Stock jitters, Gold and JPY still compressed

Gold and the yen each worked still lower this week on highly depressed sentiment readings. Each of these has had a negative relationship with the “risk trade” lately, falling as stocks have rebounded from their oversold and overbearish condition of mid-November. Now, stock sentiment has recovered to neutral territory, and traders are afraid of these sometime “safety trades.”

Trader opinion gold has been very low since late October, a full eight weeks ago. Every similar instance in the past several years has been followed by a substantial multi-week rally. That said, if the bull markets in precious metals and the yen are indeed over, we should expect downtrends to become more protracted, with sentiment remaining low for longer.

Here’s a 1-year daily chart of gold:

1-year daily JPYUSD:

I’m holding to a thesis that the risk trade is topping out here as the US slides into a recession that remains largely unrecognised. Tops are rarely sharp peaks, but consist of several months of choppy sideways action during which sentiment deteriorates from giddy to nervous and the VIX picks up even before prices have fallen substantially. I view the rebound since mid-November with that context, akin to the action of April-July 2011 or pretty much all of 2007.  Last nights mini flash crash in stock futures fits into that context of a increasingly jittery market.

We’re three months from the 4-year birthday of the (presumably) cyclical bull market. It is now older than most cyclical bulls within secular bears, though the last bull phase lasted from March 2003 to October 2007, 4.5 years.

Another cyclical bear and a recession and drop in corporate earnings may finally compress multiples to the investable levels required to build a solid base for another bear market. I don’t expect this to happen quickly, though, since prices have a long way to go before we see anything that can be called historically cheap. I wouldn’t be surprised to see stocks hold at or beneath current levels for the rest of this decade as inflation creeps in towards the end and boosts earnings, as happened during the latter stages of the last three secular bear markets (roughly the 1910s, ’30s, ’70s).

Japanese yen getting oversold on low sentiment.

Traders are again very bearish on the Japanese Yen, just as they were back in March 2012, prior to its 8% rally against the USD. JPY/USD is also getting very oversold, as shown by RSI on a weekly chart.

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The daily chart is showing a positive divergence in RSI, a bullish sign:

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However, a glance at the monthly chart shows a major break of the uptrend since 2007, as well as a deterioration in RSI (diverting downward over the last 18 months).

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Traders are more bearish now than in March, but this condition has not yet been sustained for long enough to give the buy signal we had then. Also, I believe the yen may putting in a long-term top, due to the trendline break as well as developing trend of lower lows and lower highs in sentiment readings. Any multi-week rally that may be setting up should be viewed in that context, perhaps as an opportunity for entering a short position.

That said, a yen rally would fit into the global context of a nascent US recession and top in equities, as the yen and dollar have been safe-haven trades along with government bonds from the US, Japan, Germany and UK, among others. Sentiment on US equities has rebounded sharply since mid-November, when it reached oversold territory by some measures. Equity sentiment is not elevated, but if we are entering a bear market it need not become elevated before deteriorating again (a trend of lower lows and lower highs in sentiment was observed in 2007-2008).

One other interesting piece of data here is that Nikkei sentiment has been on the low side since mid-2011. Sometimes the yen and Nikkei have a strong negative relationship, other times positive, so I don’t know how this fits into things, unless Japan is finally going to reflate after 20 years of a bear market in stocks and strong currency and bond markets. We may indeed be at such an inflection point. I would certainly rather buy and hold Japanese equities than bonds here.

Toppy action in dollar index, another rally in stocks coming?

The dollar index is showing waning strength on advances, and its rally is very long in the tooth. There could be worse times to take a short position on DX. At least there is a clear and close stop price at the highs.

Here’s the 2-hour bar, then the 5-min:

TD Ameritrade

Here’s what ES looks like to me this evening (5-min chart). There’s an upward divergence in RSI, indicating waning oomph on the sell-offs:

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I took a long position in CHF and ES (SPX futures) after the close of regular trading today, and I’ve shorted some Treasuries and yen, but I’m still short oil, palladium (added to my position today), copper, silver, gold also added more today) and copper. I’m agnostic about the intermediate-term direction of the risk/inflation trade and just trading what I see: commodities look broken, but stocks still have rebound potential, as do the euro, franc and pound.

This chop and weak rally action in stocks precludes neither a big new rally nor a fall into the abyss. Big rallies like August-October 2007 or Feb-April 2010 have started slowly with chop like this and kept the bears confident. The timeframe for such a rally is limited, however, and if we don’t take off in another week or so momentum will peter out and we can start to roll over. This is what happened in late spring 1930 after the first hard leg down from the top of that post-crash rally.

Do we finally have an intermediate bottom in the euro and franc?

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.

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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.

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You can see on this daily chart that there is no strong RSI buy signal like there was 15 months ago:

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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).

Closed equity & currency longs, short metals & oil

SPX futures are looking wobbly, and gold and silver are looking downright weak. I took profits on my equity, euro, CHF and GBP longs and JPY short and have built a modest short position in crude, copper, silver, gold, palladium and GDX (gold stock etf).

Here’s ES as of the open (1-hour scale). A set-back today may be likely, but I would still probably expect stocks to recover and inch higher a while longer. RSI is weak on a 5-min scale but still strong on the hourly.