Sage Weekly Letter – 7/15/2012

• Posted by Robert Sinn
• on July 15th, 2012

Equities seem to have entered one of those strange moments in time in which the balance between bulls & bears is almost perfectly even and there is far from a clear consensus as to the path ahead. While sentiment is about as mixed as I can ever remember, the market’s current technical structure offers a bullish tone. Perhaps most important is Friday’s large rally which predominantly took place during the first 40 minutes of trading and surely took the vast majority of market participants by surprise:

 

Thursday/Friday’s market action was also noteworthy due to the fact that equities ($IWM $SPY) and gold ($GC_F $GLD) rallied aggressively while treasuries remained well bid ($TLT) – this is curious in itself and strengthens my belief in what I wrote in last week’s Letter regarding the Fed. If you were thinking of taking a day off this week it would be best to make sure that it is not Tuesday. With $BAC and $GS earnings set to be announced before the market open followed by a deluge of economic data, Chairman Bernanke’s highly anticipated semi-annual testimony to the Senate Banking Committee at 10am EST, and $INTC earnings after the close Tuesday is set to be a very important day for financial markets:

After the 2nd huge Friday rally in the last three weeks US equities are within ~1.5% of some very key upside levels, let’s have a look:

Click to enlarge

 

While most observers attributed a large part of Friday’s rally to JP Morgan’s quarterly report and ‘relief’ that the London Whale loss is likely to be “only” around $7 billion, the rally across financials was impressive both in terms of breadth and magnitude which leads me to believe there was much more to it than simply the $JPM report – above 14.85 the “chase” may be on in $XLF:

 

Gold bounced off support near $1550 yet again and now appears poised for a sizeable squeeze higher if it can breach resistance at $1620 over the coming days:

 

Meanwhile, treasury bonds remain well bid and the extremely overbought technical condition of seven weeks ago has been corrected –  despite a multitude of top calling and a general bewilderment as to the continued strength of the treasury market, the charts look quite strong and a technical case for an end to the treasury bull run remains shaky at best:

 

Finally, Friday’s most important chart ($CRB) is likely to become the most important chart during the week ahead:

 

I would be remiss if I did not address this weekend’s Barron’s cover which calls for the euro ($EURUSD) to fall to parity with the dollar in order to ameliorate some of the economic competitiveness challenges facing the weaker eurozone members:

 

 

The current situation regarding the euro is a contrarian’s dream:

• Hugely bearish sentiment which by most accounts is now more one-sided than it was during June 2010 (the last time EUR/USD fell below 1.20)
• Heavy speculative short interest in euro futures ($6E_F)
• Multiple magazine covers proclaiming the death of the euro along with a recent general acknowledgement in popular culture that the euro may be on its last legs
• A bearish Barron’s cover (for many contrarians this is usually the icing on the cake for a tradable contrarian investment thesis)

While the calls for sub-1.20 EUR/USD are now deafening and I certainly would not be surprised in the slightest bit to see a 300+ pip rally during the coming weeks, the Barron’s piece makes several excellent points. Moreover, it is important to remember that central banks are the real heavyweights in global currency markets; therefore, regardless of how skewed the small money may be positioned it is ultimately the will of the ECB and Federal Reserve that will decide whether EUR/USD will hit 1.15 or 1.30 next.

From my vantage point there are plenty of easier places to make a buck than trying to figure out where EUR/USD is headed next. However, it is worth noting that below the June 2010 low of 1.1870 there isn’t much in the way of support – while parity may be a ways off, 1.10 before the end of 2012 certainly seems reasonable:

 

A final point regarding EUR/USD: The EUR/USD correlation with US equities is much less powerful than it has been in the past and it is not inconceivable for the S&P 500 to make new 52-week highs as EUR/USD continues to plumb fresh 2-year lows.

To wit, I continue to hold a positive market outlook with fairly defined near term reference points on the S&P 500:  1325 (last Thursday’s low) below with 1375 (July 3rd high) above.

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