A Risky Proposition… [Dirty Dozen]

Oct 1

In chess we have the obligation to move; there is no option to skip a turn if you can't identify a direction that suits you. One of the great challenges of the game is how to make progress when there are no obvious moves, when action is required, not reaction. The great Polish chess master and wit Tartakower half-joking called this the "nothing to do" phase of the game. In reality, it is here that we find what separates pretenders from contenders. ~ Gary Kasparov

In this week’s Dirty Dozen [CHART PACK] we look at the troubling flip in our yield leads, talk about the diverging short and long term technical signals for stocks, walk through the latest CoT data, pitch a long copper and a short USDJPY trade, plus more…

1. We saw a big jump in leading yield indicators last week. This isn’t what you want to see if you’ve been looking for a buyable bottom in bonds. Also, small specs continue to set their money on fire trying to fade this move down in bonds (yields up).

All this means that there’s still likely plenty of fuel left to drive this bond move lower.

2. Last week we pointed out the troubling signs we’re seeing in longer-term breadth indicators. Another bearish development has been the increasing willingness of large specs to buy into the dip, or at the least not sell into it. Our Large Spec CoT Oscillator crossed the 90% threshold last week. The highlighted spots mark past >90% sell signals.

3. With that said, shorter-term indicators of breadth, overbought/oversold, and positioning put the odds in favor of a short-term bounce. How long this bounce can hold will depend on the action in bonds. And as we pointed out above, the jump in yield leads isn’t exactly comforting.

4. Our Market Internals also favor a bounce and bullish trend continuation. So we’re still not seeing a fat pitch for a sell setup. But neither are we seeing a lot of positive confirming data points. It still reads like a good time to continue to tighten up stops, pare down risk in names/exposures that aren’t working, and wait for clarity.

5. Breadth across the market, sans energy, is deeply oversold over the short-term and looking increasingly unhealthy over the longer term (% of stocks > 250dma).

6. Here are the latest relative performance trends and market regimes.

7. Specs are bullish SPX, crude, cocoa, and cotton and bearish wheat, copper, and AUDUSD.

8. Here’s our multi-chart view of the conditional setup in copper. Specs are short, sentiment is near multi-year lows, valuation is in the sub-10th percentile, and seasonality is currently neutral.

9. It’s also in a major compression regime with its weekly Bollinger Band compressing to its tightest range in four years. Similar compression regimes in the past led to large breakouts.

10. We’re looking into ways to play a potential accelerating unwind in risk, should bonds fail to find a bottom and long-term breadth continue to deteriorate. Short USDJPY is one potential.

This chart from Sentix shows Specs are crowded short JPY while their Strategic bias indicator shows improving sentiment to own yen (this is a confirming positive signal for JPY).

11. USDJPY’s real effective exchange rate is at 40yr+ highs while odds are increasing that the BoJ will be forced to lift their rates off the floor in the coming months.

12. With all that said, this isn’t a tape you’d want to fade yet. Momentum still strongly favors upside continuation. We’d need to wait for technical weakness or a news failure event before we could start probing to the short side. But worth keeping this one on your radar.