SOME CORRECTION IN THE RALLY

After nine days of rally the European indexes opened in negative territory this morning. Asia made also made correction tonight after the disappointing U.S. labor market report. The report provided an unclear outlook about the US economy recovery. Fears of the Fed removing its QE program resulted the drop. The sharpest correction was in Shanghai Composite -1.25%.

I have a historical chart below about the S&P500. Since 1997 seems clearly why was better being on the long side. All in all this is a bull market since that time, included the Credit Crunch period 2007-2009. You could make more money on the long side than sell the market. Most of the traders want to sell the bull markets. Sometimes it works sometimes since 2007 you should be very lucky making money on the short side.

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The BFM Assets Team.

EUROPEAN MARKETS ARE GAINING AND GAINING AND...

This is the first time since 2009 July the European markets have risen for 8 days in row. Greece and Spain are outperforming and showing very strong bullish momentum.

The Bloomberg's European 500 index came up to a perfect 61.8% retracement of the 2007-2009 collapse. European stocks have been retraced 61.8% fibo level of their 2007-2009 losses.

In the meantime the Europe's VIX dropped to 9 month lows (below 16%) yesterday. Technically I am more optimistic in short and middle term in the European markets compared to the US markets. I see great potential further in Europe in FTSE and in AEX, the Dutch index.

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The BFM Assets Team.

BULL STAYS FURTHER THIS WEEK?

Mostly all European equity markets are up and down today. The picture is mixed a bit. This could be the 8^th gaining day in row.

The Stoxx Europe +0.10%

FTSE +0,88%

DAX - 0,14%

The US market’s sentiment on SP500, DJIA, Nasdaq are moderately bullish.

We are going to have some macro numbers this week like U.S. nonfarm payrolls, unemployment rate, home sales and the Bank of England minutes. The investors are awaited a report on existing home sales in the U.S. to gauge if the country’s housing market remains in recovery mode or not. On Tuesday, the much-anticipated nonfarm-payrolls report from September will come out and the unemployment rate.

Technically the DJIA is still in the range 14,800-15,700. It is lagging behind the Nasdaq, SP500 and Russell 2000. They are on new historical highs. On DJIA we see the potential to hit the new high level above 15,700. For this first need to take out the 15,400 key resistance level today or tomorrow. But the bulls around us with a strong momentum.

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The BFM Assets Team.

 

USDJPY DAILY STRATEGY

Direction: long

Target: TP1 98,80

Protection: SL 97,70

Our setup: 98,00

Background: The USDJPY is now trading at 98.00 after a huge drop yesterday. Technically the long term trend is still intact. This dip, correction level is a good option to buy back the trend. If broken the critical support at 97,70 we have liquidate the position. But this is a good Risk &Reward ratio position. On the target side we are looking up to 98,80 the previous resistance and top level.

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The BFM Assets Team.

GBPUSD DAILY STRATEGY

Direction: long

Target: TP1 – 1,6070

Protection: SL – 1,5920

Our setup: 1,5985

Background: The Cable has established the monthly low yesterday. Namely it built a double bottom on H4 chart. After that back test slightly came up the pair. Current price action can extend further and can be a bullish reversal for longer term. The first key resistance level at 1,6000 if it is taken the final target for this position is at 1,6070. 

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The BFM Assets Team

Shiller’s Nobel Win and the markets

Shiller’s method is broadly used in the investment industry and the recent Nobel prize shows his influence on the investment science in the last decade. Many traders and investors prefer what is called the "Shiller P/E," named after the Yale University economics professor. Instead of comparing price and earnings data for the last 12 months, or forecasting it for the next 12, the Shiller P/E relies on the previous 10 years of inflation-adjusted data. "From one year to the next, earnings can vary widely," says John Mauldin, chairman of Dallas-based research firm Mauldin Economics. "The reason you use the Shiller ratio is to smooth out those earnings gaps, and get better historical context."

Now Shiller seems he is our contemporary guru. He forecasted the two biggest bubbles in 2001 the tech one and in 2007 the real estate and credit crunch one. The question is how he could do that? He has an own system. He states the markets are inefficient.  The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous ten years. Major bottoms for the P/E ratio coincided with major lows in 1920, 1932, 1982, and 2009. Breaks above the longer-term downtrend line in the Shiller P/E have preceded market rallies and higher valuations. These downtrend line breaks occurred in 1922, 1945, 1951, 1983, and 2011.

So what is it telling us now? The Standard & Poor's 500's trailing P/E now stands at 23.90, above its long-term historic average of roughly 15.5, but not egregiously so. So the good news is that secular trading ranges lead to better valuations that limit late stage secular trading range pullbacks. So don’t panic – we don’t expect anything like the 2000 or 2008/2009 period. Note that during periods of market consolidation valuation levels as measured by price/earnings multiple reaches extreme cheapness – 5.3x December 1917, 5.8x June 1949, 6.8x April 1980 and so far 13.5x in September 2011. An important point is that the market bottoms before the price-earnings multiple does.

And finally I recommend his two books to read:

-         Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, George A. Akerlof and Robert J. Shiller, 2009.

-          Shiller, Robert J. (2000). Irrational Exuberance. Princeton University Press

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Have a great day!

The BFM Assets Team

The dollar is gonna be reserve currency forever?

Since the second World War the dollar has been the number one reserve currency. Most of the commercial deals are paid in dollar, doesn’t matter it is in China, Brasil, Canada…etc. But there are two challenger, like EUR or Yuan. But the dollar is still the reserve currency simply because foreign countries hold their huge quantity of reserves in dollar.

Historically as you see below on the chart the first reserve currency was the British pound sterling. Toward the end of World War II the US dollar was given this status by international treaty following the Bretton Woods Agreement. During that post war period the Fed did not inflate the dollar and stood ready to exchange dollars for gold at $35 per ounce. After 1971 FED started to evaluate the dollar against the gold.

Recently the FED has been inflating the dollar massively further, reducing its purchasing power in relation to other commodities. There is evidence that China has understood that point. It has increased its gold holdings and has instituted controls to prevent gold from leaving China. Should the world’s second largest economy and one of the world’s greatest trading nations tie its currency to gold, demand for the yuan would increase and demand for the dollar would decrease. 

It means that the world’s great trading nations would reduce their holdings of dollars. If the FED continues the US policy of continuing to cheapen the dollar via QE would mean weaker and weaker dollar. In this scenario the most likelihood that demand for dollars will decline even further, which creates a long side movement on EURUSD in major trend.

Have a great week!