Market Analysis

We identified a long signal in the Dollar Index in January based on the support that had formed around the 80 level.

This long signal has held taking DXY above 82 in March where it has since been consolidating. We have moved our stop condition to a stop on weekly close below 81.835 which is the bottom of the current resistance marked below. We would get a new entry signal to increase position size if we get a weekly close above this resistance level at 83.524. Our initial target for DXY is still 88-90. If we zoom out to the 10-15 year view the longer term targets are then ~105 and ~120:

At the start of the year our analysis of the indexes gave targets which then seemed very optimistic but now are starting to look more reasonable – FTSE targeting ~7000, SP500 targeting 1700.

We try to stick to the technical price action to define trades but also like to put together a hypothesis as to what would cause these types of moves. In Jan we speculated that the bubble in the “safe havens” of the last few years is starting to give way (bonds, JPY, AUD, NZD, “quality stocks”) with the cash flowing to areas which have been depressed (USD, Asian equities, European equities, banks, miners, shipping etc).

We are far from confirmation that this is the case although it is looking more feasible:

Safe havens

• JPY has hugely weakened this year
• US Bonds haven’t had a major move down but have been giving lower highs and lower lows suggesting they are at a top
• AUD and NZD have been trading in a range near their highs but this week may be the start of a major break down

Recent rallies

• DXY had a good move up in Q1 and looks primed to break up again
• Asian equity indexes – Hong Kong and China indexes are flat year to date but are well up from the June 2012 lows and look to be breaking up again.
• European Equity Indexes – DAX, IBEX and CAC are all up year to date with reasonable gains.
• Banks – The banks and finance companies which were on our radar – EMG, BKIR, BARC – are all well up year to date.
• Miners – The miners on our radar – JOY, RRS, BLT – have all stuggled this year and came back down to long term lows.
• Shipping – The BDIY Index seems to have found a long term bottom and has been giving higher lows recently to give a rising structure.

In summary we currently have the view that we may be moving back to a strong USD and strong equities period. In equities we feel that the best potential upside is currently in Asia with our focus on Hong Kong.

In terms of a new really contrarian view if the SP500 Index closes next week above 1576.09 it could signal the start of a new significant bull market in US equities.

For all of the commentary about equities being overvalued this graph might suggest a different story: