Weekly Update 4 January 2015 – LS Trader

2014 has ended and it was an excellent year for the LS Trader system, easily the best year since 2008. Trending markets returned in force in 2014, particularly in the second half. Strong trends have been seen in several sectors, particularly in the energy markets and the currencies. These two sectors were responsible for a large percentage of the system’s outstanding annual return. The New Year, although only one day old is off to a good start as well with further weakness in energies and a continuation of the dollar rally.

As 2015 begins the long-term trends are as they have been for much of 2014, up for stocks, the dollar and interest rate futures, and down for most commodities. The year ahead promises to be a very interesting one and one which will likely be very profitable as the trending phase that began in 2014 should have much further to run and possibly one that will deliver a bigger move than the 46% decline seen in crude oil.

Stocks

Weakness in the S&P over the last 2 trading days of last year and the first of this has erased the market’s progress for December and barring a large rally tomorrow will indicate a failure for the Santa Claus rally, which as we have mentioned typically runs for the last 5 trading days of the old year, through to the first 2 trading days of the New Year, which this year ends on Monday the 5th.

Historical seasonal tendencies are far from 100% reliable and not something that trading decisions should be based on solely, but they do offer repeating patterns fairly often and are something of interest and to be aware of. The records show that when the Santa rally fails to materialise, the following year is often a bear market. In effect, we’ll need to see new all time highs printed on Monday in the S&P 500, which will be a considerable rally, which at this stage looks unlikely, or the Santa rally will have failed.

Commodities

The big story in the commodities markets continues to be the huge energy bear market, which has begun 2015 in the same way that 2014 ended, with weakness. Crude oil shed some 46% last year and the selling may not yet be done. The long-tern trend remains down across the energy sector and in spite of extreme negative sentiment towards the energy markets, the extent of the decline and the markets in classically oversold levels, it would take a brave (and foolish) man to be a buyer here. Trying to catch a falling knife in a huge bear market is usually a fast way to the poor house.

Even if we have seen the bottom in the energy markets (the odds favour that the bottom is not yet in) trading with the trend has by far been the best strategy for trading these energy markets, as of course it is in all markets.

Currencies

From last week: “The dollar index this week printed above 90, a level not seen since 2006. This rally has now retraced just pips over the 38.2% retracement level of the decline from 120.99 printed back in July 2001 and bullish sentiment is up to 91%. The dollar trend remains bullish across the board and higher levels cannot be ruled out.” The dollar rally has continued in full force, ending 2014 with strength and beginning 2015 with a strong rally. Sentiment on the dollar index has risen to 96, which is a degree of bullishness not seen since 2010.

The inverse of the dollar index is the Euro, which this week has continued to fall. Bullish sentiment here has dropped to low single figures. In neither case do these sentiment figures guarantee a reversal but they do represent considerable sentiment extremes and levels that are not that often reached.

Weakness seen in the Euro was also seen in the Pound, which dropped like a stone through support on Friday, shedding over two and a half big figures in the process.

Interest rate futures

Interest rate futures were higher this week and the RSI bounced notably right off bull market support at 40 in the 5 year T note as we suggested may happen in prior updates. The long-term uptrend remains intact as the New Year gets under way. 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.

Good trading

Phil Seaton

LS Trader

 

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