things can always get worse - but will they?

Here is a daily bar chart of the euro priced in dollars.

The EUR.USD is very much on the markets' mind now with the Cyprus banking system hanging by a thread. But after a downard adjustment to this news last Sunday night the euro has managed to hold its own as mini-waves of optimism and pessimism have washed across the markets.

I think this steadiness in the euro in the face of bad news is interesting for three reasons. First, the market has dropped for nearly 7 weeks from its early February top. Second, this decline has brought it to a point slightly below the midpoint of the rally from the July 2012 low (blue line). Third, the spring equinox is upon us. According to Paul Montgomery of contrarian Time Magazine cover fame this year's equinox is likely to bring the lunatics out in force this week and next, giving us volatile markets and making a dramatic change in market sentiment more likely now than at other times.

And all of this is occurring in a monetary context which suggests to me that the euro is going to  appreciate against the dollar because ECB monetary policy is much tighter than the Fed's. My conservative upside target is 1.40.

So I have a strong suspicion that this chart is going to look a lot different a couple of weeks from now. I think a big rally is about to start. The first sign of an up trend in the euro will be a move above the 20 day moving average which appears in this chart as a wavy red line.

Conservative Contrarians Take Note

The bottom two images are today's front pages from the Chicago Tribune and the New York Times. Both note that yesterday the Dow closed at historical highs. I think the Tribune headline captures the spirit of this market pretty well. I think investors are happy to see the Dow at new highs but that skepticism about economic conditions and US economic prospects remains strong.

The top image appears on page 1 of the Tribune's business section today. It suggests a little more optimism but in my judgement "Dow 20,000" projections are not very common right now.

I don't think we are seeing a bullish information cascade here, at least not yet. Yet the Dow is at historical highs and the S&P is not far behind. In fact the S&P is just below the levels it reached at the 2000 and 2007 bull market tops. And this bull market has already lasted 4 years.

There certainly has not yet been a 200 day moving average sell signal for conservative contrarians. Nonetheless I think it makes sense for conservative contrarians to cut back stock market exposure to below normal levels now. There was no bullish information cascade visible at the 2007 top either, but we still saw a more than 50% drop from that top.

I don't like to deviate from standard operating procedure like I am doing now. But I think it makes sense to substantially lighten long positions at the top of a 13 year trading range after a bull market has lasted four years and newspaper headlines are starting to suggest increasingly bull sentiment.