Be Vewy Vewy Careful

T’is bear hunting season. I borrowed this chart to Michael on Friday and it’s becoming so critical that I need to post an updated version:

This is a correlation chart between the S&P cash index and the Euro futures. Quite salient is the massive drop in the Euro futures with an inverse short squeeze in the DXY (more about that below). And the moral of the story here of course is that equities have remained completely unimpressed and have not relinquished as much as an inch (or centimeter for you Euro-rats). Considering how far the Euro has dropped – and assuming a continuation of this correlation – the SPX should be trading at below 1000 right now, not at 1100+.

What does that mean? Well, I’m not sure exactly because the big inflection point all the bears (and deflation proponents) have been desperately waiting for during the past few months was a counter rip in the Dollar (and an inverse drop in the Euro). It took its merry time to get there as Dollar bulls were close to extinction at around 3% for over two months. And then – finally – there it is – a fast rip up. The bears strap themselves in for a fast ride down the equity slide – there you go – better be ready…. aaaannd….

NOTHING.

This is bad. Very bad. You all know I’m not a correlation trader but I do use currency correlations as a bias for short/medium directions on equities. Meaning, on a daily basis I don’t care if the Dollar is down or up if my TA suggests to me that a particular issue or index is going to turn a particular direction. But if I see a chart like the one above in the context of a sideways consolidation in equities then I can’t help but think that the bears have another fast one coming.

When I saw the spike in equities early this morning I thought that the Dollar was probably painting a nice retracement as anticipated. Frankly, I was quite surprised seeing it stretch its legs at 78 today. Not what I expected and it is why I need to second Michael’s call for caution for anyone hoping for a catastrophic drop in equities either right now or perhaps even early January.

The next thing I did was to pull up my DXY odds calculator – again Evil Speculator is proud to have been given exclusive access to this valuable tool courtesy of 2sweeties over at retracementlevels.com.

Alright, as you know the first thing I usually do is to set my 100% odds. And after this merciless short squeeze I decided to play it super conservative and use 79.7, which is near a veritable wall of resistance ole’ bucky would have a very hard time breezing through. However, even then the odds of a turn at 78.42 remain very high at 97.19%. Not that 77.64 at nearly 92% were lousy odds at any measure – but here we are and admittedly the progression upwards has slowed since Friday.

Finally I took a look at the frequency table and on that one we are a bit in uncharted territory right now. 77.64 was where I expected a brief but sharp reversal. Undoubtedly the current short squeeze is pushing us outside the ‘norm’ and thus it’s probably best to stick with the odds. Although the frequency of 78.42 is only registering at 5% its odds are in the 90 percentile. So, ‘chances are’ that this first wave up should be near the roll over point.

Back To The Future

Which brings me back to my first chart. Perhaps I’m relying too much on this particular correlation – and perhaps I should listen to my own advice which is to only use select correlations as a directional bias. But I can’t help but think: We have been consolidating sideways on the SPX – some call it a topping pattern – maybe. At the same time the Dollar has been busting through one high frequency short RL after the other and is now four handles higher than at the beginning of December – that’s a huge move when it comes to currencies.

What will happen when the Dollar decides to consolidate and perhaps drops back to 76 or maybe even 75? Remember that second waves can reverse by quite a bit and if the Dollar starts dropping hard – where does that mean for equities?

Exactly…

This entry was posted on Monday, December 21st, 2009 at 3:56 pm and is filed under Currencies, Market Outlook, Retracement Levels. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

gmak

In a crisis, all correlations go to 1. To understand the effect of dollar strength or weakness, one has to be able to see the cause of that strength or weakness.

http://evilspeculator.com/?p=13783#disqus_thread

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Carl V

About this correlation stuff, as mentioned by boldadventure: in 2008 EURO was leading the way (down) without SPX being correlated, but then the correlation came back with force Actually, when SPX finally followed EURO drop few weeks later, it continued to drop even when EURO had a strong up reaction for few days. If we were to have exactly the same sequence (Jul 16 to Aug 14, EURO drop, then SPX starts to drop from Aug 15 - a 4-weeks delay) then SPX should start from...Jan 2, a perfect seasonality after the end-year rally..!
http://screencast.com/t/NTA3NzMxY
CorporalCarrot

Some very interesting speculation on this thread which made for nice reading as I get to my desk here this morning. Indulge me while I add to the mix.

