After yesterday’s rally in the markets, it seems probable that stocks could be preparing to make a new high this week.
Part of the reason for this has been the weakening Japanese Yen which has been getting crushed by Japan’s desperate attempts to inflate its economy.
However, all is not well with the stock market. Even if stocks do push higher, I don’t believe the party will last for very long.
Here is why…
As we have seen, the financial stocks sector (XLF) which comprises key stocks like Goldman Sachs, JP Morgan and Bank of America has failed to make new highs. See chart below:
When financial stocks are diverging negatively from the stock market, (or to put it in simple terms “acting odd”), this is not good news for the rest of the market.
Also, as we have seen, Copper has been getting destroyed recently. This is a major red flag for stocks. Copper and Stocks are usually closely correlated which means they tend to move in tandem. When copper is selling off hard, this does not bode well for the economy or indeed the stock market.
Further, the Russell 2000 index (small cap stocks) has closed below its 21 moving average. Another warning signal.
However, markets are “irrational”. So after yesterday’s rally, it is probable that shorts could still get slaughtered this week if we make a new high.
But I don’t believe this rally will last for very long. The cracks are already appearing which shows that a “flush down” is coming.
In regards the Euro (EURUSD), I am looking to get short at the 1.3110 level, and seeing if the Euro can roll over from there.
Folks have also been asking me why metals are getting destroyed…
The major reason why gold and silver are in decline, is due to the strength of the US Dollar. The dollar and metals have an inverse relationship. The US Dollar, despite its weaknesses, is still seen as liquid “safety” in light of the European crisis (remember Cyprus?). So for the moment, any rallies in metals is a shorting opportunity.