What a week! Admit it, we got stuck between good economic news and uncertainty about European austerity measures and whether this will derail the recovery. Banks do not trust each other again - look at Libor. Can't argue that if we put European problems aside some fundamentals look good. But unfortunately the markets tell you otherwise.
So lets turn the page, forget that fundamentals are good and Europe is in troubles and look at what markets tell us. When I first read about commodities I learned that on contrary to equities spot commodities are not forward looking indicators and spot prices represent current supply and demand balance. in other words of supply exceeds demand, lower prices should encourage more consumption. Equities on the other hand, since we do not have anything better then discount factor model to value it, is a function of expected future profits or more precisely free cash flow of the company. Having said that, I should forget everything I learned about commodities now. Spot commodities also became a forward looking indicator not just back end of the forward curve. Please can someone prove I am wrong? So the risk is, when we need it badly, price will not regulate immediate supply demand balance. I think it has happened before in 2008 and probably will happen many more times in the future. So I would not be surprised in some future to see something like oil going from $20 and $200 and back or copper at $10 000.
Going back to the real markets, here is a trick... if spot commodities are forward looking indicators like equities, here's what they say. we've made new highs for the year in most of asset classes (including "safe" gold) and fell sharply after that. Within 3 to 6 months from now economic indicators should start deteriorating... And I am afraid it will not be just double dip, but something worse then that... War? deflation? Definitely not stagflation with this amount of spare capacity, despite everyone printing money now. I think we need worldwide repricing of all the assets... I am not sure in which way it is going to happen or if it happens at all, but I will keep my ears open for any signs of new troubles ahead.
Meanwhile on daily basis markets have recovered and next week promises to be an interesting one. Here is why. On Monday we will have the end of the month trading in thin liquidity. Volatility on such day can be very high and depending on the close we will see if new trend has started or the fall continues. I am closely watching Dollar index and EURUSD:
There is a potential for a double top in Dollar Index. if we break 85 that would result in a drop to at least 100 days moving average at 83. This would support short term bounce in other asset classes. EURUSD similary is trying to post double bottom (But chances for this are slim given the fact that just now Spain had been downgraded by Fitch). If we close above 87 in Dollar index in May (above 200 months moving average) this might lead to a multi year dollar rally. Before it was supportive for equities and commodities, but, in view of recent risk-on/risk-off market attitude I would not be surprised to have the doom scenario materialise.
Long term moving averages in equities, oil and copper also are turning down, but I would allow for some oversold momentum to unwind before market finds its direction (but watch out for Dollar index). Copper rallies should stall by 50/100 days moving average and higher Bollinger bands at 7300-7400. Oil and S&P500 picture is unclear since moving averages are far away from each other creating multiple resistance levels. The graphs are below:
The problem I had before was that I always had an opinion on market direction, but market did not care about it. and it cost a lot. It is better to admit you were wrong and admit it early. This is the lesson I learned, but there are many people out there that do not listen to market and continue "pissing against the wind".
Have a good weekend everyone!
