First, we want to make you aware of some exciting opportunities in the works here at Black Swan Capital.
We’ve been fortunate enough to forge new working relationships with some real professionals in the financial industry. The ultimate aim of these partnerships is to bring you services and opportunities that hep you trade and invest successfully.
More specifically, these relationships make it easier to use and manage the ideas provided in BLACKSWAN’s Premium Service trading newsletters.
We’ll begin unveiling these relationships starting this week. So stay tuned to Currency Currents to learn about ways you can build a successful trading approach to capital markets.
Now let’s talk about the markets …
Are stocks worth the risk at these levels?
A friend of ours, Terence Brogan at Brogan Group Research, passed a chart along to us this morning. He gave me permission to share it with you. It shows the recent action in the US dollar index futures. More importantly, it shows that money flows barely budged during the recent short-covering rally we saw:
Here are some additional comments from Terence:
There has been very minimal accumulation of the USD since June … from a price and volume perspective. The USD has been closing below its daily mean price more days that not, and on the days that it has closed above its daily mean price it has not been on persistent high volume. This tells us that there have been more sellers than buyers of the USD since June this year.
Basically, considering the money flow models developed by Brogan Group Research, this all suggests the US dollar is in for renewed downside pressure.
We’d have to agree. In fact, Jack’s analysis is suggesting further short-term weakness (at least) is in store for the buck. And he’s already recommended ways subscribers of his Black Swan Forex service — BSFX — can trade this price action. (Click here to subscribe or read more about BSFX.)
This US dollar action, as one might suspect, probably feeds into the general risk appetite mood of markets. In other words: because financial markets have become so tied to the flow of dollar-based liquidity around the globe, a falling dollar suggests this outward flow of dollars in search of return will persist.
All that in mind, the continued rise in the stock market prompted Jack to ask Terence if we’ll see risk aversion rear its head ever again.
That’s certainly the question of the day. Commentary is swirling something fierce about potential unintended consequences of Federal Reserve monetary policy, e.g. asset bubbles.
Meanwhile US stock markets are railroading higher and dragging global stocks higher alongside. Take a look at this weekly chart of the S&P 500 — I’ve drawn in key trend channels that go back as far as 2009:
I also applied a Fibonacci extension to the first part of the bull market rally that began in 2009 and went through March 2011. It shows we’ve now fully extended (100%) that initial wave as trend channel congestion now may begin providing resistance.
Does this mean the S&P can’t or won’t go even higher from here? Of course not.
But I think it does add to rationales for why the upside might be exhausted at these levels. With all the talk of bubbles circling the markets, and the continued speculation about the integrity of economic recovery around the globe, do items like this not create further doubt?
I believe a sell-off could materialize as enthusiastic investors and traders start asking themselves: is it worth the risk?
You can debate valuations back and forth till the cows come home. But up until recently, the landscape of global economics and financial markets has proven that investing in the US stock market was easily worth the risk.
But just as rising feed prices influence demand from livestock operations, rising asset prices reduce the demand from investors and traders who see potential risks growing and potential rewards dwindling.
One final chart — margin debt on the NYSE:
Basically, the point of showing the rise to record levels of margin debt — i.e. traders borrowing in order to invest in stocks — is to highlight the fact that there are probably many weak hands in the market right now. It is they who will run scared at any sign of heightened market uncertainty. It is they who’ll add to the selling momentum in any “abnormal” downturn.
It is they who threaten the risk appetite mood. Thus, it is they who threaten the money flows that are keeping pressure on the value of the dollar. When investors run scared in a herd-like fashion, these money flows tend to reverse as they accumulate US dollars.
This isn’t necessarily something to act on now. But it is something to keep in mind, all things considered.
Remember: Stay tuned!