Since QE arrived, the correlation which used to work on Bouncy castle water slide Monday may not work on Tuesday, but on Wednesday it was working again. The whole of the marketplace has not made any sense for quite some time now. The month of April cost me some money. The month of April is behind us. May 1 was a good day for me … thank you Japanese yen. For the whole month of April I have watched the yen correlations break down repeatedly. What used to be a safe haven currency has not acted that way AT ALL in April. Let me explain.
Three weeks ago the DJIA traded as many as 360 points lower … the yen traded lower all day too. The DJIA finished 280 points lower on that Friday. The yen closed five ticks higher. Under normal circumstances, the yen should have been up 50-100 ticks. Something stunk three weeks ago. Something still stinks today.
Two weeks ago the stock market rallied and the yen rallied with it. I scratched my head in disbelief, eventually covering my short yen position for a 50-tick profit as opposed to a 100-tick profit.I was asked this week in Las Vegas my opinion on the yen. Thinking outside the box, this is what I came up with.
What used to be a safe-haven currency is no longer. With the Nikkei trading at 20-year highs, the Bank of Japan achieved the desired result of a weaker yen, which will in time produce greater profits for Japan Inc. With a strong stock market, the Bank of Japan does not need to keep its foot on the QE accelerator. The yen strengthens … life is good. Anyone want a cheap Toyota? Who needs a cheap Toyota with crude oil at $50? But when the world bourses go into correction mode, the initial reaction by the world traders is to buy the yen, and buy it they did. The only problem … we saw the DJIA fell 75 points on Wednesday and the yen lost 8 ticks. On Thursday the DJIA lost 195 points. At one point in the morning the traders bid the yen up to +38 ticks on the day. By day’s end the yen finished 30 ticks lower at 8378. Thursday is the day I got my sell signal. Thursday is the day I got short.
What used to be a safe haven currency is no more??? When world bourses go into decline the yen goes with it, because at the end of the day the Bank of Japan knows the meaning of insanity: doing the same thing over and over again but expecting a different result. The BOJ were insane for 20+ years. There is a new game in Tokyo and it’s called QE. They will not take their foot off the QE gas pedal until they achieve their desired result. So when world bourses decline, the likelihood of the Bank of Japan increasing the QE ante goes up, in my humble opinion. That is why we saw the yen fall this week when stocks were offered as well.
With the DJIA down 270 points on Wednesday and Thursday, the players definitely bought the yen and were sucking wind on it to the tune of about 40 ticks. On Friday the DJIA rallies 183 points and the players have to take their losses. The yen closes 62 ticks lower on Friday. What we saw over the past three trading days in the yen tells me this currency is in BIG TIME trouble. The yen sells off when it should rally and then falls out of bed when it should fall out of bed.
I am definitely talking my book. I would think the smart money got out of their longs on Friday. The dumb money will get stopped out with a trade below 8280 and if this happens on Monday we could easily be testing the old lows at 8195-8207 before Payrolls on Friday. The point I am trying to make … if there are traders thinking the yen is going up, they will look to buy breaks getting long. They won’t be looking to get short. The longs will provide the fuel needed to drive this currency lower still. Do you think the Bank of Japan will get in their way to support the yen? I don’t think so either.
FOOD FOR THOUGHT
Japan Inc. imports of all their oil to run their factories. A weaker yen translates into higher costs to run their factories. These higher costs could be a deterrent to having a weaker yen. But with crude oil trading 40% to 50% below levels of the past five years, a weaker yen does not hurt Japan Inc. as much as it could. The yen can and will go a lot lower.
MORE FOOD FOR THOUGHT
When all is said and done and the Bank of Japan will not achieve the results they are looking for, they will most likely abandon QE. It is when they abandon the program that the rest of the world will say Oh-oh, now what!!! The only option left will be to devalue. That is when the yen will get hammered overnight. That is when you cover your shorts and retire. Led by the long-end … just the way I like it, the treasuries got trounced this week. When I say I love when the long-end leads, I like to look at the number of ticks (in this case lower) the bonds are down versus the notes. I consider the bonds leading lower when they are down twice as many ticks as the notes. In this case you can see the bonds are down three times as many ticks as the notes. This means the yield curve is steepening (30-year rates are rising quicker than 10-year rates) which is good for the banks, but not very good for the housing market.
