I find this an interesting chart. The implications are to hold stocks, but nervously, and that the “Yen Short” is a bit old. Yet there is a vote for a new Bank Of Japan Governor. There are three candidates, all more for a ‘weak yen’ than the current occupant. Most likely the present levels of the Yen assume the ‘middle guy’ wins. So I would predict yen can go either way, based on who gets the position. Iwata, Muto, or Kuroda. I don’t like to make trades based on things like elections as it is basically a crap shoot.
But the chart is still interesting. If one HAD made the Yen Trade, what tickers did well? (And which would be shorts if the yen gets stronger?…)
RUT - Russel 2000 small cap US stocks GLD - Gold ETF FXE - Euro ETF FXY - Yen ETF SPY - S&P 500 benchmark ETF EUO - Euro Short leveraged ETN DXJ - Wisdom Tree ETF in Japan with ex-Japan exposure EWJ - Japan broad market ETF YCS - Yen leveraged short ETN
This chart uses the RUT Russel 2000 as the base ticker. It is showing continued ‘steady up’ trend. (Due to The Fed pumping in money and bonds starting to roll down). “Don’t fight The Fed” argues for that trend to continue “for a while”, though US Markets look very “toppy” to me. Likely not a good time to put in ‘new money’, but I’d use a trailing stop loss behind present positions rather than sell them out preemptively.
Of particular interest here is that two tickers both did rather well. The “leveraged Yen Short – YCS” and the “Stocks with sales in non-yen terms Wisdom Tree fund – DXJ”. These are the two black / grey lines on top. Short yen the upper one.
The two losing tickers are the “Euro Leveraged Short – EUO” and the yen FXY. Notice that the blue line, the FXE Euro, is rising. So a short yen / long Euro would have been a very good trade. The green line is the broad Japanese stock market, EWJ, and clearly did not get as much money flow as those export oriented companies with non-Yen income in the DXJ fund.
Finally, SPY is the redish line that ends up about 5% up on the right hand side. Less than RUT. So being “Long RUT” and short yen was better than many other strategies (including long Euro short yen or long EWJ short yen).
For indicators on RUT, I’ve used momentum and MACD with DMI. Momentum is clearly saying “hang in there”. MACD is above zero and more or less flat sideways, also saying “stay in” for now. A “sideways weave” is the hardest MACD to deal with as it does many regular crossovers that mean nothing much; then eventually does a crossover toward the zero line that “sticks” and then you ought to be out. So I watch for “how long has it been going on” and for “has the slope started to trend downward?”
With ADX at near 50, the trend is very strong. DMI+, the blue line, as started a new inflection up and continues high while DMI- the red line, is staying low. RUT has strength and is continuing. Watch for an inflection downward in DMI+ and / or ADX as indication of weakening trend.
The Yen Trades look to have “gone flat” at the ends, so pausing for the election of the BOJ Governor while the Euro has started to roll down a bit, likely getting worried about the Italy vote coming up. Watch the Euro for opportunities to short it if the election makes Italy a Poster Child for exiting the Euro. Watch the Yen for opportunites to continue shorting on resolution of their BOJ toward a ‘bugger the yen” ongoing position (though I think that trade is a bit old). At some point Yen will start a rally as the “big money” exits their trades (the Dead Cat Bounce). That’s about a 1 week ‘counter trend trade’ you can make if you move fast and use a fast chart.
Finally, gold has rolled over and is in an established down trend. That will “continue until it doesn’t” (which is not a cheeky as it sounds). Plan on a trend in progress to continue even through modest reversals (“dips” if up trending, counter trend rally in down trends). That holds until such time as the trend has clearly reversed with prices going to the other side of the Simple Moving Average lines and staying there (failure to penetrate on a reversal to the SMA stack). The most likely explanation is some very large Fat Wallets exiting their gold positions (measured in $Billions) for other trades. In particular, Soros has been doing the “long Japanese stocks short yen” trade and may well have funded some of that with gold sales. That the trend has reversed to the downside indicates someone figures they’ve made their bundle and are selling out. (It doesn’t matter what “The Story” is, nor who you think is buying or selling what. Actual sales and buys move the price, and the net price movement tells you the net-net of all “Stories” … so a down trend says selling is in excess at this time). IFF we get a sudden reversal of both gold and yen, it is likely some Fat Wallet ending that “yen short” trade and parking money in gold; but I’d expect to see the ‘parking’ to be done in another currency that is rising vs gold.
Leveraged funds usually have a “go flat” if the underlying asset just has a drop of rate of change. (They are often made from instruments like options that have a volatility premium in them, so just a change of volatility, or rate of change, can cause a ‘go flat’ or a drop.) This is useful some times as an early indication of a trend weakening, even if you don’t use the leveraged fund.
All in all, I see this as the “Great trade I missed” rather than the trade to do now. Yet still instructive. It shows what “Big Money” does and how fast it can move on Central Bank news. IFF you can watch the news that closely and react that fast, you can make a lot of money on Government News. The ‘swing trade’ ran for about 45 trade days ( 2 elapsed months ) and had onset in a couple of days. (That yen ‘leveraged short’ shoots up on the first move day). So there was time to be in the trade, even if you didn’t ‘catch it’ until the end of the first week. (When it then went flat for about 1.5 weeks, so would be a frustrating time to make an entry…)
So “lessons learned” are to pay attention to ALL the Central Banks and what they say. When there is a major shift from “strong currency” to “weaken the currency”, you have a few weeks to trade, and watch the leveraged funds for clear inflection indications.
Knowing what specialized currency sensitive tickers exist for the major currencies / countries is very helpful. (I didn’t even know the Wisdom Tree fund existed). Planning in advance matters. Even if you end up waiting for years for a change of Central Bank behaviour. Do the trade plan now, put it on the shelf, and then it’s just pull the tab when the news flow hits.
Not likely to trade “short yen” going forward until after the BOJ election and the Italy election are out of the way. Oh, and the USA “sequester”. Gee, actual production of goods and markets not mattering, while government posturing and bogosity is driving things… Welcome to Global Central Planned Finance…
Here is a ‘live chart’ of the same tickers so you can see what is going on ‘going forward’.