Solace in Gold
Short Term Market Anxieties
Since early May, financial markets, globally, show only one direction: DOWN. In a dominant show of foreign investment changing hands (from strong to weak), markets find 100% correlation - for a short term. The downward pressures were worst in the last 2 weeks.
Light Glittering at the end of the tunnel?
Punters are finding temporary solace in gold now. This is where it gets intriguing (...goes against the established pattern). Last week, as many markets suffered their worst days YTD, gold suddenly raced up by some 5% (green arrow) even against a strong USD.
Ever since the summer 2011, gold prices sold off in huge, volatile steps from the lofty USD 1800 range to below USD 1530 just last week. The remarkable comeback in the last 3 days says something about investors' ability to take a meticulously calculated risk, - and rotate asset classes at a moment's notice.
We also need to remind ourselves that gold prices are often the front runner for equities: prices rise ahead of an equity rally, - and when enough profit has been made in the precious metal, investors turn to equities. We may be nearing such a point.
Technical Observations
The last fortnight certainly, little went according to 'plan' (=my game plan) in financial markets. Ever since the March highs, markets displayed a complexity that had many punters reeling for cover. So did we, very timely in mid March, reducing equity to less than 50%. Since then, we also tried to make money with some short term moves: My research indicated a more positive week, even an intermediate high point around mid-week, but we saw markets turning South with increasing momentum. As yet, the charts do not provide any clear signs that we have reached a significant low point in the short term. Working mostly with technical analysis I am reluctant to point to outwardly political and fiscal dangers we know off in Greece, Spain, or the run on Santander Bank and Greek banks (a few billion dollars withdrawn a day?) as triggers to the sell off. I don't see a causal relationship between such events and the stock market moves. Rather, such events are but logical extensions of the cycles into human behavioural pattern. However, I am still looking for a common factor that is driving decisions at the moment.
Here is one idea:
Today's successful decision makers are pragmatic and mostly guided by
Asset rotation is one of the strategies that works extremely well to this end and we saw fine examples again in the last few trading days. Asset Rotation can involve any asset class and sector.
Before markets sold off (i.e. between mid March sometime in April) correlation between regional markets and various sectors was off course, - as it should when markets are driven by local punters and local investment conditions. To highlight the significance of where the market is at, I am charting the period from August 2011 to now.
STI - Singapore
The most eye-watering fact is the turning points in August, October (2011) and May (2012), which all fall on the THIRD of the month! We also note that since the start of the year up until now, the graph forms a 'DOME', which among technical analysts is usually considered bearish short term.
The index did not recapture the highs of August last year (retraced only about 60%, not quite the typical two thirds). Until it moves above that level we must be more weary of sudden downside pressures than surprises to the upside.
Short term, the STI has broken support levels (50% Fibonacci of total corrective move last autumn) with a gap opening last Friday and now sits firmly on the last support line (38% Fibonacci), faced with a potential drop to the 2600 level, another 8% down from here. Reason enough to get out and stay out till a bottom forms. As we have only just passed the Fibonacci time line, a real turn around is at least 6-8 weeks away, - I think. But I say this with some apprehension because other markets hint at a different outcome.
S&P 500 - USA
We see immediately that this index is not in sync with the STI. For the US index, August 2011 was but an interim high, moving higher in the most recent rally. The turning point last summer came early, on July 24th. The next higher peak took almost exactly 9 months, on April 25th, 2012. The low point however, was on the same day as in the STI and the final turning point before the most recent drop also happened on the same day, but - no Fibonacci time line to support a defining moment. The next time line for the S&P500 is on June 14th, 2012. Clearly, something else is happening in this market: ASSET ROTATION HAS TAKEN PLACE, away from Asia, and other emerging markets in favour of US equities.
There are suggestions that the time line should start on October 3rd, 2011 as a potential start to a new four-year cycle. That would explain the new higher high, and also the comparatively small correction in recent weeks. But in doing so, we would see downside extending into autumn. With a technical set up like this and a top in the USD, we can speculate on a turnaround as early as mid-June, - presumably another rally.