My own theory is that while the main bear case hinged on a turn in the dollar, not enough attention was paid to what the accompanying causes of that turn might be.

For me, the dollar weakness has always been about excess liquidity in the system; and the turn in the dollar needed to be a function of a tightening of liquidity; it’s not sufficient that the price alone would move.

And that’s what’s happening here IMO. The price has changed, not because of dollar strength or tightening liquidity, but because of Euro weakness. This is not a dollar story, it’s a Euro story. And as such, this short squeeze doesn’t really affect a market which is currently driven by excess liquidity chasing the best yielding assets.

Until the liquidity spigot is turned off, mere fluctuations in the exchange rate are not going to be enough to derail the equities train.

That being said, we are also at year end, and I can’t discount the fact that for a variety of reasons, many people may not want to sell at this point.

Also, looking back over a few years of $spx:$xeu, major turns in one index often take time to be followed by the other, so theres nothing says that both indices must turn on a dime now.
tradejane

Another gap up day for the DAX. It's currently trading close to 1st resistance of 5963. A plus of +.50%. Today's pivot is 5902, 1st support is 5869. Its bank are green but barely. TecDAX continues to underperform.

According to the news, Germany's GfK consumer climate for January came in at 3.3 vs a revised 3.6 for December.

Top sectors in Europe for the moment are Cars, Oil & Gas, and Basic resources.

In the meanwhile Moody's downgraded Greece to A2 from A1. Bond market responded: http://tinyurl.com/ybgoteb

The Greek stock market is up for the day. Maybe the news for them were better than expected. ;)

PS. Crude DAX chart update:

http://www.screencast.com/t/MGRhNDhhYj
weasel_whisperer

"The Greek stock market is up for the day. Maybe the news for them were better than expected. ;)"

This might explain why they are up, not down (from ZH):

"The rating agency that has gotten selling out down to an art, just downgraded Greece from A1 to A2, yet kept it two notches higher than where the country is now fairly rated by Fitch and S&P, thereby preventing the country from collapsing into a liquidity crisis. By taking this action, Moody's has once again proven its utter worthlessness, by pretending to be objective while at the same time keeping an artificially inflated rating high enough to prevent the unforeseen spillover effects from Greece's inability to use Treasury's as ECB collateral: the definitive first domino to fall in Europe, about which wrote 3 days ago"

http://www.zerohedge.com/article/moodys-downgrades-greece-a2-keeps-it-two-notches-above-sp-and-fitch-prostitutes-itself-again
Graphite

When you're selling bonds in a panic that money has to go somewhere, right?
tradejane

Yes. Our American friends call it "jumping from the frying pan into the fire."
Graphite

It's kind of funny to me how everyone watching the stocks/dollar correlation is assuming:

a.) the dollar *must* significantly retrace a significant portion of its recent rally, and
b.) when it does, the old correlation will reassert itself and equities will ROCKET higher.

I don't get b.) in particular. I mean, the correlation is broken, remember?
gsavli

Any correlations that would, could, should exist were broken with market manipulation. This market is not about TA, EW analysis or fundamentals. It's about what FED and his biotchezz GS and JPM are about to do.
Graphite

In a few years when the Fed is completely discredited and/or disbanded I hope someone will be able to explain to me how that fit into their master plan to manipulate the Matrix.
randomwalker

Bearish intermed candle on DIA last week:

http://screencast.com/t/YWZjM2VjYzU

SPY may go to 1130 TL then break to 1050 Sup

Mole, you should post shorts AFTER you do some sector DD..thanks anyway
zstock7

Click here to see GENZ chart, GENZ, buy now, multiple higher exits.
MarketFeel

doesnt the dollar and market have positive seasonality? - I am not reading too much into correlation or non-correlation
arkhamb

Which charting program in TDameritrade is the SPX chart from?
srk_null

thinkorswim platform. Tos is owned by Ameritrade.
arkhamb

Thanks
Gold_Gerb

could is the key word CastorTroy.
volume was less than the day before.
and look at the upper tail on that candle. unimpressive. i've seen taller headfakes.
perhaps the major brokerages are parking in solid tech companies, in case they have to liquidate pre NewYears?
http://www.etfinvestmentoutlook.com/etf_holdings.php?s=qqqq
my 2 grams.
CastorTroy

Add to that the QQQQ has closed above its trading range and could be pointing out to an imminent breakout
http://tinyurl.com/yk2gyq8
StainlessSteelChicken

