A Look at East Asia Via AUD

I'm not predicting AUD strength, but I look at charts of AUD crosses and wonder. With the RBA relatively hawkish, what if AUD loses less than expected in a USD rally? Many charts would break bullishly for both AUD and by implication, USD should USDAUD be also climbing. RBA Surprise Rate Hike

I'm Shorting the Gap

That's quite the gap that's opened up between XLE and CL. There's a roughly 20 percent peformance gap open. It can go wider, 30 percent wouldn't be impossible, but this type of directional gap where one rises and the other falls is rare. This isn't necessarily going to close then, but the inverse correlation should end. Since XLE looks like a double-top here, I see XLE as offering similar downside potential as CL or USO, but without outperformance potential (for short positions) should the gap close.

Here's how performance went in 2014 and 2018. The latter looks more relevant to me given rising rates and falling stocks as part of the backdrop.

Are We Done Here?

The elevator doors are open and there is no elevator. Will the market step in today?

Hello Deflation

The October PPI report was bullish for stocks. The market should love than news and run higher this week, but there are signs of weakness. I was caught wrongfooted opening short positions yesterday, but I might have been early instead of wrong about the rally completing.

The exhaustion I saw in the market yesterday was wiped out by the morning’s response to the PPI. Most people are not looking at China and other data sets showing the clear tilt into deflation underway and more oncoming in 2023 once housing data trickles through. At least through the PPI release, the market is still viewing falling inflation as bullish.

The core PPI services segment went negative in October.

There’s one potential paradox: speculators have been bidding up commodity prices in response to lower inflation readings. Will that continue? Today’s initial response was a jump in commodity prices that quickly reversed. It will be telling how this plays out today. If copper and oil continue sliding, it may indicate the market has started realizing the downturn in prices and slowing pace of Federal Reserve rate hikes might not be bullish.

Stocks reacted far more positively because there’s no sign of recession yet. Falling commodities without a recession would be positive for GDP growth, consumer spending and limit Federal Reserve rate hikes. It would be a move back towards the “Goldilocks” economy that stocks love.

If instead stocks and commodities start sliding, it will be evidence the market has moved beyond inflation worries and started on deflation worries.

Yesterday I opened a bunch of short positions having seen exhaustion on the tape. I’m going to be underwater at the open, but notice the line on the NQ chart. I have two resistance lines on the NQ at 12100 and 12200. Right here, my thinking is to add more shorts at 12200 if it can get there, but cut loose all the short positions above.

China Going Supply Side

Yicai: China’s Local Governments Should Put State Assets to Better Use, Ministry Says

Chinese local governments should make better use of state-owned assets, such as houses, land and cars, in order to help plug the gap between fiscal revenue and expenditure, the Ministry of Finance said.

Local governments should conduct a thorough inventory of the assets that they occupy and use to make sure that they are being used efficiently, such as through the sharing, swapping, leasing or selling of these resources, and that none are lying idle, the ministry said in a document released yesterday.

Liu He had a widely-discussed editorial calling for supply side reforms: 刘鹤人民日报撰文：把实施扩大内需战略同深化供给侧结构性改革有机结合起来Hong Kong shares jumped 5 percent and A-shares more than 2 percent with more rumors of reopening. These two hotpot chains sport higher lows.

The emerging market ETF will open up near the gray line this morning.

Since everything is tied together, it still all boils down to the U.S. dollar. Copper is up 5 percent today, crude oil 4 percent for the same reason as the above. Will the Federal Reserve ease policy if the CPI reverses and goes vertical on a China reopening? Or are we headed for 10 percent interest on 30-year mortgages

FWIW, I'm looking for a reversal in the stock market today because none of these moves are good for U.S. equities. Short-term anything can happen though.

Melt-Up or Reveral Time is Coming

The market is looking for its melt-up heading into the Federal Open Market Committee meeting. My gut read of the market is that the Fed will have to come in surprisingly hawkish to nip what is forming in the bud. When sentiment is in control, reality doesn't matter. The reaction matters. The Fed's hawkishness or dovishness will be interpreted in the immediate present based on the market's reaction.

