Tag Archives: yen

Yen:Euro cross as a measure of risk appetite

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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):

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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?

Ahh, panic is back.

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Everything that was hot, all of a sudden is not.

For the past nine trading days, we’ve seen a rapid return of the kind of fear we experienced last fall. The carry-trade currencies (dollars and yen) and Treasuries have appreciated against everything else: stocks, the former bubble currencies (GBP, EUR, JPY, CAD, AUD, etc) gold, oil, grains and metals.

Today’s action was particularly convincing because of the breadth and extension of the equity sell-off, coincident with the VIX cracking 50, gold nearing 800 (a one-month low), and the 30-year Treasury yield pushing strongly back down to 2.9%. This across the board unwinding and preference for senior currencies and Treasuries is exactly what wave 3 of the crash looked like from September to November.

That’s all, folks.

I think we have seen all the bounce (Elliott wave 4) we are going to get off of the November 21 lows (Dow 7392). Too many bulls and bears alike were expecting a repeat of the November 1929 to April 1930 post-crash rally. Perhaps that rally was more powerful because it corrected a more oversold short-term condition, a 48% drop in 10 weeks that came right off the very peak of the preceding bull market. Animal spirits were still strong that winter, while the memories of rebounds and new highs were still fresh in traders’ minds. This time around, our rally only needed to correct a 35% drop over three months (Dow ~11,500 in August to Dow 7400 by Thanksgiving), while the underlying economic situation and social mood were in a more advanced stage of depression (at least a year into the economic contraction and two years into the housing bust).

The weakness of this post-crash rally is also another indication that we are in a larger degree decline than the depression of the ’30s, indeed a Greater Depression, as befits the aftermath of the largest credit bubble in all of history.

Targets and strategy.

At any rate, this plunge looks ready to take us much lower, probably well below 7000 on the Dow. I also hope that oil gets dragged to $25 and gold to near $600, where I will be a buyer of each for the multi-month corrective rally that should follow, prior to yet lower lows in equities (Dow 3000?) and mood.

I’m still holding many of my REIT, S&P 500, and miscellaneous stock puts from before the crash, and I intend to sell into the plunge just like the last time. If we bounce from here in the next few days, I’ll perhaps pick up some near-term puts for some extra oomph.

A bleak, bleak year ahead.

2009 will be the first time that it feels like a Depression to most people. Only about three million jobs were lost in 2008, and the crash came at the end, so most people have still been in denial about the severity of this event, or have yet to lose their faith in the Fed or the change in the White House. As stocks sink through their 2002 lows, house prices drop even faster, entire malls start to close, and huge waves of layoffs begin, the social mood will get dark and increasingly volatile.