Stocks saw some selling this week, which is in line with our recent comments about sentiment levels being so high that a correction at a minimum was due. As April moves into the last few trading days, many will be contemplating the old adage of sell in May and go away. This may prove to be an excellent strategy this year as far as stock indices are concerned. Commercial funds remain heavily net short of the S&P 500 so it is likely that there will be a lid on further advances. A resumption of the long term dollar uptrend may also begin to pressure stocks and further pressure commodities. The coming weeks are likely to present more short selling than buying opportunities in most markets.
The commodity bear market has continued with heavy selling seen in metals and energies. The long term trends are mostly down for commodities, but are still up for stocks and the dollar.
The S&P 500 has just narrowly held on to key support, forming a bull sash pattern on Friday’s daily chart. Contrary to popular opinion about candlestick patterns, the best signals come from failed candlestick patterns, so a close below Thursday’s low, which would also take out support, would be bearish and suggest further selling back to 1477 basis the June contract.
The Dax continues to lag and may be the first of the indices that we trade at LS Trader to complete a change of trend to down. The Nikkei continues to advance and this week reached its highest level since August 2008, following a weekly advance of 1.60%. The upside target for the Nikkei remains at 14000.
We have been writing about the bear case for metals for quite a few weeks and recent price action has confirmed that view. Last week we were looking for 1425 on gold and 2400 on silver. The markets reached and sailed past those levels in the heaviest selling seen in decades. There is little doubt that the markets are now beginning to price in deflation instead of the commonly held, and erroneous in our view, expectation of inflation. Both of these markets are oversold, but as we have said many times before, markets can remain oversold for longer than people can imagine possible. That said, a bounce and increased volatility can be expected but the trends remain down and lower prices could yet be seen.
We also wrote last week that further weakness in the energy sector could be expected and we have also seen that, although the selling was steep, it was not quite of the magnitude seen in silver and gold. Commodity markets are beginning to echo 2008 and we should see substantially lower commodity prices for most of 2013.
The dollar index pressed lower this week but has since recovered. The long term trend remains up for the index as indeed it does for the dollar against several of the majors. The dollar index should now push higher once more towards the highs of the year, especially should last week’s lows hold firm.
A dollar rally against the majors is looking imminent, especially should support levels be taken out this week. The pound in particular looks set for further declines and new lows for the year could be seen in the next few weeks.
The U.S dollar has had another good week against the Yen and once more a test of parity looks to be on the cards. As written previously this level represents the 50% retracement area of the decline from 2007 as well as the psychological parity level, so we can expect strong resistance, and possibly a pull back. However, should parity be exceeded, don’t rule out a continuation higher.
Interest rate futures
Interest rate futures have been relatively flat, but the long bond led to way this week with a 0.40% advance. There is a good possibility that we will see yields falling to record lows and new all time high prices in the sector and the long bond may now target the 150-153 area. The long term trends are up.