One of the things I do is “fool around” with various charts. Putting different things on the same graph to see if any correlation shows.
I’ve found a variety of them. Some more persistent than others. A couple of years ago there was an interesting inverse of Japanese Yen and some stock trades. The “Tell” was what looked like “settlement” of trade money flowing to / from Yen. As though some large Whale was using Yen. At that time, the Yen was way lower interest rate than anything else, so it was used for the “Carry Trade”.
In the carry trade, a major stock house borrows money at ‘as near nothing as it can get’ and invests it. Making profit on the difference between the cost of the money (nearly zero) and the return on the investment. Think of things like Oil REITS yielding 10% with asset appreciation in the oil… Or a drug company with a 4% dividend and growth. Nice.
But sometimes it looked like it wasn’t just Carry Trade, but perhaps High Frequency Trading.
Then The Fed cut US rates to nearly nothing and the relationship softened. As though some of the carry trade had packed it in and moved to $US loans of Carry Trade money and Treasuries as a parking place.
Now it looks like some of that Yen trade may be back. Especially of interest is how the higher volatility of Emerging Markets looks to have “called the ball” on the rollover first, and the Yen confirms nicely.
Here is a static chart as of today, with several stock ETF tickers on it along with TLT 20+ year treasuries ETF. This is a very large chart so click on it to get a much more readable version.
I find this chart interesting. Perhaps useful as well…
First off, notice that Yen and TLT tend to trade together, but with TLT being more volatile. So one quick idea is a “reversion to the mean” trade that buys TLT when below Yen or at the Yen line, then sells it for Yen when too far above and a Reversion To The Mean is likely. In the last two months that relationship breaks down a bit as TLT rises well away from Yen. Does that mean TLT and long duration bonds are “at risk” of a drop right now? Time will tell.
While stocks are rising in a fairly strong trend, both bonds and Yen drop. February and March. But Yen seems to have a bit of a lag to stocks at the start. TLT drops from a peak mid-Dec to a valley toward late January while Yen is mostly just wobbling.
Looking at various Emerging Market tickers (EEM, FXI China, EWZ Brazil) we see them ‘rolling off’ first. Weakness shows up first in the most risky tickers, last in the least risky / most cherished. So those bright yellow, orange red, and raspberry red lines; they start dropping in the start of March. SPY and other US Stocks hang on until April 1 to begin their drop.
During the ‘run up’ they are above the blue SPY line. (As are the RUT Russel 2000 and QQQQ Nasdaq 100). At the “failure to advance” point in US markets, the green RUT line cuts through the blue SPY to run below it. At the same time, the black TLT line “cuts up” and away from the Yen. Slightly before that “roll off” the Yen has a MACD crossover to positive (buy Yen) and DMI goes to “blue on top” – buy Yen. So “buy Yen, sell US Stocks” seems to be the relationship (with Emerging Market stocks moving first).
Right now, MACD looks to be making a crossover to “Red on top” and DMI has red rising and blue dropping, as though a crossover is due soon.
Does this imply the present stock run to the downside is going to “pause” and perhaps give us a couple of days of recovery? It ought to have a reversion to the trend bounce back to the middle of the SMA stack “soon”, but ‘when’ can be a bit variable. Still, the implication is “A bit late to short more, and a jump possible, which may then be evaluated for a fresh short”. Will the Yen indicators call that point first?
There is also an implication that WHEN we see the emerging markets start to rise toward the SPY / RUT; that may happen a bit before the US market bottoms and turns. (Though that is speculative. It may be that emerging markets lead down and lag up… we’ll need to “dig here” a bit more to sort that one out…)
What is clear is that there is a timing relationship here. “Risk Appetite” fades first in the more risky instruments. Bonds had already had a ‘failure to advance to the downside” at that May 1st date and the Yen had been rising for a week before SPY, RUT, and QQQQ rolled over and died. (Perhaps on the strength of that money leaving Emerging Markets?).
At any rate, it looks like the Yen has returned as an indication of Whales moving money and it looks like sorting markets by risk lets you spot a “risk on” vs “risk off” transition early for some classes of ETF (with less risk lagging more risk).
Here’s a live chart for watching for a few days to see if the relationships hold:
I’d noticed something a lot like this a couple of years back, but this example is even stronger. Realize that if such a “tell” is widely watched, folks change their behaviour such that it tends to stop working; so this may work for “a while” and then break down again. No indicators are forever and no process is permanent… so “use but verify” any indicator… and let the ‘stop loss order’ be your friend. ;-)