2009

May 10, 2009 · Posted in Weekly Posts · Comment

Global markets ended the week with impressive gains as the bank stress test results and the US non-farm payroll numbers were regarded as very market friendly. That said, equity markets remain extended and prone to a correction. Last week we looked at the S&P, Bovespa, and Shanghai index and analyzed what appeared to be a looming conjunction of resistance areas that could lead to a global sell-off in stocks. We will look again at the same three indexes this week.

Bottom line up-front: the US market remains in a solid up-trend. We will continue the back and forward movement but Friday was a good day and we saw continued buying interest into the close. The market is rising against a backdrop of a falling US dollar and rising interest rates. Rising rates are negative for the government’s fiscal position going forward as well as negative for rising economic activity. The falling dollar is potentially a big negative for investment in the US including into US equities. We remain long but cautious.

Following are the S&P, Shanghai, and Bovespa indexes (in that order). As you can see the S&P is in a well ordered bull channel with rising Accumulation/Distribution line, rising RSI, and generally rising volume. All this is bullish. Shanghai however is getting rather extended above its long term trend line, its RSI is reaching the 70 area where it traditionally corrects and the price action in the last few sessions has formed a pattern nearly identical to the few sessions before the last correction. So we think that Shanghai should head down in the next few days for a correction that could last one to two weeks if it similar to the last one. Longer if it is a bit more severe. A correction of 10% would not be out of line at this juncture which would take it back to near the trend line we have drawn.

As for the Bovespa we note three distinct changes in trend in the Bovespa over the past months, each denoting an accelerating rise in the index. The chart of the Bovespa looks toppy so we expect a correction here very soon.

SPX 05/08/2009

Shanghai Index 05/08/2009

Bovespa 05/08/2009

We therefore have a situation where China and Brazil look poised for a correction. Remember that they started their rallies earlier than the US did. We expect then that they will begin correcting sometime this week. We expect the US to follow but the US correction may be delayed by some days or weeks depending on which sectors are leading the market higher. If it is commodities then China and Brazil correcting may cause the US to correct earlier rather than later. If on the other hand it is tech then the correction may be delayed.

All that said, how are we playing this? We believe the theme of the US dollar decline is a backdrop that cannot be ignored nor can the near certainty that China, Brazil and Asia will emerge first and strongest from this downturn. That said, we are sticking with our holdings of Fortescue Metals group (FSUMF) which broke out of its many month consolidation strongly on Friday, and Ag Feed Industries (FEED) which appears to be in a very bullish ascending triangle. We believe we will need to sell Sadia (SDA) as it is looking very extended and will be hurt when the Bovespa corrects.

As Shanghai and Brazil correct we are looking to enter long positions in SINOPEC, Petrobras, BHP Billiton, Cosan, and VALE among others.

We are also looking closely at the GDX index of gold miners as it appears to be completing its correction and preparing to break higher. We like GDX above $38 as that would give us confidence in a breakout. We are also looking at silver to buy SLV on a pullback which we hope to see this week.

We are keeping our eyes on the base metals this week as well as the rest of the agricultural complex. We will have a Members Only post on the Ags Wednesday and a further post on the US Treasury market and US dollar later in the week.

As of 05/08/2009 we are holding:

Long Sadia (Brazilian meat packer) SDA

Long Australian Iron Ore Supplies to China through Fortescue FSUMF

Long AgFeed Inc FEED

The following posts are relevant:

How the US Dollar Will Lose Reserve Status

Commodities Update 04/30/2009

Chinese Gold British Debt

Brazil

China Part 4 - Playing the Dragon

China Part 3 Global Hard Assets

Commodities

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

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