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22/12/14

Very short week ahead, with few releases and no notable speakers.

EURUSD is still being weighed upon by a looming sovereign QE program that Mario Draghi wants to implement in the New Year. This has been the running theme of the whole of 2014. For those not too familiar with fundamentals and why things are happening the way they're happening, here's a bit of history as to why EU officials might be against QE.

Going back to the time after WWII, Germany went through a period of "printing money" ie Quantitative Easing policy to try and repay their debt. What resulted from this was a mad hyper-inflation with groceries costing into billions of deutsch marks and still going up by a few billion by the evening. As a result of this history lesson, Germans deemed any QE programs illegal for themselves in the beginning, but as Germany rose to the top of EU, this stance was adopted by the rest of the European council.

So naturally Angela Merkel is of opinion that a similar hyperinflation will happen again to the whole of Europe. The first debate is whether EU should change the law to make QE legal - after all we now have faltering EU recovery and no real way out of it.

On the other side of this table sits Mario Draghi, a true genius who came up with LTRO program and single-handedly saved Europe from being doomed.

Now let's take a look at a modern example of QE.

If you followed the markets even a little over the last 4-5 years, there was a lot of talk about American QE program. The Fed ran an aggressive "money printing" policy from November 2008 which had no effect on the US inflation at all. The Fed continued to pump $85 billion every month into the banking system, eventually causing stock markets to turn bullish and go on a mad run for 6 years. Before QE, S&P500 index stood at $738. It's now at $2074. Markets almost tripled with very little correction and for now, no real sign of this trend coming to an end.

But the reason behind this rally was a little bit suspect: none of the cash injection reached further than the businesses. Consumers didn't get a sniff of the funds. So QE kept large companies in the game, expanding and growing, but your average disposable income was unchanged.


Even so, Fed's QE proved that a country can print money without adverse consequences to inflation. In fact, US QE is now considered a success, with jobs numbers being back on track and economy largely recovered. However, the Fed decided to keep interest rates at historically low rates, which might be the reason for the lack of inflation. I expect them to do a rate hike in the spring 2015 and we'll see whether the equity markets can sustain their gains even after the rate hike.


So perhaps now we have a successful model of QE, especially if the correction after the rate hike stays limited and above 200 DMA, a model upon which Europe and Mr. Draghi can use to guide EU through another modern QE process in a bid to preserve the economy. All eyes on Super Mario.
 
Red tie or blue tie? 
19/12/14
After the FOMC carnage on Wednesday evening, equities recovered ground and are carrying on their upwards March.

I mentioned on my blog from 15th Dec Monday to look out for Janet NOT mentioning "considerable time" for rate hikes for a continuation of the downward move. I also mentioned 200 day moving average and the danger of not closing below it.

Sure enough as soon as Janet started speaking, out comes the “considerable time” phrase again. I immediately closed my short position in s&p500 and listened in. There was some confusion over the phrase and some thought that perhaps FED had changed their forward guidance policy. It turned out that they didn’t change anything, but that they are still allowing “considerable time” before the rate hike. Janet also said that they will re-evaluate this within a couple of meetings. To which a “clever” journalist asked: “what does a couple of meetings mean?” with Janes responding; “a couple of meetings means two meetings”?!

So after such a gem of a conference that sent markets rallying again, I’m left wondering if the “considerable time” was only left in there for the sake of Christmas cheer. To keep people happy and spending money for the holidays.

You see, around this time last year, terrible winter storms rocked America. NFP job numbers were absolutely terrible, seeding doubts about the whole US economy recovery. This year, though, everything is hunky dory, so perhaps FED decided to avoid the elephant in the room in the wake of festivities – the unavoidable rate hike. Well - Ho,Ho,Ho to you too granny Yellen!
 
She's a real dove, isn't she?
 
15/12/14
S&P500 lost 3.5% last week. On Friday I was speculating on AC facebook page that I’d like to see a close of around 1997 and below to confirm the acceleration of downward momentum. Wall Street closing price was 1999.

Several things could be a factor in the drop. This whole year, downward corrections were few and far between, most of them lasting 3 days or less. Predicting any kind of a serious drop in S&P500 seems a fools errand.

However, end of year profit taking and possibly a chirp from Janet Yellen this Wednesday about the impending rate hike could have a further negative effect on the index. Look out for her NOT mentioning “considerable time”, as the rate hike could happen in spring, as heard before from the resident Fed hawk Fisher. Not mentioning “considerable time” might fade Yellen’s usual dovishness in the eyes of the market participants.

Technical analysis supports this view. S&P Daily chart paints a picture of a weak demand level here at 1999, with stronger support all below 200 DMA (1938)  waiting at demand around 1854. So far, anytime this index dipped its toes below 200 DMA, it failed to close below it, violently retracing upwards. If we do get a close below 200 DMA it will be a significant confirmation of a more serious pullback taking place, at which point players with large buying power will be jumping in. Short setups advised with eyes on 1938 reaction.
10/12/14
Angelo Capital is working on bringing you a section with video webinars where our director Deeyana Angelo will be explaining the process of picking levels.