Complete mayhem! These two words were the best we could come up with to describe the market’s behaviour last week. Over the last 10 days, especially the last few, we have been watching with interest the rapidly growing bearish consensus with the stock and commodity market and the Euro.
From our years of experience in the markets we have found that when a crowd becomes “unanimous” in its belief that a bear market has taken hold it coincides with the major market indices having already registered multi-week lows. Given the level bearish tone coming through in the popular press one could be forgiven for thinking that the S&P and Dow were trading well below the levels they were trading at in September/October. However, both indices are merely trading at mid November levels and still well above levels that would present “technical” breakdowns (1030 on the S&P). OK to cut a long story short – the crowd is too bearish. Major downside generally only occurs when there is complacency towards risk. Given how quick the “risk” trade has been thrown out the window over the last 10 days we think that the crowd is now far from being complacent towards risk.
It does seem like a repeat of late 2008/early 2009 but on closer inspection there are some notable differences. US treasuries have barely moved over the last three weeks or so. In fact they are only trading at mid December levels!
There is no question that the commodity market has been “crushed” over the last three weeks, but has it? Yes in USD terms it has (although no technical support level has been broken), but in Euro, GBP and AUD terms the CRB is only trading at November/early December levels. Until we see commodities registering multi-week lows in both USD and non USD terms we have trouble concluding that the rally in commodities is over.
There has been no material downside in real estate stocks to suggest a change in trend, yet we still find few believers in the prospects of the real estate sector. Markets follow the path of least resistance!
There can be no question that the USD Index is looking bullish and any technical analyst would tell you that this chart is going higher. Well higher it may go, but hear this for the week ended Tuesday, the CFTC said the net spec short position in the Euro (this translates to bullish positions on the USD) reached a record high dating back to its introduction in 1999. Given that the Euro has sold off dramatically since Tuesday it would be safe to presume that a new record has been set for bearish positions on the Euro. 
If you want to get bearish on the Euro now odds firmly suggest it is too late…….which also suggests that being short the equity and commodity market and long “safe haven” markets/securities is a high risk proposition! Big call but someone has to make it!
