The above is the FXE Euro Trust Currency Shares vs the S&P Trust. As much as I am fundamentally bearish in today’s environment, the above is Bullish for equity valuations – at least relative to Europe. Why? The general environment continues to me heavily macro and volatility driven. From the strengthening of the Euro, and its recent breakaway/outperformance, we see that despite fundamental weakness, the world is settling down.
So there are a couple of options in this environment. Maintain shorts and try to find high quality that will rally and hopefully hold in the subsequent selloff or cut shorts and delever.
The technicals for the S&P remain fundamentally poor in the long term. My primary fear comes from the 60-120 SMA death cross which marked the Jan 2008 – March 2009 Bear Market as can be seen below:
I remember a paper a number of years ago speaking of the predictive power of the 60-120 cross. Personally I don’t care of its power in a purely academic sense – ie without other inputs is it a decent signal. We *have* other inputs – namely withdrawl of stimulus, massive delveraging, and implicit and explicit increases in taxes to name a few, all of which is deflationary and therefore inherently dangerous for equities. Witness the following from the most recent St. Louis Fed Monetary trendes showing the decline of credit:
So we have short term bullish and long term bearish = continued volatility. Actually I am starting to get excited with investment opportunities now that immediate crises are over (Greece and many state governments will default but not today). Volatility creates great trading opportunities – but they are that – trading opportunities. Money is made in this environment providing liquidity and then taking it back as it becomes plentiful. Said another way – buying low and selling high.
There are core positions to be held, but exposures likely should be “traded around”. Underexposed net as things take off, and overexposed in the worst of times. It’s not an easy business.
Finally just for the record, I mentioned AIPC – American Italian Pasta Company – in a few posts. The company was bought out marking one of my most successful and interesting investments. I started getting into the stock at $9.00 after which is rather promptly went to $5.00 before starting it’s long and rewarding journey to $53.00. All of this occurred during a period of some of the worst returns of the S&P in history. Indeed in 2009 I believe AIPC was the 5th best performing stock in the market.
The point is that not all volatility is warranted and sometimes it takes the market a long times to see things – good and bad.
Try not to lose money.
Arthur O’Keefe, São Paulo Value