ASX - Australia
At first sight, we see that the index has been correcting much earlier than August, as early as mid-April 2011. Secondly, we note that the rally from the low in October was meagre, only retracing about 50%, hardly confirming a return to an Australian Bull run. Worse still the drop in the last 2 weeks wiped out all gains for the year. Additionally, the AUD is wavering vis-a-vis USD and Asian currencies. That arguably denounces the Australian index as one of the worst performers since April 2011.
Australia's market is often closely aligned with what happens in Mainland China's bourses. So, here is the direct comparison:
The Shanghai Index, too had a peak in April 2011 and corrected since. The general mood of short-term bullishness in October 2011, it, too, showed signs of revival, but the correction in Chinese stocks continued till early January 2012. Only then, do we see signs of a change in fortunes, but it is very early days yet to confirm a longer term trend change. At present it appears to be working into a 'wedge' or a 'bullish flag', which may resolve into an impulsive upward move, rather sooner than later. It certainly showed strong resilience in the last two weeks.
THE NEXT MOVE
Financial markets are moving toward uncharted territory. I say this despite parallels being drawn to the 1920s and other periods of similarly chaotic backdrop. For those who think we, the people of today, have forgotten the past, and are not learning from history, let's not pass the baton of responsibilities too righteously. Situations now may look similar to the period after the WW1. Today's wars are fought differently and winning one is quite illusory. The world is no longer just so black and white as it was painted then.
The background in Europe keeps shifting and changing with enormous speed: If Friday saw an exit of Greece as a fait accompli, the G8 summit on the weekend speaks of agreement for coordinating a successful rescue, but as usual, hard facts and details are lacking. In British newspapers, we hear of advisors telling their investors about an imminent equity rally, - on the premise that Greece exits the Euro Zone, - in an orderly fashion (CAN?) and through gigantic coordinated efforts like in 2008, IMF, FED, ECB, JCB and other central banks coming to the rescue. Liquidity AGAIN, just what I have been predicting for the second half of 2012.
To spite all sensible attempts to deleverage, the European debacle will force the hands of policy makers. When thie point comes, just make sure you are ready to move in with them, because another round of asset inflation is the result. But courage comes first, and the ability to recognise the moment of change. There is a danger now that many will jump the gun following the politicians call of - ALL'S WELL IN EUROPE again. Mind your steps.
Since early May, financial markets, globally, show only one direction: DOWN. In a dominant show of foreign investment changing hands (from strong to weak), markets find 100% correlation - for a short term. The downward pressures were worst in the last 2 weeks.
 |
| NASDAQ & BOVESPA, two leaders on the way down |
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| STI and SWISS, less downside but currency weak |
Light Glittering at the end of the tunnel?
 |
| 1-Year View: Gold's volatile path with winners and losers aplenty! |
We also need to remind ourselves that gold prices are often the front runner for equities: prices rise ahead of an equity rally, - and when enough profit has been made in the precious metal, investors turn to equities. We may be nearing such a point.
Technical Observations
The last fortnight certainly, little went according to 'plan' (=my game plan) in financial markets. Ever since the March highs, markets displayed a complexity that had many punters reeling for cover. So did we, very timely in mid March, reducing equity to less than 50%. Since then, we also tried to make money with some short term moves: My research indicated a more positive week, even an intermediate high point around mid-week, but we saw markets turning South with increasing momentum. As yet, the charts do not provide any clear signs that we have reached a significant low point in the short term. Working mostly with technical analysis I am reluctant to point to outwardly political and fiscal dangers we know off in Greece, Spain, or the run on Santander Bank and Greek banks (a few billion dollars withdrawn a day?) as triggers to the sell off. I don't see a causal relationship between such events and the stock market moves. Rather, such events are but logical extensions of the cycles into human behavioural pattern. However, I am still looking for a common factor that is driving decisions at the moment.
