Stocks rose to new all time highs as optimism continues to rise. According to polls in America run by CNN, Americans have not been so optimistic since January 2007, just before the financial meltdown. Typically when optimism reaches such extremes, the end of a trend is near simply because everyone who wants to buy is already in the market and there are few new buyers left to push the markets higher. Additionally, according to COT data (commitment of traders) commercial funds are near record short positions still. However, the flip side of all of this is that hedge funds are at record long positions, so there is a huge fight underway in stock indices and soon one side or the other will give way.
Commodities have been mostly bearish and look to be continuing the long term bear market and the dollar has been weak for the past week.
In last week’s LS Trader update we wrote: “The rejection of the lows on Friday led to the formation of a hammer on the daily charts, which is bullish and also confirms the support area around 1540.” The market never looked back from that level and the S&P 500 cash finally pushed to new all time highs and having reached new highs, accelerated higher, almost reaching the psychological 1600 level. The cash S&P 500 stalled at 1597.35 and then pulled back to Friday’s close. Basis the cash index, the prior highs at 1576 may now form support with that level being the top of a support zone between 1576 and 1538. Should the market fall below 1538, a sharp sell off back to 1477 as a minimum may follow. For now the trends are clearly up for U.S. stocks, which are undoubtedly in a bull market.
Global stock indices such as the Nikkei and the Dax also remain in uptrends but the Dax is lagging. The Nikkei continues to advance and this week reached its highest level since August 2008. The next upside target if the bull run continues will be the 14000 area.
In recent weeks we have been writing about the bear case for gold and silver and have written extensively about a likely test of a critical support level in both markets, which was 2628 on silver and 1527 on gold. Both those levels were tested and broken this week with heavy selling being seen especially on Friday. We now look lower towards 1425 on Gold and 2400 on silver. The long term trends are very much down for the sector with only palladium remaining in an uptrend.
The metals were not the only commodities under pressure as the past week has also been bearish for the energy sector. Steep sell-offs were seen in all the energy markets with the exception of natural gas, which is now the only market in the sector still in a long term uptrend. Further weakness in this sector can be expected.
The dollar has declined almost across the board this week and the dollar index tested support twice. Due to the proximity of the index to support it is very likely that support will be tested and possibly broken this week, bringing a pause to the long term uptrend for the index.
In spite of recent dollar strength, the Euro just narrowly held on to the long term uptrend, although a change of trend to down is very much within range in the near term. If the Euro can clear resistance from last week’s highs, which is also the area of the 38.2% retracement of the decline from January, we may see a continuation higher to the $1.33-1.34 area.
The U.S dollar’s sole advance came against the Yen, where the dollar pushed up almost to parity but did reach 4 year highs. Whether this level, which is also the 50% retracement area of the decline from 2007 proves too much at this juncture remains to be seen. We may see some weakness over the coming weeks before the longer term trend resumes with potential over the coming months for the dollar to push much higher.
Interest rate futures
The interest rate futures sector was marginally lower this week but the markets recovered well from lower prices seen mid week. The long bond may now continue higher towards the November highs and the 150 area, while the shorter term markets remain close to all time highs. The trend is still up and we may yet see higher prices and yields falling to record lows.