USDSEK - Further evidence of USD strength to come

Above is a weekly chart of USDSEK. I have detailed what I see as a weekly diamond formation which typically leads to sharp counter moves. With stock markets likley in a corrective phase, this bodes well for further dollar gains over time. Initial targets, as detailed on the chart image are, 7.7390 and then 8.0430. Please note this is a weekly chart so things may take time to evolve, if indeed I am right!

World/emerging ratio - One to watch during a deleveraging period

Above is a chart that I have shown on this blog before. It basically divides the value of the Morgan Stanley World index by the Morgan Stanley Emerging index. This is shown at the top of the chart. Below are the world and emerging indices. Click on image for a larger chart.

It is clear, from what data we have, that during bullish phases in equities the ratio rises, so emerging outperforms. Converely during periods of equity weakness emerging markets underperform their developed world cousins.

Now if you believe that we are in for a new wave of deleveraging then there is a greatly increased probability that the ratio heads south, ie emerging underperforms. There is no such thing as decoupling. At the very best a variation of decoupling may take place over decades where the ratio always peaks at higher levels and forms higher lows at higher levels. It remains to be seen if this is the case.

JALSH - Breaks multi-month rising trend and leaves a false break higher

Quite a nice example of an emerging market that looks like it is set for a larger correction then we have seen of late. As can be seen in the chart above the JALSH has broken both the multi-month rising trend-line and in doing so has left a false break higher. This now warns of the possibility of sharp losses ahead. Similar to the indian stock market, most emerging markets are well overdue a big correction. Just another warning sign.....

Dow Jones Industrial Average - Chart pattern similarities with the 1929 crash

Ok here is one to scare anyone who is still sober on a Friday night. Take a look at the two screen shots of charts above (Click on images for a larger picture). The first one shows the extent of the retrace that took place after the crap out in 1929 (just over 50%) and the second one is what has happened since the peak in 2007. As you can see we have retraced just over 50% again.

I appreciate that the two moves took place over different lengths of time but the patterns are very similar and also relate to two very similar periods of market excess.

For what it's worth I am in the large correction downwards camp and cannot rule out a break of the low. If an industrialised government bond issuer defaults (Japan), anything can happen. Bond yields don't need to rise too far there for the entire tax receipts to be exhausted paying interest on outstanding debt. Scary. I'm sorry to bring it up on a Friday night! In any case it may not even be a top yet but still interesting...

EURGBP - Approaches a great risk reward region for long entry

As can be seen in the chart above, EURGBP has been correcting off the recent .9413 high, as it has appeared that all is not well in the Eurozone. In particular yesterday saw claptrap about Angela Merkel resigning! This was just stop hunting. I have a good idea where this rumour was probably generated. The good part is that it has taken EURGBP back into a great risk reward zone. While above .8705 this pair remains bullish from a structural standpoint.

From a fundamental approach we are all familiar with the trouble in Greece and with Greek government debt. To put it into perspective consider that Greece is responsible for 3% of Eurozone GDP. Spain and Ireland are old news too, with Ireland looking like it is willing to take the appropriate steps to improve its fiscal position. Now contrast this with the article from the FT via Naked Capitalism.

The probability of a sterling crisis, in my opinion, is much higher then is priced into the currency markets. Over the last 18 months private debt has been passed over to the public sector as governments in most industrialised nations (and the UK in particular) have bailed out their bankng sectors and supported other sectors. This is why there is so much emphasis on sovereign default probabilities. What has taken place is that the debt has just moved around from private to public bodies, but it has not really gone down. Deleveraging is alive and well. Don't forget the UK is loaded to the brim with civil servants. The state is one of the largest, if not, the largest employer. So now it is time for austerity when half the nation gets its pay check from the state! To my mind EURGBP back at .9805 or parity makes a lot more sense then back in the old range near .6500.

I would recommend getting long on the approach to .8787 with a stop under .8705. Great risk reward.

Nifty 50 - Market sentiment is always most bullish at the top

Its is said a picture speaks a thousand words, so above I present a picture I have become quite fond of. The nifty is shown in the upper portion of the image with the p/e showing at the bottom.

Now, if there is anyone that can justify to me that there is any value in the Indian stock market then please let me know (seriously, send me an e-mail). The only times that the P/E has been higher then it is today was in the bubbles of the tech boom and the one that was driven by the biggest credit bubble in the history of the world, in 2007. I can only repeat the sentiment from my previous post. If you are a long term investor who likes to sit on value based positions, this is highly unlikely to be the time to invest in Indian equities.

I have read countless articles about the way retail investors are piling into emerging markets and Indian equities in particular. Remember:

1. Market sentiment is almost always most bullish at tops. It must be to get the greedy to buy

2. There is no such thing as decoupling.

Mind how you go....

