March 10, 2017
Today, my focus is on the equity and bond markets. While the long term technicals of US equities is still positive and don’t indicate a need to reduce exposure, the short term technicals look very overbought.
The RSI and MACD (moving average convergence divergence which is 12day exponential moving average – the 26 day ema) are at levels only seen back at prior peeks. In the short term, I would expect a reversal. Whether this become a longer-term collapse is not clear, but it’s worth noting the timing of Snapchat may demarcate a market top. Time will tell. We have postponed adding to equities for the time being.
Several other markets are also looking toppy in terms of short term technicals. Japan on the other hand may have further to go. In terms of bonds, we have already seen the High Yield bond index (HYG is the ETF) sell down 2% this week. We continue to believe spreads are overly tight and don’t see any value here. While we appreciate the risk of rising rates, we actually see opportunity at the long end of the curve which has become oversold on most technical and market indicators. We have added here in the expectation that there may be a short-term reversal. Should it prove more than that, the position will also provide a good hedge.
In terms of FX, we are still USD bulls. Have a great weekend!