The Next Phase of the Bull Market is About to Commence

April 4, 2010 · Posted in Weekly Posts

The US employment report Friday while not as strong as the consensus expectations was nonetheless an excellent report. It shows hat the US economy is finally creating jobs. This does a number of things for the global macro economic picture:

1) Risk of a double dip is reduced globally. That is, the risk trade in commodities and developing markets is improved.

2) Bonds, which had been looking in danger of breaking down now will. Interest rates rose in the wake of the report. This is due to rising inflation expectations and the fear of Fed tightening sooner rather than later.

3) A breakdown in bonds will send a flood of money into commodities, and global equities. This together with rising inflation globally will carry stocks much higher. Money has flowed preferentially into bonds over stocks by a ratio of four to one by some accounts. There are also trillions of dollars in new treasuries out there.

4) The US dollar will be buffeted by cross currents. One the positive dollar side an improving economic outlook in the US, a rising stock market, and rising US interest rates will attract money to US equities. The counterpoint is that continued concern with the US fiscal position, sluggish US growth, and the money coming out of US Treasuries could see a flood of money heading to riskier assets overseas. It is unclear how this will play out. It will take some time for the trend to become established.

5) Gold will benefit from rising global inflation but will not fully start its next leg up until we see some signs of US inflation. They are seeing it in China, India, Canada, and now Europe. It is only a matter of time until we see it here. In two weeks we get the US data so gold may tread water this week.

6) Developing countries and especially China now have stronger global demand to look forward to. As you will see in the charts below, China is set for a breakout to the upside.

7) US investors who have been sitting on the fence may now commit to equities again.

Into this environment we like iron, coal, copper, steel, oil services, major integrated oil, off-shore drillers, and China. As US markets are short term overbought add names on pullbacks and in small increments. That said, we have been waiting for a month for a pull-back. It will come but we are adding slowly just in case it takes awhile.

The following annotated charts are provided. Please study them thoroughly. All of them are weekly charts. TNX, TLT, Copper, XLB, WTIC, XLE, FXI, USD, Gold.