Correction In Risk Assets: Is There Still More to Go?
Downside targets have yet to be hit in the euro and the Aussie dollar, and the bond markets aren't telling us anything bullish to counteract the negativity in currencies.
As I mentioned last week, we got a bearish signal from the ratio of the euro / Swiss franc (EURCHF) vs. the euro / Swedish krona (EURSEK). Once the ratio of EURCHF / EURSEK turned lower (meaning relative strength in the Swiss franc – see the red lines), we should have been looking for a correction in equities to begin 45-75 days afterward. Well, at the end of September we entered the target date range for the correction to begin.
Now, it appears clear that we are seeing that correction unfold as predicted. Based on the last two corrections following the beginning of Franc strength, we should expect the correction to last anywhere from 30-75 days. We are less than 30 days into the correction thus far. Keep in mind that there are no rules here – I'm just trying to use history as a guide. In terms of magnitude of the correction, I would hesitate to give an estimate based on this indicator alone.
I would just note that if the S&P and Nasdaq support levels given earlier in the report fail to hold up, there will be much more downside potential opened up for the equity markets.
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Wrapping It All Up
There's no way to sugarcoat it – things are going to get a bit worse in the very short-term and will get even worse after some modest sideways to upside counter-trend moves occur. The EURUSD has much more room to go before I foresee another sharp upside move occurring. The Aussie currencies are confirming the weakness in the euro – although they are closer to short-term support than the euro is.
Finally, the new franc / krona indicator I introduced last week and the history around that indicator tell me that we've got some more time before we should start looking for a change in direction (meaning krona strength). So, be patient and wait for the rest of the correction in risk assets to play out before getting too aggressive on the long side.
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