Here is one idea:
Today's successful decision makers are pragmatic and mostly guided by
a) opportunities andAsset Rotation
b) the need to preserve wealth -
and any combination in between, preferably 'opportunities that preserve and enhance wealth at the same time?
Asset rotation is one of the strategies that works extremely well to this end and we saw fine examples again in the last few trading days. Asset Rotation can involve any asset class and sector.
Before markets sold off (i.e. between mid March sometime in April) correlation between regional markets and various sectors was off course, - as it should when markets are driven by local punters and local investment conditions. To highlight the significance of where the market is at, I am charting the period from August 2011 to now.
STI - Singapore
The index did not recapture the highs of August last year (retraced only about 60%, not quite the typical two thirds). Until it moves above that level we must be more weary of sudden downside pressures than surprises to the upside.
Short term, the STI has broken support levels (50% Fibonacci of total corrective move last autumn) with a gap opening last Friday and now sits firmly on the last support line (38% Fibonacci), faced with a potential drop to the 2600 level, another 8% down from here. Reason enough to get out and stay out till a bottom forms. As we have only just passed the Fibonacci time line, a real turn around is at least 6-8 weeks away, - I think. But I say this with some apprehension because other markets hint at a different outcome.
S&P 500 - USA
There are suggestions that the time line should start on October 3rd, 2011 as a potential start to a new four-year cycle. That would explain the new higher high, and also the comparatively small correction in recent weeks. But in doing so, we would see downside extending into autumn. With a technical set up like this and a top in the USD, we can speculate on a turnaround as early as mid-June, - presumably another rally.
ASX - Australia
 |
| ASX - hardly taking note of the bullishness elsewhere |
At first sight, we see that the index has been correcting much earlier than August, as early as mid-April 2011. Secondly, we note that the rally from the low in October was meagre, only retracing about 50%, hardly confirming a return to an Australian Bull run. Worse still the drop in the last 2 weeks wiped out all gains for the year. Additionally, the AUD is wavering vis-a-vis USD and Asian currencies. That arguably denounces the Australian index as one of the worst performers since April 2011.
 |
| Shanghai Index with early signs of revival |
The Shanghai Index, too had a peak in April 2011 and corrected since. The general mood of short-term bullishness in October 2011, it, too, showed signs of revival, but the correction in Chinese stocks continued till early January 2012. Only then, do we see signs of a change in fortunes, but it is very early days yet to confirm a longer term trend change. At present it appears to be working into a 'wedge' or a 'bullish flag', which may resolve into an impulsive upward move, rather sooner than later. It certainly showed strong resilience in the last two weeks.
THE NEXT MOVE
Financial markets are moving toward uncharted territory. I say this despite parallels being drawn to the 1920s and other periods of similarly chaotic backdrop. For those who think we, the people of today, have forgotten the past, and are not learning from history, let's not pass the baton of responsibilities too righteously. Situations now may look similar to the period after the WW1. Today's wars are fought differently and winning one is quite illusory. The world is no longer just so black and white as it was painted then.
The background in Europe keeps shifting and changing with enormous speed: If Friday saw an exit of Greece as a fait accompli, the G8 summit on the weekend speaks of agreement for coordinating a successful rescue, but as usual, hard facts and details are lacking. In British newspapers, we hear of advisors telling their investors about an imminent equity rally, - on the premise that Greece exits the Euro Zone, - in an orderly fashion (CAN?) and through gigantic coordinated efforts like in 2008, IMF, FED, ECB, JCB and other central banks coming to the rescue. Liquidity AGAIN, just what I have been predicting for the second half of 2012.
To spite all sensible attempts to deleverage, the European debacle will force the hands of policy makers. When thie point comes, just make sure you are ready to move in with them, because another round of asset inflation is the result. But courage comes first, and the ability to recognise the moment of change. There is a danger now that many will jump the gun following the politicians call of - ALL'S WELL IN EUROPE again. Mind your steps.
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