar pattern. You can clearly see the intraday reversal, RETESTING a previously important low and support level of $1625, but we have yet to return into the $1640 range of previous days. I am still expecting a short sharp recovery in gold prices in the coming weeks. This is why we entered last week after prices came out of the low on April 5th.

The downward sloping trend could block a rally

Only if prices fall below 1625 must I concede that I have been beaten by the dominant bearish influence in gold prices. The last high was on February 29. The gap down was probably the latest starting point. It is a scenario we cannot ignore for the time being.


More supporting evidence

• If Europe - or the Euro- were really at their wits end, the Euro would have to fall substantially. but it remains firmly above the 1.30 mark. 
• Markets in Asia are much quieter today, suggesting a bottom building phase.
• The Chinese bourses are very much in positive territory - a clear sign that the soft landing is not just an empty promise. 
• Australia's AORD is not rattled by the negative sentiment, though its currency has given up some of its strength after the recent interest rate reduction. 

... to name but a few.  There is more, if you care to look.  But it remains a tricky investment climate.  We are sticking to our 50% exposure, until further notice.