Long the Dow

FOMC acknowledging improvement in economic conditions yesterday led to the market perceiving QE3 as less likely, and intiated a Dollar rally, and marking a key sell off in Gold (currently at $1640). Despite reports of a wider trade deficit in the fourth quarter, the dollar maintained its bullish trend.

US yields surged higher today, in a continuation of this theme, with Bernanke's statement doing nothing to take away from the bullish potential of the Dollar.

With the Dow touching 13,200 today, we see a strong move with a rising dollar and rising treasury yields (US 10 yr yields rising 0.142, t0 2.27% a substantial move).

With earnings season coming up, and 3 months to the next ISDA coupon payment date (when Europe will dominate headlines once again) I think the potential is there for a Dow rally, and with good risk reward too.

The Dow looks like it is now in sight of 13,500. With 13,000 as key Support. An interesting play would be to go Long the Dow, and short the ftse as the ftse is still below 6,100 resistance zone (which it has not regained since April)



FTSE 100 5945.43 -10.48 -0.18%

DOW 13,194.10 +16.42 +0.12%

GBP/USD 1.566 +0.00%

GBP/EUR 1.2021 +0.00%

EUR/USD 1.3029 -0.01%

Gold 1,642.40 -0.50 -0.03%

Medium Term Trade:

Long the Dow 13,182 Stop 13,000 Limit 13,390
Short the FTSE 5943, Stop 6050 Limit 5850

(Dow to outperform FTSE with earnings season coming up and
stronger improving US economic fundamentals).

Greece Restructuring Credit Event Announced

The deicion commitee voted that a Credit Event has occured with respect to the Hellenic Republic.

"collective action clauses (CACs) to amend the terms of Greek law governed bonds issued by The Hellenic Republic such that the right of all holders of the Affected Bonds to receive payments has been reduced."

Markets didn't move much, the Dow sold off 30-40 points, EUR/USD largely unchanged after the notice.


FTSE 100 5887.49
Dow Jones IA 12922.02
GBP/USD 1.566
GBP/EUR 1.19
EUR/USD 1.311
USD/CHF 0.919
USD/JPY 82.5


Where do we go from here?

Firstly non farm pay rolls beat expectations on Friday, and this saw a dollar rally, with EUR/USD now around 1.311 . Further "optimistic" comments from the FOMC on Tuesday could be bullish for the dollar. Particularly mention of higher oil prices contributing to higher inflation could also reduce the probability of QE3 and support the dollar.

Will be interesting to see, if earnings match the trend of beaitng expectations (which has been a hallmark of this bull market since 2009) whether the dollar will rally with the Dow. Given we saw the Dow sell offf somewhat at the start of the week, I will be on the sidelines this week waiting to see if there will be any reaction to the ISDA announcement in european equity markets (which were closed when the news was announced on Friday evening) and any possible reaction on eurozone bond spreads (some analysts saying that attention may now focus on Spain).

Dow 17,000?

And now I'm back.

FTSE 100 5911.13 -20.12 -0.34%
Dow Jones IA 12977.57 -2.73 -0.02%
NASDAQ 2976.19 -12.78 -0.43%
DAX 30 6921.37 -20.40 -0.29%
CAC 40 3501.17 1.44 0.04%
GBP/USD 1.583 84/25 0.00 0.07%
GBP/EUR 1.20 03/09 0.00 0.14%
EUR/USD 1.319 11/39 -0.00 -0.05%
USD/CHF 0.914 41/63 0.00 0.18%
USD/JPY 81.7 61/81 -0.02 -0.02%
GBP/JPY 129.4 92/55 -0.01
Gold $/oz 1710.9 0.40 0.02%
Silver $/oz 34.75 0.05 0.14%
Platinum $/oz 1691.77 -0.65 -0.04%
Palladium $/oz 709.23 -2.77 -0.39%
Brent Oil $/barrel 123.58 -2.21 -1.76%
WTI $/barrel 106.55 -2.36 -2.17%


I have remained on the sidelines of the markets for the past 6 months. Despite the trend for earnings to continue beating estimates, I was wary of the ongoing political uncertainties regarding the Greek bailout situation, and I did not anticipate a high probability decision from Merkel either for or against further bail outs which could have resulted in sharp shocks to the market (and a potential chain reaction taking the market substantially lower).

The LTRO program has helped keep equity markets supported, and paved the way for a subsequent rebound in European Banking stocks. There are still fears of a disorderly default by Greece. Although further cuts have been agreed to, it remains to be seen whether social unrest that has been building in Greece will allow this to be a practical solution.

The Italian 10 yr below 5% now, seems to be a sign that the European banks are playing ball and buying soveriegn debt.

US economic data has continued to beat expectations. With US GDP revised up to 3% for Q4, with Bernanke acknowledging the improvements and making QE3 less likely in the near term (which saw a sharp drop in Gold to the low 1700's).

My bias is to be look to go long the Dow, with the next catalyst to move higher likely to be Q1 earnings season. For the coming week with numerous Central Bank statements, and Non farm payrolls on Friday, the market is likely to remain range bound. 13,000 has proved a difficult number to remain above. And I think the market is due a 2/300 point sell off to bring itself back to trend line.



Questions?

1)I will look to analyse, whether the longer term pattern of long the dow sell the dollar will be suitable in this next potential bull phase of the dow. Given that LTRO is likely to be inflationary in the eurozone (even with the offset of declining growth) and the ECB more likely to be the one cutting rates, this may be a potential time for the long awaited (by myself anyway) positive correlation of the Dow and the Dollar.

2) At what oil price will oil and the Dow become substantially negatively correlated?

3)I saw an interesting interview with Peter Schiff on CNBC lately, where he asks what happens when interest rates rise?

Jeremy Siegel's looking for 17,000 in 2 years? However to what extent will this be due to the devaluing of the dollar?


http://video.cnbc.com/gallery/?video=3000075553#eyJ2aWQiOiIzMDAwMDc2Mjc3IiwiZW5jVmlkIjoibXk1VGpTNE5lVWZKK0NOc2o1MU54QT09IiwidlRhYiI6InRyYW5zY3JpcHQiLCJ2UGFnZSI6IiIsImdOYXYiOlsiXHUwMGEwTGF0ZXN0IFZpZGVvIl0sImdTZWN0IjoiQUxMIiwiZ1BhZ2UiOiIxIiwic3ltIjoiIiwic2VhcmNoIjoiIn0=