There are some flow and technical factors lining up for a tactical short in stocks
State capitalism for the win
highlights
USDJPY and… Tactically bearish stocks
Current Views
Short EURUSD @ 1.1729
Stop loss 1.1867 Take profit 1.1511
Short TNA at 64.60
(the 3X smallcap ETF)
Stop loss 69.11 Take profit 57.57
Buy GCQ6 at 4610 (limit order)
Stop loss 4294 Take profit 5320
BOJ meh
Well, the Masu BOJ speech was hawkish and USDJPY did this:
“Japan has clearly entered an inflationary phase,” Masu said, “therefore, what is vital from now on is to ensure that, through timely and appropriate policy rate hikes, the underlying inflation rate does not exceed 2%.”
With U.S. yields slightly lower overnight, this is not a good outcome for JPY bulls. It is textbook bad news/good price for USDJPY and while normally that would lead me to buy USDJPY with a stop below the overnight low, I am hesitant because I don’t have a strong idea of what the MOF does next. And we are still below the key 158.00 level that I highlighted in yesterday’s am/FX: Pivotal moment for USDJPY.
I have stressed many times in the past that BOJ policy is a low-importance variable for USDJPY most of the time given the tiny, slow rate hikes and the much faster moving U.S. yield story, but on any given day, changes in perception of BOJ policy can matter for USDJPY for 24 or 48 hours.
At the April meeting, the vote was 6-3 for on hold. Tamura, Nakagawa, and Takata voted for a hike and you can now add Masu to the hikers list. Himino is another swing voter and he speaks at 16:25 JST on May 16 (3:25 a.m. NY time on the 16th). I suppose with a 75% chance of a hike priced and Masu on board, this story gets boring fairly quickly and now we move on to see what the MOF is up to. The reality is that 25bps from the BOJ doesn’t change the dynamic very much as real rates in Japan will remain deeply negative regardless.
Short stocks for a week or so
The extreme divergence between the S&P 500 Index (price) and its components continues as we had 105 new lows yesterday and only 86 new highs. That’s a -19 differential and the average throughout history is that number is +150 when the S&P makes a new all-time high. As discussed earlier in the week, that’s a bearish tell, but I didn’t want to be short earlier in the week due to the option expiry and time of month dynamics. When stocks are up huge, they tend to rally even more into options expiry due to various dynamics around yield-enhancing ETFs and mid-month 401k flows. Once those dynamics play out, it’s much safer to go short.
When you backtest a strategy or effect in equities, you almost always find the output is bullish because the trend of the asset (SPX or NDX) is massively bullish. Therefore, it is hard to find studies or backtests that put out bearish strategies. That said, it’s interesting that the period after expiries (17th to the 21st of each month) backtests flat to bearish. The 401k buyers and gamma hedgers and general inflows are absent in that short period.
On Tuesday, I explained why I was getting bearish stocks, but wanted to wait until closer to the end of the week. Now, we are close to the end of the week and I want to be short stocks into the weekend. Pick your poison, I suppose, with the juiciest downside in the most-volatile stocks (SNDK, INTC, etc.), or you can always sell Russell and avoid the idiosyncratic AI capex headline risks. I like that idea best and I tend to use TNA (the 3X Small Cap ETF) as a good short vehicle when I am bearish like this. In TNA, the idea would be to sell around here (64.60) with a stop loss at 69.11, looking for 57.57. Risking 4.51 to make 7.03.
This is not investment advice! My view could change at any time! I will put it in the sidebar as my conviction is high that tactical short stocks for the next week or so is positive EV. Here is a chart of TNA.
Note there is a nice triangle that will break one way or the other and that might provide more clues on direction.
Final Thoughts
1. USDBRL is a most-loved trade and so the political heat rising there is not necessarily an insta-fade.
2. 800 million payout of a 1-year 6.20 went through on SDR in USDCNH. That’s a big ticket! We have not been below 6.20 since the deval in 2015. So it’s a very expensive lotto ticket. Premium spent of around $40 million it looks like.
3. Intel and Cisco are two of the hottest stocks right now. Let that sink in. Hardcore 2000 flashback.
State capitalism for the win!
