November Turns 2

Most commentators' spiel aims at convincing you one way or another to buy something. Some take the trouble to explain why you should. I tend to only comment when I see a real potential for change, change that you can follow and trade at some point - with a positive outcome. Today, I want to highlight a few potentials and how they are related. A change usually comes with a comrade or two. It does not mean you need to get ready to jump in straight away, but the signs are accumulating.

The most important assets to watch are

• commodities, including oil and precious metals
• equities
• bonds

I would say that at least in two the of three asset classes major change is breaking. To evaluate how these changes are coming about, here a brief overview of the important/ most watched indices.

USD 1-month view, rising dramatically
ever since the election results.
Source; chartnexus

But before all that, one acute BREAK in the pattern of GOLD PRICES is really important now:

Prices have once again been sliding below $1200 mark, currently sitting at $1186,  a frequent Fibonacci level, acting rather "magnetic". It's all because the USD keeps rising.

Gold prices, 1-month view, high corresponds with low in USD,
and SPIKE coincides with US presidential election results!
source: BullionVault

The correlation between the USD and gold prices is inverse. We therefore need to assess both charts to decide on where each asset class is heading. One thing is almost 100% sure: they are heading in opposite directions near-term.  

Gold

For gold prices, I foresee further selling pressure, possibly till the interest rate rise announcement mid-December. At least, "Mr. Market" seems to have priced in such an event. Even then, it is not clear whether prices will stop falling thereafter. Downside targets for the gold ounce are $1138, $1121, and $1100.  But it might not stop there and head lower still to form a double bottom around $1060, confirming the lowest point of the 4-year long correction in December 2015! 

USD

For the USD, a rate hike in December may coincide with a peak (most likely). Thereafter prices will need respond to a more fundamental economic backdrop. Watch out for December 13, 2016 (+/- 2 or 3 days) for a prominent turning point. 

The Next Rate Rise

A US rate hike will also see repercussions in the stock markets. It certainly will not create better correlations between global markets. Even in the Trump vision, a politically favoured US economy will need to trade with the rest of the world, - to be great and leading. I know, in the eyes of the purist economy analysts, politics don't feature highly when it comes to stock market movements. So really why place much importance on it? Well, this conviction will almost certainly be challenged under a Trump administration. Trump's ambitions to impose import penalties and protectionism for the US economy. Self-sufficiency is an illusion and chances are, economic powers will shift away from the US toward Asia and Europe as the main productions centers of the world. Will that Make America Great Again?

The State of Global Financial Markets

Allow me to briefly look at the stock markets around the world. It is a simple picture. But the conclusions may need to cagey at best, or put on hold till the FED decision.  

Trends

Equities

When financial asset prices fluctuate the way they do and have done for some time now, the bulls usually roar after a market run up and tell you to buy more, - and the bears growl for you to go short when they see a market correcting. Of course, the vast majority of these fail to shout exactly when it starts. A trend is ever only a trend when it is going for the allotted time. 

As most of my readers know, I am not a day-trader. When the time frame for a call for my trading style is "wrong", I shrink like a violet in the hot sun, - and remain stumm on the sidelines, even at the risk of arousing the ire of the overly keen traders all trades, greedy for all opportunities. But I don't regret it. 

If we look at recent patterns in the various regional indices, bulls and bears have been busy roaring and growling intermittently - every few days, as none of the rallies really lasted much longer AND many global markets continually fail to display their traditional correlations with the leading market, the US.

The following charts are kept very simple to illustrate the trends - and high volatility that affects all regions and asset classes.

In Downtrend

Swiss Stocks, source: chartnexus

EUROSTOXX50, source: chartnexus

1. Eurostoxx 50, since April 15, 2015 till February 2016, and sideways till now. But the Euro has fallen, too. 
2. Switzerland, since August 8, 2015 till February. After a less than comforting relief, it is trending down again.

   

   STI, source: chartnexus

3. STI, Singapore, since April 15 till February 2016.
   Little upside since, with a weakening upward momentum and a weaker SGD. 
   
