Sunday, September 30, 2012

Shanghai Composite is tumbling, S&P500 and GOLD are losing Momentum.

 As the whole world is now aware the Federal Reserve has announced 2 weeks ago that it will continue with its stimulative policy effectively starting what is known as QE3. This gave risk taking a boost but we saw last week the waning of the momentum in the S&P500.

 This is a great chart depicting the impact of the stimulative policy of the FED since the Lehman Brothers collapse. It is always hard and a bit stupid to call a top before a significant move in the market actually signals it but it is noteworthy to pay attention to the waning momentum indicated by the Slow Stochastics which already turned down. The Candlestick pattern on the Weeklies also gives a warning signal of a possible reversal.

 Shanghai Composite has been in the news recently as Industrial Production figures decline further. It is reported that there is a general lack of interest in the Mainland to investing in the stock market and people are rather putting money in the Real Estate as a more prudent way to manage their wealth. The SSEC Index is in steady decline ever since the global financial crisis started and this is in a stark contrast to the steady rise in the US stock markets. And this event has a rather clear explanation.

 The price of GOLD has been a proxy for the flight to safety and the fear of the inflationary policy of the Federal Reserve. It's move is a good indicator of how the investment community perceives the risk of the debasement of the US Dollar and we can easily see how in the last 3 months the QE3 phase has been largely anticipated giving GOLD a boost up to the significant ~$1780 level. Looking at momentum, however we had to exercise caution as it has begun to lose steam already and while we can't call a top without any significant chart confirmation, the risk of retracement at this stage is rather big.

 As Chinese has the saying "A picture is worth a 1000 words" here is the story of the world since the beginning of the global financial crisis. The US found its way to inflate its equity markets out of the mess while the Chinese markets failed to do so which is mainly to the difference in the monetary of the 2 economies. While it is a rather complicated concept to differentiate the 2 approaches it is obvious that the US markets have been a rather better performer.

This chart is simply a confirmation how the depreciation of the US Dollar helped boost the US Equity markets - an easy and proven approach since the birth of central banks around the middle of 18-th century.