A Review of Recent Market Action:
Thanks and welcome to all who subscribed to our newsletter service over the past month! I just thought that I would remind anyone who’s considering subscribing that the August newsletter will be published on Monday. Moreover, I thought I’d review a few insights and a trade idea that we outlined in our June 2011 newsletter (available here).
Entitled “What Happens when the Major Portfolios of the World are Pointed in the Wrong Direction?“, the June 2011 newsletter focussed on the deteriorating global monetary dynamics and the implications for asset prices. We noted:
One might (reasonably) ask; so what [about the May/June correction]? What’s to say that this isn’t a routine correction like any other? Indeed, that could easily be the case, however, global monetary dynamics are pointed downwards strongly…
In recent months, we find that global real money supply growth has started to slow down notably (see chart below [see link to the June 2011 newsletter at the top of this post]). Such slowdowns in the growth momentum of the ‘real money supply’ have often preceded bouts of profound market stress. It is for this reason that we are considering the possibility that the May 2nd high was significant (that is, that it might not be taken out meaningfully)…
The above indicator is signaling that global liquidity has been tightening for some months. This contention has been corroborated by the fact that momentum in ‘risk assets’ has been slowing, volume has been light on up-moves & high on down-moves, divergences have been emerging between various sectors of the risk-space and fewer stocks have been participating in the upward-move (that is, the indices haven’t been reflecting the true price action in the stock market)…
If the above is clear, it shouldn’t be surprising that we believe that one should be very cautious at present. That would involve owning a substantial cash balance and – for the brave of heart – a few small short positions (that one could add to) in the most vulnerable sectors of the ‘risk assets’ space.
In particular, we noted the bearish momentum in the real money supply growth of the Russian Federation. We then went on to outline our personal opinions on positioning for the likely consequences:
A small short position on the ‘Market Vectors Russia ETF’ (RSX), may be a decent way to play this. However, given that we’ve experienced 2 months of negative price action in global equities, I would wait for a rebound before entering a position (or adding to one), and – to safeguard against the possibility of being wrong – I would put a stop at the early-April high (at around $43-$44).
At that time we posted the following chart:
After rallying for a while, the RSX etf went on to crash horrendously:
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012