Last week the Dollar Index completed a head and shoulders top formation; began a series of declining peaks and troughs and broke below its 200-day simple and 65-week EMA. The only question is whether the implied decline will be orderly or end in some kind of crisis.
The long-term trend for the World Bond Index remains positive because the Index is above its 65-week EMA. However, that might be about to change and the Index may be in danger of deteriorating to the point where a primary trend sell signal is eventually generated.
While the Global Commodity Index may be close to a top, it is better to assume the primary bull market is still in force until the 12-month MA is violated on the downside
The 2010 4-year cycle buying opportunity will turn out to be similar to those in 1986and 2006,which followed an extended consolidation, rather than one that develops after a sharp price drop. Of course, we could still get an October surprise and the odds of that will increase if sentiment moves too quickly to the bullish side. However, notwithstanding an unexpected geopolitical event or a sharp drop in the dollar, the odds of a fourth quarter sell-off have decreased substantially.
We think the market had its opportunity to decline and blinked. Now that the major indexes are back above their long-term MA’s and both our equity barometers are bullish, we are increasing our equity allocation.
U.S.EquitiesWith the S&P back above both its 9- and 12- month MA’s, and the KST being in a positive mode, our longterm indicators are in strong agreement that the primary trend is bullish.
In conclusion, there is no shortage of geopolitical risks and the recent breakdown in the Dollar Index has the potential to morph into a crisis. However, when we look at the equity market, the consensus of primary trend indicators is positive and the intermediate series have only now just started to turn bullish. Breadth indicators have made new bull market highs and sentiment is certainly not at the boiling point. All this suggests to us that prices will move higher between now and year-end.
Bond prices have been feeding on a double diet of fear and a stimulative Federal Reserve. Both have been justified with false expectations of defl ation. To our mind the notion of deflation, as industrial commodity prices register new all-time highs appears a tad inconsistent. This suggests that if our expectations for a weaker dollar and higher commodity prices materialize, bond prices could be doubly vulnerable as market participants unwind positions based on unrealistic deflationary projections and also play catch up to economic reality.
Recently, the more broadly based Dow Jones UBS Commodity ETF (DJP) has started to move to the upside as it has completed an inverse head and shoulders pattern. It, too, is being supported by three rising KSTs. One reason it has been lagging is that it has a relatively higher weighting for oil, a commodity that has not yet participated in the rally. All three KSTs have been fl at in recent weeks while the price itself has been hugging the lower boundary of its recent trading range. As the chart states, $77.4 and $73 are the critical points to watch out for. Given strength elsewhere, it seems likely that an upside breakout will materialize.
Infl ation sensitive equities are likely to out-perform their defl ation sensitive counterparts in the period ahead. This typically means higher commodity prices and bond yields.
The Gold price reached a new all-time high in September and obviously remains above its 65-week EMA. Since all three KSTs are positive and the new highs have been
confirmed by the shares, there is little to argue with.
Silver also experienced a positive breakout, but in this case, from a formidable base. Again, all three KSTs are positive so much higher prices are likely.
Martin Pring
