State of the Market

I continue to believe that Equities are in the process of putting in an intermediate-term bottom. DAX currently at 3637; NASDAQ at 1066. I see bounces of at least 15% from these levels, which would give us a very modest DAX 4150, around 50% retracement level of the drop from February 2009 highs. The Bund is also looking toppy here are 125.35, rallying up in a five wave move from 4 March 2009 123 low. Finally, the USD looks set to weaken substantially, and currently, among the majors, the CHF is leading (USD/CHF 1.16). I expect to see that cross below 1.04 very soon.

USD weakness imminent; Equity strength likely to continue

The Dollar has done very well recently, and against the EUR/USD at least that trend looks set to reverse very soon. New lows in the cross have been made against substantial divergences, and appear to be taking shape of an ending diagonal [the move from 1.47 high has taken shape of overlapping, corrective slide. There are many ways to count it, but most of them arrive at the same conclusion - USD strength likely to end very soon].

Global equity markets are moving higher this morning, bouncing from 12 year lows. The move into those lows appears complete (to me). I expect equity strength to last for a few weeks at least, followed by a fairly deep retrace, and then still higher into May 2009. Fitting well with that is coming government bond weakness, in Europe and the US.

A medium-term bottom in Equities?

The following is a chart of a basket of major EU stock market indices (FTSE100; CAC40; DAX30; IBEX; MIB/SP). It seems to me that the move lower that began at the beginning of February 2009 is approaching or may have hit its end. There are a number of reasons for my bullishness:

• The two impulsive moves lower in 2009 - one that began in January and one in February are equal in size, and internally subdivide into impulses. This suggests a bounce.
• 85% of all stocks in the US are trading at least 1 standard deviation below their 40 day moving average. There have only been 6 other periods when this was the case: 1) 19-29 Oct 1987; 2) 31 Aug 1998; 3) 21 Sept 2001; 4) 23 Jul 2002; 5) 2-17 Oct 2008 and 6) 20 Nov 2008). All of these have marked significant market bottoms.
• 65% of stocks are trading below 2 standard deviations below their 40 day moving averages, a condition only achieved on three other occasions: 1) 19-29 Oct 1987; 2) 21 Sept 2001 and 3) 6-10 Oct 2008.
• Finally, the US Dollar looks set to WEAKEN from these levels. The two currency pairs that I track and believe are set to fall are USD/CHF & USD/CZK. With the USD playing a "safe haven" role when risk appetite falls, imminent USD weakness suggests that risk appetite will return soon.