After the strong Trump-rally markets have stabilized in the last 2 months. Stocks have gone bit higher, gold as well, but all other markets have been rather stable. That could be coming to an end now, as we see the first signs of a new trend. Spotting trends as they arise is one of the key challenges of investors, because that is the only way to maximize profits with a minimum of risk.
InvestingHaven wrote in February of this year how 5 leading markets are trading at major inflection points suggesting that “something is brewing.” It appears now that the observations in that article are evolving in new trends.
This article provides a look at 4 leading safe haven assets: yields, US dollar, gold, Japanese Yen. The trend we spot on their charts is quite unusual and not what most investors would expect.
First, rising yields reflect ‘risk on’. Rising yields suggest that risk assets like stocks are in favor.
Right now, yields are rising and are setting up for a breakout above 25 points (2.5% in the 10-year yields). Such a breakout would be a very important event, as, if it would take place, it would confirm the continuation of the Primary Market Trend Of 2017 which we spotted last year. In other words, rising yields would be the dominant market trend, and that is the staring point for all market correlations.
As yields rise, bonds become less attractive and the U.S. dollar becomes more attractive. The dollar chart clearly reflects this point, as seen on the next chart (see also the annotations).
A rising dollar is mostly bearish for gold. That is in line with what we wrote in Dollar Continues Bull Market: Bullish for Yields but Bearish for Gold. No surprise there. Right now, gold could be violating an important trend line. If $1210 gives away, which seems to be happening right now, we see gold moving sharply lower until the summer of this year.
In line with a falling dollar, the Japanese Yen is losing value as well.
What does this mean for the 2017 outlook of markets?
Here it becomes interesting. Rising yields suggest ‘risk on’, and that is confirmed by falling prices in gold and the Yen. But if yields would rise too high too fast, it would be counter-productive as the dollar would be rising too fast as well (and that is always a tricky thing). We already get a first sign today from the crude oil market, a risk and inflationary asset, which fell sharply.
Our point is that sharply rising yields along with a strongly rising dollar could bring turmoil in markets. Investors are seemingly not fleeing to safe havens like gold and the Yen. They could also quit stocks and other leading commodities. In other words, this trend could be setting up for a very unusual trend in markets, one that most investors would not expect and certainly not understand.
This is a first warning sign. We closely watch what stock indexes and crude oil is doing to get an idea of the general market trends of the coming months.
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