Patience before adding…
As I envisioned last Monday a bullish move started – a trend based on a plausible macro scenario is possibly starting. If that is confirmed this week, EUR/USD could end up in mid-December up to 1.34 (maximum target), SPX at 1500, and Gold at 1900$. But I could be wrong of course.
So it is definitely time to decide whether you want to build a bullish or bearish position. In any case there is going to be a trend… My Macro rational pushes me toward the bull case, as explained last week. If you disagree with my points, now is probably the right time to do the opposite. We are close to nice entry points. But for people who started taking exposure on a bull case, you should be quite profitable by now. You can either take partial profits at the start of this week if you were aggressive, or simply be patient (what I would recommend – I advised a gradual risk build up) and go full risk after the inevitable correction.
Indeed, we have seen no retracements yet. (I must say that on EUR/USD the market was quite short with many stops around 1.2850). But fireworks in the Republican vs Democrat fiscal cliff negotiations on entitlement cuts are a sure thing (good material from The economist and from FT) before an agreement is reached (I think they will find one). We have also risks based on today’s Troika meeting on Greece, but that should also be dealt with. Catalonia is also a risk, but likely for next year. And more importantly we have major US data in the coming two weeks, that are likely to be distorted by Sandy. And at the end of that period, we have the very very very important FOMC meeting on 11/12 Decembre. Is the Fed going to change its policy reaction function? Is it going to use formally new targets? Is it going to have a new framework (new forward guidance) that will make it credible when it says that it will be irresponsible (So far Bernanke suggested it, but the framework doesn’t guarantee it. I will soon write in more details on this important theme)? I think all that is highly likely, but I am not sure if it will come in Dec or Jan. In any case these concerns should offer opportunities to add risk at better risk/reward levels, before the continuation of an eventual major upmove. The key thing to understand in the bull scenario I described last Monday is that there are new engines to legitimate a lengthening of the business cycle.
I would advise to look for the following levels to add risk-on exposure for good size – S&P around 1380, EUR/USD between 1.28 and 1.29 and Gold around 1735/40. Of course the corrections could also be more muted so one should be reactive. QE4 should also be very supportive for Gold and NJAsia currencies (I like SGD). This is likely the last opportunity to make money in macro trend trading for 2012, so if you are a bull, you should keep some of your positions, be patient to wait for the retracement but be quick to get large exposure.