Global Assets Rejoining Dow Or Heading For Meaningful Correction?
Tiho Brkan | Mar 11, 2013 07:47AM ET
Just a quick update for Monday morning. Prior to the US elections, I began to open a variety of minor short positions (equities and currencies) in anticipation of a sell-off into 2013, for the purpose of hedging major long positions (commodities) in my portfolio. Currency positions include long yen and short Aussie, loonie and pound. British pound and Canadian dollar bets via put options were closed on Friday, as can be seen in the charts above.
Other minor positions, like Silver put option purchased for protection in October '12 as sentiment turned very optimistic, were also closed last week.
Chart 2: Funds hold large bearish bets on the Loonie
While I think there might be more downside risk left, both of the currencies shown above have become extremely oversold from the near term perspective. That is not to say they cannot go down even further (boy... have a look at the yen in recent months), but most likely scenario is for a counter trend rally to occur. Sentiment has become extremely bearish with Public Opinion on the pound reaching levels not seen since 2008 panic, while hedge funds hold relatively large short bets against the loonie (Chart 2).
Chart 3: Risk On or Risk Off? Depends on the asset!
Interestingly enough, these currencies used to correlate rather closely to the US equities and the overall risk on trade (Chart 3). All three peaked in April 2010 and experienced a correction, with US equities going through an infamous "flash crash." An intermediate bottom followed in the middle of 2010 as Bernanke announced QE 2 at Jacksons Hole (printing presses were re-started).
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The rally in almost all risk assets lasted until the middle of 2011. A major top was in place and what followed was a mini-panic of 2011. Once again, majority of risk assets bottomed in late parts of 2011 as Fed's Operation Twist and ECB's LTRO were introduced (printing presses were re-started again).
While US equities still continue to rally towards new bull market highs (1550 for the S&P), mainly on the back of the Fed's QE infinity and corporate profitability still holding up, other risk assets are not confirming the rise. the Canadian dollar and British pound have failed to exceed their 2011 peaks and in recent months totally de-correlated from the uptrend (green circles in Chart 3).
Chart 4: Global bull market confirmations are thinning out
Furthermore, these are not the only assets failing to confirm the recent euphoric rise in US equities. Consider Chart 4, which shows that emerging market indices like Hang Seng, riskier bonds like High Yield, risk asset poster boy Aussie Dollar and economic PhD Dr Copper are all in non-confirmation with S&P 500 and Dow Jones.
A great technical analyst by the name of Tom McClellan also discussed this phenomena in his last two public newsletters (link 2 here ). Mr McClellan states that:
"By itself, this divergence between copper and the SP500 could be set aside as an anomaly. But when we combine it with the divergence between GE and the DJIA, it becomes much more of an attention-getting situation, calling attention to the problematic nature of the current multi-year high in the major averages. When these situations appear, there is usually a scary-feeling dip which ensues, and which helps cure the problematic price anomaly. That remains on the agenda for March."
Will global assets re-join Dow Jones towards new bull market highs or are we at the beginning of a more meaningful correction?
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