Friday, June 18, 2010
Fear investments are rising. Greed investments are falling.
In my Penny Trends trading service, I track 88 exchange-traded funds. These ETFs represent every major commodity, currency, international stock index, and stock market sector in the world. Each week, we calculate the three-month return of each ETF and put them in order. This way, we can immediately tell where the strongest and weakest trends are.
Right now, near the top of the list, we've got gold, gold stocks, and volatility. These are all up around 10% over the last three months. Volatility spikes and investors pile into gold when they're worried about the markets.
Near the bottom, we find a major new downtrend in basic materials: Lead, copper, aluminum, nickel, and steel are all among the worst-performing ETFs of the last three months. These metals are all sensitive to world industry. When things look shaky, investors abandon basic materials.
My list of funds is pretty clear about the "fear up, greed down" trend. But what I'm about to show you is an even better illustration. It's a chart of the euro against the Japanese yen... And I think it can give us a clue of what to expect from the stock market over the next few months.
I'll explain why in a minute. But first, consider the fashionable euro. It's the product of the most ambitious financial experiment ever attempted by bureaucrats. It became a tradable currency in 1999. For almost a decade, it was a hot-money favorite for hedge-fund managers and sovereign wealth funds.
Now, consider the unfashionable yen. It's had the lowest interest rate of any currency in the world for as long as I can remember. Investors greedy for higher yields and appreciation sold the yen and bought euros.
When you chart these two currencies together, you get a fascinating picture of the world. Take a look...
Like I said, the euro stands for risk, greed, economic boom, and clever financial engineering. Right now, people aren't interested in risk, greed, and economic boom. They're interested in protecting themselves and their capital.
They're fleeing the euro and buying back the yen.
You can see the precise turning points in the euro-yen's big trends. The euro-yen chart peaked on July 21, 2008. Then, it crashed and bottomed on February 2, 2009. A rally started, reaching its climax on April 1, 2010. It's been falling since.
When you compare the turning points above with the major turning points in the stock market, you find the euro-yen chart leads the stock market each time.
For example, before the S&P 500 crashed in 2008, it hit a short-term high on August 11... a month after the euro-yen rate had peaked. The bounce in the S&P 500 began on March 9, 2009... again, a month after the euro-yen started rallying. Finally, the S&P peaked on April 23, 2010. The euro-yen exchange rate peaked in April 1... three weeks ahead of the S&P.
Last month, the euro-yen exchange rate broke down to an eight-year low... and it's still falling. This is extremely important. It implies the stock market is also going to test its March 2009 lows.
Right now, stocks are stuck in a trading range, so you can get whipsawed if you put on heavy short positions. I'm looking for the S&P to resume its downtrend before I jump in too deep on the short side. I don't think we have long to wait.
Apple shares hit all-time high... reports 600,000 orders for new iPhone on first day of release.
Gold and gold stocks lead the market... Giant gold fund GLD trades 4-cents below its all-time high.
Oil rally takes a break... price pulls back below $77, ending four-day winning streak.