The past week was dominated by two events: the first was Larry Summers ruling himself out of the running to be the next Fed Chairman and the second was the Fed announcement that the tapering that the markets had expected was not going to happen, at least not within the expected timeframes. The first of these is largely irrelevant since nobody really knew what Summers’ policies would or would not have been so the reaction was not really due to any real change and is really a knee-jerk reaction. The second is perhaps more important but again, its long term relevancy is in question.
The Fed had previously claimed that it would be more transparent by giving forward guidance but then reversed its previously stated position of tapering, a position that it had only announced in June. Bernanke’s willingness to reverse his previous guidance so quickly is perhaps what surprised more than the event itself, with the whole episode making forward guidance the exact opposite! This surprised many and amply highlights the foolishness of Fed watching and even forward guidance itself. The near-term impact was a weakening of the dollar and a rise for stocks and many commodities, moves which have largely been erased in the 2 days following. The longer-term impact of this is as yet unknown but the impact on long-term trends has been negligible apart from a continuation of the recent shift towards dollar weakness, a shift that was underway ahead of either of this week’s events. Stocks remain in a long-term uptrend while bonds remain down. The trend for commodities and the dollar is mixed.
The S&P 500 rose to new all time highs this week, easily clearing the 1700 level. New all time highs were posted on Thursday at 1726.5 basis the December contract. However, following Thursday’s high some weakness has been seen and there was a weak close on Friday. This close was just above the key 1700 level, which in theory should now act as support due to change of polarity (prior resistance acts as support once resistance is broken). Whether it does or not will be answered quickly on Monday.
The Nasdaq 100 also had another good week, trading in similar style to the S&P and reaching new 13 year highs (highest level since late 2000), but as with the S&P 500, had a weak end to the week. In effect, U.S. stocks have all but erased the Fed’s no taper rally.
The Nikkei and Dax also rose but both also ended the week with selling. As we wrote last week, the long-term trends are therefore still very much up for global stock indices and the odds therefore favour higher prices over the coming weeks. This still applies. The VIX fell again, reaching new 5-week lows so complacency remains high, which as we also noted last week is often a precursor to sharp declines.
A glance at the weekly metals charts, in particular that of gold, show how volatile the past week has been, but also shows that come Friday’s close, the most important price of the week, nothing has changed. Gold printed a long-legged doji on the weekly chart which represents total confusion in a week that has seen wild swings higher and lower during the week, only for the market to close pretty much where it began. Silver was the most volatile, but the rally following the Fed meeting has almost completely been erased and silver may break to the downside again as early as this coming week. Both gold and silver’s failure to clear the August highs may prove telling over the coming weeks.
The important thing is that the long-term trends remain intact and that often the biggest up moves happen in bear markets. Metals are still in a bear market set up and may yet move to new lows for the year.
Last week we wrote: “For the uptrend to remain intact, the dollar index needs to resume higher from current levels.” The dollar index did not resume higher and instead took out support, changing the trend for the index to down. In spite of a small recovery on Thursday and Friday, lower prices look to be on the cards with the next target being the 2012 Q3 lows around 79.50.
In last week’s update we wrote that following its recent breakout, GBP/USD may push higher to test $1.60. It did and eventually pressed higher to $1.653 basis December. The next target will be the $1.63 area, a level that capped the entire 2012 period and thwarted several rallies.
Interest rate futures
Interest rate futures continued their recent corrective rallies, led by the shorter-term markets. Further strength may be seen in the next week or so but the longer-term trends remain unaffected by the recent moves and lower prices will likely follow with a resumption of the long-term downtrend later in the year.