Cyprus: Could it Really Cause the Rally to End?

In case you missed the most recent brick to be placed in the Wall of Worry, Cyprus, a small island country with a population near 1 million people has hit the international headlines and quite possibly may have derailed the bovine train that has led equities to an impressive rally so far for the first quarter of 2013.  It’s hard to believe that an obscure unknown country may carry more weight in global markets than the risk of spending cut backs due to sequester in one of the leading countries in the global economy.  Weirder things have happened I suppose.

While a country like Cyprus may seem inconsequential in both size and matter it is important to keep in mind that in today’s derivative based financial world things that seem small and inconsequential can have a surprising effect on the confidence of market participates.  As I peruse the day’s headlines this evening I realize there are many well written pieces (much better than I can write) on this subject and offer these titles to you as you will find them interesting and informative.

“Cyprus: Has the Next Phase of Global Crises Arrived” by Todd Harrison:
Click Here to Read More

“Four Important Messages From the Cyprus Situation” by Peter Atwater:
Click Here to Read More

Whether or not the Cyprus saga will mark the point of recognition for equity markets that nothing heads in one direction forever we felt this is a good time to take a look around at markets and discuss those that look a little long in the tooth and those which may look ripe for the picken.

Let’s start with equities since they have been grabbing all the attention since the beginning of the year with a stampede that has, according to Jeff Saut of Raymond James, lasted 52 days (as of last Friday) which would make it the second longest in the past 40 plus years.

The chart below (provided by Big Charts) of the S&P 500 annotates some items that investors should be aware of before deploying additional funds into equities in the near term.

First and foremost let it be noted that the recent rally in equities backed with the appearance of a steady economic recovery and a very accommodating Federal Reserve supplying ample liquidity would and should lean our sentiment for equities towards the positive.  However, entry points and risk management are key to keeping a healthy portfolio and state of mind.  For this let us note that for the near term equity markets look a bit overbought and due for a correction.

First you will note on the chart provided how the volume has steadily declined as the market has moved higher.  This is a classic warning sign that should be headed prior to deploying fresh capital into markets as it is tough for a market to continue to rise if the number of participates is shrinking.

Investors looking to add or start new equity positions may want to consider the potential entry point we have outlined in green labeled “support zone“.

Let’s now move to a couple of markets that may be showing some signs of bottoming and thus maybe worth your attention.

Bonds – More Specifically – Treasuries.  Before you say it, yes I know interest rates are at all time lows and yes I know that in order for the price of a bond to rise the interest rate must fall.  And no I am not crazy to think that there may be a short and intermediate term opportunity in treasuries as represented by TLT in this next chart. (provided by Big Charts)

If and when equity markets correct the most likely benefactor will be treasuries and this chart seems to support that view as there appear to be positive divergences in both the daily MACD and Relative Strength.  And to the flip side of equities the volume has been increasing as price has begun to stabilize.  Sometimes you can learn a lot just by looking at a few pictures.  Whether bonds will turn out to be a good buy at current levels is yet to be seen but the charts are suggesting they shouldn’t be forgotten.

And for our last market to look at for today we circle back to an asset we recently scribed “Could Gold Be Bottoming” to see how that shiny metal is behaving since our last love letter.

Since our last writing about Gold it has bounced off the support zone noted on the graph (provided by Big Charts).  In addition, the MACD and Relative Strength indicators have triggered buy signals and positive relative strength respectively.   I can’t say for certain whether Gold has bottomed but as we mentioned a few weeks ago the charts and the sentiment surrounding the yellow metal would indicate that if your risk tolerance and time horizon fit you may want to consider nibbling a little in your portfolio.  As a side note and I have not seen anyone write about this yet, but if the fear of governments being able to tax or levy your bank account (as they are talking about in Cyprus) spreads you could see additional buying pressure in precious metals as people look for places to stash cash.

The opinions expressed are those of Colby Mcfadden and Quiver Financial as of 3-22-13 and are subject to change due to market and /or other conditions.  This is not a solicitation or recommendation of any investment or security.  Consult your own financial representative prior to making any investment decisions.  Colby Mcfadden is a registered rep with Newport Coast Securities and this publication is not to be construed as market research or analysis.  Securities offered through Newport Coast Securities member Finra/SIPC.  Advisory services offered through Newport Coast Securities and Registered Investment Advisory.