Thursday, June 24, 2004
To everyone's expectations and no one's surprise, global stock markets rebounded in May after having had a rough sledding earlier in the year. Publications such as the Bank Credit Analyst as well as internet sites that I follow placed the May rally as a "tradable" rally, meaning that if you got in early, the chances of steady profits were high. However I also stressed that it was a rally to fear and not to cheer. Indeed, I fully expect the rally to fizzle out soon and stock markets to head south in due course.
For those interested in numerology, June 24 is expected to be an important day for the US market, as it is 1557 days after the June 2000 high of 1557 on the S&P index. Trading at or around June 24 is thus expected to be significant, and may provide valuable clues to the future market direction. More importantly however, would be the impact of the Federal Reserve's decision on interest rates and the Iraqi handover at the end of this month. It is widely believed that once these uncertainties are out of the way, markets would be free to rally. As usual, you know that I am standing against the crowd.
For the past few weeks I was pretty distracted by San San and do not have a good grasp of the market movements, but the general feeling I get is that the market is marking time for something important --- something big. With volatility low and the market caught in a sideways trading motion with absolutely no conviction whatsoever, some expect a big move either to the upside or the downside to occur within the next month or so. I expect that the big move, should it occur, will be to the downside.
Let us look at bonds. Everyone expects that the rising interest rate environment will hurt bonds badly. Many are positioned to take advantage of rising yields across the yield curve. As usual, my stand is that when everyone is leaning towards one direction, it always pays to consider the opposite, contrarian view. While I think bonds may have a knee-jerk reaction to the Fed decision come end June, but my opinion is that if the yield of the 10-year note hits 5.3-5.5% on capitulation selling, then it would be a strong buy. I would go against the crowd if the crowd goes too far.
As usual my investment recommendations for equities will be to concentrate on European small caps and Asian markets that are not overly dependent on exporting goods to the US --- India, for instance. For bonds, I would go for countries with the least inflationary bias such as UK, Eurozone and Singapore, and go only for investment grade debt, in anticipation of widening credit spreads. In terms of a short term trading position, I would be 100% cash in anticipation of the Fed decision. This is a time for maximum caution.
By the way, the bond futures market is assigning a 100% probability to a 25 basis point Fed Funds rate hike. They are going to be right on the dot, with absolutely no surprises whatsoever. Come 30 June, the Fed Funds rate will be 1.25%, guaranteed.
For those interested in numerology, June 24 is expected to be an important day for the US market, as it is 1557 days after the June 2000 high of 1557 on the S&P index. Trading at or around June 24 is thus expected to be significant, and may provide valuable clues to the future market direction. More importantly however, would be the impact of the Federal Reserve's decision on interest rates and the Iraqi handover at the end of this month. It is widely believed that once these uncertainties are out of the way, markets would be free to rally. As usual, you know that I am standing against the crowd.
For the past few weeks I was pretty distracted by San San and do not have a good grasp of the market movements, but the general feeling I get is that the market is marking time for something important --- something big. With volatility low and the market caught in a sideways trading motion with absolutely no conviction whatsoever, some expect a big move either to the upside or the downside to occur within the next month or so. I expect that the big move, should it occur, will be to the downside.
Let us look at bonds. Everyone expects that the rising interest rate environment will hurt bonds badly. Many are positioned to take advantage of rising yields across the yield curve. As usual, my stand is that when everyone is leaning towards one direction, it always pays to consider the opposite, contrarian view. While I think bonds may have a knee-jerk reaction to the Fed decision come end June, but my opinion is that if the yield of the 10-year note hits 5.3-5.5% on capitulation selling, then it would be a strong buy. I would go against the crowd if the crowd goes too far.
As usual my investment recommendations for equities will be to concentrate on European small caps and Asian markets that are not overly dependent on exporting goods to the US --- India, for instance. For bonds, I would go for countries with the least inflationary bias such as UK, Eurozone and Singapore, and go only for investment grade debt, in anticipation of widening credit spreads. In terms of a short term trading position, I would be 100% cash in anticipation of the Fed decision. This is a time for maximum caution.
By the way, the bond futures market is assigning a 100% probability to a 25 basis point Fed Funds rate hike. They are going to be right on the dot, with absolutely no surprises whatsoever. Come 30 June, the Fed Funds rate will be 1.25%, guaranteed.
