Peak Loose

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Gold broke, now crypto broke, and the USD has turned. Q’s next?

by Brent Donnelly

December 11, 2023

This sealed bottle has not been watered since 1972. It’s a self-sustaining ecosystem.

Current Views

Long EURCHF @ 0.9444

Stop 0.9339

Take profit 0.9644

Short QQQ @ 391.60

Stop 397.60

Take profit 378.85

December 11, 2023

PDF version

Data, Positioning, and QQQ

The market continues to deliver as much pain as possible as The Year of Mean Reversion and Annoying Moves continues. Last night, there was a Bloomberg article headlined “BOJ is said to see little need to end minus rate next week” and that, along with a strong NFP report, has taken us miles off the 141.60 lows in USDJPY.

December 19, 2022, the Bank of Japan (still under Kuroda) made a change to the 10-year yield cap and that was one of several idiosyncratic BOJ-driven yen moves that lasted a day or two. That meeting was preceded by a mix of articles pushing in both directions, for example:

18DEC22 Japan Times: BOJ to hold steady as markets weigh post-Kuroda path

When all is said and done, USDJPY remains mostly a global yields trade and these upside bursts in the JPY on speculation of BOJ hawkishness have been fun, but short-lived every single time.

This week

The BOJ meeting isn’t until next week, so we are back to US dominance with bond auctions and US CPI at the forefront. The US bond market has had a huge reversal off the round 5% level and it’s probably safe to assume the big bond shorts are all out. There is now plenty of room for bonds to sell off this week if the data, auctions, and FOMC meeting do not cooperate with TLT bulls.

I had expected 4.33% to provide some support to US 10-year yields, but we cut through there pretty easily and it seems like the high right before the Silvergate Bank debacle (4.06%) is the pivot to watch. You can see in this chart that 4.06/4.10 has been a big support or resistance point four separate times.

US 10-year yields have had 4.06/4.10 as a major pivot four times

While the auctions will trigger some vol, CPI and FOMC are the big events. Let’s start with CPI. There was a systematic error in economists’ forecasts throughout the boom as NFP, Retail Sales, and CPI all came in stronger than expected, over and over through 2021 and 2022, but most of this has now faded. If there is any systematic bias now, it’s that economists have been too slow to adjust to the softening regime.

That said, the real story has been that as CPI has become less volatile, it has become easier to predict, and the frequency and size of errors has gotten smaller. Here’s the cumulative error in the forecasts for the two main series back to the year 2000.

Cumulative miss (Actual vs. Bloomberg Median Forecast) of the two main CPI releases, 2000 to now

Zooming in to look at the monthly misses from 2020 to now, we see this:

Monthly misses (Actual vs. Bloomberg Median Forecast) of the two main CPI releases, 2020 to now

You can see the misses have fizzled as it’s become easier to forecast, and there doesn’t seem to be much of a systematic bias here. The outcomes have been on the weak side in 2023, but not dramatically so. The result that would annoy the most people at this point would be a stronger-than-expected figure.

The market is back to fully long stocks, megalong crypto, and trapped long gold, and it seems clear from price action in gold and crypto that we have reached peak liquidity. Now the risk is a downside wipeout in stocks, another leg lower in crypto, and a final capitulation out of gold and silver. In other words, while I see no strong bias in terms of what to expect from CPI, there is an asymmetry in the market created by positioning and the looser-financial-conditions euphoria that has swept through markets since the Treasury/Fed intervention in bonds and the weak CPI figure last month. Caution is warranted.

If you are a short-term trader, short QQQ here with a stop at 395.60 looks interesting as a tactical trade. Nothing in am/FX is ever investment advice. Always trade your own view. If you like this idea, you could also sell MSFT or NVDA as they both have tradable tops and clear exit points. MSFT is wrong above 385 and NVDA is wrong above 520. This is all short-term, like 1-week time horizon kinda stuff for me.

After last month’s CPI release, QQQ gapped up and the bottom of that gap is 383. The equilibrium zone has been 383/394, as you can see in the chart. Shorts from here can target either 383, or a fill of the gap to 378.50. Risking 4 to make 12.8 off current 391.60 level pre-market. See page one sidebar.

QQQ hourly chart August to now

The main premise is that we have passed peak liquidity and the cracks in crypto and gold (plus USD strength) are showing the way for stocks. And therefore, the asymmetry through the auctions, CPI and the FOMC is that we see tighter financial conditions this week and lower NASDAQ.

If you’re looking for an FX proxy, here are the currency pairs that are most correlated to QQQ over the past 60 days.

60-day correlation to QQQ

If you run the same grid using a 1-year lookback, it’s AUDUSD (44%), USDCAD (41%), NZDUSD (37%), AUDJPY (35%), and USDSEK (32%). Considering the fact that risky assets have ripped in the month following the November 13 CPI release, and USDMXN is unchanged, one can certainly make the argument that MXN is still crowded and trades poorly.

Calendar

A couple of small corrections in here.

Final Thoughts

Really good point and sweet chart from Sam Rines:

One of the more overlooked aspects of the labor market recovery has been the goods-producing side of the economy. This is the first 21st century economic recovery where the goods-producing side of the economy has fully recovered its job losses from a recession. The Revenge of the Middle continues as Re-Regionalization will not be defeated.