There has been tons of coverage on the potential “great rotation” out of bonds and into stocks. I will acknowledge the coincident action in those markets. However, it appears more likely that the key force behind the resumption of the equity rally recently (with a nod being given to end-of-month and quarter shenanigans) may be the yen’s renewed decline in the short-term. Let’s go to the charts for a closer look.
The yen working lower than anticipated before one more up move is expected.
Next move: yen lower, risk on. Second move: yen higher, risk off. Macro trend: yen lower, risk on
The yen broke lower than I thought it would on this move. The next downside target appears to be 0.9785 (from 1.0030 currently). This move lower is an “abc” move lower for wave “B” of a larger ABC correction to the upside.
As the next chart of the yen futures shows, once the downside target for wave “b” is reached, we should see a wave “c” move higher that should reach about 1.0751. So, the way the market has been behaving, risk assets (namely stocks) should see some more upside in the short-term as the yen completes its wave “b” move lower. After that, a corrective move lower should be in the offing for risk assets / stocks.
The greenback should have some more upside in the short-term.
Next move: DX higher, risk on. Second move: DX lower, risk off. Macro trend:trading range, neutral
From my vantage point, it appears we are seeing a change in intermarket dynamics between the US dollar and risk assets. In the past, risk assets would move inversely to the direction of the greenback. Now, however, the greenback seems to be tethered to the direction in Treasury yields. As yields have been rising when stocks have been rallying, it is forcing the DX futures to rise as well. I am fairly certain that when we see stocks correct lower, yields will fall and the DX futures will tumble as well.
It must be noted that, at least for now, it really appears that the world is focusing more on the yen’s movements as a driver of intermarket movements and not so much on the DXY’s. This may be a temporary phenomenon, but it clearly is the dominant relationship on which we should be focused.
Right now, in terms of the US dollar, it looks like the buck is the the “c” wave of an “abc” correction to the upside (see the 60-minute candle chart below) with an upside target of 84.825. This strength in the short-term is being created by the Yen and the euro’s short-term weakness.
Once the DX futures reach the upside target, I am expecting a reversal lower. That move should, at the very least, re-test the mid-June low of 80.64. If the most recent relationships hold, we should see risk assets correct as the DXY falls (along with Treasury yields and as the yen corrects higher).
The euro is oversold, but far from hitting downside targets.
Next move: unclear, neutral. Second move: EC lower, risk off. Macro trend: EC lower, risk off
As mentioned above, the world is keying off of the yen’s movements – almost to the exclusion of just about every other previously important currency risk gauge. One of those previous risk drivers was the euro. Any suffering in the euro usually meant trouble for global stocks. Now, however, the euro is languishing in a “head & shoulders” topping formation, but stocks (at least here in the US) are on the rise still. That may change if and when the euro breaks down below the neckline of the formation, but any selling in stocks at that point may also just be coincident with the yen reversing higher.
US high yield debt not confirming bullish action in equities.
Next move: unclear, neutral. Second move: JNK lower, risk off. Macro trend: trading range, neutral.
All of the attention in bond land recently has been on the (surprising) jump in interest rates and the anticipated “statement shock” bond and bond fund owners will experience in a week or two. I will not belabor that point. My article last week
should suffice in terms of how I feel the investing landscape has changed due to the rise in yields. This week, I wanted to see what has been happening in the non-Treasury / non-investment grade parts of the fixed income market. Is the rise in rates hurting junk bond prices? Or, are junk bonds holding up along with equities as an additional play on risk (historically, junk bonds are fairly highly correlated with small-cap stocks)?
As the chart of the SPDR Barclays High Yield Bond ETF
(NYSEARCA:JNK) below shows, junk bonds have been getting hammered recently just like investment grade bonds. However, stocks had their own pullback recently (followed by the last five sessions of rallying), so it’s difficult to attribute JNK’s entirely to the run from fixed income. Whatever the reason is for the decline, the chart looks pretty ugly in the short-term. JNK can certainly move a bit higher in the short-term as it bounces after the recent decline, but I would be betting on at least a test of the recent lows occurring fairly soon.
The longer-term picture in high yield is neutral. There is a case to be made by the bulls as well as the bears for JNK.
Short-term, I am looking for a continuation of the current rally in equities along with the decline in the yen and the rally in interest rates and the US dollar. Once targets are met, we should see a short-term reversal in all four of those areas (stocks, rates, and the US dollar lower while the yen rises).
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.