Happy New Year

I have had an extended break and am now well and truly settled into my new role. I seem to be forever apologising for not updating this blog, but then if time does not permit? As always I start this new year with the best intentions to update more frequently. Lets see what happens.

The first article that I am going to present will give a good indication of my bias for the year ahead. As followers of this blog will know, I am a medium term dollar bull as per my earlier post. I see Aussie dollar bulls as mindlessly following a momentum trade that reminds me of the emerging market madness just before the crap out in 2008. With that in mind take a look at the following:

http://digitaljournal.com/article/284509#tab=comments&sc=0&contribute=&local=

Remember which nation was once the biggest borrower in the world? Look what happened to them. YOU CANNOT BORROW YOUR WAY TO PROSPERITY. Australia, and China for that matter, are ticking time bombs. As a trader I would say have your fun. But depending on what you are trading you may be engaging in the greater fool theory. It never ends well, remember Japan.... As an investor I would say get out of risky positions (particularly in Australia) and book what profits you have. There are far better investments out there.

I intent to update a couple of times today so do come back for more.....

Nifty 50 - Possible p/e based warning sign....

So here is the promised update on India's Nifty50 stock market. I have highlighted, as on previous occassions, the prior time that equity markets where stimulted and p/e's reached these levels. As we can see the markets fell about 35% back at the beginning of 2004 . I intend to get some data to compare developed versus emerging stocks and will hopefully have that by tomorrow. Definitely food for thought.....

Talking of running just to stand still.......

As each day goes by and new bits of economic data are released I find myself looking at the S&P500 and thinking of the cartoon roadrunner and Wile E Coyote. I can't help but think of these markets as being so euphoric on the back of garbage that it reminds me of the moment in every episode when the coyote winds up running off the edge of a cliff and for a moment is suspended in disbelief about what is about to happen. Are we there yet as far as markets are concerned? Well contrary to many I believe that emerging market equities are a sell and in particular the Indian ones. I will update shortly with my usual p/e based reasoning. I guess there is no accounting for how far a bit of stimulus can take the raging crowd....

In the meantime enjoy the cartoons above.....

Running just to stand still

Morning!

So we have had countless stimulus packages in various flavours in various countries and the end result is anemic growth almost everywhere apart from the UK which is apparantly still contracting. This is just a re-run of the events that took place in Japan in the 90's. Admittedly, goodness knows what things would be like if there was no stimulus at all. In any case what we do know is that Japan had periods of positive gdp AND a relatively strong labour market and they still suffered massive asset price deflation. By the way anyone who wants a good big picture view of the potential for deflation should read Roger Bootle's series of three books; The death of inflation, Money for nothing and his most recent one, The trouble with markets.

The way to solve the problem of excessive debt is not to issue more. The obvious thing to do is to pay it back? This is exactly what happened in Japan. Private debt was, and is, being paid back. This is why banks are not lending and businesses on the whole are not borrowing. I believe Mervyn King was right when he said some months ago at an inflation report press conference that in the short run we have to do the complete opposite of what is right for the economy in the long run. So in the short run excess government spending has been the appropriate economic medicine to avoid armageddon. There is a possibility that governments can stimulate their respective economies back to their pre crisis highs and perhaps beyond but without an increase in lending it seems unlikley this will occur. As I have mentioned in a post from months ago I think the Nikkei is a great roadmap for what may happen in the Anglo Saxon world. Every time there is a rise in optimism and equities rise, the smart people get out, learn from their mistakes and return to a more balanced approach to investing. This process repeats many times and eventually the system is cleansed. It is essentially what Mervyn King was talking about but it will probably need to happen many times because it is simply too dangerous to let all economic agents fail, that need to fail, all in one go. Thus it is done in stages as per the Nikkei chart over the last 20 years.

It is my belief that we are going to experience at least one more credit contractionary phase. As a proportion of outstanding debt, USD denominated debt is the largest. If folk start scrambling to get the money back that they have lent out, the end result is a monumental USD rally that comes from out of the blue. USD sentiment is near an all time low. Note, that when the USD rallied following the collapse of lehman it reached a point at which 98% of USD speculators were bullish USD. Guess what? That was the point to sell USD (around March 09). Now we are at a point where about 3% of speculators are bullish USD. In my mind it is a reasonable place to build small long USD positions.

Take a look at the NZDUSD chart above. It is one of the few USD pairs that has broken below trend-line support and I believe is one that should be sold aggressively on pullbacks towards .7450. Unfortunately I do not have access to my normal charting package so I am trying out an alternative. Let's just say that the false break higher that occured on 21 October followed by the breach of the support of a rising daily wedge and then the major trend-line support off the lows from March/April is an early warning sign of probable further losses. As always, good luck if you have a go.