Stocks had a very mixed week, beginning with weakness before a decent recovery later in the week. The dollar’s rally continues to new multi-year highs, energy markets dropped to new multi-year lows and the long bond reached its highest level since May 2013.
Several markets have reached extremes in terms of sentiment percentages, with the dollar and long bond reaching the high 90s and several currencies down to single figures. This does not guarantee that reversals are imminent, in fact markets often continue on from these extreme levels as price overtakes sentiment, but does show how far numerous markets have come. At some stage of course things can reach levels where all market participants who want to be involved in a market are, and there is little buying or selling pressure remaining to keep the moves going.
As we suggested may happen in last week’s update, weakness seen in the S&P 500 meant that the Santa Claus rally failed to materialize. Based on historical studies, such an even usually precedes a bear market for stocks in the coming year. However, of far greater import is the fact that the long-term trend is still up for all 4 stock indices we trade at LS Trader.
On the S&P 500, weakness was seen on Monday and Tuesday, which took the RSI below the key 40 level for the second time in a month. The breach was only for one day and was only just below 40 at 37.42. However, a move back above 60 will be required for the trend to get back on track. Such a move would suggest a test of the recent all time high and possibly further strength ahead.
Crude oil dropped below the $50 level this week basis the March contract, as the long bear market continues. Brent crude has just about held the $50 level but that may be taken out this week. There is still no sign of a bottom in the energy sector as the other 3 energy markets that we trade at LS Trader also remain in severe downtrends. No leaded gas made its lowest print since March 2009, and heating oil its lowest since July of the same year. All 5 trends remain extremely profitable and we remain short and still focused towards lower levels until there is evidence to the contrary.
Gold and silver continue to trade mostly sideways and both remain in long-term downtrends. The trending market from the metals sector remains copper, which this week broke support and reached its lowest level since June 2010. Copper of course is known as a good barometer for the economy, hence its nickname “Dr Copper”, so a weak copper market does not bode well for the economy, which suggests that global economies are much weaker than most think. There is plenty of room for lower copper prices as structural support is at much lower levels.
Sentiment on the dollar index rose to 98 on Monday, which is an extremely high bullish reading, but still further rally was seen through to Thursday, where the index made its highest print since November 2005, basis the cash index.
Both the Euro and Pound dropped to new lows for the current move and the dollar pushed to new multi-year highs against the Swiss franc and the Canadian dollar. Things are about as bullish now for the market as they can get and a correction, or at a minimum a period of consolidation would not be a surprise, but with the trends as established as they are, continuations of the current trends cannot be ruled out either. As we’ve said many times before, it would take a brave man to jump in front of the dollar trend at present.
Interest rate futures
From last week: “As before, the 30 year T-bond is the strongest market in the sector and we may see another pop at new highs in the coming days. Significant resistance can be expected at the double top, but a breakout could lead to heavy short covering and further rally.” We did see the breakout and further rally before a two-day sell-off mid-week which took the market back to the prior resistance level from the October high. Due to change of polarity where prior support becomes resistance, this level held and the market remains very bullish above that level. Indeed if that support level holds, we will likely see further rally to new highs.