Further Food for Thought
Over the past two weeks ZBM is down 251 ticks versus ZNM down 65 ticks. That is over 4 to 1 and that is the type of number which will be hard to reverse out of when the time comes. If these treasuries ever do bottom out the process will be slow. In other words … sell rallies … sell rallies … sell rallies.
Without looking at the weekly numbers posted below, one would think the stock market got hammered this week? Think again. The Russell 2000 took a good hit and NDX was also down 1.25%. But DJX and SPX were down minimally. A better than expected ADP number on Wednesday could set us up for a good Payroll number on Friday. As always we will take things one day at a time, but I am looking for a strong market going into Payrolls on Friday. I think these markets are set up to test the old highs.
FINAL FOOD FOR THOUGHT
Initial Claims on Thursday at 262,000 was the lowest number since April 2000. Initial Claims for the past eight weeks have all been below 300,000. The last time we saw that many consecutive weeks of sub-300,000 Initial Claims was January 20, 2000 to April 27, 2000. More food for thought … NDX topped out on March 27, 2000. By May 24, 2000 the NDX fell 2000 points or 41%. Hmmmm … if you don’t see what I am getting at, reread this paragraph. The point I am trying to make … they say volatility is always found at highs and lows of moves. For the past five months, or basically December 2014 and all of 2015, we have seen increased volatility at the highs of a six-year bull market. Building a top is a process. Building tops take time. I wonder if stellar job numbers out on Wednesday, Thursday and Friday will finally mark a top in these indices markets. In 2015 alone we have seen the DAX and the EuroStoxx50 surge 24% and 26% respectively. Technically speaking, these could be considered “blowoff tops.” In just three weeks the DAX and EuroStoxx50 are down 8% and 6% respectively. The Dow Transports have not acted well, topping out in November of 2014 and trading anywhere from 6% to 7% below those November highs. Something stinks. I think we are very close to a high. I think the next 20% is lower … not higher.
One day at a time … one trade at a time. I am short the yen … you don’t want to know how many. If you knew, you wouldn’t sleep at night. If I was a gambling man I would be trading the indices from the long side, buying breaks at Pivot Points. If this is your trade of choice, do not get greedy. I think we will see two-way indices trade with a bullish bias. My main position is short the yen. I do not need to over-egg any omelets at this time. There is enough critical data out this week to move this yen around a bit. I need to manage this position at this time with no distractions. I have a 60-tick lead on a trade which appears to be readying itself for a test of some critical support levels below. If I can get well enough onside, I may just run this trade into Payrolls on Friday. “Well enough onside” can be defined as the yen trading below 8250. I am short at 8378.
The Asian markets closed mostly higher but the Shanghai Composite closed down over -4%, and in Europe 8 out of 12 markets quoted are trading modestly lower this morning. Today’s economic calendar includes the International Trade numbers, Gallup US ECI, Redbook, PMI Services Index, ISM Non-Mfg Index, Chicago Federal Reserve Bank President Charles Evans speech on the economy and monetary policy in Columbus, Indiana, Minneapolis Federal Reserve Bank President Narayan Kocherlakota town hall in Marshall, Minn., and earnings before the bell from ABMD AKRX AFAM AMAG AFSI ANIP BLMN SCOR CRTO CYNO DTV EIGI EOG EL GTN HCA HW H ICE K MNK NBL SALE SABR SBH TW VMC ZTS, and after the close from – AGU ALL FOLD AMSG CTL CYH CVG DVN FANG EA EXAM FISV FOSL GRPN GPOR HLF IGTE LC MTDR PXD RUBI SCTY TMH TNET TSRA UNTD WAGE DIS ZLTQ.
Our View (by Danny Riley):
I will be back full time in a few days, but today Tony LaPorta is up, and we have TopNotch on Wednesday. I will be back up doing the videos soon but I have to be honest, I needed a breather.
As always, please use protective buy and sell stops when trading futures and options.
In Asia most markets 5 out of 9 markets quoted closed higher: Shanghai Comp. -4.06%, Hang Seng -1.31%, Nikkei +0.06%
In Europe 8 of 12 quoted markets are trading lower: DAX -0.20%, FTSE +0.36%, MICEX +1.98, GD.AT -3.41% at 6:45 CT
Fair value: S&P -6.08 , Nasdaq -6.68, DOW -77.39
Total volume: Going up : LOW 1mil ESM and 6.2k SPM traded
Economic schedule: International Trade, Gallup US ECI, Redbook, PMI Services Index, ISM Non-Mfg Index, Charles Evans and Narayan Kocherlakota speak.