KRUGER INSIGHTS TUESDAY, OCTOBER 29, 2013

By: Joel Kruger 

At The Core - So many of you might be wondering why I have spent so much time talking US equities and not enough time talking currencies. The simple answer is that the US equity market is all that matters right now. Given the entire market is fixated on the Fed, and given the Fed has used the equity market as the vehicle to help stimulate recovery, everything then comes down to the direction in the US stock market. This fact has become ever more apparent in recent days, with the US equity market seemingly unwilling to pull back from record highs in any way, despite no other clear catalyst for an offerless market other than expectations for continued ultra accommodation from the Fed. The most fascinating thing to me over the past few weeks has been the stock market's inability to even soften on profit taking ahead of event risk. Whether it is concerns over the debt ceiling outcome or nerves ahead of the monthly US employment report, it doesn't seem to matter. The notion of repositioning ahead of event risk has gone out the window, and instead of profit taking, the market has resorted to a pre-event risk consolidation by record highs. Again I stress that this type of price action is highly abnormal, although one would expect highly abnormal price action in response to highly abnormal Fed monetary policy.

Nothing Changes- Yet I do believe in the cyclicality of markets and do not subscribe to "the world has changed and things are different now theory." If the price action looks abnormal and seems well overdone, then it stands to reason that the market is actually overdone and will indeed undergo some form of major correction. The S&P has now exceeded its average monthly range by just under 1.5x, and longer-term technical studies continue to warn of a major top. While I can not say that this top will be today or tomorrow, I am sure as I am about anything, that there will be a serious liquidation soon enough. My recommendation is to keep a close watch on the S&P and wait to see if the market breaks back below 1740. This level in my view is the key level to watch, and could act as the technical catalyst for the start to something real big. On the currency front, the Euro could stall out soon enough, but will probably need to test major falling trend-line resistance around 1.4000 before it does. Meanwhile, I suspect that the anticipated liquidation in risk assets will have a favorable short-term influence on the Yen, and I am looking for one more sharp intraday pullback in USD/JPY into the 95.00's before looking to establish a meaningful long position in this market. Elsewhere, look for commodity bloc and emerging market currencies to start to come back under pressure following this latest multi-day rally.