This is a quick update on markets and models.
- Put options bought in late April as insurance paid off as markets fell from their April peak
- Many positions were sold on the first wave down in early May as stop losses were hit
- The small number of remaining positions, ex gold, were sold for cash at the end of May
- Global stocks turn lower immediately and we proceed into a deeper plunge
- We break higher, with commodities leading, but we fail between S&P 1130 and 1160 and then reverse into a deeper plunge
- We break higher for a sustainable multi-month trend
“It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” (Keynes, General Theory of Employment Interest and Money, 1936).
The exchange rate between the Australian dollar and the Japanese Yen has been an excellent indicator of investor confidence in global growth, as Australia is a major provider of commodities to the Asian growth countries, while Japan is a net importer of nearly every commodity. This indicator has also been consolidating since late April. A break of the upper trendline (Chart 2.) would signal Scenario 2, confirming renewed optimism in global growth, and would lend further confidence to our decision to reinvest client cash. A close above 78.60 would confirm this new up-trend defined by Scenario 3.
Chart 2. Australia Dollar / Japanese Yen Cross
Chart 3. U.S. 10-Year Treasury Yields