Thursday, July 12, 2007

Stock Market Update/Currencies 12 July 2007

Firstly, welcome to those who are new to the blog.

I'm hopeful the information I provide can be of use to you in the management of your personal investment decisions within the Emirates Provident Fund. Unlike other "advisers" (no names but our company recommended advisor "M" comes to mind), at this website you will find this is strictly a "no B.S." zone. I'm not selling anything; all I am here to do is let those who are interested know what I am doing in my personal EK Provident fund account and why. The blog is mostly technical analysis (TA) oriented (which I will try to keep as simple as possible) but on occasion I will delve into economic or fundamental discussions.

The markets are at a crossroads. This could be serious or this could be a bump in the road. No one knows at this point .

While I normally do not touch too much on economic or stock market fundamentals (it bores the hell out of most pilots!), the US sub prime lending debacle I referred to in a previous post is finally showing itself (if you are interested Goggle "Bear Stearn's" and their "leveraged hedge fund operations"). In short, there are "tons" or "tonnes" (no one knows the extent of it but the use of the word "trillion" has been spoken of by several highly respected economist) of highly leveraged financial vehicles linked to the US housing mortgage market that are in the process of "unwinding" (also know as being in default). These mortgage backed securities (known as "tranches") are baskets of both high grade and low grade bonds linked to the US mortgage market. Without delving into the details, the short version is the mortgage market is on the verge of possible collapse and these mortgage backed securities (including a product called Credit Default Swaps or CDO's which was essentially portfolio insurance on those baskets of mortgages) are at the head of this issue.

While the details of how these products were conceived, sold, manipulated and now recognized are not something most want to know, what is important is that the markets are "nervous". Mark that with a capital "N"! The bottom line is the markets do not know how many of these products were sold, who holds them, and most importantly what their market value is (essentially up to this point these tranches have been held and not openly traded on the market; when Bear Stearn's hedge funds got in trouble they tried to sell some of them on the open market and found the market would only offer around 50 cents on the dollar........they decided not to sell and instead attempt to bail out one of their hedge funds with cash from within the company because if they had sold "at the market price" it would have brought down the entire sub prime market). Bear in mind this is just the beginning of this whole thing.

The problem investors have is deciding to what degree this "U.S. problem" (make no mistake; this housing issue is a MAJOR PROBLEM in the US) will affect not only the US but also other markets around the world (which is what we are most concerned with in our provident funds as the equity funds we are allowed to invest in are predominantly tied to the MSCI World index which is a composite index of all the worlds stock markets).

There are those "bulls"who believe it is a "localised" problem that at the most will cause the US markets to correct yet allow the rest of the worlds markets (Euro zone, Far East and emerging markets such as China, India, Brazil and Russia) to continue to expand (as the US has become much less significant in the worlds financial circles over the past 10 years). In other words, the US for the first time in 80 years is no longer relevant to the rest of the worlds economies and the US can go into a slowdown or even a recession and the rest of the world will be fine.

On the other side of the trade are those who feel the US still is the economic leader (or in this case the economic drag) in the world and the shear size of it's economy will pull the rest of the world down with it (the old "when the US sneezes the rest of the world catches cold".

Who is right is yet to be decided. What is important as far as our portfolio's are concerned is one thing: PRICE.

First chart is the DJW (click to enlarge all charts):

This chart is worrying. As can be seen, while the DJW Index has climbed in USD terms, in all other tracked currencies (Euro, British pound, Aussie dollar), the market has fallen since 09 Jul.

Chart 2 has the DJW Daily Index:

In USD terms it is in a rising trend channel and nothing has changed. In fact, it is quite bullish and has held the 307.24 level as can be seen. Any move down to the lower trend line at around 295 would be perfectly acceptable.

Next chart is my customized PNF chart:

In this chart a buy signal was generated through a closing price of 305. It is currently bullish.

That is the good news........the worlds markets are fine as of today. The problem we face is the U.S. dollar.

First chart is the daily USD chart.

As can be seen on the chart, on June 29 my charts indicated a sell signal on the USD. Bear in mind this is a short term signal and while I use this in my own personal trading portfolio outside the Provident fund, this is not a signal that can be used within the provident fund due to it's short term and volatile nature.

However, the USD continued to weaken and fell below it's prior support at 81.251. on the Tue, 10 Jul close. This is a major problem as areas of prior support once broken tend to become areas of resistance. In other words, the USD is under pressure........big pressure.

Next chart:

The markets reaction can be seen on the next chart. The market wanted to hold 81.251 and the bottom of the descending wedge. It has now broken below and may Technicians are now redrawing their charts (from bullish USD to bearish USD). HOWEVER.......note the divergence on the MACD.......this is telling us for every new low on the USD there is less and less momentum support of the move. This could be potentially bullish USD.

Is the USD dead and we all go home...........not yet. Next chart

Note the weekly close late in Dec 2004 at 80.39. We are not there yet. Will this hold? Only the market will tell.

Bottom line: I like the stock market as it has held support and appears to want to go higher. I'm not happy with the USD but there is enough technical evidence to suggest it might be nearing a bottom.

Based upon the above, I will continue to hold my 75% equities position (equally divided between the Fidelity International Fund and Blackrock/MLIM Equity Portfolio fund) and a 25% position in the Fidelity Euro Currency fund. Should the DJW continue to advance and the USD gain a footing I will go to 100% equities.


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