This week the index tested the 78.50 to 78.70 area and found support there. It closed out the week on a strong note: up 0.7% on Friday. The above chart has been useful in that I thought the index would at least pause in its decline with those fibonacci 89 and 233 moving averages as support. Buyers have emerged and the dollar has stabilized. It could be that this is simply a temporary pause and the index continues lower in the shorter term. This is not the scenario that I favor at this time, however. Uncertainty in the Eurozone and overbought conditions in some risk assets suggest to me a bounce here in the DXY to be more likely than not.
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The European politicians have been successful in kicking the can when it comes to Greece: the sovereign debt crisis in Greece is now going into it's third year! All kidding aside, none of the measures taken by European governments have improved the situation in Greece. Using the financial press to stay abreast of the situation has become an act in futility at this point. I think it useful instead to review a Bloomberg interview of Marc Faber in April of 2010:
Back in April of 2010, Dr. Faber suggested that Greece sovereign debt should be haircut between 30-50%. He stated that if one assessed Greece as if it were a corporation, perhaps by GAAP accounting standards, then the conclusion is clear: the country is bankrupt. The politicians did not write down debt however, and a €110 billion loan package was put together by the IMF and other Eurozone countries.
Fast forward to today and the crisis rages on. Here are two short clips from Al Jazeera:
In the first clip, one woman interviewed says, "I think a huge explosion is needed...an explosion of rage." In the second, Al Jazeera interviews a military veteran living on a government pension which has been cut in half. What struck me most about this man was that he was using the pension money to support has children because they did not have adequate work.
As Dr. Faber put it eloquently:
"...if it's [Greece] bust then it doesn't help to extend loans and actually increase loans."
The loan program put in place in 2010 clearly hasn't worked. Greece took on too much debt and simply cannot pay it back. Lending them more money while implementing austerity measures has failed in part because as the measures go into affect the economy shrinks and tax revenue declines. I think the current situation is worse now than it was in early 2010 and this is what people like Marc Faber and Jim Rogers suggested would happen. Similar to the way that mortgage-backed securities were rated AAA until they were toxic, the financial institutions that lent to Greece gave their sovereign debt asset holdings a 0% risk weight. I suppose the loan packaged agreed to in May 2010 allowed the markets to pretend until more recently that there is a 0% risk of a Greek default.
The gap in competitiveness between Germany and Greece means a continuous balance of payment surplus in Germany and chronic deficits in Greece. This is root of the problem. The Greek government used debt to mask it during the boom. They even went so far as to work with Goldman Sachs to evade Treaty of Maastricht deficit rules. Now that the bust has happened Greece cannot paper over a lack of competitiveness using deficits. Why should the Greek people agree to austerity and an overvalued currency, an endless depression essentially, so that the people who made bad loans take a smaller haircut. They shouldn't!
The problems the other peripheral Eurozone members suffer from, excessive debt levels and a lack of competitiveness, share commonalities with Greece. Furthermore, German, Dutch, Austrian, and Finnish citizens may never agree to subsidize the less competitive countries with a Euro-bond.
Events may unexpectedly come to a head at any moment in Greece and this uncertainty concerns me greatly. What happens if their is a revolution or coup in Greece and the country defaults and exits the Euro system? That would certainly trigger credit-default swaps and one has to wonder about counter-party risk. Is there another AIG Financial Products lurking in the financial system? If so, I would expect a significant rally in the DXY because of the high weighting to the Euro in the index:
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I'll turn my attention now to some charts that suggest to me that the markets may be running out of steam here and that a risk-off period may be forthcoming.
First, a daily chart of the Toronto Venture Composite Index:
It is clear that the TSX.V has been extended and overbought for the past few weeks. There is negative divergence showing on the MACD histogram and long period slow stochastics have crossed over to the downside. It was weak on Friday and I'll be interested to see how it behaves next week, the middle of the Bollinger band could be tested as support soon. The index increased in price ~18% in less than two months. Hopefully, it backs and fills a little bit.
Next up a Break-Point Trades chart of the percentage of S&P 500 constituents above their 50-day moving average:
The problems the other peripheral Eurozone members suffer from, excessive debt levels and a lack of competitiveness, share commonalities with Greece. Furthermore, German, Dutch, Austrian, and Finnish citizens may never agree to subsidize the less competitive countries with a Euro-bond.
Events may unexpectedly come to a head at any moment in Greece and this uncertainty concerns me greatly. What happens if their is a revolution or coup in Greece and the country defaults and exits the Euro system? That would certainly trigger credit-default swaps and one has to wonder about counter-party risk. Is there another AIG Financial Products lurking in the financial system? If so, I would expect a significant rally in the DXY because of the high weighting to the Euro in the index:
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I'll turn my attention now to some charts that suggest to me that the markets may be running out of steam here and that a risk-off period may be forthcoming.
First, a daily chart of the Toronto Venture Composite Index:
It is clear that the TSX.V has been extended and overbought for the past few weeks. There is negative divergence showing on the MACD histogram and long period slow stochastics have crossed over to the downside. It was weak on Friday and I'll be interested to see how it behaves next week, the middle of the Bollinger band could be tested as support soon. The index increased in price ~18% in less than two months. Hopefully, it backs and fills a little bit.
Next up a Break-Point Trades chart of the percentage of S&P 500 constituents above their 50-day moving average:
I don't have a lot to say except the market is in nosebleed territory on this chart with greater than 80% of S&P 500 stocks above their 50-day moving average.
Next, here are two daily views of the VIX, both courtesy of Break-Point Trades:
It looks like the VIX may have finally broken out of this bullish wedge. Longs beware.
Finally, here is a 60min view of the S&P500, with thanks to Break-Point Trades:
I will be following this $SPX chart next week. There is plenty of room left in the wedge for it to grind higher. Perhaps the market bounces early in the week but flattens out later on. Who knows? It could crash through support here just as easily. Either way, I don't think it's a good long at the moment.
References:
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