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Risk Trade Across All Asset Classes Appears to Be in 'No-Man's-Land'


A check of stocks, the major "risk currencies," and Treasury yields gives us little in the way of conclusive macro direction, despite individual trade setups.

We have all heard the old saying, "It is not a stock market - it is a market of stocks".  Right now, based on the miserable action in many of the high-flying social media, tech and biotech names versus the buoyant action in the indices and many other sectors, that saying appears to be right on point. 


That old adage can be transposed onto the other asset classes as well - especially right now.  As an example, instead of all "risk currencies" (read the euro, Aussie and Canadian Dollars) moving in unison and reflecting the general risk on / risk off attitude, we have (as you will see below) the euro setting up bullishly while the Aussie and Canadian Dollars may very well be in for short-term downside.  While there may be great trading opportunities with any of those currency futures contracts or in several of the currency pairs, macro strategists are left still hungry for direction.

To add to the confusion further, when I gander over to bond land, the macro messages coming from US yields are just as ambiguous as in the other asset classes. 

When conditions like these present themselves, I find that it helps to take a higher (longer-term) view of the charts and to set up your core portfolio off of the bigger picture view and then to take a portion of your portfolio and to implement more opportunistic / trading-oriented strategies.  Right now at our firm, we remain long with a majority of our "core" equity money (using a variety of ETFs) and are sprinkling around long/short positions in individual equities, specific commodities / futures contracts and specific currency futures and/or forex pairs.  If you cannot do this type of account management on your own -- totally understandable for most -- find funds or firms that can guide you in this type of strategy.  Sometimes, paying fees for advice is worth it, especially in this type of dicey market condition. 

Now, let's take a look at the charts to illustrate some of the mixed messages that are emanating from these markets....

S&P e-Mini futures short-term picture muddy, while intermediate-term indicates higher prices

The US markets, as represented by the S&P e-Mini futures (@ES) below, appeared set just a few weeks ago to potentially test out the 1760 projected (using the 38.2% Fibonacci retracement line as guidance) support level.  Instead, the "minis" halted their decline at the 23.6% Fibonacci line at 1810.84. Since then, the rally that has ensued took prices above levels where they should have stopped if there were much more downside in store in the short-term.  What that meant to me is that a test of the recent high of 1892.50 was / is a strong possibility.  So, the little pullback that occurred in the last week may have been a chance to add long positions in the "minis" futures contracts.  Just as I type that, however, I remind myself that anything is possible in the short-term for the bears and that only a close above the 1892.50 level would spell real trouble for them. 

In the aggregate, I would have to say that the action in stocks remains pretty bullish overall despite the short-term dislocations that have been going on in the higher multiple social media, tech and biotech names.  For the short-term, I would be using any dips that occur to buy into those sectors showing the greatest strength / resiliency.  Once we get up to points north of 1900 and preferably all the way up to around 1926, I will be looking to sell / sell-short names that are showing early relative weakness more aggressively. 

Click image to enlarge


The yield on the 10-year Treasury Note sports an equally inconclusive chart

Yields on the intermediate to longer end of the Treasury yield curve are a great place to look for guidance as to what "bigger money" is thinking about risk.  Right now, there is no clear message coming from the Treasury markets -- yields could easily go either way from current levels.  If they rise, it will likely be in conjunction with higher equity prices.  If they fall, it will likely be in conjunction with a correction lower in equities.

My read on the chart of the 10-year yield below (INDEXCBOE:TNX) is that we should still see lower yields - perhaps down to 2.461% - before the buying of bonds dries up.  That type of move would complete what appears to me to be an "abc" correction to the downside (for wave "iv").  However, I must note that there is support that has been established and tested above that level at around 2.579%.  Only a break in yields above 2.803% will signal to me, though, that my call for 2.461% yields will likely not come to fruition for the time being. 

Click image to enlarge


The euro appears to be setting up for more upside -- score one for the bulls

The continuous futures contract of the euro (@EC) is shown below going back about a year.  My read on this chart is that the euro futures (heavily influenced by the EURUSD cross) should continue to work higher (signifying strength in Europe and the euro and relative weakness in the US and the greenback).  My upside target for EC comes in at the wave "(iii)" target of 1.4728 -- a nice move higher from the current read of 1.3867.  I will be using any dips in EC - even to today's lows - to buy the active futures contract for our fund.

From a macro perspective, a bullish euro has traditionally been a good sign for risk bulls - but there's no guarantee of that moving forward.

Click image to enlarge 

The Aussie dollar could be in for short-term weakness -- score one for the bears

The daily chart of the Aussie Dollar futures (@AD) is shown below going back about a year.  Based on my view of the chart, AD appears to have just completed wave "ii" (higher) of the macro wave "C" (lower) in early April.  Since then, we have seen a drift lower in the Aussie futures with a little stabilization coming in just in the last couple of days.  I really feel that the AD is headed down to around 0.8064 and potentially slightly lower.  I will be using any short-term strength in the Aussie to add to the short position our fund already has (our entry was right around 0.9400).  Nothing goes straight down or up, so make sure to wait for overbought (or at least less-oversold) readings on the %R indicator to initiate or add to short positions in the Aussie. 

Overall, this chart has been bullish of late, but may well be setting up for more downside.  This would fly in the face of the bullish euro in terms of macro risk messages.

Click image to enlarge 

The Canadian dollar appears set for more downside after the recent bounce -- the bears gain an edge

So, a bullish euro and a potentially bearish Aussie Dollar.  Can we look to the Canadian Dollar futures (@CD) as a tie-breaker?  I don't really think the Canadian Dollar is to be relied on for the formulation of macro strategies.  However, for the purposes of this exercise, I am willing to say the Canadian Dollar is siding with the Aussie Dollar in its bearish leanings. 

The chart below of CD shows a bear market bounce occurring recently but topping out around 0.9195 in early April.  CD has since pulled back and now is bouncing slightly over the last few days.  My read on this chart is that CD is likely headed down to the wave "3" target of 0.8484 eventually.  That being noted, very short-term rallies like the one currently in progress are, in my humble opinion, to be treated as selling opportunities (and we will be doing so at Sea Change). 

Click Image to Enlarge 


So, on the unambiguously bullish side of the ledger for the risk trade, we have the euro - and that's about it. 

In terms of charts that could be bullish for risk assets, I spy the S&P e-Mini futures.  However, the strange (in my view) nature of trading in US stocks recently has me a little reticent to declare that chart outright bullish.

The same type of neutral messages are being sent by the yields on US Treasuries right now, although I am sticking with my call for a drop in yields to projected "abc" support.  We'll have to wait to see if I am correct on my read or not.

Finally, we are seeing what appears to be bearish technical set-ups in both of the commodity-focused currencies -- the Aussie Dollar and Canadian Dollar.  If global growth were that great, commodities in general would be setting up very bullishly and would likely be spilling over to more bullish technicals in the two "stuff" currencies.  The fact that things could be setting up for more of a fall on both of those charts has me a bit concerned about the longevity of the rally in risk assets in general. 

That's it for now, keep your composure in these markets and consider utilizing the combination strategy of long-term core and shorter-term opportunistic for your portfolio!

Twitter: @seachangereport

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