On the heels of some wild trading action this week in the gold, silver and stock markets, today 54-year market veteran and analyst Ron Rosen sent King World News a fascinating piece.  Rosen believes we are headed for some extremely violent trading in 2013, and that this gold and silver bull market will dwarf that of the 1970s.

….read 54-year market veteran and analyst Rosen’s comments & Charts HERE

Prognostication on the future can be a mug’s game. You look like a goat if you’re wrong and some kind of wizard if you’re right. But I learned early on in my career at Richardson Greenshields, and then RBC Dominion Securities, working with the influence of some great people like Don Vialoux or Ray Hansen that true investment success comes from understanding probabilities. It’s a stark, uneventful way to assess opportunity, and act, but the most relevant now. With the contemporary twin investor objectives of performance and asset preservation having one’s cake and eating too, or at least a bit of both, is the portfolio manager’s job these days.

From today’s standpoint – that is post-QEternity, post-US presidential election, pre & post the Euro mess, and as we (especially the non- American “we”), march along with the US on their lemming saunter (it is like a slow motion train wreck isn’t it?) towards the fiscal cliff – here’s what changes are occurring in asset classes, sectors, TSX stocks and countries. They lay out an investment map for 2013.

Asset Classes

Our regular weekly work on asset classes is a study in inter-market analysis, something crucial to delivering absolute return. This tells us which broad asset classes are strong and which are weak. Within the large group the biggest movers on an intermediate or investment term basis (vs. short term or trading) since mid-September were US government bonds, the US dollar and silver bullion. Bonds jumped from 11th to 4th; the US dollar moved from 14th to 9th; and silver bullion from 1st to 13th. While we expect markets to favour pro-risk assets through to the New Year big money appears to be placing its markers in more risk adverse classes.

TSX Sectors

Drilling down into TSX sectors the top ranked are the cons. staples, cons. discretionary, telecom and trusts. Industrials and financials moved down out of the upper ranks to mid-tier. Rogers Comm. (shown) as a presentation of the teleco sector (we have preferred to own BCE) continues to show strength against the TSX. The recent up mofavveofuorr pthroe-risk moved down oowners of the trade-hot Blue Jays too shows a longer term commitment to industries with more stable revenue, cost-certainty and a good yield. Consumer discretionary in Canada is not as much about consumer consumption pace as it is in the US. Besides take-out-candidate Astral Media, it also has Shaw and Cogeco. Go figure.

TSE Stocks

Today’s chart illustrates how the stock market has performed during the average post-election year. Since 1900, the stock market has tended to underperform from early January to late February and again from early August to early November during the average post-election year. Some parts of the year have, on average, outperformed. The most notable period of outperformance has occurred from late March to late May. In the end, however, the stock market has tended to underperform during the entirety of the post-election year. One theory to support this behavior is that the party in power will tend to make the more difficult economic decisions in the early years of a presidential cycle and then do everything within its power to stimulate the economy during the latter years in order to increase the odds of re-election.

Notes:
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Global markets from Mexico and Canada to Europe and Asia are beginning to take note of the U.S. fiscal cliff, the daunting array of tax hikes and spending cuts set to take effect Jan. 1 unless lawmakers find a compromise.

If there is no solution reached, the impact could be devastating to Mexico, America’s third-largest trading partner, Voice of America (VOA) News reported.

“While Mexico is doing relatively well economically, the country would take a hit if debt talks fail,” Eduardo Garcia of the Mexican financial news site Sentido Comun, told VOA.

Editor’s Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

The effect would be adverse because Mexico’s economy is highly integrated with the U.S. economy, Garcia said. In fact, approximately 30 percent of the Mexican economy is export-based, and the United States consumes 80 percent of those products, he said.

According to The Toronto Star, almost two-thirds of Canadians are worried that the looming U.S. fiscal cliff will harm the Canadian economy, according to a survey commissioned by Sun Life Financial. 

“Canadians are right to be worried about this. If it doesn’t get resolved and the U.S. economy goes into recession, the impact would fall into Canada as well and cause difficulties here,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments.

Meanwhile, the Financial Times noted that going over the fiscal cliff could impact China’s recovery

The Times said that “for all the new found optimism in the Chinese economy, it is feared that any such recovery could be derailed if the U.S. falls off the fiscal cliff. And it is this issue that is arguably still the main driver of broad market sentiment.”

Agence France-Presse, in a dispatch from Hong Kong, agreed, noting that Asian “markets are nervous that U.S. lawmakers seem to be making slow progress on an agreement.

Emerging markets in general are being affected by the talks in Washington, according to Bloomberg.

