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Markets are refusing to turn
I can't help thinking that we're at some kind of inflection point. Right across the board, markets - be they equities, commodities or currencies - seem at an obvious place to make a turn.
Yet they stubbornly refuse to. Many of us have been expecting the 'next leg down' to begin around now, but said leg doesn't seem to be forthcoming.
Which way hither?
Stock markets are heading for a correction
Looking first at the S&P 500, which I use as a proxy for global stock markets, the action of the past few weeks has been for every sell-off to be halted by enthusiastic buying. It can't seem to crack 950, but it is finding a lot of support at 900.
Sooner or later one of these points will have to give. If we break through 950, I expect to test 1,000, but I really can't see it getting through that level. If we break down below 900, I would expect a retest of 800 and even the March lows at 666.
Having called the March low, I have been an advocate of the 'Sell-in-May-and-go-away' strategy, but so far this hasn't been the right call. However, I am sticking to my guns on this one. The daily sentiment of bulls vs bears now stands at 88%. It has not been this high since the October high of 2007. At that point, the S&P was above 1,500.
We have had bits of bearish news starting to creep back in: the Saudi sale of Barclays stock last week, and of its stake in Berkeley Homes yesterday, for example. There are also the well-publicized troubles of Irish pay TV group Setanta. (I'm very sad to see this company in trouble, by the way. I have done a lot of work for them over the years and they have been excellent to work for. But their business model, which relies on credit, even leveraged credit, is, unfortunately, the wrong one for this environment).
And stock markets have now rallied for some 13 weeks in a row without any significant correction. Although most unusual, it is perhaps not that surprising given the scale of the preceding crash; but the longer the rally goes on, the more the odds favour at least some kind of pullback.
Commodities are also due a sell-off
Moving over to commodities, one of the common assumptions many pundits make is that a high oil price is somehow bad for the economy. Why is it, then, that oil so often seems to rise with the boom and fall with the bust?
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We have seen this pattern yet again this year. Having made a low in February, oil has led these markets up. I'm a believer in the Peak Oil story (the theory that we're close to, or have already hit, the point where oil production has reached its highest level possible), but oil is approaching 'overbought' territory and I would not be a buyer here. In fact, I have been a seller. There is plenty of resistance between $70 and $80. I would be surprised to see the winter lows of $35 retested again, but a retracement to $50 looks very possible. It's an anecdotal point, but callers were moaning about the high cost of petrol on the Vanessa Felz radio show this week, which confirmed my decision.
The same goes for copper and for both gold and silver. I am a longer-term precious-metals bull, but I have been taking some money off the table here in expectation of a better entry point later in the summer. Silver, in particular, meets a lot of resistance just above the $16 mark. And when it spikes, as we have seen during this last month (from $12.50 to $16!), it tends to be towards the end of its runs.
Also very worthy note is that the short position in gold taken by the commercial traders (also known as the 'smart' money) on the Comex is almost at record high levels. That is a bearish signal, though the commercial traders have been wrong before.
What about paper assets?
One of the most notable moves of recent weeks has been in the US 30 Year Treasury Bond. It has now given back all of the gains it made in that spectacular spike of late last year. But I would expect it to find some support in the 112-113 area, where I have drawn the line.
Given that the US Bond has, largely, been trading in the opposite direction of the stock market these last few months, a likely scenario is for the bond to find some support and enjoy a countertrend rally, just as stocks and commodities turn down.
In the currency markets, we have yet another market that looks like it could be on the verge of making a turn and that is the US dollar. It, too, has been trading in the opposite direction to stock markets. If equities turn back down, we can expect a rush back to cash and the dollar will rally. However, if the dollar breaks down here, I think we can expect a retest of those 2008 lows at 72 on the US dollar Index and a concurrent, continued rally upwards for stocks, commodities and precious metals.
My view is that stocks and commodities will pull back, and that the dollar will rally. That's where I have placed my short-term bets, though, I must say, not with any huge conviction.
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Dominic Frisby
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