Forex Market Commentary
Yes, in the trading world most traders fail to understand trade logic and end up like Gummy Bears walking up to the top of a cliff singing "Kumbaya" before falling off the precipice!
Firstly, technical charts are only a guideline and cannot be taken as the be all end all Bible of trading. Secondly, bank analysts are paid by industry exactly to say this and that because companies pay them to do so. Thirdly, sensational journalists have vested interests in whipping up traders into a frenzy. so the next time you hear a piece of news take three steps back and try to build your trade logic before you also go marching off hand in hand with the Gummy Bears because when you peel away at the entire surface, very little logic holds the entire picture together.
As I have been stating for some time now since the beginning of this year 2016, the USDX needs to trade in a sideways channel this year and cannot sink below the 93 mark for a long period of time quite basically because at this moment in time the US Fed is carrying the world. So now let's go over several points in the financial markets to lead up to our inevitable conclusion that the US Dollar should stabilize at the 93-95 level for the remainder of this year 2016. Currently the USDX has retraced upwards 38.2% very quickly since it's tumble from the 100 mark in January this year 2016 to the low on 2nd May 2016.
The following charts are from www.investing.com
Day Chart USDX:
Now let us try to build a logical rationale for markets and price behavior.
Firstly, the FOMC minutes. The US economy is sound and as usual sensational journalism has fed into wild speculation pushing up commodity prices such as gold with the fervent pitch that the US Dollar is dead meat. Now where on earth did that opinion come from? Nothing can be further from the fact and as a result you cant count how many gold longs got slaughtered yesterday. In economics there is a fundamental concept of time lags where events in time usually take some time to translate into the demand and supply equation and pricing of monetary assets. Equilibrium theory is based upon this concept of opposing forces eventually settling at a perfect pricing of demand and supply in the cash market until speculation drives prices into Disequilibria until again the market forces pull back like a rubber bang into a perfect state of equilibrium. The winter season hampers the US economy because of he weather. When it snows not too many people will drive their cars or shop around in the ice and sometimes floods damage crops and gale force winds knock down power lines. The effects of winter usually translate into April and May FOMC releases. Now here is the warning; that the FOMC should openly contemplate the raising of US rates by 25 basis points next month and issue such a statement when the US economy is supposed to exhibit weakness, is a massive implication of the fundamentals where the US economy trudged through the winter quite well enough and is all set for massive growth potential this spring and summer 2016. Thus, in ignoring the fundamentals of the US economy, many small traders got it completely wrong by ending up in short traps in the USDX and long traps at the top of the gold. This is a massive demonstration why a trader should not solely depend upon charts or listen to the journalists that screamed to enter gold for the next gold mania breakout when the exact opposite happened and as usual the large traders slaughtered the small traders caught in a long trap. I am overwhelmingly short at the 1290 - 1300 region.
Secondly, The SP500 - OK, well Carl Icahn took his massive short position bet and his fund IEP have some 11 billion Dollars capital base and with near 150% leverage we can safely assume that IEP have some 30 billion Dollars in leveraged credit to maintain this massive short position. This is why last week I clearly stated that although the SP500 may slide to the 2000 mark I would not dare enter a short position and remain neutral until evidence of a breakout to the downside for which evidence is starting to build as in the case of Warren Buffett's footprints. Massive buy support lies at 2030 and 2000. When every pension fund in the world has nowhere else to put money except USA to earn dividend you can be pretty certain the US Dollar is going to remain high bid. Warren Buffet recently revealed that this week he bought a 1 billion Dollar stake in Apple Inc. Why? because all those journalists screaming about insane price/ earnings ratios are dead wrong. When you place 100 buyers for a Giacometti piece in an auction room there's no telling where the price will end up because the auction will value the piece of art as a result of the pressure of the bid. The same principle applies to stock prices. If a share is 20, 30, 40 times earnings there is no hard and fast rule on fair value. Fair value is in the eye of the beholder who so desires to hold that stock. So Warren Buffett is buying on the dips and Carl Icahn is selling on the rallies. one of the two is dead wrong. But my hunch is IEP will wind down their shorts once the SP500 reaches the 2000 support and everyone in the planet starts piling in to buy opportunities like Google, Apple, American Airlines and several other stocks which gaped down and then recovered as buyers came flocking in hunting bargains for long term buy and hold for dividend. Also watch out for mergers and acquisitions because as stock prices slide down a little then companies with large cash balances will become prime targets for takeover bids and that's going to feed into Dollar strength. Yesterday US stock SAAS (inContact) soared 53% when it was announced that Nice Systems was going to acquire the company for $940m. Just now in Bayer AG makes preliminary offer to buy $42 billion valued MON (Monsanto). traders are going to jump for value whenever the SP500 dips. so dont bet on that US Dollar crashing at all.
