ROBERT PRECHTER : 6 TRENDS ABOUT TO REVERSE

Here's an article I came across in 'The Business Insider' > Robert Prechter: These 6 Trends Are About To Reverse‎

"

Prechter argues there are several themes out there right now that investors, economists, and markets all believe to be true just like they did with interest rates in the 1980s.

• 
  
  The dollar - everyone is bearish.


• 
  
  Interest rates - everyone thinks they're going to rise.


• 
  
  The stock market - everyone is bullish but corporate insiders.


• 
  
  Inflation expectations - everyone thinks it is going to go higher.


• 
  
  Economy - everyone is confident in 2011.


• 
  
  Oil - everyone thinks it is heading higher.

"

He makes some really valid points. Ignore the principles of 'Madness of crowds' and 'mean reversion' at your own risk.

GOLD : RALLYING IN ALL CURRENCIES

EURO RALLY - SUSTAINABLE....NOT

A positive rate outlook for the Euro and the continuing downtrend in the USD has resulted in quite a sustained uptrend in the EUR USD exchange rate. As the Club Med nations come to the table asking for handouts, the ECB has gone ahead with the first of many proposed rate hikes. Rising inflationary pressures as a result of booming commodity prices led by Crude Oil could have forced the ECB's hand at this point.

But is this rally in the EURO justified?

Is the USD in much worse shape than the Euro?

Here's my analysis:

• The Euro has considerable exposure to Club Med and is by no means out of the woods.
.

• The USD too has many structural weaknesses - rapidly expanding Federal debt levels, terrible finances at the state and municipal government level, a slumping housing market and uncomfortably high unemployment.
.

• But the fact remains that the USD is oversold at the moment.
.

• The CBOE VIX is currently trading well under 20, at 18 currently. A warning sign for perma bulls.
.

• Equity markets are far too complacent at the moment, totally ignoring the headwinds of $113 Crude Oil and all the negative geo -political newsflow. The risk reward ratio is clearly against the prudent investor. .


• Just like 2008, an equity market sell off will once again be accompanied by risk aversion and a rebound in the USD as investors shun other risky asset classes ( emerging market equities and hot commodities) for the relative safety of the USD and the US Bond Market. The USD always benefits from the flight to safety during market panics.

Sadly,most fiat currencies are seriously flawed as governments continue to ignore structural problems of their economies, preferring to ''kick the can further down the road''.

This is reflected in the fact that Gold and Silver continue to rally in most currencies.

Commodity currencies like the CAD, Swedish Krona & the Australian Dollar remain vulnerable to a sell off in the commodity markets. The Swiss Franc and the Japanese Yen have also shown sustained strength vs the USD.

To conclude, I expect the USD to recover when the stock market starts to sell off & I expect further negative newsflow from Club Med in coming months to weaken the ''overbought'' EURO.

SILVER FEVER !!

Most fans of the precious metals sector will obviously be over the moon after the monstrous rally in Silver in 2011 so far.

The USD continues its sell off, while the Euro rally continues despite all the trouble with Club Med.

With all the momentum in Siver bullion, prices could rise still further.

Personally, I would advise against any opportunistic buying at the moment, as the risk reward ratio is clearly against the long only trader for now.

For those investors with access to hedging strategies, perhaps they can use put options to protect long positions, given the overbought position in Silver.

Mr P. Radomski of Sunshine Profits has some excellent analysis in his latest free update.

VIX & COMPLACENCY & the UNPREDICTABILITY of MARKETS

Despite all the news on Libya, Japan, the EU Debt crisis and the discussions of raising the US Federal debt ceiling, global stock markets continue to trend upwards.

Are we overdue for a spike in the VIX ?

THE FED & the US ADJUSTED MONETARY BASE

Here is a follow up post to my March 15, 2011 post on the correlation of the S&P 500 with the size of the FED Balance Sheet.

Graham Summers of ''Gains Pains Capital'' has also put up a detailed note on the US Monetary Base.

LINK:

http://www.gainspainscapital.com/index.php?option=com_content&view=article&id=244:graham-summers-free-weekly-market-forecast-the-fed-is-terrified-edition&catid=39:stocks&Itemid=58

Below is a chart from the above mentioned article.

EVENT RISK FOR MARKETS - CAVEAT EMPTOR

Global equity markets these days seem to be totally unaffected by all the geopolitical turmoil and natural disasters of the last few months.

Once again the ever cautious David Rosenberg chips in with words of wisdom, alerting investors to the many risks that the market is currently ignoring. (Note to readers - David Rosenberg's Newsletter ends its free trial period this month, so this will be the last of his charts on this blog)

S&P 500 vs The FED's BALANCE SHEET

Investment Guru David Rosenberg in recent writings has commented on the positive correlation of the rally in the US Equity Markets and the size of the Balance Sheet of the US FED.

Here is yet another article from Jim Sinclair's Mineset website that supports Rosenberg's view.
This is some excellent research by Trader Dan Norcini and is worth a read.

S&P 500 Versus The Fed’s Balance Sheet

(LINK FOR CHART FROM JIM SINCLAIRS WEBSITE)

GEOPOLITICAL NEWS IMPACTING MARKETS

The last couple of months have really been a roller coaster ride for the world economy.

Whether its the unrest in the Middle East leading to surging Crude Oil prices, or rising food prices or EU Sovereign debt troubles, or the recent Japanese Quake and resulting Tsunamis...... a lot has been going on.
The incredible damage to property and the loss of innocent lives in case of the Japanese quake is really tragic.

There was another important bit of news that went by unnoticed.
"" Wisconsin Gov. Scott Walker on Friday signed into law the controversial bill that eliminates most union rights for public employees""
Wisconsin governor signs anti-union rights bill World DAWN.COM
Wisconsin governor signs into law union curbs Reuters
Clearly the crisis on Main Street is not over yet. As David Rosenberg recently said, the impact of cost cutting and downsizing at the state and local government level will really undermine the '''ongoing consumer recovery'''
So I think that it's time that the guys on Wall Street sit up and take notice.
.
The Dow Jones may continue to brush off the impact of rising gasoline & food prices and the discontent on Main Street for now, but the prudent investor must realise that its now too late to join the equity market bandwagon. The risk reward ratio is not in favour of the ''long only'' investor and his margin of safety is far too inadequate at the current time.

IS THE USD OVERSOLD ?

Even as the EURO continues to rally, the USD is breaking down through some critical levels.

While regular readers know my long term view on the USD, let's not forget that the USD appears to be oversold at the moment.

Below is a screenshot of the CNBC website-7th March 2011 - A classic contrarian indicator! As traders get caught up in the surge in Silver prices, everyone is bearish on the USD all of a sudden.

Turmoil in the middle east and North Africa continues to dominate news headlines, easily crowding out news of dissatisfied government workers' unions and the ongoing austerity measures being implemented by state and local governments in the USA.

.

Discerning readers will realise that the troubles with Club Med and the 'PIIGS' are far from over.

.

Meanwhile the price of Crude Oil continue to trend upwards, and with the US unemployment rate near 10%; this will add further stress to the recovery on main street.

.

The stock markets may continue their upward rally for now, but a toxic combination of high unemployment and rising food & energy prices may be just as detrimental to the US Equity market rally as they proved to be for the ''dictators'' of North Africa.

.

A sell off in the overbought equity markets could trigger a counter trend rally in the oversold USD.