Weekly Update 5th May – LS Trader

Stocks have once again reached new all time highs and Friday saw some exuberant buying and price action in several markets. The best six months of the year for stocks are now over and we enter the historically weak May to September period. As we wrote last week, this does not mean that prices will move lower over this period and the near record levels of bullish sentiment may continue to drive prices higher. However, as a warning for stock bulls, when sentiment is at such extreme levels when the sell-off does eventually appear, it can often be swift and deep.

Long term trends are still up for stocks, bonds and the dollar and down for commodities. For the time being none of these long term trends look like they will change in the near term.

Stocks

We wrote last week that we would continue to favour the bullish scenario as long as key support on the S&P 500 held. This week has seen stocks push higher and reach new all time highs. This led to the S&P 500 moving above 1600 for the first time in history and one argument for the bulls is the fact that the index managed to close above that threshold.

The Dow 30, which is not a market we trade at LS Trader due to it’s historical lack of trending properties, briefly cleared the psychological 15,000 level on Friday but then swiftly reversed in what was quite a volatile day.

The Nikkei managed to clear the 14000 level, closing at a new multi-year high at 14200. This week saw prices reach their highest since June 2008 and the trend is still clearly up.

Commodities

We have been writing recently about our expectation for increased volatility in the metals markets and we have seen further volatility this week, albeit less than the two prior weeks. Both gold and silver have been unable to clear key resistance levels and the trend remains down. If resistance holds we may yet see a push lower to new lows for the current move.

The grains markets have been mostly higher this week but overall the trend remains down across the sector with the exception of Oats. Our proprietary trend analysis still points to lower prices in 2013 and in some cases significantly lower prices, more than exceeding the 2012 lows. For now we have to wait for price action to confirm and then jump on board for the resultant downtrend once it gets underway.

Coffee had a decent 2 day rally but we still have a bear market set up of lower lows and lower highs and we may yet see this market turn lower once more and make new lows for the year. Feeder cattle made a nice decisive move to the downside following the roll to the August contract and we now look for a further decline to test the April lows.

The energy sector had a very bullish week, which postpones the bearish outlook for the near term. Longer term the trend is still down for the sector with the exception being natural gas.

Currencies

The dollar has had a mixed week, with the dollar index falling below key support at 8178 but then putting in quite a decent reversal. This suggests that last week’s low, which also correlated with a bounce from the 200 day moving average, may be the bottom for the time being and potentially the beginnings of a new uptrend which may test the April high at 8366 and further out a test of the 2012 high at 8481.

Last week we wrote that GBP/USD may press slightly higher to the 50% retracement levels before resuming the longer term downtrend. The pound did narrowly exceed the 50% retracement level but failed to push on further. If last week’s highs can be cleared, a further advance towards $1.5750 may follow but this will not likely happen if the dollar strengthens elsewhere and weakness in the direction of the long term downtrend appears more likely.

The dollar continues to flirt with parity against the Yen and the latter part of the week saw a decent bullish recovery following earlier weakness. This momentum suggests another test of parity near term but whether there is sufficient momentum to finally break through remains to be seen. A sold break above 100 should lead to a move higher to around 105.

Interest rate futures

The trend remains up for interest rates but having pushed to new highs, a sharp reversal was seen on Friday. The selling on Friday was so extreme that the price action engulfed prices for the prior 8 trading days. Such extreme selling is normally an indication of a reversal so we may see lower prices near term. Longer term the uptrend is still intact.

Good trading

Phil Seaton

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