Everyone’s talking about Greece.
What’s going to happen if she exits the Euro? Will Europe let her go? Will the Russians and Chinese step in to save her? Will the next domino to fall be Italy or Spain? Will there be a global financial freeze that follows a Grecian implosion. And so on and so on…
And yet the truth lies elsewhere.
For behind the headlines, what’s actually unfolding is classic Greek drama – a Euripidean comedy in fact – whose performance so captivates its audience that they fail to recognize the underlying tragedy of the piece.
What is Hidden and What is Revealed
American investors should be crying.
For the Greek theater has hidden from them what we believe are the most significant financial developments in well over a year – developments that could be making them a lot of money.
And they are –
1. The dollar’s continued strength – in large part a function of European, and general global anxiety over the fate of the Euro,
2. The continuing decline in the price of commodities, a result of the dollar’s rapid advancement,
3. And ongoing strength in U.S. equities, which have, for the most part remained stoutly resistant to the rocket’s red glare of the media’s Greece coverage.
Look at a chart of the Dow for the last year alongside the Global X FTSE Greece 20 ETF (NYSE:GREK) –
As the very worst that could be expected from the Hellenic opera gets priced into Greek equities, the U.S. has been a pillar of health – growing some 12% over the same period that Athens has dropped by over 50% (top, red).
And while some of the more sophomoric commentators are offering that the US market will go into a freefall if this or that nightmare scenario unfolds on the Aegean, we say balderdash. Achilles’ heel has been severed, he’s limping as badly as he ever will, and precisely nothing has happened to U.S. equities. Which raises the question of what might have occurred if the Greek debacle wasn’t.
In the end, friends, the stock market is a discounting mechanism before anything else, and the worst European nightmares have already been baked into the pie, as it were.
There will be no fallout for U.S. stocks should Greece go East or West, or just dig a hole on the Spartan hillside and crawl inside.
The bull market is on, and ain’t nothing gonna stop her.
Go With the Flow
The trends that are in force should be stuck with.
Dollar – good.
Stocks – good.
Commodities – bad.
And look for a potential breakout from the homebuilders – a development that could spark the next surge in stock buying.
Look here –
This is the SPDR S&P Homebuilders ETF (NYSE:XHB) for the last half year. The ascending triangle (in red) is a bullish formation, and we expect a quick surge of buying should overhead resistance at $36 be breached. We also believe this is an inevitability, as the rest of the technicals are fully supportive of a continued bull move for XHB –
• Volumes are growing (in black),
• RSI and MACD remain strong above their respective waterlines (in green), and
• The stock’s moving averages are all trending northward and are about to unfurl (in blue).
In short, you couldn’t ask for a better technical layout.
Throw in sentiment, however, and it gets even better.
This is a chart of the National Association of Homebuilders (NAHB) Confidence Survey:
As you can see homebuilders are as confident today as they’ve been at almost any time in the last decade, and next Monday the series reports for January.
Should we get a breakout in sentiment, the move higher is a lock.
For that reason, we’d be partial to speculative, three month, out-of-the-money CALLs on XHB.
And hold on for Monday.
A Final Note
Though we’re not including a chart in this week’s letter, we encourage you to look at the SPDR Gold Trust ETF (NYSE:GLD) chart for the last six months. In our view, this thing is a mere three or four middling to lower days from assuming a full blown bear posture. Forewarned is forearmed.
Keep us close in the days ahead for more on gold, commodities and everything else investment related!
Many happy returns,
Matt McAbby, Senior Analyst, Normandy Research