It would be nice to think that financial markets move in straight lines, but alas they don’t! In fact we feel that it is not healthy for a market to move in a linear fashion because it indicates that too many weak hands have entered the market. The recent melt down of the Chinese stock market illustrates what happens when too many weak hands enter the market.
We feel that the volatility that crept into markets last week was merely the Mr. Markets’ attempt at shaking weak hands out of the market rather than a change of trend.
We are still surprised at how quick the crowd is in becoming bearish. Let’s face it, the “big” move last week was only centred around one day’s movement (last Tuesday) where the Dow fell some 200 points. However, by the way many crowd participants reacted it was as if the Dow had fallen by 500 points! While the crowd remains bearishly trigger happy any downside will be limited and should be seen as a buying opportunity rather than selling.
We have no idea as to how long the reflation/high yield/inflation trade will last but what we do strongly suspect is that we are likely to see upside in the major market indices and downside in US Treasuries and the USD that will surprise the majority. Perhaps the upside in equities and commodities is just getting into gear.
Out of the asset classes the only directionless performance is coming from commodities. However, we are not too concerned now that gold and silver have started to punch through the barriers. Now that gold is above $1000, crude will follow and break above $75 and in so doing will drag the rest of the commodity complex up with it.
This week, as we were last week (click here to see last week’s article) we are reasonably confident that a new multi-week low will be achieved in the USD Index and we should see meaningful downside in US Treasuries. Of course, this is nothing new. It is merely a continuation of the trends that started back in November last year.