Today should be a nothingburger in the markets and that will probably last until 2 PM tomorrow.

Inflation Inflation Inflation

The most interesting chart today is ZB and the reversal in treasuries. It has made it back to my initial target level at 121. Above and there's a potential base in place. I've been holding some calls since Monday that were a short-term trade with possibility. The big question going back to the summer for me has been: when/will bonds signal a shift to deflation? Home prices are down on schedule, but as I've discussed before, the government inflation indices may not capture this until as late as early 2023 if Larry Summers has it right.

Copper and oil have stabilized with the markets. These factor into the "big question" beccause inflation is hard to kill. The 1970s saw the Federal Reserve take their foot off the rate hikes when recession hit and the CPI reversed, but it never made it back down. Result: endemic inflation.

As for the market, I don't think we're in an uptrending market with earnings season volatility. I'm not convinced in a rally yet. My current thinking is the transition scenario where the economy moves from inflation to deflation, bonds rally and stock market bulls and maybe commodity bulls (less successfully) interpret this as bullish. Then around January, the reality of deflation sets in. Contra that, the Cleveland Fed has been hiking thier inflation forecast for October. Maybe this rally gets garrotted like it has the past couple of months.

Confuson Growing

We've entered the part of the bear market where confusion begins creeping in. Did the Bank of Japan intervene again or was that the market? Are central banks secretly intervening as the did in 2016? True or not, this signals the market now belongs to the central bankers. If the yen rallies, the BoJ rises in stature. If the yen falls, the BoJ has failed. Some bears are now wondering if central banks will destroy them again as in prior bottoming attempts and bulls must now worry that the yen starts trading more like the Thai Baht in 1997 than a G7 currency.

My advice: it's a binary event. Either it happens or not and there's nothing we can do about it. The market is already down a large amount this year so pressing shorts isn't advisable. Conversely, the bounce we have seen since the bounce from 3500 is a good spot for opening new shorts. I am stalking energy again, gold, and looking at individual targets such as DPZ.

USDCNY moved to a new high today and is tracking with the yen. USDCNH is up 1.2 percent, gold failed at resistance, U.S. long bonds are following through on their bounce from last week and Hong Kong cratered 6 percent overnight.

With Chinese yuan pounded and Hong Kong down overnight, iShares MSCI Emerging Markets (EEM) is down more than 3 percent in premarket and below it's long-term support line.

Better Off Red

ZB is heading for the measured move target of 121. TLT is in free fall. I do not know if 121 will hold or not. I'm agnostic here. As I've said before, I think ZB can bounce as stocks crater and it can bounce with a bull rally. If it is falling, then stock are probably going lower. ZB is at a new 52-week low. Don't over think it.

Gold, copper and oil are all below important horizontals that mark topping patterns. All three have collapse analogs. The Federal Reserve is doing what they did when commodities collapsed over the past decade. The charts are rolling over into h-like patterns. I have a simple two-part thesis. One, I think these charts are going lower. Two, if these charts go lower, they complete setups that forecast plunging prices. If they go lower, they go way lower. So I buy OTM puts. Since gold has lower expected volatility, I went with that one. I have November $150 strike puts on GLD.

Stocks say hold your horses. I can't ignore the counter-signal from the market because it can be a predictor. For now that's all it is, a prediction. Everything else says stocks are experiencing an internal technical move that will lose steam. Stock will recouple with commodities and bonds, and sink.

You know what didn't rally? Energy. I closed weekly puts I opened yesterday. I may or may not open them again. I am still holding some OTM COP puts for November. I also closed my USO puts that expire Friday yesterday. I may or may not reopen that position because as I posted yesterday, I think it's time for XLE to underperform USO. If oil goes higher, that is probably bad news for stocks and bonds.

