Opinion – Monday 3 November 2014

Little did I know that just before I posted on Friday the Bank of Japan would unexpectedly expand its QE programme citing risk of return to a ‘deflationary mindset’ and sending the Nikkei racing higher, with the market eventually closing 4.83% higher. The Japanese stock market which topped at over 39000 in 1989 is still less than half of its value 25 years later thus showing that when deflation becomes rampant it is very difficult to fix. This robust action by the Bank of Japan led to a 2.55% increase for the Euro Stoxx and a 1.2% rise for the S&P to a new closing high. If someone had offered me odds of 50/1 on October 15 when the S&P was trading at 1812 that the market would rally 200 handles in two weeks I would not have taken the bet. The VIX is now back to where it was at the end of September closing just above 14.

In Currencies, the US Dollar was the start performer with the Euro briefly breaking 1.2500 versus the Dollar for a new low whilst the Dollar Index closed over 87.00. The big losers on Friday were Commodities where Gold and Silver lost over 2% and 4% respectively. The US markets were also helped by better economic data with the Chicago PMI and University of Michigan Survey both beating expectations.

This morning on the economic front we have German Manufacturing PMI at 8.55 am. This is followed at 9.00 am by the Euro-Zone PMI whilst at 9.30 am the UK will release its PMI. With the US having moved its clocks back over the weekend the US data releases will return to normal and at 2.45 pm we will have the US Manufacturing PMI whilst at 3 pm we get the ISM Manufacturing data. At 5.30 pm the ECB’s Nowotny will give a key note speech on economic policy. Finally for today the Fed’s Fisher will speak on Monetary Policy at 5.40 pm in New York.

December S&P 500

When I posted on Friday morning all markets were behaving normally but soon afterwards the whole Bank of Japan extra QE stimulus news kicked in. Unfortunately all my levels were exceeded by the time of posting which, given what transpired, was probably a good thing. Over the weekend I have been reading a lot trying to get more of an understanding of the market action over the last four weeks. What struck me most was the bar chart of the Dow for the month October. I have analyised the Dow for a long time and I could never remember seeing such a wide-ranging monthly high and low, with the market also closing at a new high. I had to go back 113 years to May 1901 to find a month that was comparable to the current one. For whatever it is worth, back then the Dow rallied another 3% into June 1901 and then lost 46% of its value into November 1903!

The McClellan Oscillator closed at a very extreme reading of +271 thus showing how overbought the markets are trading at this time. The S&P is now trading at the top of its Bollinger Band and Williams Index but with today been the beginning of a new month and Mid-Term Elections tomorrow the market may hold up for another couple of days before finally selling off.

Today I will be a small seller from 2012/2020 with a wider 2027 stop. If I am taken short and subsequently stopped out I will use my 5 handle rule to re-establish my short position with a stop above  at whatever new high is put in. Given how overbought the market is currently trading and with the very high MO I still do not want to be long the market at this time.

Euro/USD

The Euro briefly broke the 1.2500 support level on Friday but so far has held the key 1.2450 support level. I am still flat and today I will be a small buyer on any dip to 1.2460/1.2490 with a 1.2430 stop. My only interest in selling the Euro is on a rally to 1.2610/1.2640 with a 1.2670 stop.

US Dollar Index