Unwinding the Panic Trade - 10-ago-2012, 08:10
Let’s start with this.
Sentiment numbers are weak.
Though we haven’t seen this week’s American Association of Individual Investors (AAII) bullish percent reading, last week’s came through at a measly 30.45% – not far from 52 week lows set two weeks ago and well off the long term average of 42.10%.
As for this week’s number, we don’t expect any significant changes, despite a steady upward climb in the major American indices – and the moonshot flights we’ve been watching in Europe.
Have a look at the chart for Spain’s Ibex 35, for example. It’s important to remember that Spain is this year’s poster child for European debt disease, an affliction that strikes particularly mercilessly at the fresh-faced youth of the Mediterranean basin, forcing them to cover up in shame and hurl incendiary devices at establishment figures wielding batons.
Right. Back to the charts.
Resistance at the falling moving averages may be difficult to overcome, but getting there, in our opinion, will not be.
We see a near term move to IBEX 8000 before the consolidation begins. That’s an 11% gain from today’s levels.
Amazing, isn’t it? That such a foul-smelling carcass of a market can experience such a revival in so short a time?
There will be many who simply see a short covering bounce on the heels of Mario Draghi’s announcement last week that the European Central Bank will start buying Euro sovereign debt. Once the initial excitement wears off, they figure, markets will resume their fall.
But we’re not so sure.
There will certainly be shocks and jags all the way to the top, but we suspect that the direction is now determined and that any continued pessimism regarding equities will only serve as a buoy for markets the world over.
By the way, the rain in Spain falls elsewhere, too…
In Draghi’s own Italy, we see a similar situation unfolding. Look at the Milano market:
Even though the chart is promising, there will likely be congestion in the area of the moving averages until there’s any further bullish action. It takes time to digest a 20% move in just over two weeks.
By the way, were we the only ones to notice what went down in China since the July bottom?
Have a look here:
We say that after some regrouping at these levels FXI should begin to make its way toward the long term moving average at $38.50. That’s another eight and a half percent on offer for those ready to snag it.
Our Man in Beijing
Earlier this week, Oakshire’s own dazzling Hugh L. O’Haynew predicted a Chinese market pop, and lo and behold, that’s just what he got!
Action in FXI was almost straight up since Hugh’s call went out at the top of the week, and we say that’s more proof in the figgy pudding that the man needs a plaque or a gold watch or something that shows just how darn much we appreciate his tremendous market acumen.
And while we’re at it…
We note, too, that bond yields are on the rise in more meaningful fashion. The ten year note has backed up handsomely in the last eleven trading sessions, moving from a 1.4% yield to over 1.7% in that period, a climb of 21%!
And how does that translate in actual bond prices?
Let’s look at the iShares Barclays 7-10 Year Treasury ETF (NYSE:IEF) to get an idea.
But also look at the drop below the short term moving average and the gap that waits filling at 104.
Both of these argue for further deterioration in the ten year’s price.
We have money leaving bonds and headed toward equities, particularly those that have recently been beaten pulpy, viz. Spain and Italy. And remember: it’s in precisely those two precincts that short covering could turn the whole affair into an Olympic-sized trampoline act.
The whole thing is underpinned by a) a lack of investor confidence that the move is real and b) a Chinese growth spurt that appears now in the making.
The risk trade is on, friends, and it’s best played with leveraged products on both European stocks and US Treasuries.
We’re unwinding the ‘panic trade’ now, sending our less scared dollars back into a European sanatorium.
Hope she has a quick recovery.
Many happy returns,
Unwinding the Panic Trade | Oakshire Financial