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.

Technical Update Tuesday, November 5

KRUGER INSIGHTS TUESDAY, NOVEMBER 05, 2013

By: Joel Kruger 

Uncomfortably Numb - The Australian Dollar is the standout underperformer on the day thus far, with the relative weakness unquestionably driven off more dovish than expected RBA rhetoric. While the central bank did leave rates on hold at 2.50% as was widely anticipated, comments that the currency was "uncomfortably high" and a lower level "would likely be needed" to achieve balanced growth, have been the clear influence of the noted selling. Still, at this point, given the broader uncertainty around the US Dollar, we would need to see additional Aussie bearish confirmation before upgrading expectations for accelerated declines. Right now, AUD/USD 0.9420 is the key level to watch, and only a break below would strengthen the immediacy of bearish case. 

Nothing Else Matters - But at the end of the day, it isn't the Australian Dollar, Euro or even Yen that maters. It isn't GOLD prices or OIL prices. Everything right now comes down to the US equity market and where the next big move will be. In the previous week we saw signs of potential topping after the market stalled at record highs and retreated back to weekly opening levels into the Friday close. Yet, despite every compelling technical and fundamental justification for a very necessary corrective reversal in the stock market, this asset class continues to ignore these justifications, only left to think about the incentives behind ongoing ultra accommodative Fed monetary policy. The price action in this market is what will dictate the course in all other major markets, and until we see a pickup in volatility in US equities, nothing else really matters.

It Takes A Lot To Laugh, It Takes A Train To Cry - So why has it been so hard for stocks to show any signs of let up? Well - to understand this requires an understanding of a major fundamental difference between equity markets and currency markets. In the currency markets, there is always some inherent demand for a currency, no matter how badly it has been beaten down, and always some reason to sell a high demand currency no matter how well bid. Simply put, when selling a currency, you are always buying into another currency. So with currency markets, the idea of shorting is fundamentally more acceptable and natural. Conversely, with stocks, this is really not the case. The equity market is a market that by design is always trying to move higher over time. There is no real demand for actually being invested on the short side, other than to profit from expected bad news.

Simple Twist Of Fate - This therefore makes looking for a reversal in equity markets all the more difficult. The presence of actual short interest in this market is lacking, and as a result, there either needs to be some major fundamental event that shakes investor confidence and forces an exit, or there needs to be a very good excuse to inspire a material profit taking. So as much as I contend this market should indeed reverse lower at any moment, it seems the momentum required to inspire such a reversal is much harder to come by. I do however remain quite bearish equity markets, but as a currency trader, I have realized more and more just how different these market dynamics are, and wanted to share this with you all today.

Technical Update Monday, November 4

KRUGER INSIGHTS MONDAY, NOVEMBER 04, 2013

By: Joel Kruger 

The Black Gold - We enter the week with some very light trade and markets mostly locked within tight consolidation ranges. Still, there have been some notable moves over the past several days, and it will be interesting to see how things play out with the latest bearish reversal in EUR/USD. The week ahead is stacked with a solid amount of event risk, highlighted by Fed speak, a European Central Bank rate decision, and Friday's US NFP report. Technically, Monday's early break below some key support at 1.3480 is significant, and should we manage a close below this level, we can expect to see a further depreciation in the rate towards 1.3000. While the Euro has now taken out its key support against the buck, the Pound is still contemplating such a break, with the market tracking just over some neckline support of a major double top. The neckline comes in at 1.5895, and a break could then open the door for a test of the 1.5500 area in the days ahead. Elsewhere, there has been a lot of excitement in the OIL market, with the commodity coming under some intense pressure of late and tracking deep in oversold territory on the daily chart. While I like the idea of picking some up, I am now looking for one more drop into the $93 area before doing so. Finally, US equities have been showing some signs of topping after establishing fresh record highs in the previous week, but we still have a long way to go before any legitimate confirmation here. Nevertheless, a Gravestone doji-like formation on the S&P weekly chart could actually offer the necessary catalyst for what I believe should be the start to a major correction in US and global equity markets.

