FX Futures Edge - Wednesday: February 8, 2012

“FORECAST”

STOCKS: As 2012 begins, very little has changed from the end of 2011: the European debt contagion remains in place and is growing, China remains on a growth deceleration curve — while the US is showing stable growth, with an increasing probability of a recession. What is clear to us, is that at this point — the US is better positioned than the rest of the world, which simply means that it shall outperform yet again this year.

STRATEGY: Technically speaking, the S&P 500 remains above longterm support at the 45-mema at 1190; which is critical given it delineates bull & bear markets. But thus far, the 2012 rally has seen very little weakness, and appears ready to embark upon another leg higher — a weak leg higher to be sure towards the 1350-to-1370 zone; a correction of some substance, but then perhaps a “moon shot.”



WORLD MARKETS ARE HIGHER as Asian bourses led the charge higher. China in particular was strong – rising +2.4%, with Japan rising by +1.1%. This bullish sentiment leaked into Europe where hopes are high once again for a Greek deal that was supposed to have been completed weeks ago. Hope springs eternal; and we would not be surprised to see a deal done in days ahead as the ECB agreed to take a “haircut” on their holdings bought in the secondary market. And, this week is perhaps the final deadline given all the paperwork and lawyers involved to prevent a March 20th default. Whether or not Greece defaults now or not doesn’t matter; she will ultimately default, and it shall be sooner rather than later and will come after the austerity programs put in place will not yield the results throughout the year.

As for the market reaction to this potential “deal”, we feel that is discounted quite obviously, for the markets have been trading higher in anticipation of the deal. We would not be surprised to see the markets “spike” sharply higher on an announcement of the deal, and then to sell off thereafter. A classic buy the rumor…sell the fact type circumstance. Certainly the stock markets are ripe for a correction; when the NASDAQ 100 is up 8 straight sessions and 22 out of the last 25 – one gets the sense sentiment is becoming just a bit too complacent.

TRADING STRATEGY: We have come to admire the resilience of the US stock markets these past few weeks as they have had many fundamental as well as technical reasons to



decline, but the fact of the matter is that buyers were found on the dips. However, the short-term has become a bit more worrisome by several technical measures, which argues strongly that any move into our resistance zone at 1350- to-1370 shall allow for a well-needed correction. We are unsure as to the depth and length of the correction, but we wouldn’t be surprised to see a sideways trading range develop between 1290 and 1370 to work off the overbought condition.

In terms of the S&P futures, it is relatively “flat” with a gain of +1 point. The Euro is trading modestly higher, with risk assets in general being bought, but tepidly so. Crude oil is higher by over +$1/barrel and is approaching $100/barrel once again – a level we think shall be given easily as yesterday a bullish key reversal formed in crude oil. We continue to like “parts” of the stock market, and in particular the energy sector as from a technical perspective, we see variations of bullish pennants or consolidations below their overhead 200-day moving averages. And in the case of coal stocks – our favorite speculative group at present, they are forming bullish declining wedges. The risk-reward is favorable for sharp moves higher in this group.

Looking ahead, and given the current overbought condition into the 1350-to-1370 selling zone – we are reticent to add any further long positions unless it is in the energy sector. However, as we trade into “the zone”, we shall look to add a short-term short Russell 2000 position (TWM) to hedge our long positions. From a trading perspective, we will consider short technology positions in AAPL and IBM if they show signs of faltering in the days ahead.

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