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Random Thoughts: Japan, Leadership, and Sector Rotation


Seeing both sides in an increasingly complex world.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Japan took it in the teeth last night, losing another 5%, making the 12-session correction tally a meaty 15%. Yes, Japanese equities have had a heckuva run-they're still up 30% as measured in yen (12% when measured in dollars)-but that's a different conversation altogether.

While Nikkei (INDEXNIKKEI:NI225) futures are currently trading higher (based on reports that Japanese pension funds may be able to increase their investments into equity markets rather than Japanese government bonds), we would be wise to pay attention to the volatility.

We've seen it in gold and other commodities, and now we're seeing it overseas. Volatility, like a virus, has a way of spreading quickly.

I've mapped a one-year chart of the S&P (INDEXSP:.INX) vs. the Nikkei for purposes of comparison. As always, it won't matter until it does, but you always want to see both sides when proactively managing risk.

Random Thoughts:
  • The banks traded dry all day yesterday, which served as a precursor to the Snapper in the broader market, and they are firm thus far today. They remain front and center as trading tells, with Goldman (NYSE:GS), JPMorgan (NYSE:JPM) and Deutsche Bank (NYSE:DB) my primary proxies.
  • Yesterday, we asked the question, Four Years Into a Bull Market: Where Do We Go From Here? Some have asked if that was a rhetorical question, and the answer is, "Yes, insofar as nobody has a crystal ball." All we can do is map a probability spectrum and sync our risk profile with our time horizon.
  • There was a subtle but potentially important shift in character earlier this week as rate-sensitive cyclical names (the same stocks people piled into for yield) got hit alongside perceived safety plays (consumer non-durables such as McDonald's (NYSE:MCD), General Mills (NYSE:GIS), Proctor & Gamble (NYSE:PG)). In a tape that has worn "sector rotation rather than outright migration" on its chest like a badge of honor, we should keep half an eye peeled in this direction for continuation.
  • S&P 1650, S&P 1635, and S&P 1600 are stair-step support levels, while S&P 1660, S&P 1675, and S&P 1690 are resistance on the way up. And IF S&P 1635 is breached to the downside, one could make the case for a head & shoulders pattern that "works" in a technical vacuum to S&P 1595-S&P 1600 per the chart below.

  • The fact that I almost didn't share that potential pattern speaks to the "against the grain" mentality of seeing both sides.
  • Of course, we don't shy away from seeing both sides around here, as evidenced by asking a preposterous question last week: Can the S&P Trade to 1500? The popular discussion is rarely the most profitable one, or that's the way it used to be.
  • I think I've discovered the Fountain of Youth; I went to outpatient physical therapy yesterday and I was 40 years younger than anyone else at the joint!
  • And yes, I saw the nuttiness that was Fannie Mae (OTCBB:FNMA) yesterday-and had a vivid and somewhat disturbing flashback! Somewhere, a table has a ton of money on it, right where I left it with the rest of my $70-line puts that expired worthless. I mean, where is Franklin Raines?

Twitter: @todd_harrison

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