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By John J. Hardy

Saxo Bank

Don’t Be Fooled by this Bull
Monday, April 28, 2003



Here’s a little taste of inter-market analysis that I’m offering up because I feel that we are witnessing a very dramatic inflection point in a number of markets that is setting in motion the next big wave that may define the action all summer. This is all being hinted at with the recent upside breakout of the EURUSD and the surge in US treasuries. Look out! This is going to be quite a ride. Here are some predictions as a teaser:


- The SPX will fall to 720 or lower
- EURUSD will soon hit 1.15+
- 10-Year US Treasury Notes will go to at least 117
- Gold will reach 360+


Before, during, and just after the Iraq war, we were “triangulating” (tightening the ranges) in the stock market, US treasuries and EUR/USD as the markets tried to react to war-related news and even anticipate what would define the markets once the conflict was effectively ended. After all the back and forth, we finally saw a dramatic breakout of EURUSD – as well as a upward breakout of the SPX over the 900.


Normally, a strong EURUSD comes in the face of a weaker stock market – so these two phenomena cannot coexist for long if we are to believe that the negative correlation will re-establish itself over time. In other words, one of the breakouts is a false indicator. In this case, I think it is the SPX that is the red herring. The action in US Treasuries is what has reassured my belief – treasuries actually began their recent surge while the stock market was also rallying and breaking above the key 900 level. As with EURUSD, you would normally expect treasuries to head lower on stock market strength. Also, the basing and subsequent rise of gold doesn't fit with a sustained stock market rally. If the EURUSD/Gold/Treasury moves are showing the way, as I believe they are, then they will all head even higher as they point to magnitude of the downward swing in the stock market, once it reverses.


The problem here is timing. We’re close to the beginning of the month – which usually sees the most stock buying – so I don’t think this will happen right away – but I believe it we will have seen the top inside of 10 days to two weeks.


Two contrarian indicators bolster my argument further. First, the VIX is making lows not seen since the early summer of 2002, when the market also went into a tailspin. Second, bullish sentiment among American investors is rearing its head in a manner not seen for some time. The latest AAII Index of investor sentiment puts 63% in the bullish column and only 19% in the bear column – a massive jump from the week before, which had only 46% bullish and 32% bearish – this is a warning sign of an impending fall if I’ve ever seen one. Bullish jumps of this nature usually mean that most of those that are bullish have already hopped on board.


So, while a new for the SPX is likely in the cards, I would expect it to be a marginal one in the range of 930 to 980. This will coincide with small retracements in gold, US treasuries and EURUSD. Stock market bullishness will be at an all time high. But don’t be fooled by the bull – it’s a trap! The stockmarket will fall through the summer and the EURUSD will continue on its rampage.