Balki Bartokomous and the $NDX
http://bit.ly/77dEC1
raised_by_wolves

Nothin's gonna stop $COMPQ either . . . except maybe the line I call "Purple Haze" — http://screencast.com/t/OGZiNGRk
boldventure

Check August 2008, Dollar rally broke 50DMA and kept right on rising, Dow rose 5% also with the dollar, but as the dollar kept rising for 4 consecutive weeks by Sept the Dow and SPX started their huge decline over the next 6 weeks. If the same thing were to happen again we could see the Dow rise to 10,900-11,000 by the second week of Jan 2010, only to drop to 7,000-7500 by the end of March
Tronacate

I believe there is a rush to the safety of US equities and currency........which indicates to me there are some very deep seeded worldwide problems......pretty soon it will all unwind
Trader_Steve

Wrong as usual with regard to equities. Rushes like that are overwhelmingly wrong and into metals, not stocks. The dollar is merely completing an Elliott Wave pattern where the Euro has topped. If you knew anything about financial history, money USED to flow here rapidly when serious turmoil hit the geopolitical landscape because we pretty much owned the market on thermonuclear weapons and they wanted money out of their countries before accounts were frozen. Now that the world know we will never use them since many with your disturbed mindset of military hatred and what it takes to defend a nation could never accept their use, and if we get hit, ask "what did we do wrong? Did we not apologize enough to the world?"

BTW, I thought you were banned for repeatedly talking crap against America. I've found you have one hell of a past.

Not to worry, I just dropped by as a little birdie told me they thought you were gone, yet I see you are still here. I guess that thin ice has yet to crack. It will. And as much as I appreciate Mole's work here, as well as others, life is far to short to even read your name. I'm not surprised with what you spew that you hide behind a moniker.

Merry Christmas to all...but you!
Steve
sloth_bear

Hey mole,

I'm completely sick and doing a quick look of what is apening around with my dry red eyes...

I just wanted to point a chart posted by "asetrader" on danerics blog:
http://www.screencast.com/users/asetrader/folders/Jing/media/10a53262-4ee7-49a8-8c02-d62511909872

We can see further in the past and can suspect that the equities are in fact lagging...

I don't know if ethicaly I can post stuff from other people & other blogs, do not hesitate to delete this message

Here is the link to the original post:
http://danericselliottwaves.blogspot.com/2009/12/elliott-wave-update-21-december.html

Time for some medecine
Thanks for your work, merry christmas
SB
Stainless_Steel_Hamster

you aknowledge the author, you post the link to daneric, the author doesn't have a blog for a direct link.

sounds good enough for me.
johneeboy3

Ladies and gents,

Why am I reading these alarm bells everywhere around the blogosphere about this supposed 'decoupling' of the currencies from the equity indexes?

Of course they 'could' be decoupling, but I highly doubt it. Why? Cos The main driver of the coupling is still there, bigger 'un badder than ever - debt and leverage.

Sure that EUR vs SPX overlay chart is one way of looking at it.... and freaking yourself out.... but before you soil your jeans, please bring up a 5 year weekly chart of any of these pairs and have a good look:

SPX with inverse DXY overlaid
SPX with EUR/USD overlaid
SPX with Gold overlaid
Gold with DXY overlaid

What you will see is that major tops and bottoms can be out of sync by weeks (sometimes months), but the longer term strong correlation REMAINS INTACT.

In short, we must give these correlations more time to prove or disprove themselves.

Oh, and the fact that DXY's first leg up is extending beyond the historical statistical norms simply screams at me that this is the real deal and that the bottom that DXY recently printed was a major turning point.

Remember back in the crash of 08-09 when the SPX and DOW busted all historical retracement levels? Ring any bells?

Chillax, crew.
hindyomen

i agree with that jb3
i think currency turns precede changes in risk appetite
that are strong enough to turn equities.

here is an annotated chart of the aussie yen cross, which i've long used as an early indicator of shifts risk appetite. in particular, i think the recent 20dma / 50dma bearish cross on AUD/JPY could be a 1-6 week early warning of flight from equities.

http://screencast.com/t/YWM4YjQ2OGE

EDIT: but i appreciate the possibility gmak raises that dollar appreciation is due to influx of foreign capital for investment. however, i wonder if a dollar rally that starts this way might not start a risk panic.
johneeboy3

I think that's good work.
charles_smith

In looking at these extending narrow Bollingers, I can't find any equivalent except maybe in the long low-VIX ramp-up in 2006-early 2007 period of CONfidence. Does anyone think today's economy is robust? It beggars belief.

