Reacting to a reactive rally – can the market extend further?

It has been an amazing two weeks. Fear and loathing, indeed panic have given way to hope, high spirits and exuberant price action. On Friday night we saw this again with the Dow up 1.45%, the S&P 500 1.74% and the Australian Dollar cruised up and through the 1.03 level. As I noted the key driver is that fear has given way to hope that things aren’t going to be as bad as many worried about just recently. Indeed I think its the first time we have had two weekly up moves in Equities for a few months and the US markets best week since July 2009 according to Bloomberg this morning. Commodities were higher as well with the CRB up around 2% with Copper and crude oil both rallying more than 3% and not a single price of the 19 commodities falling on Friday.

The punters are back.

But what do you do now? It is a difficult question to answer. As trite as it sounds you stick to your longer term plan that you should have had already mapped out. When you don’t do that it can cost you plenty.

Take me for example – I have been writing over at MacroBusiness for many months, mostly in response to questions, that I didn’t think the Australian Dollar would fall anywhere near as far as it has in the past in this European induced rout and that it would find good solid longer term support. I said that it should probably find support in the low 0.9000’s. I even identified 0.9200/50 as my key level.

I wanted to buy it toward this level – it was in my little book of trades I want to do that I keep so that when the panic hits I can cooly evaluate the market in the context of where I see value.

But NO, just like all those around me I got bearish toward the bottom of my range and with the Australian Dollar printing just 138 points above the top of my buy region I should have said I was looking for a chance, or place, to buy. The blasted thing even bounced of the bottom of the damned trend channel I had identified in print as you can see below.

But I didn’t, the rest is history and the Australian Dollar is up 10 cents.

Having a well thought out and written down plan is a must in this Investment game but there is little point having it if you lose your head with everyone else and dont end up sticking to it.

Rudyard Kipling, I let you down.

So what about now?

As you can see in the chart above the Australian Dollar is now right at the top of the recent down trend – this should hold. But the Aussie’s life is not its own as the correlation table below shows.

If you click on the chart above you will see the very high correlation that the Aussie has with all the other risk, I prefer punting, assets. On a 3 month basis its 0.824 with the S&P 500, -0.742 with the VIX volatility index (inverse remember, equity risk assesment goes up AUD goes down) and 0.70’s for the major European CDS indices.

So where the market goes so goes the Australian Dollar and ASX and 3 year swaps and………

But what is the outlook for related markets?

As you can see in the chart above of the S&P 500 it is just breaking out of its trading range and 1250/60 looms large as the level to watch. This level is the bottom twice this year and the one we were watching prior to the cascading fall in August. It is also 61.8% level of the July to October selloff. If it gets through here then things get more positive. I don’t feel it will though – personal opinion remember not advice.

Similar story with the ASX 200. It held above the 3848 level we identified a few weeks back – yet another example of not sticking to your long term written down plan. As you can see i am quite disappointed with my trading stance lately – I thought I was removed from the emotion. I’ll have to try harder for more self control.

The ASX200 is approaching the top of its downtrend at 4297 sitting at 4263 as I write. I reckon it will probably hold as well with the S&P 500 and I did see a good post this morning over on the “Rational Investing Blog” which has the outlook in a little more detail so no need to replicate.

So if I don’t think there is much left in this rally what am I doing. Honestly, I’m on the sidelines because this volatility is ridiculous at the moment. I remember after the pessimistic crescendo in march 2009 that the market rallied hard for a while and then did so again last year with the QE2 asset bubble.

Markets can be irrational longer than we can stay solvent if we are shorting so even though I reckon the answer to “are we there yet” is soon. I’m guessing the Australian Dollar is maxed out on this run both technically and in the current fundamental global environment and that the ASX200 is somewhere close to0. But it is probably better to sell into a failure rather than try to sell now. Having said that though I still contend that longer term it’s all about the economy and the economy is weak again.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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