It would be safe to say that fear has returned to the markets and that we are overall seeing a risk-off strategy being employed by many market participants and this is leading to many markets selling off sharply and entering bear market territory. The main exception is the US dollar, which as we have suggested recently would benefit from stock market weakness and its perceived safe haven status.
The long-term trend remains down for stocks indexes and is also down for nearly all commodities but it remains up for the dollar almost across the board.
We have been writing for several weeks about the seasonal September weakness for the stock indexes and in particular the S&P 500 and we have once again seen this tendency appear. The December S&P 500 contract opened the month at 1211 and closed out the month at 11 26 for a fairly hefty down-month and it could have been considerably worse as the index had been as low as 1102 earlier in the month but support around 1100 held firm. Weakness on a seasonal basis can often continue through to the end of the first week of the month and beyond.
The VIX ended the week ahead by 4.15% and is looking to be in a very bullish pattern formation that could lead to a spike higher. A move above 43.87 would likely bring a test of the 4800 level and if 4800 is taken out we could see levels of fear in the markets not seen since the 2008 crash where the VIX actually topped 8000. Such a move would correlate to a sharply lower stock market. Whilst I would personally never place any trades based upon what the VIX is doing it is worth keeping an eye on.
Commodities price action over the past week can be briefly summed up with one word, “sell”. This seems to be the case with virtually every commodity market at present and many are being sold off sharply in a trend that looks set to continue. Even George Soros sold his Gold this week and gold has held up better than many commodities and still remains in a long-term uptrend!
Perhaps the most important of these markets as far as the economy is concerned is our old friend Dr Copper, known for taking an accurate pulse of the economic climate. At present, copper is giving a sell signal not just in its own market but also for the global economy and the past week has seen another sharp move lower, as well as a new low close on Friday for the move. A continuation lower towards 28400 may follow if 30000 can be taken out.
Our comments from last week about the dollar still very much apply and it continues to be the beneficiary of the current global financial crisis and its perceived safe haven s tatus. But as we have written many times before, since the other safe haven currencies of Japan and Switzerland are both being devalued by their respective central banks, the dollar will likely continue to rise as the global economic crisis deepens over the coming months.
The reverse is true obviously of the higher risk commodity based currencies of New Zealand, Canada and the ultimate risk currency, the Australian dollar. All of these 3 currencies were lower over the past week as risk continues to be shunned.
Interest rate futures
We wrote last week that we may be approaching a top for interest rate futures and were looking for 10 year yields to find support around 1.70 and they did before moving higher. The 10 year notes have just about held on to support but things are getting interesting in this sector as there appears to be limited upside.
Although clearly still in a long ter m uptrend, we still see interest rate futures as being a likely candidate for a very steep decline over the next few years.