Then there are those cyclical charts Mole posted last week. yes, nobody trades off cyclical charts or divergences (because they will soon lose their stash) but nonetheless there are some reasons to say the next move will probably be down.

the fact that Bears are deflated and defeated and VIX is back to CONfidence levels may well have significance which we will only discern after the fact.
Captain Obvious

Maybe the carry punks are waiting for a little DXY pullback before they unload their risk trade. we could be even more confused then as stocks sell off on a dollar pullback. If i were a carry punk, i can read a chart and know borrowing dollars or yen is a game that may have ended. Now I am trying to manage the least amount of tax on the risk asset so i am hoping to get to Jan 1 to unload, but, I also am getting a little scared of DXY ramping everyday so I may just puke it all out first chance I get on a pullback. Either way they are about to soil their pants.
Bullturnedbear

Love the descriptive language.
boldventure

Check out what the dollar did August of 2008, rallied hard for 4 weeks with the market rising almost 5% before market collapse as dollar kept rising... If same thing happens again expect dow 10,900 to 11,000 in the next 4 weeks then -40% on the dow and spx by april 1st.
Stainless_Steel_Hamster

yes, people around here have heard me pointing to a possible paralelism on summer 2007
crush1618

Market is telling us that SPX does correlate inversely to dollar. Fine print: Only when dollar is falling (sic).
hindyomen

please indulge my fantasy hypotheticals
but you can tell from my screen name that it is in my nature.

http://online.wsj.com/article/SB126105856288895461.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsForth

could the next headline risk be:
i think that the senate will give bernanke a hard time before his reconfirmation
including the bernie sanders bill that threatens to overhaul the fed
helicopter ben feels that the fed overhaul bill will undermine his authority
there will be many dems coming out publicly against ben's reconfirm
facing delegitimization, ben may try to scare congress by floating rumors
that he could threaten to walk
rumors of this kind, or the chance that a fed overhaul could pass
will bring headline risk to the markets and destabilize them in the last week of december
Bullturnedbear

What's the update on a Hindy Omen? If the market falls hard now, will we get one? If the market rallies hard and then falls down hard will we get one?
bigmovingstock

<sarcasm>stocks don't go down anymore, only up - will never go down again, regardless of dollar going up or down, gold going up or down, stocks will just go up. Not one indicator left that supports rising stock prices, but don't worry - stocks will go up!</sarcasm>
charles_smith

Agreed--the divergence from the real world economy is remarkable and tiresome.
hindyomen

i can't swing trade this market
FML
Gold_Gerb

neither can I.
hey how's the moon? is it on our side?
hindyomen

new moon not working so far. full moon on dec31. for the last week of december, i think there is a chance that traders will try to front-run the perception of a january selloff and this could create a tradeable correction

EDIT: i should add that december 24 premarket is the first-quarter moon. volatility increases after this date until the last quarter moon (first week of january)
Captain Obvious

Chill Hindy, it is all lining up slowly but surely, the rip down will be too fast too furious. What is more surprising than the lost equity/dxy correlation is that the DXY can't find a correction. And 2-10T spread is blowing out. rock about to meet hard place
gmak

heh. Look at that little push on SPX coming into the bell to put the close over top of that horizontal white line on the daily SPX chart that I keep harping on about.
gmak

Let's try this one more time:

If the USD is getting stronger because the FED is pulling liquidity, then SPX will drop. If the USD is getting stronger because foreigners are buying it to buy USD assets, then SPX will not get weaker.

Is there anyone who doesn't understand this, or have I got it wrong?
molecool

Carry traders (foreigners and domestic traders) are implicitly short the Dollar and will have to settle with Dollars that keep getting more expensive. The Fed has been pulling liquidity for a while now - just look at a long term version of the Slosh report:

http://www.gmtfo.com/RepoReader/OMOps.aspx
gmak

Sure. But the carry trade - by definition - would not be going into US assets (equities or tbills). it might go into commodities, but definitely into foreign assets. Why? Borrow cheaply in a currency that is supposed to depreciate in value, change for a stronger currency with higher returns and invest in their assets. Right?
Tom_27

isn't that just a flight from risk to "safer" assets?
gmak

Nope. Equities are by definition risk assets. If I want to invest in Thailand, I have to buy Thai Baht - ergo it strengthens. I then buy the assets with "new" money which pushes the price up (supply /demand) because new money is in fact coming in.

