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Warning Signs for Risk Assets in 2015

There are two major warning signs that are developing for risk assets in 2015:

First we have significant dollar strength, with the dollar index hitting multi-year highs. This is on the back of the potential end to the quantitative easing by the fed but also due to weakening fundamentals in the Euro Zone which is mired in a deep recession. Also chaos can result if the issues surrounding Greek are not resolved in short order.

UUP Chart

Even if problems in Greece are addressed which would be tantamount to throwing good money after bad dollar strength is set to continue and would result in a serious bout of carry trade liquidation that could take down commodities, emerging market currencies and eventually global stock markets.

CRBQ Chart

EMLC Chart

S&P500 Chart

The second major development is the potential upsurge in volatility. The Vix index has not made new lows on each of the recent new highs for the S and P 500 and is not breaking below it's 200 DMA. This could ultimately resolve into higher prices for the Vix and lower prices for risk assets. The Vix is incidentally well above it's 52 week low of 10.28.

VIX Chart

 

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