A fair degree of complacency has snuck back into markets over the last month. We don’t have a strong sell signal in stocks yet, but if April marked the high in US and European markets and economic indicators are turning down again, this could be a good spot to start building short positions again:
Here’s the equity put:call vs the 20 day moving average, back to one standard deviation under its mean. Dipping lower would require the kind of extreme complacency that we’ve only seen twice in the last decade, so I wouldn’t count on it:
The dollar has also corrected its overbought condition (and is actually very oversold), which is key for a resumption of the deflation trade:
The Swiss Franc has been the strongest non-yen, non-dollar currency, and its moves generally coincide with those of the whole “inflation trade” currency basket (CAD, AUD, NZD, BRL, EUR, etc). Its rally looks exhausted:
Last night’s sell-off in risk brought new lows for the euro and Swiss franc, though no other currencies made lows vs. the USD. Now with today’s rally, EUR and CHF have spiked very hard. This jumpiness and the presence of an upslope in RSI bottoms on the hourly chart (and the fact that June would be month 5 of extreme bearishness), suggest that a relief rally could be forming. I would not be surprised by $1.28 for the euro and $.91 for the franc. As usual, I’m not counting on it (the daily chart would look better with a deeper low), but we do have the formula for a short-covering rally.
Here’s the 4-hour chart of the franc. There is a strong buy signal here, as the new low was made with very weak selling according to RSI, which stayed in its uptrend.
You can see on this daily chart that there is no strong RSI buy signal like there was 15 months ago:
A sharp rally here would likely coincide with rallies in stocks and commodities, but I can see the a scenario in which gold and silver do not participate or even fall as everything else rises.
Also, I’m still long-term bearsh on Japanese yen, and this price does not seem like a bad entry for a short (I put one on at $0.01104 this AM, and also shorted Treasury notes for a short-term trade to balance the odds of a rally in stocks & commodities).
Checking the early futures action, I see some strength has been building in several currencies vs the dollar over the past few days, despite their longer-term weakness. The dollar enjoyed a small rally against the european set late last week, putting the CHF, EUR and GPB in attractive positions for long trades. With sentiment entering its 5th month of extreme negativity, it may pay to be alert for signs of a rally (that is to say a dollar decline, and further yen decline too against the dollar).
Here are a few charts (1-hour bar), noting the RSI uptrends that have developed:
To wrap it up, here is the dollar index futures contract:
In government and mainstream media logic, the bailouts are supposed to be good for the euro. With EUR/USD pushing 1.27, it appears that somebody forgot to tell the market that implied guarantees for GIPSI nations to the tune of 100s of billions of new euros should strengthen the value of those in circulation.
Here’s a 10-year view of the spot market, revealing just how much downside there is in this cross. On the other hand, the euro is getting oversold on a short-term basis, with RSI approaching the conditions preceding the short but violent rally in late ’08. It could trend a little while longer, but don’t get caught short without your stops.
Mainland China was hit the hardest, down 6% today and 12% in a week:
The deflation trade is on again. Commodities are down, bonds are up big, and the dollar and yen are up. Here are those two scripts vs. the euro, pound and Aussie:
Funny how you can’t tell the difference between the euro/yen, Aussie/yen, pound/dollar, euro/dollar and Aussie/dollar. Throw some global stock indexes and Treasury bond yields in there and they’d blend right in, too, and probably even gold and a commodity index.
Jason Bourne asked for some thoughts on the Yen. Well, the poster Sleeping Bear over at Slope of Hope pointed out that John Murphy (a technical analysis grandmaster) noted the strong correlation of the Yen:Euro cross with the global risk trade. Here it is (blue) in Yahoo! versus the S&P 500 (red):
I feel like I should have made this a regular chart of mine ages ago, since the Yen strengthens versus the dollar when the deflation trade is on, while the Euro gets weaker, so of course these two should be paired for an extra sensitive indicator. Come to think of it, I even successfully traded the Yen:CHF cross last fall and winter, and the CHF trades like a slightly harder Euro.
Anyway, you can see the divergence in the chart last July, and more importantly in Feb-March where the Yen strength didn’t follow through as equities continued lower in their 5th wave. This was just the kind of hint you would expect in a 5th (ending) wave, along with the relative weakness in the VIX and Put/Call ratio compared to the panic conditions of Wave 3 (Sept-Nov). Yours truly was too dense to remember this, which is part of why he missed the rally bus.
Well, I see a divergence here again, but this time it’s bearish for stocks. The Euro has failed to make new highs this summer as stocks have surged, and in fact the Yen has been creeping higher. This jives with my current read on an extreme in dollar bearishness. A dollar and Yen rally vs. the Euro, Pound, Loonie and Aussie would bode poorly for stocks and commodities. Conversely, if the Euro recovers after a correction and breaks out here, who knows how high stocks will go?