If it is a case of running away from risk, the USD may get stronger - but the money would be going into short term MMKT instruments, or GOLD perhaps.
Tom_27

I agree, however, what I meant by safer assets is that people move from non-us denominated assets into USD assets. Hence, we see both USD and SPX move up i.e. correlation is somewhat subdued now than before.
gmak

Sure. I'm just cautious about ascribing motivations to the money movement. That leads to trading mistakes.
molecool

Not really sure where it would go - maybe bonds, maybe precious metals, yes. Maybe into more sector rotation - who knows.

I don't think we should take end of the year tape too seriously, but the bears have been making a lot of excuses in the past few months. FACT IS - equities are not dropping and they should have yielded to the cracks that started to show up two months ago. If you are trading futures you don't give a rat's rectum - but if you are an options trader like most on this board then you better pay attention. We might go sideways for another month or two until we see any real tradeable weakness. Which is why I am now playing delta neutral.
gmak

I think maybe we have different definitions of the carry trade. If you borrow in a currency and invest in assets in that currency in that country, then (to me) it is margin and not carry.

Carry trade, to me, is borrowing in one currency to invest in assets in another currency.
texpresso

if foreigners THINK that the dollar is going to get stronger, then they will try to get into US equities now. Right? according to the wonks on bloomberg, fed is removing liquidity. so, which one of those is more powerful? watch the tape...
charles_smith

Good post to keep us on our toes. None of us would be too surprised by a huge ramp up, given the past 10 months, but the internals are no longer very supportive of another giant move up. MACD is crossing on the weekly (yes, depending on your MACD parameters) and the market is running out of catalysts other than the PPT.

DXY and SPX correlation could have flipped polarity, gone neutral or as other have suggested, simply acted to pull the rubber band tighter.
molecool

Yes yes and yes - but we've been in extremely overbought long term conditions for a while now - and thus far it ain't budging. One can get ruined trying to call a top - tried a few times and I lost my appetite. I prefer to let the market show me the direction - when we see a real consolidation down I'll get excited and expose myself on the rip following it.
charles_smith

Agreed, your strategy is the wiser one. As I posted here in Nov, I was long and made decent coin. Then I took a sip of the Ole Bear Juice and got excited that "the top must be in". I now have several gaping holes which have leaked my profits. Unwise, to say the least. We all know trying to catch the top is a fool's game yet here I am... tin hat firmly in place once again.
K.I.M.

http://www.flickr.com/photos/42905134@N08/42043...

there's chance we will get 136-138 with amzn, but probably not higher

my first short is still active from 125 or so, then I added more at 135 which and already close at 128. I will enter again if it touches top green line. damn netbook keyboard, my notebook died yesterday!
tradejane

And several GDP numbers coming out tomorrow...

Dis bear is feeling like the guys in das Boot right now:

http://www.youtube.com/watch?v=_zK8YM0naVI
Nightwind

rut breaking down out of channel, expect backtest
Nightwind

Neckline broken
Captain Obvious

Good questions indeed. If this DXY rally is as powerful as P2 SPX rally then can't we expect time corrections to be more likely than severe price corrections? Can't let those dollar carry traders off too easy right? As for the correlation breakdown, I wonder if proximity to year end has temporarily severed the correlation? Currency and interest rates have more dough sloshing around as you know. I will err on the side of the deeper market, and keep watching TLT. Good luck Mole
hindyomen

i thought that tops/bottoms in equities generally lag dollar tops/bottoms by several weeks. can anyone corroborate?
tradejane

When the Euro topped at 1.6037 on the 15th of July 2008, the SPX rallied about 100 points for nearly 6 weeks afterwards before beginning its now famous descent.
Nightwind

Yea, but when the correlation does catch up....
Anna

Yeah isn't it convenient that it only works in benefit for the bulls ( who have all the liquidity!)
molecool

Word!
hindyomen

excellent caution sir. *gulp*

short scalp from 10.75
half off at 09.5, moved stop down to b/e on the rest
imo, break of 1109 should yield a big red candle
hindyomen

1109's broken... looking for 06's and 05's

EDIT: covered rest at 1107.75... on NLT. #discipline

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