Short Global Market Update and Outlook

Good morning,


Today seemed to be a fitting day to update my global outlook for the stock markets, as yesterday the President of the European Central Bank (ECB) Mario Draghi confirmed that he was prepared for a stimulus program if he felt that the European economy needed it.


This combined with the end of the US stimulus program and the rekindling of the Japanese stimulus program is the symbolic equivalent of the baton being passed on from one continent to the next.


Realistically, I don't think that the markets are likely to go into a long term bearish stage for a while yet, when there's simply too much stimulus in the background coupled with the idea that Richard Farleigh presented in his book "Taming The Lion" that markets have a general tendency significantly over-extend the point people expect them to reverse at. 


Further to this, worries of deflationary pressure across Europe in particular are only going to increase the pressure on the ECB to provide a strong stimulus program to counteract these worries.


Potential Trades Assuming ECB Stimulus:


1. The Euro and Yen are likely to suffer from further weakness against their major currency pairs, so there's the potential for a good short position on the Euro or Yen.


2. Long positions in European stock futures would be sensible as the ECB purchases drive down yields elsewhere in the markets (bonds, etc).


3. Shorting gold and silver further is also a trade that will likely yield some pretty good results, but it's worth noting that the extent to which gold and silver have fallen so far makes the next set of support levels a lot stronger in relative terms against its previous levels.


4. Short Dollar denominated assets, which could be pretty much any commodity of your choice, but being careful to recognise seasonal patterns in the soft commodities and industrial changes and production variations in the hard commodities.


5. Short European bond yields, which are going to be under pressure as a result of the purchase of the underlying asset by the ECB.

- This trade has to be done very carefully, because in the US Treasury Bond yields haven't always responded in kind to this trend - probably because the market associates stimulus programs with inflation, which normally causes increases in nominal bond yields.


6. Short non-US companies that depend on the import and processing of dollar denominated goods. If we assume that the dollar is likely to experience a period of medium term upwards price pressure, then companies that purchase or import dollar denominated assets are going to experience greater currency based risk.

- This being said, the very largest companies are likely to have FOREX Swaps in place to hedge this risk, so the medium to smaller end of the market would be better to look at for targets.


Enjoy,

The Masked Stock Trader