No Added Value - Over the weekend a close friend of mine (he does not work in the financial markets) sent me a NY Times piece offering some warning signs from market strategists who feared risks of a market melt-up. While these strategists were bullish the market, they were also concerned that we could see an unhealthy acceleration of gains from current levels, that would ultimately compromise the current bull trend. I have two big problems with such views. 1) Is the current price action not already indicative of a market melt-up? We have already seen a relentless rally in stocks to fresh record highs, with no offers in site, despite what might otherwise be some disturbing fundamental developments that have forced the Fed to leave policy at emergency levels. 2) These strategists have been critical of a market that is overly bullish at present, showing no regard for anything that might otherwise dissuade further investment, but at the very same time, have perpetuated such behavior by saying they are also bullish and think the market still could go higher (melt-up). For me, I will be looking for an S&P break below 1740 this week to really get things going to the downside. I have already sold at 1755 as per my recommendation in the previous week and will only exit on a daily close above the current record high at 1779. But a break below 1740 should seal the deal and confirm medium-term topping. Let's see wha November brings.

Technical Update Friday, November 1

KRUGER INSIGHTS FRIDAY, NOVEMBER 01, 2013

By: Joel Kruger 

Under the Rug - The latest slide in the Euro has been a pretty big story in the FX world over the past couple of sessions, and it seems the fundamental catalyst has come from some softer than expected inflation data out of Europe and the expectation that this could inspire fresh rate cuts. Technically, the Euro had been overextended on the daily charts and already due for a pullback. This in conjunction with failure ahead of critical longer-term trend line resistance just shy of 1.4000, has opened the door for an accelerated liquidation. For the most part, the rest of the markets were rather tame in the final day of October, although I suspect things will heat up immediately in November. The post Fed profit taking in risk assets is also another major story, with the markets realizing perhaps they were a little too aggressive in pricing out near-term taper prospects. Still, the reversal in risk assets on the back of this news has been marginal at best, and I believe we should soon see some accelerated declines. For now, the reality of the Fed statement hasn't fully resonated with a spoiled investor base refusing to accept the fact that the Fed won't be there unconditionally to always and forever prop risk assets. Some other risk negative themes to think about as we enter November include the reemergence of stories kicked just a block or two down the road, that feel like they are now only about a half a block away. Just as the markets are starting to forget about the government shutdown and debt ceiling uncertainty, we enter the final weeks of the year that guard against the resurfacing of these themes in early 2014. Meanwhile, geopolitical risk has also been brushed aside and yet, with the US confirming an Israeli strike on a military base near the Syrian city of Latakia (Israel has declined to comment), we could be headed for another escalation in global tensions. All of this a testing ground for the real elephant in the room - a major conflict on the horizon with Iran.

What Lies Beneath - Unfortunately, Fed risk, US structural risk, and geopolitical risk are all problems that aren't just going to go away, as much as we think these problems can be swept under the rug. After all, there is only so much crap that can build up under the rug before it all eventually rips right through. As far as the markets are concerned, looking beyond anticipated equity weakness, keep an eye on EUR/CHF. Any intensified pressure to the downside could really warn of a broad vulnerability in risk assets. Though the SNB 1.2000 floor is a ways off right now, the level is symbolic of the new world intervention we have seen in recent years to artificially prop the global economy. If 1.2000 is threatened, it could really have a ripple effect on the macro landscape. I am also of course watching the Yen and very interested to see how any escalation in risk impacts the currency. While I believe that such an escalation will initially inspire a favorable Yen reaction on traditional correlations, ultimately, the reality that these correlations no longer have any lasting influence on the beleaguered currency will win out, with the Yen remaining under broad pressure into 2014. I will be looking to take advantage of any short-term Yen strength, and will be an aggressive buyer of USD/JPY on dips. Elsewhere, I would recommend staying away from trying to trade GOLD right now, but would be on the lookout for another pullback below $1250 and towards those critical multi-month lows from late June at $1180. I hold a rather bullish longer-term outlook here, but given how wacky this market has been, I would only take my shot at buying on another severe sell-off. Finally, OIL has once again become an interesting market to watch. Though we have already seen an impressive retreat back under $100, I still feel there is room for additional weakness into the $93 area before consideration is to be given for a compelling buy opportunity. Have a great weekend!