Here’s a roundup of the usual markets, plus a look at grains. This topping process is frustrating, but the action remains encouraging for those waiting to profit from a resumption of the deflation trade. Even as some stock indexes make new highs, they have been revealing their weakness with low volume and advance/decline ratios. The currency and metals markets are signaling exhaustion, and Treasuries have refused to participate in this summer’s nonsense. To the charts:
The dollar to stock inverse relationship is still strong:
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With only a few % of traders (DSI) bullish on the dollar and about 90% bearish on stocks last week, and respective 20-day averages similarly extreme, a big reversal is imminent. We first entered this condition in early August, and we have not had a significant correction to relieve it, but it has grown even more extreme, so when the break comes it is likely to be very large. My theory is that the more extreme sentiment gets, the sharper the reversal, and the longer extremes are maintained, the larger the degree of that move.
From a trading perspective, I prefer dollar longs (via euro, pound, CAD and AUD shorts) and gold and silver shorts as optimal short-term plays right now. This is where the single-digit DSI readings and exhaustive spikes are to be found. Short entries from this level allow for tight and well-defined stops.
Risk appetite remains very robust across the board, with investment-grade corporate bonds back to the kinds of yields we saw near the peak of the credit bubble. Here is the LQD ETF:
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The above is sure to end very badly, since corporate revenues are off a whopping 25% since last year. Treasury traders are holding up a big red flag and are not participating in this summer’s risk binge, but keeping a steady bid under the entire yield curve. Bonds made their bottom in June (TLT and IEF here — 30 and 10 year proxies, respectively).
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I almost never mention the agriculture markets, but I have been watching them all summer, and I think there may be an opportunity coming up for a short-term play on the long side of grains. Wheat, corn and oats have been in a downtrend for much of the last two years, and their slides may be approaching termination as DSI readings enter the 7-18% range. This is similar, though not yet as extreme as what occurred in the natural gas and hogs markets recently, and those went on to violently reverse to the upside. The grain charts are not yet as pretty as those, and sentiment has some room to allow for an exhaustive plunge, but if it happens that would be a very nice buying opportunity, especially if we get a few consecutive days of single-digit readings. Here’s a weekly chart of wheat, my favorite:
source: http://futures.tradingcharts.com/chart/ZW/W
Corn here:
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That about wraps it up. In summary, I’m feeling good about my long-term equity puts, but even more excited about the set-up in the currency and precious metals markets. I always like to able to go long something relatively uncorrelated, so it’s nice when a random commodities like grains provide such an opportunity.
