- Barron's article seals deal on stock outlook
- Evidence of USD selling as Fed normalizes
- Room for one more big Dollar push
- Waiting to sell the Buck against EMs
CONTRARIAN INDICATOR - Back on the 12th of December, Barron's published an article with 2016 stock market predictions from esteemed Wall Street strategists. With stocks just off record highs, all the global uncertainty and Fed in the process of normalizing monetary policy, you'd think a good chunk of these strategists would have called for lower stocks in 2016. And yet, ALL went ahead with the easier career bet of going with the flow, predicting more of the same higher stocks. All 10! As a contrarian, I am always looking for signs of an overcrowded trade that has extended as far as it can and is ripe for reversal. Well folks, this Barron's piece is a screaming bearish signal in my view and only helps to strengthen my already strong bearish bias. As you all well know, I continue to hold short exposure in the SPX500 from 2088 and will look to keep holding this trade in the weeks ahead. As simple as it sounds, it comes down to this: Easy money supported stocks to record highs and the removal of this easy money should in turn weigh on stocks. That's it. As far as currencies go, I am still very much on the fence with the US Dollar. I'm thinking we still could see one more healthy push in the Buck's favor over the coming weeks, before the Dollar finally starts to top out.
USD OUTLOOK - The Fed is well aware of the impact a stronger Dollar can have on the global economy, and may be forced to reconsider its monetary policy stance if the Dollar puts in another big rally. But I still think we need to get to that point and this leaves room for more USD upside ahead. Once we get to that point, I believe there will be good opportunities that emerge to sell the US Dollar. As crazy as it sounds, this opportunity may best present by way of the emerging market currencies, with currencies like the Rand ripe for a massive correction. As already highlighted in recent commentary, the monthly technicals on USDZAR are violently overbought, and I think if we see one more push to a fresh record high, this could be the time to buy Rand (i.e. sell USDZAR). All of the evidence looking back shows the US Dollar weakening once the Fed has set out on previous rate hike paths. And so, while this time round could be a little different and benefit the Buck initially due to the global backdrop of lower rates abroad, at some point, history will repeat itself and the Buck will succumb to the pressure of having already strengthened a good deal in the lead up to this past December liftoff. For now, I think it best to sit back and wait for the market to move a bit before committing to any meaningful positions.