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Asset Allocation Play Continues; Stock Rise, Treasuries Break Overnight

James Hyerczyk from ForexHound.com at 12/22/09


U.S. stock indices are trading better overnight.  Last night’s rally took out the recent top in the March E-mini S&P 500, reaching 1114.75.  The next upside targets are 1119.00 to 1122.00.  Optimism over a U.S. economic recovery is encouraging investors to seek higher yielding stocks at the expense of Treasuries and Gold.


March Treasury Bonds and Treasury Notes continue to feel downside pressure.  Japanese investors are moving money into the Treasuries.  Investors are asking for higher yields because of concerns over the abundance of U.S. debt and the Treasury’s ability to pay it back. Asset allocators are pulling money out of fixed income instruments while seeking higher yields in the stock market.


The March Euro is trading flat after Moody’s became the last of three major credit rating services to downgrade Greece’s debt.  Traders had been waiting for this downgrade and were not surprised by the news.  Although this last downgrade is out of the way, traders are not optimistic about the Euro.  Many feel that further downgrades of other sovereign debt are likely.  Spain and Portugal remain targets of the credit rating agencies.  There may be a relief rally, now that the news about Greece is out but don’t expect a change in trend to up. 


The March British Pound continued to show weakness overnight.  The charts indicate that 1.5940 is the next downside target.  Overnight U.K. GDP was revised upward to show a loss of 0.2%.  The previous estimate was for a loss of 0.3%.  Pre-report estimates were for a loss of 0.1%.  Like the Euro, thin holiday trading conditions could lead to a counter-trend move today.


Rising Treasury yields continue to boost the U.S. Dollar versus the Japanese Yen.  Optimism over an economic recovery in the U.S. is leading traders to sell the Japanese Yen.  The recent rise in Treasury Bond and Note yields have become attractive to Japanese investors who have to sell the Yen to buy Dollars.


The Dollar continues to strengthen versus the March Swiss Franc. Not only are traders looking for the U.S. economy to recover faster than the Swiss economy, but some investors are factoring in the possibility that Euro Zone sovereign debt issues may spillover to the Swiss financial system.


The strengthening U.S. economy is having a positive effect on the Canadian Dollar.  Although the U.S. Dollar has faltered against the Canadian the past three days, this currency remains inside of its October to November range.  The mid-point of this range is .9446.  This price is an important pivot.  Additional pivot price resistance comes in at .9505.


February Gold hits its lowest level since early November overnight.  The charts indicate that the next downside target is $1079.00.  Traders should look for a technical bounce on the first test of this price, but gains will be limited by resistance at $1107.00. Investors are reallocating funds at this time, and with expectations of a stronger Dollar, are cutting allocations to gold.


March Crude Oil is trading weaker.  Overnight selling pressure has helped form a new main top at 76.33.  The main trend will turn to up on a move through this level.  The first downside target is a .618 level at 73.63.  This is followed by a main bottom at 72.53.  Supply/demand issues continue to plague this market.  Traders also feel that OPEC will not cut production while the world is still trying to mount economic recoveries.

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