``The market doesn’t reward fools for long.” — Timothy Vick, author of How to Pick Stocks Like Warren Buffett
We should not forget that from the second quarter of the year the Phisix, and Global markets have trailed the movements of key US equity benchmarks or that global markets have been strongly correlated to the activities of the US equity markets. The strong performances of the world indices appears to be factoring in a US “soft landing” scenario, although in my view, this has been supported by liquidity arising from unofficial channels.
Figure 4: stockcharts.com: What slowdown? Volatility Index shows complacency
As shown in Figure 4, the volatility Index as measured by the VIX has been treading lower following the May scare and equally supported by declining volatility in the technical indicator the Bollinger Bands. This implies that market participants seems to be discounting a disorderly unwinding of the US slowdown...signs of bizarre complacency. Could the bulls be right to treat such slowdown as simply a “wall of worry” to climb? We will see.
Which brings us to the seasonality factor as shown in Figure 5.
Figure 5: Chartoftheday.com: Worst month of the Year
September based on the return averages has been the worst month of the year for US equities since 1950 and 1980, according to chartoftheday.com. And if seasonality reasserts its relevance we could see some heightened volatility heading into the last quarter. But the good news is that in the face of the weakest month is an offsetting factor, the strongest quarter...the year end rally, which filters over to the start of the year. So in a tactical perspective, assuming the carryover effects of seasonality, the September dips should be used as an opportunity to accumulate.
Figure 6: stockcharts.com: End of Commodity Bullmarket?
But again, we take market signals on a macro scale in search of possible clues for directional paths. While US equities appear to be scoffing at the outlook of a turbulent unraveling of its high impact real estate industry, the furious rally in the bond markets appears to be indicative of more worries. Moreover, the breakdown by the commodity benchmark CRB index, as shown in Figure 6, led by the oil and energy sector has been giving the deflationist camp reasons to celebrate...
Figure 7: stockcharts.com: HUI-Gold bullish technicals
I am not easily swayed by the deflation story though, especially considering that governments by nature, especially those with the democratic leanings, will exhaustively work to appease over the short-term the demands of its voters. Besides, it is rare to see such governments work on the unpopular and painstaking reforms for the long term good.
In addition, US consumers may find alternative avenues to fund their profligate spending habits, to quote Morgan Stanley’s Andy Xie, ``As the US housing bubble bursts, US consumption could come down also. This is not assured. The US has developed an entrenched culture of ‘borrow and spend’. It allowed the US consumption to survive the tech burst, 9-11 and the energy shock. The ‘borrow and spend’ culture could allow US consumption to survive again.” Under such circumstances we presume that the credit bubble dynamics will continue to expand.
Having said so, the key mining index HUI or the Amex Gold bug has withstood the recent selling pressures in the monetary metal, which may have been due to possible stealth sales by European Central Banks under the European Gold agreement which is slated to end its calendar year this month, as shown in Figure 7. This serves a non-confirmation in the decline of gold or a divergence.
Since gold finds the gist of its gains during the last semester of the year based on consumer demands on jewelry due to traditional festivals in India, China and the Christmas season in the US, such fundamental support has backed gold’s strong end-of-the-year seasonality. Further as gold has rebounded from its lows, as shown in the lower window of the above chart, the Amex Gold bugs appears to be testing for an upside bullish breakout from its bullish ascending triangle formation. Once the breakout is confirmed the likelihood, that gold, silver and other metal related stocks would follow suit. 
No comments:
Post a Comment