Expect a massive volatility battle towards the Fib 38.2% and a high degree of probability of an upswing to the 2100 give that investors like Warren Buffett are looking for position entry as in the case of his purchase of an Apple Inc stake. Most likely Carl Icahn will cash shorts here and turn predator looking for bargains like Warren Buffett.
Day Chart SP500:
Watch the Day Chart AAPL, Juggernaut Apple inc on the Nasdaq:
Thirdly, the bond markets. FOMC data caused pandemonium in the bond markets as investors ran for cover on the 10 and 30 year and bond related stocks. here again i have pointed out the building up of buying pressure that cannot go any further up quite simply because the US FED has stated very clearly last month that it will never allow US yields to sink into negative territory. Yet how many traders missed this point. The entire world needs Dollars and Dollars are going to be bid and therefore the current cozy world of the bind markets is going to come under stress as prices cannot hold at such high levels as reflected in the day chart below where bond prices surged as a result of Dollar weakness since January this year.
Weekly Chart US 10 year Treasury:
Now at this point what we need to understand is not trade direction where many traders can get lost but trade logic which smart traders use to build positions. In a sequence of events let us look at the following two premises:
Premise 1- If the SP500 cash future falls then money spreads across the world and US Dollar weakens and commodity markets rapidly escalate in value.
Premise 2 - If the SP500 cash future falls then money spreads into the US bond markets driving US bond prices up and the US dollar finds strong support but does not appreciate rapidly like last year.
Premise 1 is highly unlikely. Why? Just take a look at global government bond yields and where exactly is the alternative investment?
Currently US yields are:
10-year U.S. Treasury:1.87%
S&P 500: 2.19%
30-year U.S. Treasury: 2.67%
MSCI AC World index: 2.7%
Russell 1000 Value: 2.74%
Investment-Grade Corporate Bonds: 3.2%
Now compare that to Japan 10 year at - 0.079% or Germany 10 yr at 0.16%
Premise 2 - is highly logical. Outstanding debt of G10 is at $39T and 90% of that is issued in US Dollar. The gold market is quoted in Dollar. Crude oil, 90% trades in Dollar. When the whole world is flat and the US economy is the only driving engine then firm Dollar bid. In US equities, even though aggregate earnings growth has fallen with a poor showing this earnings season, still US companies increased their dividends by 4.6% in Q1 2016.For this reason global funds which to drive into US equities every time their is a dip because investor appeal for dividend growth buoys all considerations for alternative global investments.
The alternative scenario for the US Dollar is very frightening. Fed Chair Janet Yellen moved very quickly to reassure nervous investors when the USDX collapsed in January 2016. She has very firmly stated that the US government bond yields will not sink into negative territory. If the US bond markets were allowed to rampage with higher and higher prices then lower yields would become a problem for the US banking and insurance sector. Since 2008 the US financial sector has been carefully nurtured back to strength. Lower bond yields and lower US dollar pushes US banks to become unprofitable and take that out of the US economy and you sweep away the entire foundation for the health of the US economy. Commercial banking is at the heart of any economy. Lower bond yields would undermine this vitally strategic market and Fed Chair Janet Yellen will never allow this scenario to play out. another logical consideration would be the coming US elections. She would not dare afford to undermine the US equities markets and shave billions of dollars of shareholder value and take away the value of US pensions. Therefore the FOMC plays a vitally critical role in keeping up the US equities markets whist tolerating a more gently appreciating value of the US Dollar. Allow the US Dollar to fall dramatically then invite the deflation trap and bankruptcy of the Us banking and insurance sectors. The US Dollar must stabilize and the USDX must trade the 93-95 band for the world to find stability in the global money markets.
Thus, in this picture of trade logic, the US Dollar needs to remain stable to support the potential for other global economies to expand. a collapse of the US Dollar has too many negative implications for the health of the entire global financial system.
