Time To Lighten The Book… [Dirty Dozen]
“You become a big winner when you lose,” Dan says. “Everyone plays well when they’re winning. But can you control yourself and play well when you’re losing? And not by being too conservative, but trying to still be objective as to what your chances are in the hand. If you can do that, then you’ve conquered the game.” ~ from the book The Biggest Bluff by Maria Konnikova
In this week’s Dirty Dozen [CHART PACK] we talk shooting stars in small caps, breadth thrusts and their implications for short and long-term returns, weakening market internals, high Trend Fragility, the case to be short USD, and a bearish gold play, plus more…
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1. Small caps saw an ugly close on the week, leaving a large upper wick following their breakout from a 6-month compression channel.
2. The Russell’s breakout was accompanied by a surge in new 4-week highs amongst its members. Historically, when the % of members hitting 4-week highs climbed above 60%, RTY tended to trend slightly down for the next two months, indicating temporary exhaustion of buyers, before turning strongly positive over the following quarter.
3. Last week we talked about the 3-day NYSE ADR buy thrust that triggered. Well, this was followed up with Zweig Breadth Thrust in the Nasdaq. This chart from SentimenTrader shows that following weak returns in the first month, this signal precedes strong gains out to 1 year later.
So similar to the RTY thrust above, it seems there’s decent odds we see chop over the next 1 maybe 2 months before another bull leg higher.
4. While our Internals Aggregator hasn’t officially triggered a sell signal, we are seeing a continued negative divergence in its subcomponents. Credit is still holding up (for now) but this is enough broad weakness to warrant paring down risk.
5. Our Trend Fragility indicator triggered an official sell signal 2-weeks ago, with a reading in the 98th percentile. Another reason to lighten the book and go on vacation.
6. And while the primary trend in risk assets is still up, we’re willing to take some small swings to the short side if given good technical setups. One setup we’re tracking is this potential H&S top in Euro STOXX futures.
7. BBG’s Simon White put out some interesting charts arguing the USD bear case. He writes “This curve is one of the top (and very few) shorter-term leading indicators for the dollar, with it currently indicating the US currency is likely to see downside in the nearer term(6-9 months).”
8. White continues “Almost every currency in the DXY basket is undervalued on a purchasing power parity (PPP) basis versus the dollar, especially the euro and the yen, Currencies do not typically remain persistently over or undervalued and instead gravitate toward their fair value. As the chart below shows, that translates into a secular weakening of the dollar over the next decade.”
9. And finally “Trump is expected to usher in looser fiscal and monetary policy, but really that horse has bolted. The largest peacetime, non-recessionary budget deficit — reaching $1.7 trillion last year — is already a signifier of coming dollar weakness. As the chart below shows, the deficit typically leads the dollar lower by about 18-24 months.”
10. One way to take a swing at the short USD trade is to go long CAD. It’s at its lower Bollinger Band, near the bottom of its 9-month sideways range, and positioning is very crowded short. You can put a buy stop right above Friday’s highs with a stop below Thursday's lows, giving you a sizable position on low risk.
11. We’re long-term precious metal bulls but have been cautious for the past couple of months as we’ve felt that both gold and silver needed to work off their overbought levels and trigger happy sentiment.
After last week’s failed breakout and shooting star, it’s likely this consolidation still has a ways to go.
12. SentimenTrader also recently pointed out that the percentage of GDX members above their 200-day average is quite high and at levels that in the past have preceded weak returns out to a year later.
Thanks for reading.