4. Hang Seng (Hong Kong) since June 2015 till February 2016. A topsy turvy, momentum lacking upward move followed (hardly worth trading) that is about to be retraced. 
5. NIKKEI 225, Japan, since August 2015 to February 2016.

   

   NIKKEI 225, source: chartnexus

   Then a volatile rally - and a sharply weakening Yen (112 to the USD, 23/11/16:00 GMT). Since the US election result, the NIKKEI is rallying sharply, breaking out of the downtrend marked by the blue trend line. This looks quite convincing if not for the fact that oil prices might be going up soon, inhibiting Japan as a energy consumer, - and the dollar won't go up forever either.  Therefore this rally may have short legs.

Ambivalent Trends

ASX, source: chartnexus

1. Australia, ASX, peaking in April 2015, swinging down and up since then, and we are there where we were beginning of 2015. But the Aussie Dollar has gone up. And the overarching trend still tilts downward. 
2. MSCI Taiwan, peaking in April 2015, swinging down to February 2016 and up again, but momentum is waning once again.
   
   

MSCI TAIWAN, source: chartnexus

Watershed Moment No. 1, in 2016

A key turning point this year was mid February. Arguably, most markets saw a recovery of sorts since then. In my portfolios, called a top in June and August, even tried my hand in September, not entirely successfully, but have been largely negative on stocks and gold since mid-October. The divergence across global markets rarely finds sensible commentators,. Most of them focus on a black or white scenario, leaving no room for grey shades.

They also prefer an uptrend! A downtrend does not sell itself well.

Up Trends (at least since February 2016) 

Almost solely limited to US indices for now...

DJIA, source: chartnexus

NASDAQ 100, source: chartnexus

1. US DJIA, not only benefiting from upward momentum but also from a strengthening USD
2. US NASDAQ, outpacing the blue chip index in the last few days, and substantially above the blue trend line since February
3. Shanghai Stock Exchange, which remains on a slow and steady uptrend. To improve the view, the chart is going to before the last rally, which surrounded the maneuver to connect the SSE with the Hang Seng, leading to a huge spike. Now, for the first time in many years, we see this market accelerating while keeping to a moderate upward momentum.

SSE, source chartnexus

But these upward trends do not cover the whole US markets. Short-term trends are supported by small caps and the leading DJTA, the Transport Index, but as so often, when the risk is seen as fading, utility and food companies, for instance, are on the decline. We need to look for other asset classes to seek conclusive proof of whereto NEXT.

Precious Metals and Oil

I mentioned gold already, so what about oil prices? Today, of all days, OPEC nations are deciding on production cuts intended to raise prospects of higher oil prices, - and higher revenues for oil producing countries. How this is going to play out when the FED raises interest rates remains to be seen. It is just very difficult to see how commodities that are priced in USD but sold to many countries,  can sustain high prices for long. The shale industry and alternative energies in the US also will see more hardship, if oil prices remain in the doldrums. 

When overall economic growth is as mediocre as it is, considering the benefit of low interest rates on corporate budgets, do we really expect for stock markets to go blazing new trails?

Bonds

This asset class is presently showing the greatest potential for suffering, already obvious in rising yields, and sharply falling bond prices.  This is unnerving not just for bond holders but also for those who thought to protect against the rising volatility in other asset classes. It is also annoying if like me you chose to be cautious.  The last 4 weeks I count losses in my portfolios for being cautious. It does not happen often, but when it does, the trends are culminating, directions will soon change significantly. But the first damage is done - and hurting.

Watershed Moment No. 2

We are heading into it, guns blazing.  I expect it for this December, and dragging on into early 2017, too. It is unproductive (many say) to stay on the sidelines, but until the chips line up in a different fashion, any opportunities in the meantime hardly warrant consideration, while accompanied with extraordinary risks. And Yes! Political risks count as extraordinary when pragmatism is overruled by populist ideas.