Key Reversals as Market Climbs a Wall of Worry

Posted by Victor Adair for Money Talks

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Submitted by Victor Adair on July 30, 2012 – 7:41am

We’ve had a week of dramatic reversals across all markets.

Stocks: The DJI dropped nearly 500 points from the Friday July 20 highs to this past Tuesday’s lows…and then rallied back nearly 600 points to the Friday July 27 close.

Credit Markets: Early this week the yields on “safe haven” bonds fell sharply while the yields on Spanish bonds soared. This pattern reversed dramatically Wednesday through Friday.

Currency markets: Early this week the US Dollar Index surged to new 2 year highs…and then reversed sharply Wednesday through Friday.

We had Key Weekly Reversals higher in Euro, Swiss, CAD, AUD, DJI, S+P, TSE, Gold (in USD terms), US treasury yields from 2 through 30 year maturities, and a Key Weekly Reversal lower in the US Dollar Index.

From an emotional point of view the stock market had been flying high (relative to the credit markets) until it hit a stone wall Friday, July 20, as Spanish bond yields soared and the markets feared that the Euro debt crisis could swiftly spin out of control. The fear intensified Monday and Tuesday…investors scrambled for safety…the USD and the Yen soared, stocks tumbled, safe haven bonds rallied and liquidity drained out of the markets…and then…

Late Tuesday afternoon an article by Hilsenrath in the WSJ speculating about imminent Fed easing brought the DJI back from its lows to close slightly higher on the day. A comment the next day from ECB head Mario Draghi to the effect that the ECB would do “whatever it takes” to save the Euro seemed to light a fire under the markets and the weekly reversals were on with a vengeance. The market mood had become increasingly fearful Friday through early Tuesday and then suddenly changed to becoming increasingly hopeful Wednesday through Friday. To say that the market mood swings have been manic-depressive would be an understatement.

This week ahead there are scheduled central bank meetings of the BOE, the ECB and the Fed…as well as the US employment numbers Friday Aug 3…plenty of fuel for more manic price swings.

What is the market really doing? Despite the manic-depressive mood swings, despite the torrent of capital rushing into perceived safe haven bonds, despite the seemingly intractable European debt crisis, despite the sluggish US and global economy, despite the all time record high number of American citizens on food stamps and disability it seems that THE STOCK MARKET WANTS TO GO HIGHER…the DJI has rallied over 1000 points from the June 4 lows…over 2,700 points from the October 4 lows.

Why? It seems as though we are mainly trading off macro political or central bank inspired headlines…or rumors…its seems as though the markets expect central banks will take further reflationary action…will print more money…which will inspire risk on…and higher asset prices.

The technical view: Technicians make the point that you can never know all you need to know to make the best market decisions…but if you look at the market you can see what it’s doing…so free yourself of your opinions about what the market should be doing and look at what it is doing. When I look at the US stock market this week I see that it rallied right through this month’s previous highs and closed at its best levels in nearly three months. This market is a classic case of climbing a wall of worry.

There has been a huge amount of cash sitting on the sidelines for the past few years due to economic and political uncertainty and that money could come into this market…taking it much higher…yes, the economic and political uncertainty that has kept that cash on the sidelines still exists…yes, those problems may only be intensifying…and yes, it’s entirely possible that the stock market may reverse tomorrow and drop a few thousand points before Christmas…but…since March, 2009, the US stock market has been trending higher and, as skeptical as I am and as skeptical as I have been, I have to say it looks like this market wants to go higher.

With my own money I remain cautious in both my short term trading account and my long term savings accounts…I feel there is a high degree of risk in these markets…so I remain on the sidelines…but I don’t want to be short either!


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Victor Adair

Senior Vice President and Derivatives Portfolio Manager

Contact Victor E-mail @

Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd. Victor began trading financial markets over 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker. He provides daily market commentary on CKNW AM 980 radio Vancouver and is nationally syndicated on Mike Campbell’s weekly Moneytalks radio show.

Victor’s trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.