Weekly Strategic Plan 01222013

7/28/2019 Weekly Strategic Plan 01222013

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Liquidity Cycle

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Late in the week rumors began to circulate that a new Republican plan to pass the debt ceiling hike and avoid the looming risk of a government

shutdown, in favor of plans to make the lack of a budget and spending restraint the issue. The market seemed to like the idea of avoiding another episode of dysfunctional congress on TV. But while this strategy may avoid some ugliness, there is still nothing being done about out of control andunproductive government spending.

Bespoke pointed out that Fridays close in the SP500 was at a new bull market high and made this the tenth longest bull move ever without a 10%correction, 472 days.

Fridays breakout can clearly be seen in this chart and the pro le chart on the left illustrates how this is new territory over this period. The price moveis up and away from value but the levels need to hold here. Should sellers begin to show up the market is likely to fail at least back to value in the1400 area. The Liquidity Cycle Indicator is supporting the move currently, but it too is at resistance and needs to surge above the trend line to support

a move higher.

One good sign is emerging strength in the mid cycle indicator which had failed to move for months. Strength in this indicator comes from improvingaction in the industrials and basic materials, which are responding to more positive action in China. This is a real positive for the US and Global

markets.

Note the longer bull runs are quite a bit longer so no need to jump ship on that basis. Thank goodness for central bank easy money policies andwelcome Japan back to the game.


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The global growth expectations index (green) is presented here with the World Index and Shanghai composite and clearly is improving. The WorldIndex is breaking out on Asian rallies and the improved action in European markets. If the recent rally in Shanghai can follow through to the upsideglobal allocators of capital would likely shift signi cantly more assets in to equities powering indices higher. The main risks to this scenario are policy

mistakes and/or withdrawal of central bank easy money. In the US keep an eye on unemployment stats and in ation levels. In China in ation is thebig risk, so watch the food commodities closely.

SECTORS

We want to see Industrials, Basic Materials and Energy all break out upside to fuel further rallies.

None of the above means we wont see overbought and oversold conditions producing swings. The rst chart below is the VIX imlied to historicalvolatility chart over the last year and implied vol has just plunged to new lows re ecting considerable optimism among market participants. The chart

that follows has the SPX, the VIX Index, and the AAII Bull Bear index overlay and we see the Bull Bear is climbing toward over optimism but hasnot yet reached very extended levels. The VIX and Bull Bear move inversely but corellate reasonably well. These charts show optimism is rising for now,but I want to see how public sentiment changes as the 2013 taxes hikes begin to showup in 2013 paychecks. How will consumers react to lower take home pay? Historically, the consumer tightens his belt a bit. An economy that can muster only about 2.5% GDP with a t rillion dollars of stimulus

is very much at risk when tax increases threaten a1 to 1.5% slowdown in GDP.


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The Fixed Income markets are also trying hard to adjust to QE or similar policies in the major banks combined with verbiage regarding when and how

soon these policies should be changed.

Targets of unemployment rates near or below 6.5% and in ation rates as much as 2.5% as signals recovery is becoming self-sustaining are offeredas a guideline and then the hawks and doves of the Fed committee each put their own spin on those guidelines. Good growth stats speed up the

timeline and bad ones slow the prospect of a change. The relative certainty that existed for the past year or two is fading. The change is showing upin the prices of treasuries. Note the lift in 10yr yields above 2012 values. The second chart is a measure of implied to historical volatility levels in thefutures option market. Some of the big swings have to do with the rolling of contracts but recently the implied has turned up from a post election loweven though historical vol has remained quiet.


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The Euribor curve moved suddenly last week implying higher rates to come sooner in the mid curve timeframes than previously price in. Eurodollar futures did not display this movement.

At the same time 5yr CDS rates for the PIIGS have fallen near lowest levels of the past 3 months while the US, UK, and Germany have movedtoward the highs of the range. Perceived ECB support is encouraged some yield seekers to move out the risk spectrum improving the nancingpicture for the peripheral members of the EuroZone.

Volatility Environment

Commodity prices as of Tuesday Morning - 7:30 am


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Feeder Cattle also had a sharp break Thursday and Friday. Implied volatility jumped in response to the speed of t he breaks in the meats.

Grain markets were relatively quiet last week. But worries surrounding the continuing dryness in the grain and wheat growing regions of t he countryare increasing. Global food supplies are vulnerable to another weather driven crop problem. A couple of good crop years are needed to rebuild asmall degree of surplus to global reserves.


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Crude prices advanced in both markets right up to down trend lines and should be watched for breakouts that would con rm rising expectations for

economic growth. Natural Gas prices advanced on the arrival of some real cold air for the northern portion of the US.

Quiet metals prices this past week. These markets are moving based on Chinese data primarily.

Currencies

Yen has been the big noisemaker so far in 2013, but weakness in the Swiss and strength in the Euro are also worth noting. I also expect some morescrutiny of the GBP as long as the Euro shows any strength. My favorite by far is short the Yen though it has moved sharply and is due a bit of acorrection to reduce the consensus a bit. I will be looking to add shorts on a pullback or extended sideways action.


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I will conclude with this rather brief letter as it is going out later than normal. My biases for t hemes are to stay short Yen for the long term, leanto long equities on the strength of pervasive easy money policies supporting risk on investment allocations, play relative strength in sectors and country ETFs, and look for growth con rmation from energies and metals. Be alert for policy error, consumer retrenchment due to taxes reducing

paychecks, and threats to the food crops as food in ation is a big risk to China and India and could force those countries to be more restrictive.Economic recovery is happening, albeit slowly, but this remains a giant game of musical chairs and should one of the central banks decide to stop

playing the music the game will stop abruptly.

That is how I see things for now, good trading to all.

--Bruce Lawrence, Jan 22.2013

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Weekly Strategic Plan 01222013