Firstly, technical charts are only a guideline and cannot be taken as the be all end all Bible of trading. Secondly, bank analysts are paid by industry exactly to say this and that because companies pay them to do so. Thirdly, sensational journalists have vested interests in whipping up traders into a frenzy. so the next time you hear a piece of news take three steps back and try to build your trade logic before you also go marching off hand in hand with the Gummy Bears because when you peel away at the entire surface, very little logic holds the entire picture together.
As I have been stating for some time now since the beginning of this year 2016, the USDX needs to trade in a sideways channel this year and cannot sink below the 93 mark for a long period of time quite basically because at this moment in time the US Fed is carrying the world. So now let's go over several points in the financial markets to lead up to our inevitable conclusion that the US Dollar should stabilize at the 93-95 level for the remainder of this year 2016. Currently the USDX has retraced upwards 38.2% very quickly since it's tumble from the 100 mark in January this year 2016 to the low on 2nd May 2016.
The following charts are from www.investing.com
Day Chart USDX:
Now let us try to build a logical rationale for markets and price behavior.
Firstly, the FOMC minutes. The US economy is sound and as usual sensational journalism has fed into wild speculation pushing up commodity prices such as gold with the fervent pitch that the US Dollar is dead meat. Now where on earth did that opinion come from? Nothing can be further from the fact and as a result you cant count how many gold longs got slaughtered yesterday. In economics there is a fundamental concept of time lags where events in time usually take some time to translate into the demand and supply equation and pricing of monetary assets. Equilibrium theory is based upon this concept of opposing forces eventually settling at a perfect pricing of demand and supply in the cash market until speculation drives prices into Disequilibria until again the market forces pull back like a rubber bang into a perfect state of equilibrium. The winter season hampers the US economy because of he weather. When it snows not too many people will drive their cars or shop around in the ice and sometimes floods damage crops and gale force winds knock down power lines. The effects of winter usually translate into April and May FOMC releases. Now here is the warning; that the FOMC should openly contemplate the raising of US rates by 25 basis points next month and issue such a statement when the US economy is supposed to exhibit weakness, is a massive implication of the fundamentals where the US economy trudged through the winter quite well enough and is all set for massive growth potential this spring and summer 2016. Thus, in ignoring the fundamentals of the US economy, many small traders got it completely wrong by ending up in short traps in the USDX and long traps at the top of the gold. This is a massive demonstration why a trader should not solely depend upon charts or listen to the journalists that screamed to enter gold for the next gold mania breakout when the exact opposite happened and as usual the large traders slaughtered the small traders caught in a long trap. I am overwhelmingly short at the 1290 - 1300 region.
Secondly, The SP500 - OK, well Carl Icahn took his massive short position bet and his fund IEP have some 11 billion Dollars capital base and with near 150% leverage we can safely assume that IEP have some 30 billion Dollars in leveraged credit to maintain this massive short position. This is why last week I clearly stated that although the SP500 may slide to the 2000 mark I would not dare enter a short position and remain neutral until evidence of a breakout to the downside for which evidence is starting to build as in the case of Warren Buffett's footprints. Massive buy support lies at 2030 and 2000. When every pension fund in the world has nowhere else to put money except USA to earn dividend you can be pretty certain the US Dollar is going to remain high bid. Warren Buffet recently revealed that this week he bought a 1 billion Dollar stake in Apple Inc. Why? because all those journalists screaming about insane price/ earnings ratios are dead wrong. When you place 100 buyers for a Giacometti piece in an auction room there's no telling where the price will end up because the auction will value the piece of art as a result of the pressure of the bid. The same principle applies to stock prices. If a share is 20, 30, 40 times earnings there is no hard and fast rule on fair value. Fair value is in the eye of the beholder who so desires to hold that stock. So Warren Buffett is buying on the dips and Carl Icahn is selling on the rallies. one of the two is dead wrong. But my hunch is IEP will wind down their shorts once the SP500 reaches the 2000 support and everyone in the planet starts piling in to buy opportunities like Google, Apple, American Airlines and several other stocks which gaped down and then recovered as buyers came flocking in hunting bargains for long term buy and hold for dividend. Also watch out for mergers and acquisitions because as stock prices slide down a little then companies with large cash balances will become prime targets for takeover bids and that's going to feed into Dollar strength. Yesterday US stock SAAS (inContact) soared 53% when it was announced that Nice Systems was going to acquire the company for $940m. Just now in Bayer AG makes preliminary offer to buy $42 billion valued MON (Monsanto). traders are going to jump for value whenever the SP500 dips. so dont bet on that US Dollar crashing at all.
