At this time of the year, analysts are expected to make some predictions on the markets. I only want to make one – inflation – and what it could mean to all markets.
But looking at the big picture of how it all stands at the moment and starting with New York – I like to divide it into three parts – the S&P which is the 500 largest publicly listed companies in the US, Nasdaq Comp – which covers the tech section and the Russell 2000 which comprises the smaller stocks. Up until this week the RUT had been the leader having outperformed the other sectors over the previous couple of months. However, that story ended this week when it broke its steep uptrend. It needs to be a bit careful here or it will complete a little top pattern. Turning to the Comp, it was just nudging its uptrend at the close of last week. It was the top performer earlier in the year but has tended to lag slightly in recent weeks and then there is the S&P. It is still in its rather steep uptrend but needs to keep moving or it will also break. The longer-term chart of the S&P is truly frightening as it has run right back up to the upper boundary of a huge expanding triangle (semi-log scale).
The latest fiscal aid bill will mean even more money washing around the markets looking for a new home. With a couple of the leading sectors starting to look tired, there will be a desperate need to keep the S&P moving here.
But I think one of the longer-term keys to the markets will be the US dollar. As I have mentioned before the US dollar is still the world’s reserve currency and there may be some forces that would prefer to see that situation reversed. Recent trading has seen the dollar unable to break its steep downtrend but it looks to me as though it formed a bottom at the end of last week’s trading. If this is the case, it is likely to have short term ramifications across the commodity scene which has been rallying while the US dollar has been so week. Lithium has been a definite highlight over recent months having moved sharply higher since the LIT ETF broke topside. I really would like to see some of these commodities correct so that we can builder a stronger base for more rises during 2021.
The picture on gold is still not clear. On one side of the ledger we have the potential for a head and shoulders base but at the same time, the uptrend is so steep that I think it only needs to stop to take a breath and it will break down. Silver which was leading the previous week, couldn’t carry through either. At the same time, I have still not seen our XGD (Gold Index) break out of the triangle I have mentioned before so leaves us stuck on the sidelines until we get a clearer picture.
As mentioned many times, I watch the grains closely as I see them as being a good indicator of forward inflation. They have been particularly strong again over recent weeks. At all times we have to be aware of the amount of speculative money around commodities that will rush into anything that is moving – but all the grains being strong together might put them slightly out of the reach of such traders.
And then to just throw another piece into the jigsaw that makes up the markets – the Shanghai Composite (SSEC) just nudged above the upper boundary of the sideways consolidation that this index has been caught in for the past six months. Not really sufficient to call it a clear break at this stage. I have mentioned a few times how strong the Indian Sensex market has been, so what would/could it mean for all other markets if the Chinese index starts to move. So, easy to see why it is potentially so important.
So where does all this leave our market. We had a particularly ugly end to trading for the year after the XJO once more failed around the 6700 area. Again it was particularly the banks that seemed to have lost the plot once more. A downside break here would bring our index quickly back to the 6200 area from where it broke topside in early November. But looking at the longer term picture and if I can get the correction in commodities, we could be looking at a different picture a bit further down the track.
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