FYI | Aug 17 2010
Craig Ferguson, Director of Strategy Antipodean Capital reported to his clientele on Friday:
Our conclusions yesterday were reasonably simple. With earnings in the US out of the way, the FOMC adopting QE1 instead of QEII and thus exposing markets to at least a 6-12 week period of enduring soft growth data, the risk is that earnings expectations be cut, and that stocks fall, taking other risky assets with them. We’ve argued this theme since early July, but it took a few weeks for markets to get aligned with the data realities.
Now they are, thus the minimum we’d expect are for a retest of the June lows in stocks, commodities and risky FX. Markets will thus stay “on the range”, with some risk of an S&P spike below the range lows to 940, depending on how the charts play out. Let’s not count our chickens on that one just yet thought – we’d be happy with a range lows retest for now!
Along these lines, and fine tuning things a little for both traders and hedgers, we see 5 wave declines unfolding in the major rates v USD. This is good, because it gives us some technical certainty that Our call will be right, because 5 wave declines are usually indicative of directional moves. Those 5 wave declines should probably have another leg lower in the very short term, say 24-36 hours, but then could be subject to exhaustion and a 3-5 day rebound next week which will see markets try to rally back to their recent highs and fail. Then, probably by the end of next week, we’d expect risky FX to start heading lower again towards the lows of June.
This picture is mirrored in stocks, which after 4-5% falls, should have another spike lower, and then a rebound for 3- 5 days too. Then, thereafter, they’ll keep heading lower. The most apparent thing with stocks is the array of potential weekly key reversals in the major indices (assuming stocks don’t rise by 2% tonight and invalidate them) such as the DJIA, S&P, NDX, Materials (miners) Index, Allords, TSX & FTSE, HSI. Normally a key weekly reversal, like a monthly reversal, has greater weight than a daily reversal, and either the markets continue that direction the next week straight from the get go, or retrace 38-50% of the reversal and then continue the reversal’s trend.
We place high import on them, and they mean that after those 3-5 days of consolidation, which we expect next week, then stocks should fall another 5-7% to their June lows. That’s the plan we are on anyway. In FX we have less evidence of weekly reversals, because most rates made their highs last Friday v the USD and have spent the last 4 sessions retracing without making new highs, but their reversals have turned down the weekly cycles we follow, And which last for 4-6 weeks duration normally.
So unless the recent highs v the USD are compltely retraced next week (we expect partially) the weekly cycle should kick in thereafter, meaning the rest of Aug & Sept could be a tough one for risky assets. The daily & weekly reversals evident in the VIX (which would need to close under 23% to invalidate) implies that an important shift occurred in risk appetite this week, one which should translate into sharply higher vol levels 4-6 weeks down the track.
Next week, when we expect stocks and FX to try and retrace some of their falls of this week, may thus be the best time to put on option trades (puts) to capture both the directional move lower, and the volatility move higher. So, stay focussed on that timing window, and next week, to add to short risk positions, rather than get stopped out of them.
One last thought on JPY intervention. Fundamentally, we expect it to fail, as US yields should keep falling due to lower stocks and a flatter curve. However we are not JPY positive in the 84/86 window, and JPY longs are near record levels. We only need to look at Euro to see how positional extremes can unfold. If the USD index rises as we expect for 2-3 weeks min and likely 4-8, then $JPY could easily squeeze higher into the 90-95 band again. We’d rather be long USD v other things than JPY, but this also implies short AUD or NZD v JPY may not provide much joy either.
Trades: Long USD Index, Gold v AUD & Oil (starting to work well), Euribor, AU Bills, Short Oil, Copper, A$.
All charts courtesy of Etrade.
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