The Case for Deflation

The market is in a curious state with some sectors such as oil and oil serivces hinting at bullish breakouts and bonds hinting at bearish breakdowns. How about the contrary? The charts say the market isn't far from deflation either. If crude reverses, the outlook for inflation dims fairly quickly. I'm not going into monetary data in this post, only looking at some assets that should be doing well if inflation, specifically commodities prices, move higher.

Crude oil is about $10 away from a clear bullish breakout, but it is battling at a resistance area. It is $20+ away from a major bearish breakdown.

Rio Tinto has a potential measued move to $100 or its done and topping.

Freeport-McMoRan has what looks like a diamond pattern to me. Moves out of diamonds are often huge, powerful moves.

Emerging markets, of which China is the main component, are less than 10 percent from major support.

Copper is already well into a rollover and it leads oil.

Not enough to call it a serious break yet, but EURUSD went through support on Friday. The euro is keeping the U.S. Dollar Index in a bearish pattern.

East Asian currencies are rolling over. It won't take much of a push open a retest of the dollar's 2022 highs. An extension of the current dollar rally into Monday might be enough, as it would be enough to carry EURUSD below support...

Of Australia, Brazil and South Africa's stock markets and currencies, only Brazil's currency looks strong. You'd think it would be more than 1 out of 6 if a commodities bull run is coming.

Gold has a bullish look to it, but it often falls in the first part of deflationary waves. A pullback towards ther $1550 to $1600 area might be the buy of a generation if secular disinflation and the 40-year bond bull market have ended.

I've been focused on rising home prices and affordability, but I didn't pay close enough attention to the 2006 top. The Case-Schiller Index spent about 13 months topping (the low between the two tops broke in April 2007, after the initial March 2006 peak) with a double-top pattern. A precisely similar top in time would see home prices implode this month because Black Knight has said, and the trend in Case-Schiller, points to a new high in July. Case-Schiller will report August data in October. Analogs need not be precise though. As long as prices sink in the autumn, it'll be a very similar top. The prior top was followed by a 50 percent decline.

More Important Than the Dollar

Everyone is focused on the dollar most of the time and they're right to.

If the yen weakens much further though, it is going to become the story.

Something Brewing in South Korea?

The won looks weak, with a possible major bearish breakdown in play. It only looks good versus the yen.

CNY Down

USDCNY 8 is the chart and fundamental target in the near-term. If CNYJPY 21 is a ceiling, and the target for USDJY is 175, that is 8.33.

Yen Intervention Lasts For Hours

It's almost a repeat move so far. The intervention failed earlier if the low is already in.

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.

Chinese Intervention Hits DXY

I wouldn't be shocked if the moved in DXY is entirely the sterling bounceback and Chinese intervention. USDJPY hasn't joined yet. If it turns, there's a dollar pullback. If not, there's still a risk of East Asian currency meltdown.

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.

Yen Intervention Will Fail, But It Is a Signal

The Japanese government will not stop the fall in the yen. Organic market forces will end it. There's nothing to do except buy the dip in USDJPY until there's a large pullback, perhaps if stocks bottom in October. Maybe they'll intervene at 150 or 160, and then it reverses around 175 for this cycle. Maybe 150 or 160 is the peak for this cycle. Who knows. The fact that they're intervening though, tells us there's finally enough pain. The beginning has ended.

Bull Trap Springs: Inflation Higher than Expected

The great thing about a bear market is there's no need to get too tied up in the how or why because bad news is coming.

I was wrong about inflation coming down, but stocks still get wrecked.

Inflation came in higher than expected in August at 0.1 percent. That was spot on the Cleveland Fed's forecast of 0.06 percent. Since the Cleveland Fed forecasts 0.36 percent inflation for September, the stock market and bond market might be in deep trouble here.

Stocks have rallied hard for a few days leaving many bulls trappeed. Bonds are on the cusp of a major breakdown. TLT is already at a new low and ZB is almost there. I do think there's some risk of a double-bottom, but I'm far less confident about bonds here. If bonds go, then it "logically" follows that stocks should be at new lows. Maybe they don't get there, but in the short-term that thought has to cross bulls' minds. They're holding positions up more than 10 percent from the low. If bonds make new 52-week lows...

About 50 percent of the rally from September 6 went poof after the CPI report. If bonds break to new lows it could all evaporate fairly rapidly.

The euro is not at a new low and has a couple cents to go, but the yen and yuan are close to one.

For bears there is some caution warranted because new lows beget new lows, but off the top of my head, I can't think of anything at a new 52-week low aside from TLT. That is a very important fact, but it isn't enough to say markets are a screaming short yet. Though as I type, ZB is a few ticks off its 52-week low. If I start seeing new 52-week lows, I will start pressing shorts.

ECB Hikes, Powell the Matador Up Next

The ECB hiked 75 basis points today. There were spikes in equities, the euro and bonds, and then it faded. The question for today is whether this pullback hints at continuation of the prior three week trend or if this is a buying dip in a developing countertrend rally. I'm long TLT coming into the day, with a tight stop. Possible double bottom in play.

The spread between US and China govt bonds broke lower this week, but not Japan. The 2s10s has been rallying, but that is not a long-term positive sign because it's coming via the long-end rising faster than the short-end. Prior recessions (after 1982) saw a soaring spread because short-term rates fell in recessions. For now, the spread isn't as interesting as what bonds themselves are doing.

ZeroHedge was talking about a snap reversal in yen yesterday. It's not very actionable, but that's ok. Sometimes it's good to be reminded of potential trades even when the setup is not quite baked through. Looking at CNYJPY, one of two things is coming: a pullback in the dollar and reversal in charts like CNYJPY or something like July 1997 and Setpember 2008.

Bear markets are strange because it pays to have a very long-term macro focus, but the news feed is wild because years can be compressed into days. Rallies that take months to unfold in bull markets can happen in hours. Right now I'm lightly positioned waiting for reentry on shorts, and maybe go long if the rally has legs. Zooming out though, the Federal Reserve is still trapped. Prematurely declaring victory over inflation is a very expensive mistake. They must err on the side of overtightening. A recesssion is already underway and it will probably get worse. The Fed is going to take flak for that. They have an excuse though: we were fighting inflation. Everyone told us to fight the inflation. Failure is both inflation and a recession. That's why I expect stocks will tank around the time ZB starts moving higher, but the current moment might fool a lot of bulls who misinterpret what the bond market is saying.