**MONEY MADNESS: WHAT TO EXPECT NEXT **

- The most important story of the week has been the continued weakness in commodities in our view, with oil breaking out to a new low, followed by the precious metals. We believe commodities are trading at deeply oversold levels, from which a significant bounce is likely to occur. There is quite some speculation on the net, and even in main stream media, that this commodities weakness was somewhat staged to the benefit of the upcoming U.S senate elections. This case is made amongst other here.

– The Dow Jones reaching a new all-time high was headline news this week and suggests that equities are back in the spotlight again for the average investor. We agree with the observations that this is somewhat a “phony high”: although the Dow Industrials managed to break-out to new all-time highs, this is defenitely not the case for broader benchmarks such as the S&P, Nasdaq and the majority of European and Asian markets. Nevertheless, the attention for this event did support investor confidence, as is displayed in the high readings once again of the AAII investor sentiment figures. This sentiment figure has been a pretty good contrarian indicator over the past few years and we don’t think this time will be any different. The time has come to lighten up on equity exposure in our view, especially now that broader based equity indices are moving into technically overbought regions and are trading at the upper ends of their trend channels. – Bond markets have been relatively strong over the past months resulting in lower yields across the board. We believe the strength in bond markets will be relatively short lived, as the long term bond trends are pointing down. We therefore wouldn’t be surprised to see yields edging up again shortly (triggered by a bounce in commodities?) – On the currency front we’ve seen some interesting moves this week. Firstly the commodities currencies (CAD/AUD) have been relatively weak against the USD & EUR for obvious reasons. However, they have not managed to clearly break their short-term uptrends (unlike commodities). This might be an indication that money continues to flow into these commodities countries even on dips in prices.
The other big theme was the renewed weakness of the Japanese yen, which made a new low against the USD and flirted with new lows against the EUR. This might indicate that the piling into the yen carry trade simply continues. From a technical point of view though, the yen seems pretty oversold and therefore runs the clear risk of bouncing significantly when a sudden news fact shocks the bears (What about the BoJ getting more hawkish?) – Real-estate continued to perform well this week, supported by the idea that the Fed is more likely to drop interest rates in the near future than it is to carry on raising rates. Considering our view on commodities & bond yields, which are likely to rise in our opinion, we would be surprised to see real-estate benefit under these circumstances. – So our tactical short-term conclusion is to take money off the table in equities, bonds and real-estate and put some of that money to work in commodities (mainly energy and precious metals).

Opinion only, never investment advice. We urge you to read the disclaimer at www.dealingfloor.com.