Protectionism To Further Constrain Global Growth?

Washington just did it again! A currency bill was passed in the House today which seeks to impose trade sanctions against countries who manipulate their currencies... They are obviously targeting China, and the bill is deemed voter-friendly as the election is around the corner. What does this mean? This is just an anecdote of the "de-globalization" which has taken place following the financial crisis. As you may already know, globalization contributed to the above-trend growth seen in the past three decades during which financial and human capital were allocated more efficiently, leading to increased growth. However, developed countries are facing high employment in the aftermath of the credit bubble, politicians are being pressured to create jobs anyway they can, which is unfortunately counter-productive. Therefore, we are entering a period in which growth is going to be below-trend, negatively impacted by regulation, protectionism and aging population.

Bull Market or BS?

S&P's first attempt at 1,150 failed 2 days ago as the index was stalled at 1,149 and has since dropped 24 points to close at 1,125 today, below the critical 1,130 level. If you had been bullish as I had been for the past month (see "Turning Bullish! Resilience in Tech Shares and Sell-off in Treasuries Stir Optimism!"),  you have to re-consider your positions here. While I am not ready to exit my longs as I am awaiting more bearish confirmation, I did buy some puts today because they were still cheap. Not surprisingly, tomorrow is going to be a very important day as the market should decide which way it wants to go for the next couple weeks. A close below 1,130 again will undoubtedly push the index to its 200-day moving average (1,117). A close above 1,130 will likely drive the index towards 1,150 again.

Big Ben Wants To Print More Money...

Looks like Mr. Bernanke is willing and ready to implement more quantitative easing (a more beautiful term to say printing money), and as a result, gold has risen to a record and USD has tanked recently. Will this trend continue in the short term? You Betcha! While I remain bullish on the greenback in the long term, the market wants to focus on the U.S. in the near term as investors seem to believe that the U.S. is the only country that will need more QE. As traders, we never fight the market, and I am no exception as I am currently long the GBP/USD and looking for opportunities to short the USD anyway I can. From a technical perspective, the USD started its big downtrend in 2001 after the tech bust and 9/11 and fell to as low as 73.56 (DXY) in March 2008. It has since entered a symmetrical triangle, which is a consolidation formation, suggesting indecision among investors. It hit the top of the triangle on June 7th and started falling once again and looks to be headed to the bottom of the triangle.

All The Doom and Gloom Aside, Euro Is Going Higher!

Yes, Greece will default, Ireland is bankrupt.... but I do think the EUR/USD will continue to move higher in the short term due to the following reasons. First, the Euro trade became so one-sided in May that the pair was due for a significant bounce since hitting a bottom at ~1.18. Second, while some countries in the Euro zone are in fact heavily indebted, U.S.' fiscal condition is probably in a worse shape and is currently the most indebted nation in the HISTORY of the world. Third, major economies in Europe such as Germany, driven by exports, are doing relatively better as a result of strong demand from consumers in emerging markets. All these fundamental data points suggest that unless the U.S. starts to tighten its belt or its economy starts to grow at a normal rate again, it might be hard to justify further downside for the Euro in the near term. Technically, the Euro just broke a strong resistance at ~1.3270 today and looks poised to go higher with the next key resistance at 1.35.

The Bulls Are Back In Control! What's Next?

The S&P successfully broke through a key technical level (1,130) and managed to close above it for the first time since May. I believe we will continue marching higher with the next key resistance at 1,150 followed by 1,170. While 1,150 will be a difficult test, I think we will most likely break it and test 1,170 before the end of the month. Besides technicals, I believe there are other reasons behind this bullish run. First, from a sentiment perspective, people were simply too bearish, driven by weaker economic data and European debt worries. Second, dividend yields (2%-3%) are attractive given record-low interest rates globally as major developed countries such as the U.S. and Japan have kept their rates near zero. While it is difficult to predict equity prices in the longer term, the worst is probably behind equities this year.

BOJ Just Intervened! Politicians Never Learn...

BOJ finally intervened to weaken the yen on the heels of Prime Minister Kan's pledge. All the yen pairs are currently up anywhere from 150 to 200 pips while the dollar has strengthened. I had shied away from buying the yen for the past couple of weeks and I will continue to stay on the sidelines for the time being. I remain skeptical of the intervention and continue to believe that it will fail to curb the currency when it's all said and done. The government has $700B unrealized losses in its FX account, and the intervention will add to its fiscal burden. This will decrease the attractiveness of Japanese bonds, and potentially push interest rates higher (barring further quantitative easing), which could make the deflation problem worse. These politicians just did what they do best, which is kicking the can down the road...

Does Australian Dollar Confirm S&P 500's Bottom @ 1,010?

It has been well documented that a strong correlation exists between the AUD/USD cross and S&P 500, so what is AUD/USD chart telling us about the S&P 500 index? The cross found its top in November last year when it hit 0.94 and had since consolidated before retesting 0.94 on 4/11. The S&P, on the other hand, kept rising during the same period before peaking at 1,220 on 4/23. This is one of the many instances where currencies have served as leading indicators for the stock market. The Aussie dollar started declining from 0.94 and hit a bottom at 0.8050 on 5/26, which was the 38.2% retracement of the bull run from 11/2008 to 11/2009. It has never looked back from that point, and last traded at .9210. Similarly, the S&P 500 fell to 1,010 on 7/2, reaching the 38.2% fibonacci retracement. I believe this suggests that S&P has most likely bottomed out this year at 1,010, and I expect the index to retest the April highs at 1,220 sometime this year. I recommend buying cylical stocks (commodities, banks, consumer and housing) as they tend to outperform during the early cycle of an economic recovery.

On Vacation...

I am on vacation until Monday. If you are bored, here is a good article you can read. It's written by William Pesek of Bloomberg about Japan, the yen, and more.

http://www.bloomberg.com/news/2010-09-01/crying-wolf-has-cost-in-world-of-growing-pain-commentary-by-william-pesek.html