Expect a massive volatility battle towards the Fib 38.2% and a high degree of probability of an upswing to the 2100 give that investors like Warren Buffett are looking for position entry as in the case of his purchase of an Apple Inc stake. Most likely Carl Icahn will cash shorts here and turn predator looking for bargains like Warren Buffett.
Day Chart SP500:
Watch the Day Chart AAPL, Juggernaut Apple inc on the Nasdaq:
Thirdly, the bond markets. FOMC data caused pandemonium in the bond markets as investors ran for cover on the 10 and 30 year and bond related stocks. here again i have pointed out the building up of buying pressure that cannot go any further up quite simply because the US FED has stated very clearly last month that it will never allow US yields to sink into negative territory. Yet how many traders missed this point. The entire world needs Dollars and Dollars are going to be bid and therefore the current cozy world of the bind markets is going to come under stress as prices cannot hold at such high levels as reflected in the day chart below where bond prices surged as a result of Dollar weakness since January this year.
Weekly Chart US 10 year Treasury:
Now at this point what we need to understand is not trade direction where many traders can get lost but trade logic which smart traders use to build positions. In a sequence of events let us look at the following two premises:
Premise 1- If the SP500 cash future falls then money spreads across the world and US Dollar weakens and commodity markets rapidly escalate in value.
Premise 2 - If the SP500 cash future falls then money spreads into the US bond markets driving US bond prices up and the US dollar finds strong support but does not appreciate rapidly like last year.
Premise 1 is highly unlikely. Why? Just take a look at global government bond yields and where exactly is the alternative investment?
Currently US yields are:
10-year U.S. Treasury:1.87%
S&P 500: 2.19%
30-year U.S. Treasury: 2.67%
MSCI AC World index: 2.7%
Russell 1000 Value: 2.74%
Investment-Grade Corporate Bonds: 3.2%
Now compare that to Japan 10 year at - 0.079% or Germany 10 yr at 0.16%
Premise 2 - is highly logical. Outstanding debt of G10 is at $39T and 90% of that is issued in US Dollar. The gold market is quoted in Dollar. Crude oil, 90% trades in Dollar. When the whole world is flat and the US economy is the only driving engine then firm Dollar bid. In US equities, even though aggregate earnings growth has fallen with a poor showing this earnings season, still US companies increased their dividends by 4.6% in Q1 2016.For this reason global funds which to drive into US equities every time their is a dip because investor appeal for dividend growth buoys all considerations for alternative global investments.
The alternative scenario for the US Dollar is very frightening. Fed Chair Janet Yellen moved very quickly to reassure nervous investors when the USDX collapsed in January 2016. She has very firmly stated that the US government bond yields will not sink into negative territory. If the US bond markets were allowed to rampage with higher and higher prices then lower yields would become a problem for the US banking and insurance sector. Since 2008 the US financial sector has been carefully nurtured back to strength. Lower bond yields and lower US dollar pushes US banks to become unprofitable and take that out of the US economy and you sweep away the entire foundation for the health of the US economy. Commercial banking is at the heart of any economy. Lower bond yields would undermine this vitally strategic market and Fed Chair Janet Yellen will never allow this scenario to play out. another logical consideration would be the coming US elections. She would not dare afford to undermine the US equities markets and shave billions of dollars of shareholder value and take away the value of US pensions. Therefore the FOMC plays a vitally critical role in keeping up the US equities markets whist tolerating a more gently appreciating value of the US Dollar. Allow the US Dollar to fall dramatically then invite the deflation trap and bankruptcy of the Us banking and insurance sectors. The US Dollar must stabilize and the USDX must trade the 93-95 band for the world to find stability in the global money markets.
Thus, in this picture of trade logic, the US Dollar needs to remain stable to support the potential for other global economies to expand. a collapse of the US Dollar has too many negative implications for the health of the entire global financial system.
Pieter Bergli - Trader X16
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