FYI | May 22 2012
By Greg Peel
Up until Friday the US dollar index had undergone a 14-day winning streak – something not seen since 1975. The rise was driven mostly by a falling euro, but on Friday the euro bounced rather significantly. The daylight session saw the euro mark a new low before spinning around and taking out the previous day's high. In technical terms this represented a classic “reversal”.
For the better part of the last three years, movements in US stock markets have been closely correlated to movements in the EUR-USD. No great surprise of course, given Europe's domination of market sentiment. To Dennis Gartman, Friday's turn in the euro was a telling sign. Also telling was the Nasdaq's capacity to hold at its longer term support line. Add it all up, and Dennis Gartman has now turned bullish on equities, according to his Monday newsletter, which was written prior to Wall Street's Monday open.
The euro gradually gained further ground last night, but more emphatic was a 2.5% jump in the Nasdaq – that index's biggest move all year. One would be foolish to conclude the latest round of euro-fear is thus now over, with uncertainty remaining a defining factor, but some analysts are not being too quick to write last night's Wall Street rally off as a typical correction blip.
Barclays' technical analysts noted in a report yesterday that the global markets sentiment extremes had only become more extreme. In short Barclays is calling all of US bonds, German bonds and UK bonds – the go-to safe havens of 2012 – overbought. In the commodity space, Brent oil is oversold, copper is oversold and gold is back to being “bullish”. We saw a 2% bounce in Brent last night and a 1% rally in copper.
The euro-bounce (which implies a turnaround in the US dollar index) also has Dennis Gartman now bullish gold again, albeit his previous bullish stance has been in the euro-denominated gold price. This time Gartman is bullish USD gold.
Pure technical analysis, by rights, should ignore sentiment, but the issue becomes somewhat clouded when technical analysis is conducted on sentiment indicators such as bonds or on in-house sentiment measures. To that end UBS runs a Global Equity Risk Appetite Indicator, and the analysts are not as sure as Barclays of markets having reached an overstretched level of weakness.
Last week the UBS indicator dropped to a 2012 low of minus 0.78, most of which was driven by a jump in the VIX volatility index on the S&P 500 and the widening of sovereign interest rate spreads. Historically this is a low level, but not yet low enough for UBS to call an equity market capitulation – that which occurs prior to the next rally phase beginning.
At the depth of GFC fear the index reached minus 6.0, but if we dismiss that event as unusual we note that the euro-fear corrections of 2010 and 2011 saw the index drop to minus 2.0 and minus 2.5 respectively. Thus at 0.78, UBS cannot yet call a sufficient sentiment crash, implying we are not necessarily about to see a bounce.
With room for the indicator to fall, UBS continues to see near-term risk skewed to the downside.
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