Diary of a Financier

Outlook: New Year 2011 in Pictures

In Capital Markets on Thu 6 Jan 2011 at 15:01
  • Technical outlook for major macro themes in 2011.
Welcome to 2011.  One of my first Diary entries in the New Year, this is a forecast of a few major macro & broad market themes for the year 2011 A.D.  The sweet-spot for my trading strategy stands at around one month, so an outlook exceeding that horizon depreciates the further it strays.  Thus, I’m here watching everything day-to-day, providing updates as these outlooks develop.
From where I sit today, here’s what I expect.  Enjoy…

1. S&P 500: After reaching resistance @ $135, SPY’s immediate reaction will hold the key to its 2011 performance.

SPY monthly- A tilted Head & Shoulders has developed since 1999. 2011 will certainly reach $135, which will also serve as a formidable resistance for SPY. Failing a breach of that level could send SPY into a long-term spiral down to its lowly neckline around $70. I do expect a failed breach, but the subsequent drop should get trapped in the dual support $110-105 in the 3q11. I'll have to reassess then.

SPY daily- shorter-term weekly & daily charts echo SPY's shaky ground. While the price has moved up through a double top at $123, MACD divergence is setting-in on the weekly chart. This alarm is very premature, and should take a while to develop. That $123 mark represents first support, and when tested early in 2011, that support's strength will say a lot about this Market. I expect a 1q11 bounce off $123 before SPY heads to longer-term resistance around $135.

2. Fixed Income: HYG to outperform LQD through 1q11, at which point the HYG chart will turn-over.  High Yield spread widening could start a normalization in historically tight inter- & intra-asset class correlations, particularly as government intervention programs wane.

AGG daily- The Aggregate Bond Index doesn't sugar-coat the recent selloff in Fixed Income. Temporary reprieve will allow bonds to rally off recent lows, but the longer term picture is grim nevertheless. If any bubble remains after 2008-09, it's the bond bubble. We're maintaining our 1-10 year ladders in our Income Strategy only, but we're not adding new strategic bond allocations anywhere else.

LQD daily- Investment Grade bonds will follow AGG in a rebound, but long-term, they've succumbed to an erosion of value given our zero interest rate environment. Yields are too low. Period. After corporate refinancing throughout 2009-10, excess supply in the Investment Grade space simply won't get sopped up by the government. MBS & Agency issues will, Munis may, but IG slips through the cracks between government interventions. Compressed yield + no government put option = negative real return.

HYG daily- High Yield confirms that the dip in Investment Grade results not from default risk, but from interest rate risk. HY has held-the-line to maintain its bull rally since March 2009, but the price-action is resisting the underlying technical indicators. Upside momentum is visibly waning, and the trend is culminating. I expect outperformance in HY through 1q11, but this chart will turn over at some point in the Summer 2011, after the Fed suspends asset purchases in June. Do not forget that an onslaught of supply pushed the bond bubble into a blowoff top since 2009. ZIRP, a flight-to-seniority, and demographics drove demand to meet record supply... and High Yield issuance trumped all others. The Baby Boom has made its retirement reallocation into fixed income, Pension funds have absorbed HY to hit their 8% return targets. A drop in trading volume will portend the 2h11 HY downdraft, and for the time being, we're long HYG against a short LQD in a pair trade.

3. US Dollar: I expect longer-term bullish trends to unwind in an ugly 2011 if DXY fails short-term resistance @ 81.50.

DXY weekly- Actually, the monthly chart of the US Dollar Index shows that a secular USD bull began back in March 2008. As for upcoming 2011, the weekly chart is a more appropriate gauge. Therein, the DXY indicates that the USD is still in bull territory and not worth betting against yet. The divergence between technical indicators and the double top @ 88 mean that the upside is fleeting at best.

DXY daily- the shorter term daily chart shows pending resistance just under 81.50. A failure at that double top would confirm the developing bearish trend in the daily trend, and doom the weekly chart to produce an ugly 2011. Such a failed double-top would lead me to short the USD.

4. Silver & Gold: While achieving its rally over a decade as opposed to Silver’s phenomenal few months, Gold has turned short-term bearish.  I’m leaving these alone, as they’re in technical no-man’s-land, especially Silver. I do, however note that Gold has already turned short-term bearish.

GC (2003-pres)- I have to compare this steady, decade-long climb in Gold to the recent spike in Silver. The two are not equal.

SI (2003-pres)- as opposed to Gold's steady climb, Silver has achieved these heights within a matter of months. That spike is a speculative phenomenon that I can't contend with technically, and therefore I won't participate.

GC daily- I can, however, note the relative strength of SLV to GLD based upon their daily charts: the GLD chart has already turned-over and the SLV is merely flirting with an unconfirmed downside.

5. Emerging Markets: Bonds (EMB) have already slipped, Equities (EEM) are finally following them down in what should be a sharp correction.

EEM weekly- an increasing divergence in the price action is harboring a sharp correction. As MACD broke its bullish trendline recently, I expect this correction sometime in the 1q11.

EEM daily- the short-term chart shows an underlying slippage in Emerging Market Equities. While Emerging Market Bonds have already slipped & fallen, I'm closing my relative strength paired long EEM/short EMB, due to this technical reading.


  1. […] on the verge of a correction, EEM is turning over now (see my 2011 Outlook), so I’m closing down this […]

  2. […] to 2011. One of my first Diary entries in the New Year, this is a forecast of a few major macro & broad market themes for the year […]

  3. […] to 2011. One of my first Diary entries in the New Year, this is a forecast of a few major macro & broad market themes for the year […]

  4. […] to 2011. One of my first Diary entries in the New Year, this is a forecast of a few major macro & broad market themes for the year […]

  5. […] US$1.40, I’d be buying the Euro Trust ETF (FXE) for my vacation this spring. As I noted in my 2011 Outlook: …the monthly chart of the US Dollar Index shows that a secular USD bull began back in March […]

  6. […] back in 4q10, then added a long/short pair of EMB/EEM in November.  I closed that pair per my 2011 Outlook, which also nailed the subsequent activity in the Emerging […]

  7. […] swirling about the markets, this is a terrific checkpoint for the development of our outlook (January/February) for major markets.  In the interest of brevity, I’ll keep the discussion to the […]

  8. […] addition, I occasionally check in on the long-term waves of broad indices per my own technical charts, and looking at the S&P 500 (SPX) with the Dow (DJIA), it’s […]

  9. […] can see the bottom from here, luckily.  In my 2011 Outlook released on January 6, I concluded: …shorter-term weekly & daily charts echo SPY’s […]

  10. […] look as exhausted as 2008′s in their longer-term fractals. Thus, dating back to my New Year’s 2011 Outlook, my upside target is still set on the 2008 high around 1425. I’ll be quick to adjust that […]

  11. […] delving into the nostalgic or the “top ten” list thing.  I just wanted to revisit my New Year’s Outlook from January 6, 2011.  Upon that date, I covered 5 asset classes of the macro genre, and my calls on all 5 were […]


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