KRUGER INSIGHTS WEDNESDAY, NOVEMBER 6, 2013

By: Joel Kruger 

Asian Anomaly - It is quite rare to see Asian markets dictate price action, and yet, in early Wednesday trade, this is exactly how things played out, with Asia disregarding the lower close in US equities and racing higher to post fresh weekly highs. While the markets haven't exactly gotten out of control, it is still rather interesting to see such a commitment from these markets after US traders had settled on a lower equity close. Is the market no longer concerned with the US and Fed policy? Upon closer glance, it all becomes much clearer. It seems to me Asia had rallied precisely because of the happenings around the US economy and Federal Reserve. So what happened after the US equity close? San Francisco Fed President John Williams was on the wires. Here is what Williams said - “If you look at the valuation of stocks today compared to earnings and dividends and relative to historical averages, it’s not obvious that the stock market is overvalued, in fact a lot of models will tell you that it’s undervalued given how strong profits have been.” This is exactly the type of rhetoric that would inspire fresh bids in equities, despite the fact that the comments have been taken well out of context.



Picking And Choosing - First off - While it may be true that according to some models, stocks are undervalued relative to profits, these models are not accounting for the current state of monetary policy and the crisis that the US economy has been going through. Everyone is so fixated on the fact that equities might be appropriately valued or even undervalued at current levels, and yet these people forget that this would only be relevant in a normal economic cycle. We have not been living in normal times these past several years and the fact is, without the artificial support of the Fed, equities would be trading much lower than where they are now. This market has no business trading at record highs. What kind of world do we live in where the most supported asset in an emergency monetary policy environment is a risk asset? Secondly - The market has completely ignored the rest of the Fed member's remarks, where Williams has said that - “Up until recently, I was thinking we would start seeing more of that self-powered growth in the second half of this year. Unfortunately, that’s not really been happening, and we haven’t seen a real pickup. We’re still a long ways from where we want to be." So in the context of these comments, would it not make sense to question the strength in the equity market? I think it certainly does make sense to question equity strength.

Common Sense - The other major problem I have with the current equity rally (this problem is one even bulls fear), is that the market has lost touch with reality and there no longer is a presence of what would be described as healthy price action. We have only seen one way direction, and there have been no legitimate pullbacks. There is also no more profit taking ahead of event risk that would normally see market participants looking to square positions in the face of the unknown. This is just not normal and should be worrying. To be bullish does not mean that one should buy always and unconditionally. It means you should be looking for opportunities to buy. Surely at current levels, even bulls would question the establishment of fresh long positions. I can't believe the risk/reward at current prices is really so attractive. And so, I continue to look for that reversal in the US equity market, and remain focused on S&P 1740. I believe a break below this critical level will confirm my suspicions and open the door for a long overdue and much needed liquidation in this unrelenting, Fed dependent asset.

Just To Be Clear- Bottom line - From a speculative perspective, don't get me wrong. I completely understand the view that momentum is momentum and there is no point in fighting the momentum until proven otherwise. But at the same time, this doesn't mean that I can comfortably say we should expect this momentum to persist at current levels given what I believe to be some equally compelling reasons to be concerned with the alarming disconnect between the US stock market and real economy. So keep an eye on S&P 1740 and on the currency side, keep an eye on USD/JPY 98.15. I believe a break below 98.15 in USD/JPY will also help to reaffirm my outlook. So long as USD/JPY holds below 99.00, I wouldn't get too excited about risk assets in the short-term.