More bearish signs from the bond markets

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May 212010

In our April 28th Global Technicals, we had highlighted the potential for a double top in high yield corporate bonds. In yesterday's price action, the double top potential was realised as the ETF plunged through its previous trough low.

High yield corporate Bond fund (HYG) - Data and Chart from Bloomberg

This breakout signals that a collapse in the junk bonds is in the horizon. In other words the problems are mounting for the neediest borrowers and they are going to find it extremely hard to find willing lenders. While this clearly means risk aversion, there are other questions that are popping up. Could this mean there could be an increase in commercial delinquency? Or A double dip recession? Well, one has to wait and watch.

 Posted by at 2:05 pm

A potential trend reversal for the INR

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May 192010

Today's price action in the Indian currency has put a question mark on the bullish price objective of 41.5-42.0 that we have been maintaining since last year. In today's trading, the USDINR closed above an intermediate term trend-line (see chart) that had kept the rupee's strength going.

Rupee weekly chart - Source Bloomberg

Looking at the Ichimoku charts,  the currency has overcome the "cloud" resistance on its daily charts. Also, a span twist is visible (green circle) which is another bullish sign for the USDINR (bearish for the rupee). All these price actions have transpired on the day when the Indian Nifty has closed below its 200 DMA for the first time since April 2009  - a sign that FII's may be heading for the door. Considering the above technical evidence, we expect Rupee to test the support of 47.6-47.8  in the short to medium term.

INR Daily Chart - Source Bloomberg

The longer term Elliot Wave count for the INR seems to suggest that what we saw from 52.18-44.05 may have been just a wave 4 and the current move could be the start of a wave 5 that could go on to test the level of 52. Although this is too early, we will keep this at the back of our minds.

May 192010

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffett

Here is the Gold's performance compared to Berkshire Hathway's performance over the last 10 years. Data and Chart courtesy Bloomberg.

Gold has outperformed Berkshire by a whopping 277% over the decade, 135% over the last 5 years and 10% over the last year. So clearly value is not a function of utility. Blame it on the world of competitive devaluation of currencies!!

 Posted by at 7:53 am

What can a Trillion dollars buy? – A day’s rally at best

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May 172010

A round of flu kept me down the whole of last week and I was not able post any updates on the markets (and this will be a bit brief too).  But a more serious attack was on least week - on the Euro.  A trillion dollar package to defend the 16 nation currency from further collapse failed to have the effect the euro zone politicians aimed to deliver.  By the end of the week the euro traded even lower than where it traded before the bailout.

In our April update, we had pointed to further downward momentum for the Euro and had expected 1.288 to 1.255 over the medium term. Although there is no visible reversal signs here and a close below 1.2330 can sink the currency to 1.18 levels, the currency is way too oversold and a short trade here looks like a crowded one.  A bounce to cleanse the excess bearishness and a possible resumption of down-trend post the bounce seems the likely path.

Dollar Index

Since 60% of the Dollar index's weight comes from the Euro, the Dollar was the de-facto beneficiary of the Euro's plunge. Our preferred wave count for this index has now undergone a change from what we had assumed a couple of weeks  ago.

Further highs likely

The index is overbought in the short term and a pause or a pull back that refreshes the up-trend may be around the corner.  If what we saw over the last two weeks was safe-haven buying, more of the same is in store over the short to medium term. At least a test of the Mar09 highs is likely in the medium term.


Gold at an all time high

When Gold went through the resistance at 1162 we had expected the commodity to probe the all time highs at 1227. The yellow metal not only did probe the highs but busted through that level to new all time highs.  With the auspicious day of "Akshaya Trithya" coming to end in India, the physical demand for the yellow metal is likely to take a breather and that may also translate into price action.  The technical backdrop for the commodity is still strong and we maintain our price objective of 1300-1480 for Gold over the short to medium term.

Stock Markets


In my April update I did point to possibility, that we might be at the beginning of a pronounced correction and high volatility going forward. The markets were graceful enough to oblige and the high of 26th April has turned out to be a high of importance.

S&P 500

The recent market moves may have been volatile and may even seem erratic but the price action seems to suggest that lows of the 'flash crash' may not hold.

As can be seen from the chart above, ascending  broadening wedge formation on the S&P paints a bearish picture once again and by conventional measuring techniques, a move towards 1040 or near seems likely.


Now, the bears have a French Connection.  The CAC 40 index ploughed through the previous trough of 3560 and  as a result has completed a double top formation . A measured move towards 3000 level is on the cards.

BRIC Countries

In our April update, we had pointed to the reversal in trend that was underway in the Chinese markets. The Shanghai composite has since tanked over 10% . The technical backdrop in the other three BRIC nations are also dangerously close to breaching an important support. While the Indian Nifty and Russsian RTSI have barely held above their 200 DMA, the Brazilian Bovespa has closed below its 200 DMA.

Bottom Line

The deterioration of technical structure in more and more world indices paints a grim picture of the current market climate.  Before we take a more aggressive posturing, we would like to see the Dow theory affirm these signals and only then do we want to believe that we are back to land of bears. Until such time, a conservative approach to the market is warranted.


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May 092010

Almost entire market action of last week were marked by the events that transpired in Europe (read Greece). These events have benefited the Gold bugs. Gold ended last week at its highest weekly closing level of all time.

Gold shines

We have been expecting 1300 and higher for Gold for a while now. Once the all time high of 1227 is taken out, a bout of short squeeze and fresh buying should send the yellow metal racing towards 1300.

 Posted by at 10:59 pm