Thursday, September 22, 2011

Markets are signaling an economic downturn

What a day! Notwithstanding the Fed's decision, which was largely in line with my expectations, and the subsequent reaction, I believe that Mr. Market is telling us through the charts to expect an economic downturn. First of all, you have the long Treasury bonds, which rallied to all-time highs partly on the news of the FOMC statement indicating that they would be undertaking Operation Twist.

Remember, bond bullish = equity bearish
Dr. Copper has also decisively broken support, which indicates further economic weakness:

To underscore the scope of the commodity slowdown, Rio Tinto CEO said in an interview with the FT that customers are delaying deliveries:

“It is noticeable that markets are somewhat weaker,” said Rio Tinto chief executive Tom Albanese in an interview. “In a few cases, customers are asking to reschedule deliveries. “This is consistent with customers being cautious about the current state of business.”
Currencies of commodity sensitive countries such as Canada are breaking down technically. The Loonie fell through par against the US Dollar, which also signal global weakness. The next logical stop is 95c.

More worrying is the relative performance of the US banks against the market. This sector continues to weaken on a relative basis, which indicates further deterioration and rising systemic risk in the financial system.

The fact that American bank stocks are significantly underperforming is a source of serious concern as the source of financial stress comes mainly from the eurozone. We are already seeing signs of an institutional bank run in Europe. Siemens pulled money away from SocGen, Lloyd's of London has pulled deposits from some banks of peripheral countries and the Chinese have halted FX swap with selected European banks. The European banking system is extremely fragile. If any major bank loses its short-term funding for more than a few days we could see another Credit Anstalt meltdown on our hands.

Given all these negatives, can we expect the S+P 500 to hold support at the 1120 level?

All this market action is screaming, "Risk off!"

My inner investor is staying with the long Treasury bond trade, largely because the Asset Inflation-Deflation Timer Model has been singaling deflation for several weeks. My inner trader tells me that the long bond is tactically overbought and to wait for a pullback before getting long.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Greg Merrill said...

Thanks for your commentary on this recent breakdown of the equity markets. You helped me stay the course....
My own indicators never saw any sort of 'healing' during the consolidating period in August. It will be interesting to see if the market can hold the lower bound. . .