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We have generally been on board with the bullish equity market action for most of the last six months. However, we now have to wonder if global equity markets haven’t temporarily painted themselves into an interest-rate corner. Clearly seeing most equity market measures return to the panic/Lehman failure point on the charts suggests that a large portion of the 2009 gains were the result of scared money returning to the marketplace. In fact, with many key stock index futures positioning reports showing net spec long readings to be only half of their record levels, we might suggest that the markets haven’t really been factoring in a robust recovery but instead money that had flowed away was simply flowing back in.
On the other hand, we think that equities and a number of key physical commodity markets that have been heavily reliant on a weak Dollar might see a temporary bump in the road off either the November payroll report or off the December payroll report that will be released early next month. In our opinion, a pattern of noted improvements in the weekly US initial and ongoing claims data over the last six weeks would seem to depict a track toward a recovery in the US jobs market. While that might seem like a very positive development for equities and most physical commodity markets, we have to wonder if signs of an impending improvement in the economy won’t produce an interest rate conundrum effect that in turn will prompt a counter-intuitive setback in many markets. In other words, we think that equities and certain commodity markets owe a large portion of their 2009 gains to the expectation of ongoing ultra low interest rates, a perpetually weak US Dollar and also because of long term inflationary expectations.
The stock market in particular seems to be heavily dependant on the maintenance of the ultra low US rates, and therefore a premature and perhaps misguided fear of rising US interest rates from a “one off” improvement in the unemployment report might prompt a correction in equities, the Dollar and a host of physical commodity prices.
In the wake of the Dubai financial sector scare it was clear that equities and the gold market in particular seem to need a favorable economic outlook to continue to rise, and that causes us to suggest that many markets are getting to a point where “less bad” payroll readings are not going to be enough to cheer on the buyers.
In short, we see the markets poised to encounter a necessary balancing, but since we think that inflation and recovery is in the cards, one should probably begin to run increasingly tighter profit stops on longs in equities and most physical commodity markets. Traders should also realize that a noted upcoming correction in equities and commodities off signs of improvement in the real economy should be viewed as a fresh buying opportunity. If one is long and suffers a significant setback in gains in the face of a false interest rate hike threat, it could be difficult to buy into a near term correction.
