KRUGER INSIGHTS TUESDAY, MARCH 04, 2014

By: Joel Kruger

Small Change - There is no denying that the geopolitical uncertainty over the past several days has played a hand in market volatility. However, geopolitics aside, the picture does not change, and in my view, risk assets should still be exposed over the medium-term. So even if this Russia-Ukraine conflict is diffused, I would still be looking for US equity markets to top out, USD/JPY to gravitate back towards 100.00, EUR/CHF to challenge 1.2000 and commodity bloc/emerging market currencies to show vulnerability. The big picture right now is the recovery in the global economy and the even quicker recovery of the more developed nations. The developed nations were the first to enter the global crisis and will be the first to recover. Money flowed away from these developed nations for a good portion of the global downturn, in search of more attractive yield in the form of commodity bloc, emerging market economies, and equities, and this money should flow back out of these markets and return to the developed nations as these respective economies show signs of sustained recovery. This is the story right now and this is what should be influencing price action. Anything else is really only a distraction. So while we have seen a fresh round of bids into risk assets in early Tuesday trade on account of some encouraging news on the geopolitical front, if you are thinking this will have any meaningful impact on the fate of the market looking out beyond a few hours, I think you will be disappointed. 

Silver Linings - Moving on, I will say that this unwavering bid tone in US equity markets has been nothing short of astounding. The ability for this market to consistently be so well bid on any form of a dip and continue to push to fresh record highs, seemingly without thought, is quite unsettling in my view. I have very little doubt that we will soon see a legitimate meaningful top carved out that will last for more than just a few days, and it really is only a matter of time before this house of cards comes tumbling down. It doesn't need to be a catastrophic decline by any means, but we do need to see a legitimate and healthy corrective pullback. For those of you frustrated with the lack of downside follow through here, I would say that despite the ongoing surge to record highs, there have been some formidable opportunities to take shots at fading these moves along the way. I have taken many shots over the past 9 weeks and have had a lot of success with this strategy. In fact, half of my gains this year can be attributed to my shorts in the S&P and fading intraday rallies. Admittedly, these gains have not been as satisfying given my expectation that this market should really roll over and my desire to be involved when it does. I try not to get caught up in this and am very grateful for the rewards thus far this year, but when you have such a strong macro view, it is difficult to manage the crave to really catch the big wave when you know it is coming. Still, this is not an ego game and we need to trade with caution and always be looking to protect and preserve our capital. That is what is most important. As always, let's see how it all plays out. I will say that as pretty as things are early Tuesday, they could be just as ugly into the close. Be careful.