I can see outlines of a dollar top in the euro, maybe even the Korean won, but not in the Japanese yen. Not the Chinese yuan. Currency crisis only needs one player. I view this as a high stakes situation because DXY is advising some caution that will be warranted if USDJPY tops out. The flipside is China could be forced into letting the yuan drop and last time that happened, stocks went almost straight down 10 percent in much better macro conditions. I'm playing the possibility of this with OTM puts on EEM for November. There's no support if emerging markets break lower and China is their lodestone.

Finally, BTC. It ain't screaming sell everything yet, but it also ain't rallying.

These aren't my only trades listed above, only ones relevant to these charts. My first thought will be to add more BigTech, energy and consumer staples shorts if the market turns lower. I did jump into some Apple November puts yesterday. Earnings season makes single-stock options trades pricier, but I might put some on in special cases or post-earnings.

ES Fills the Gap, Commodities Down, Bonds Flat, Dollar Up

Stocks are racing ahead of everything else if a rally is coming, or they've gotten overextended before a new low is made 10 to 15 percent lower, leaning towards 15 percent since there's much more fuel for a drop now. Conversely, the move to the gap was where I was expecting stocks could move on this rally. Beyond this and things are much more bullish than they appear. The entire market activity since June looks like a complex double bottom. Stocks will likely rally into the new year if this holds, possibly into spring. From a societal perspetive, this is almost a worst case scenario because I can only imagine how many people will be trained to hold no matter what, and I still expect a massive bear market has begun. The 3820 level is only a stones throw away and if that base completes, a rally up to the 4000 area is possible.

Finally, I do not foresee commodities such as oil rallying with stocks from here. If wrong about that, then seriously consider moving your assets into secure political jurisdictions and prepare for either far-left or far-right populist governments. The public is already at a breaking point, but continuation of an economy that shovels "wealth" into the pockets of the "1 percent" at the price of impoverishing the "99 percent" will eventually catapult the first guy who says he'll smash the 1 percent into power. The 1 percent of course being whatever he convinces the public they are, but as we've learned the past two years, people can be convinced to do anything including wearing useless masks 24/7 and cheering for nuclear war.

Crude in 2008 and 2022

Shorting Energy Again

I am a glutton for punishment.

Good Payroll Report

Between the Atlanta Fed and the payroll report, I'm admit to having some doubt about the weakness of the economy. I thought there would be clear signs of recession by now. Perhaps this is the last gasp. It would be very good news if it wasn't. A strong economy also doesn't really dent my bearish thesis because remember the 1970s. The Boomers + 1965 immigration act + feminism unleashed massive labor supply into the economy, wages soared with inflation and the stock market fell until an inflation-adjusted low in 1982. High inflation and high interest rates will kill financial assets and shift capital from Wall Street to Main Street. This is undoubtedly a good thing.

As for today, my main decision is whether to close weekly puts at the open because the market could rally back towards 3750 on the ES or hold because a move down could accelerate. I would reshort at 3750, that would be the plan barring a bigger rally. I don't expect a larger rally. While a move back up towards 3800 wouldn't kill my bearish outlook, it would surprise me a great deal.

For today's chart, here's the AUDJPY cross and then again with crude oil overlaid.

Keep an eye on HYG, LQD, mortgage REITs such as BXMT, Canadian banks and so on. The word for the day is follow through. Bears want to see new 52-week lows in these types of sectors because it will speak to rising financial and credit risk. If these sectors don't make new lows, it would raise the risk that the drop today, currently driven by Nasdaq and technology stocks, could be reversed.

DING DING DING What Does It Mean?

I updated the DING DING DING post, discussing the prior peaks and reversals. I see this stuff in the midst of the day's action and alarm bells go off, but fully digesting it takes time. To hammer home the implications, here are crude and stocks layered alongside this ratio.

It's always possible the ratio goes higher before turning. Or even going far higher than anyone anticipates. Yet the latter would mean the public has faith in junk bonds as it loses faith in the credit of the United States. That strikes me as unlikely at this juncture.