The market is at a very interesting juncture. On all my favourite indicators (A/D Line, McClennan Summation, Slow Stochastics, Fast Stochastics and MACD) the current bull run is very much overbought. Given that this highly profitable move has been in place since last September it is logical that we are due a correction, but there is no sign yet of any technical breakdown. If you are not in the market or have been stopped out from positions I would hold my powder dry for the moment as the risk/reward ratio is negative.
Of particular note I would point out that despite indications of slight consumer recovery, inflation creep and mounting tensions in the Middle East the price of oil has remained low. I do not think this situation can long continue. When oil does finally takes off expect a sharp market reaction because the wriggle room available to the FED to hold interest rates low will be seriously diminished. Once interest rate increases commence a new dynamic will enter the scene. If this trend change is not timed to perfection by Mr. Bernanke and friends serious valuation problems could ensue, increasing market instability.
The sovereign debt elephant in the European parlour room has not gone away but has merely learned some social graces since its tantrum last autumn. When Euro rates start their inevitable rise, further pressure will be placed on Euro-zone nations trying to service exploding national debt. Eventually the outcome will have to involve some form of agreed default and rate discount. Without these safety valves the Euro project will remain vulnerable. Current talks in Brussels are beginning to attempt to grasp this possibility. In Ireland, in particular, the outcome is fundamental to the recent IMF/EU bailout plan working. It order to keep Irish economic growth figures on track the rate of interest agreed in that disastrous package must be brought down from the existing punitive 5.9% level. Ireland goes to the polls the 25th. of the month and the first item on the agenda of Mr. Enda Kenny, the politician expected to win the election, is to renegotiate draw-down rates on European Financial Stabilization Funds. If this endeavour is unsuccessful additional taxes will have to be earmarked for debt repayments, seriously deflating an already stalled Irish economy. Where Ireland goes the Euro will follow. Success in negotiations for Ireland will mean other Euro stressed countries like Greece, Portugal and Spain will also obtain some relief when issuing new sovereign debt.
In an article in 2008 on contracts for difference I mentioned that if New York physical market makers did not embrace CFD’s and new technological development the survival of the NYSE, as we knew it, could be called into question. I did not think events would move as fast as they have. The buyout of the hallowed NYSE last week by Europeans will see huge changes in the type of trading instruments and platforms being presented to Americans. Order matching and funding technologies are developing fast and it is no longer possible for any group, however powerful, to ignore quantum changes in trading execution. The main liquidity behind this evolution is coming from the off-shore, 18 trillion valued, Euromarket and this is why London (the center of the Eurobond market) is fast becoming the new financial capital of the world. I anticipate that the next American institution to come under threat will be the Chicago Exchange. This is due to the fact that spread-contracts, instruments that actually have no time expiration, have all but rendered options obsolete.
Dow Jones Industrial 3 Day Chart:
United States Oil Fund 9 Day Chart:
Advance Decline Line 3 Day Chart:
McClennan Summation Index 3 Day Chart:
