My colleague Dave Harder and I have been watching a number of charts for clues to tell us if the Federal Reserve’s policies of quantitative easing and the lowering of interest rates to zero are finding their way into the economy—and what these clues might be telling us about equity prices going forward. The three charts below are part of a larger report we have prepared for our members, but tell an interesting story. The moral of this story is (second verse—same as the first!): “Don’t Fight The Fed!”
The chart below shows the relationship of the euro to the Japanese yen and is a barometer of the carry trade. It is perhaps the best indication of the unwinding of leverage by hedge funds and the willingness of global money managers to assume risk. The euro has built a seven-week base, and now moved to a higher high. The indicator has now turned Green (positive) for the first time since the end of July. This is a positive signal for equities.
The next chart shows that the difference in yield between corporate bonds and government bonds moved to highs of 4.3% on October 10th. The rate declined to 2% in November, and further declined below 1.5% in the last two weeks. It is now in the middle of the trading range since August 2007. This is another positive for equities.
The third chart shows the $VIX ( as measure of investor fear that many have given up for dead as an indicator, likely because they are challenged with interpreting it.)
After making a double top at 80, the $VIX has now dipped to 42.81, the lowest level since early October. The long-term oscillator for the $ VIX turned positive for equities in late November and the short term indicator has been red (positive for equities) ever since.
This said, we are neither wise enough nor idiotic enough to predict the timing of when the stimulus will actually kick in to take these markets higher. This is a big bad bear market that has destroyed trillions of dollars worldwide. The trend is down and the trend is your friend until it bends at the end. We let the markets—not our analysis—tells us what to do.
Good Trading and Happy Holidays To All!
Janice Dorn, M.D., Ph.D., is a financial psychiatrist and chief global risk strategist for Ingenieux Wealth Management in Sydney, Australia. She also offer trading consulting and coaching services via her Web site, TheTradingDoctor.com.