“Emerging-market equities have run up quite a bit now and investors will keenly watch the U.S. fiscal cliff negotiations and corporate performance in the upcoming earnings season for more cues,” Gopal Agrawal, chief investment officer at Mirae Asset Global Investments in Mumbai, India, told Bloomberg.

In South Africa, Independent Newspaper quoted one banker as saying currency traders there are “adopting the safety of the sidelines until there is more clarity on the fiscal cliff front.”

In the United States, however, not all consumers appeared to be worried about the fiscal cliff.

One recent college grad interviewed by CNBC at a shopping center in Los Angeles said she didn’t know enough about the fiscal cliff to have an opinion. “I’m more concerned with getting my mom the right gift.”

Editor’s Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

In my short term trading accounts I try to benefit from price changes in various markets…trading what the markets are doing…not than what I think they should be doing. I try to align the time frame of my trading with the time frame of my analysis. I read a lot of research and watch a lot of markets. I try to gauge Market Psychology because I see it having a powerful impact on markets…either extending or reversing price trends. I use the term Key Turn Dates (KTD) to identify points in time when changes in Market Psychology, measured across a number of asset classes, causes a significant change in market price trends.

Sept 14 was a KTD and “risk assets” fell from that point…became “oversold” by Nov 16 and bounced…I’ve thought that the bounce was only a correction to the downtrend from Sept 14…I’ve been waiting for a confirmation that the bounce was over before re-shorting some of the “risk assets.”

It’s interesting to notice that “risk assets” may all turn (more or less) on the same KTD but some “assets” move substantially more than others…this could reflect “fundamentals” specific to one market and not to others…it could be a function of “riskier risk assets” having a higher beta than “less risky risk assets”…or other factors…this variance definitely influences my choice of which market to trade when I want to take a position.  

In most of the markets I watch the US Dollar is the common denominator…to get a different view (and perhaps a better understanding) of markets I will frequently construct charts where I take the US Dollar out of the equation…for instance, looking at the gold/silver ratio, or the EuroYen chart.   

Charts:

The S+P 500 chart really has my attention…I’ve been waiting for the rally off the Nov 16 lows to run out of steam…that may be happening this week…but no real confirmation yet…

The German DAX has had one of the biggest rallies of any of the “risk assets” off the Nov 16 lows…easily taking out the Sept 14 KTD…this has happened in conjunction with a strong rally in the Euro currency as Market Psychology has become less negative on “Europe.”

Silver has been one of the weakest risk assets since the Nov 16 date…silver looks at risk of a breakdown.

The Euro had a Key Weekly Reversal higher this week…a powerful chart pattern.  In my comments on the Euro last week I noted that the currency markets get thin and weird this time of the year…that as implausible as it may seem given all  the “troubles” in Europe…if the Euro rallies and takes out the triple top going back to the Sept 14 highs then it could run higher into year-end…here we go?

The Japanese Yen has fallen steadily from late September…some analysts have been predicting for the last couple of years that the Yen “had” to fall…it’s been the absolute weakest of the major “assets” since the Sept 14 KTD…huge short positions have been built…the Dec 16 election is expected to give Abe a clear mandate and he has been forceful in calling for the BOJ to ramp –up money printing to stimulate at least 2% inflation…will this be a classic “sell the rumor, buy the fact” story? Will Abe have to tone down his demands once in office to keep Japanese bond yields from rising?

The New Zealand Dollar has been one of the strongest “risk assets” since the Nov 16 lows…like the DAX it has easily taken out the Sept 14 KTD. It has “blown away” its sister COMDOLS the CAD and the AUD. Is this a case of “hot money” pushing up prices as it rushes into a small market…or has something fundamental changed in NZ relative to other risk assets? I’d go with the former…but beware thin year-end conditions in FX markets…note over the years how significant “V” shaped turns in currencies happen around year-end. This currency is definitely on my “watch list”…I may look to short it against the CAD or the AUD rather than the USD…once it gives me a sign that it has stopped rising…

The Japanese Yen against the New Zealand Dollar: this is the chart of the weakest currency (JPY) against the strongest (NZD) since early September…a move of about 12.5% or about 50% annualized. If Market Psychology were to turn negative across asset classes this spread could reverse big time.

The US Long Bond made a low on the Sept 14 KTD as risk assets were making highs…and made a high on Nov 16 just as risk assets were making lows…the US bond market has been the opposite side of the “risk on / risk off” teeter-totter.

Apple:  What a chart! Fortunes made and fortunes lost. Note that the All Time High for AAPL was made the week of the Sept 14 KTD…Market Psychology shows up all over the market…

Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at PI Financial Corp. He began trading over 40 years ago and has held a number of senior executive positions during his career…to go to his website go HERE (http://www.victoradair.com)