• Comments for July 21, 2017

    The big event of yesterday was the continued Euro/US$ strength. We can now see that the Euro/US$ is at the top of its ascending channel. We hence should expect a pullback or a sideway activity.



    On a longer-term chart, we can see that the Euro/US$ broke above a strong resistance level. Next resistance is at about 1.23.



    Yesterday, Draghi stated the obvious: the European economy is growing again and he will wait for inflation and salaries to catch up before tightening. The market is telling us that the ECB will start to tighten by the end of the year. Hence, I suspect that the Euro/US$ will continue bouncing back to the 1.23 level.

    Below is the Euro/US$ minute data.





    What does this mean for bonds and equities? European investors who have been buying US bonds/equities since April have already lost 10% in exchange rates only. It is tough to digest if the rates differential is only 1.8%.

    Fortunately, the Japanese Yen is relatively stable against the US$, which means that Japanese investors in US bonds still enjoy the rates differentials.

    Yellen's latest statement about keeping rates low has pushed money back into income offering instruments.





    And a weak US$ is helping the PM sector.





    Yesterday, the 20DMF displayed continued weakness.



    Not sure what this was about: the NQ100 did not show such weakness.



    The Mammoth sector pulled back a little, but it has hardly a strong influence on the 20DMF, which is a sector based indicator



    The small caps were basically unchanged in terms of Money Flow.



    Hence, I suspect that the negative 20DMF pattern of yesterday was related to a rotation from traditional to income sectors.

    This is what the table below tends to show.



    Conclusions:

    It now seems that investors seriously consider that in the coming months, Europe will grow faster than the US. Europe is going through positive changes in terms of political stability but also in terms of financial stability, especially in relation to Southern countries. On the opposite, the Trump administration is involved in many disputes/arguments that are incompatible with managing a country through new reforms.

    However, the low US rates still offer a good opportunity for a continuation of debt funded buybacks.

    I still believe that small caps is the group of stocks that is the most at risk for a pullback:

    1.Small caps do not enjoy the benefits of a lower US$, as they do not export. They only enjoy the higher costs of imported inflation.
    2.The repeal of Obamacare was supposed to offer a relief to small caps.
    3.Small caps cannot easily borrow money to operate buybacks.
    4.On average, small caps have no earnings and offer no or only tiny dividends.
    5.The Trump administration's coming economic package seem more elusive by the day.

    If foreign and index investors leave and/or re-funnel their funds into income instruments, what becomes of the most risky instruments such as the small caps?