A time for every matter

A TIME FOR EVERY MATTER - “The sun rises and the sun sets, and to its place it yearns and rises there. It goes to the south and goes around to the north; the will goes around and around, and the will returns to its circuits……What has been is what will be, and what has been done is what will be done, and there is nothing new under the sun…….There is a thing of which [someone] will say, “See this, it is new,” [but] it has already been for ages which were before us.” - Ecclesiastes. While I won’t get into the application of these verses to the broader philosophies of life, I will say that these words are the foundation of my approach to markets. The words serve as a comforting reminder that as much as you think things might be different this time, they never are. Everything has a balance.
So with the stock market rolling over a bit in recent sessions, and everyone trying to assign some specific catalyst, we must be reminded that it really is less about a specific catalyst and more a function of the fact that there is a time and place for everything.
Fundamentally, the stock market has enjoyed a rally to fresh record highs, largely supported through aggressive central bank monetary policy accommodation. But we have now reached a point where the Fed is in the process (however slow) of reversing this policy, and as this happens, it is only logical to anticipate a correction in the equity market. Markets are cyclical in nature, and while I can not say with any certainty that we have reached a cyclical top, the timing definitely feels right.

JUST ANOTHER CURRENCY – Technically, the S&P 500 has taken out the previous monthly low, to set up a bearish outside month formation in April. The monthly RSI is also just now turning down from overbought readings and on this longer-term chart, there is plenty of room for a sizable retracement. As I have outlined in recent months, the stock market could reverse as much as 15% from the record high and still be trading at levels above the record high that was established in 2013. This doesn’t have to be an apocalyptic drop by any means, but more of a necessary, healthy reversal that aligns with the forces of nature. So why have I spent so much time talking about US equities over the past year or so? Well, to answer this question, I ask another. What is it that drives currencies? Currencies are primarily (not exclusively) driven on central bank policy and interest rate differentials. And right now, the market that has been the most sensitive to central bank policy and interest rate differentials has been the equity market. So how as a currency guy can I ignore this market? I can’t. And this is why I have spent a lot of time trading in and out of the S&P in 2013 and 2014.

ANOTHER PEAK – At the moment, I have no exposure in equities and am positioned for another cycle top that I am looking for in the New Zealand Dollar. Despite significant weakness in the Australian and Canadian Dollars over the past several months, the New Zealand Dollar still stands near its cyclical high, looking quite vulnerable at current levels. At the moment, the local economy has been strong and monetary policy is quite hawkish. But all of this can change in an instant, and I believe the RBNZ has failed to properly consider the external risks to the economy. Should we see a slide in global equities, and should we see a slowdown in China (both of which look like very real possibilities), this will put a lot of pressure on New Zealand and force the central bank to reconsider its policy stance. The RBNZ concedes that it is uncomfortable with the exchange rate, but has also taken a laissez faire approach. While I wouldn’t be recommending any formal intervention (as this would be a defeating exercise), I would have thought the RBNZ could have talked a little tougher on currency and taken a slightly less restrictive stance than they have taken. Central banks have been known to invest abroad and diversify out of their own currencies. If I were advising the RBNZ right now, I would strongly recommend diversifying away from New Zealand Dollars. Any loss on yield over the next 12-36 months should be easily offset with the appreciation on foreign currency investment. Moving on, keep an eye on EUR/CHF and USD/JPY. Key levels to watch come in at 1.2100 and 100.75 respectively. A break of either or both of these levels would confirm a major sentiment shift in the global markets.