Week ending 26 Feb 2016 – Market Indecision the week ahead?

The market bounced from its oversold condition and has now reach near resistance levels in the indices. Will the market go down from here? With many pundits pushing the idea that the market should be heading further down and many traders have taken short position accordingly, it is unlikely to go down. When the majority is hedged to the downside, there is little likelihood of panic selling. When there is no panic selling or fear of the market going down, then it won’t go down.

It has been said that the market will act to fool the majority of the traders and in this case, the majority is likely to be short the market. This can be seen in the Options skew factor which is the Put/Call ratio in the Options market. Currently ,it sits at 118 which tells us that the Options market is massively short. For a contrarian, this is a bullish situation. When those shorts unwind, it will provide fuel for the market to push upward.

Dow Transportation is 20.4% below its peak high so it is still in bear market territory. Russell managed to eke out some gains over the past week and is at 19.9% below its peak high so its is barely out of bear market territory. Dow Industrial and S&P 500 are at 9.3% and 8.7% below their peak high which means they have managed to push out of their correction territory. Nasdaq 100 closed the week at 10.6% below its peak high and so it is still in correction territory.

The market have been correlated to the market lately and crude is now trading between the $30 – $34 per barrel range. With the surplus in production and lately Iran with its sanction lifted has joined the world market and the oil glut remains. Hence it would be surprising if the oil price continue to trend higher unless demand is expected to increase. That is not the case right now. Alternative energies have cut into the fossil fuel demand.

The past week, gold has been range trading. Gold has always been a place to park fear money when the market outlook is uncertain. It tends to be inversely correlated to the market movement.

The G20 had been meeting in Shanghai to discuss world issues and in particular the state of affair of economic growth and currency devaluation. With negative interest rates policy implemented by the ECG abd BoJ, we are in for interesting time of competitive currency devaluation and that is the important facing exporting nations. The USD/JPY is trading at 113.07 and has found a support at 110.978. If the USD/JPY come down further and crash through support, we can expect the market to follow. It is a situation of the oil price holding steady but the USD/JPY coming down and hence the market is correlated to both the oil price and the USD/JPY.

The 30 year US Treasury Bond Futures (/ZB) has been trading largely sideways for the past couple of weeks. Junk bond (HYG) has been the canary in the coal mine of late when it signaled that all is not well in the financial market. It had been the first to sell off about a year ago. Since the last two weeks, it has been grinding upward. We will keep a close eye on it as it might be telling us something about the risk appetite out there.

The Week Ahead.
Earning season is just about finished and it has not been great. Earnings growth is now something like -4% for the coming quarter. Oil is expected to range trade. Currency such as the USD/JPY bears watching as it will be indicative of what will happen in the market independently of the oil market. With the indices hitting near resistance levels, we should see the market trading sideways.

To Your Wealth