The most important chart – Equities and Yields

JP Morgan put out a chart at the end of 2013 that is really interesting. It’s been one of my favorite charts for a while now

It shows the correlation between yields and stock returns. The result is that rising yields correlate with positive stock returns as long as yields are below 5%. Once we go over 5%, stock returns tend to go negative.

As we start to get serious about rate hikes, keep this in mind. The conventional wisdom is that stocks will start to decline ASAP as rates start to rise. This chart would claim otherwise.

Interest Rates and Equities

Interest Rates and Equities

The link to the chart is right here:

Update on oil plays

As mentioned on Twitter yesterday, I suggested closing out any trades related to Sunday’s post (Oil plays – Sell CAD and buy JPY). CAD/JPY was a killer trade shooting straight down to the 99.10 support area. NZD/CAD also had a nice pop while USD/JPY hit lows at 115.50s.

Oil rallied hard today (pre-FOMC, then giving away some gains) along with the US dollar (post-FOMC). The CAD stayed put at 1.1650 though. We’ll need to find new plays as the week progresses. Oil seems to be finding some bids, but nothing suggests that this is the new standard (supplies still increasing and the US dollar has a bid).

Bogus reference points

Considering oil’s all time high” or “considering peak home prices in the mid-2000s” are silly statements.

We have to look at all-time high prices and judge if they are still legitimate. Just for fun, let’s bring back the good old tulip mania example. At some point in history (you’ve seen the charts), tulips were sold for a really high price. The prices were unsustainable though once the craze (i.e. the context) went away; therefore, why would anyone ever quote those prices as a reference point in the future?

Oil hit $150 at a time when we thought the world was running on all cylinders (it wasn’t) and we also believed in something called “peak oil“. Can I say hahaha? With shale oil in the house, supply won’t be an issue for a while. Suggesting oil at $150 because it was there before is an illusion. We would need new fundamentals to drive the price to those levels and higher.

The same applies for US housing prices. They can rise, but it will depend on disposable income and other parameters that support growth in the industry. In the mid-2000s, prices peaked based on no-doc loans and other bad lending practices. If these aforementioned silly things had not happened, prices would have never skyrocketed in the manner it did. It’s probably better to believe that those prices never existed. I’ve heard of people buying homes because they’re off X% from the peak in 2006. What if those prices depend on US disposable income tripling? Good luck seeing any upside.

Overall, I just think we need to consider context when talking about reference price levels, especially all-time highs. If I put a bunch of starving people in a room and try to sell one cookie, I’ll probably get $100 for a nice chocolate chip brownie. However, if they’re well fed (and that’s the general expectation), why would I ever consider getting $100 in that market any time soon?



Oil plays – Sell CAD and buy JPY

Word on the street is that the Middle East markets are crashing due to the expectation of lower oil. Some guy (UAE minister) recently said “don’t be surprised if we see oil at $40, bro”.

If we assume oil continues to crash lower:

Sell NZD/CAD ==> RBZ is looking for hikes ==> CAD will trail oil ==> USD/CAD is also solidly above 1.1430s/1.500. NZD/CAD chart is still in a range, but it could break badly here. (chart below)
      Risks: NZD tends to correlate with AUD and other commodities and commodity currencies. Thus, a big risk-off situation could have it drop in tandem with CAD.
     Alternatives: Buy GBP/CAD or EUR/CAD. In a risk-off situation, these tend to perform well. GBP/USD has also been holding ground well while the EUR/USD is trying to break higher.

Sell USD/JPY ==> Risk-off should see JPY perform. Big counter issues here are: a) the fact that Abe has won a re-election (JPY negative) b) Traders are also expecting the FOMC to be hawkish; and c) Sell side shops are still recommending buying the pair too, which should add support.

Oh, and if the above was to work, sell CAD/JPY (chart below). Risk-off with oil collapsing should see this pair sink. It already lost 400 pips last week, so caution is advised (mean reversion risk). It’s a nice outside reversal on the weekly chart though.

US yields finished last week at the lows along with the S&P 500. It does not send a positive signal.

Good luck!

NZD/CAD - Weekly Chart

NZD/CAD – Weekly Chart

CAD/JPY - Weekly Chart

CAD/JPY – Weekly Chart

Looking back (Week of December 8th)

In the beginning of the week, I thought the USD/JPY had some downside (if you really pushed me to say something). Position-wise though, I was neutral. The pair took out as many weak bulls as it could by reaching 117.94.

I thought the AUD/CAD had some momentum going on and took a dabble long. Of course, it went south right after I got into the position. Overall, the pair ranged between .9500-.9600 this week. Chop and chop.

When the #USDJPY gave me a second chance, I did not hesitate. It had rebounded from 117.94 but I thought it seemed bogus. The pair went to the 117.40s eventually (with me out of the position much earlier, duh).

The answer to the below was: no.

And I totally got snagged by the RBNZ. Ouch. They came out hawkish making the NZD fly high.

Well, at least I’m ending the week on positive notes. I liked selling USD/JPY Thursday Night (Eastern Time) given the intermarket analysis. The pair had a low of 118.10s.

And this USD/MXN call has done well for now. The pair is currently at 14.77 as I type (with a stop at break-even)

Later gator.

USD/JPY Intermarket analysis

So the USD/JPY was challenging the 119.15-20 zone just now and I posted a tweet about a short trade. My rationale was as follows:

* The Nikkei was rallying (I have no idea why…Softbank was leading the charge, but who knows..)
* And the USD/JPY was getting bid slowly and reached the 119.10/20 resistance
* However, US bond futures were still well bid (negative for USD/JPY) and the S&P Futures was flat (after getting below a key support level – Tuesday’s low). Oil was still hovering around its low too.

Overall, nothing (i.e. the bearish bias) had changed since the USD/JPY swung down from 119.40s to 118.60s. My belief was that the 119.20 level would not break (due to the other markets not moving) and send the pair down some 20-30 pips (which in this case, it did). Of course, this does not always happen, but it’s a high probability trade.

I was looking at the charts below for the trade. From top left to right: Yen Futures, S&P Futures, Oil Futures, US 2-year bond Futures, US 10-year bond futures, and Nikkei 225 Futures.

For the USD/JPY, I’m usually looking at the key levels of the pair, US yields (2, 10, and 30 years), the Nikkei 225, and S&P futures. Recently, I’ve been looking at oil too because at sub $65 its creating risk issues for the global energy sector.

Dec 11 - All charts


This is how the action in the USD/JPY has played out so far:



This is my favorite type of trade: technicals, support/resistance levels, and inter-market analysis.

Stories to expect

Let’s not be surprised when these headlines below come out in the near future. Someone is writing them right now. Thus, position accordingly.

Oh, and don’t forget, most of these will be from “unnamed sources” that are “familiar with the matter”:

* Chinese authorities considering further easing measures, given recent soft data ==> boosts equities and Aussie dollar
* ECB to implement full QE ==> sends the Euro south and boosts European equities (among other assets)
* Japanese central bank to consider more QE or that some poll shows Abe winning election ==> boosts USD/JPY + Nikkei
* Another article on how the Federal Reserve will drop its “considerable time” language in their next FOMC meeting >> boosts US dollar
* OPEC or some other entity all of a sudden considering production cuts, given further drop in oil prices ==> boosts oil prices