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It is bizarre that S&P 500 and commodity futures should open 1% lower based on the idea that the Chinese Stability Fund will no longer be active in the market. It seems like we simply need a reason to panic these days. In theory, adding to the Stability Fund’s current position and increasing the exposure to equities was never going to end well. Ultimately, how would they get out of the position? Where does it stop – when they have cornered the majority of the market? Still, the fact that the mainland markets are down seems driven by the idea that officials have moved to a more re-active function and there is a general concern of policy missteps.
Permanent Federal Reserve voter Stanley Fischer has put the weight of the world on Friday’s payrolls, although ISM manufacturing, service data and vehicle sales will also be interesting. Have markets opened on a negative footing because he caused another twist in the ‘will they hike in September’ question? Perhaps – although I still sit in the camp that a move higher in the funds rate is bullish, which is a view signalled by Fed member James Bullard at Jackson Hole. However, my view could definitely be incorrect and the market will be quick to tell me if they think the US economy is not ready to see the start of a normalisation process.
The FX market has followed US futures, although the JPY was already catching a bid prior to US futures open. AUD/JPY found good sellers at the 50% retracement of the August sell-off (at ¥87.42) and looks to be a good proxy of sentiment today. There are some real qualities to being long in JPY right now. If we look at the weekly Commitment of Traders (CoT) report, we can see that leveraged funds reduced their net short JPY position by 51,000 contracts last week. That would be up there with one of the biggest adjustments to positioning ever!
AUD/USD is also getting a lot of focus, partly due to tomorrow’s Reserve Bank meeting and partly because today’s Q2 inventory data suggests downside risks to Wednesday Q2 GDP print (consensus 0.4% quarter-on-quarter). There is also a strong technical focus as well, with the pair looking to close below a multi-year trend line. In itself, this is not enough to warrant short positions, but this fate should absolutely affect directional bias. Although the trend lower should already be shaping that view, this will only add to the growing negativity around AUD/USD, especially with leveraged funds increasing their net short position to 63,000 contracts last week and effectively eyeing the largest short position since March.
In the equity markets, it’s China that is underperforming, but most markets are closing out what has been a horrible month to be long in equities. Certainly, the ASX has had its worst performance since September 2008, and China’s since August 2009. I am not sure the technicals are telling me things are going to get better either.
If we focus on US markets as a guide for future direction in other developed markets, the weekly and monthly charts look likely to throw up a number of strong negative signals:
- The S&P weekly chart is showing a huge bearish divergence between price and market internals and the various oscillators. Here, we can see the level of companies above their 200-day moving average has been falling consistently since early 2013, while price has risen. The 14-day Relative Strength Index (RSI) has made multiple lower highs, while the S&P made many higher highs. This can be a very strong sign of a reversal.
- The 55-week moving average has been convincingly broken and this has clearly been the level traders have been happy to accumulate stocks at. Not anymore, it seems, and we could be staring at a second weekly close below the average.
- The monthly moving average looks set to be broken (on a closing basis) today and in the last 25 years, with the exception of three periods (as circled), this average has defined and contained the trend. The trends have also been very powerful when this average is crossed and the bears will be watching this with huge interest.
- The NASDAQ looks to have completed a wave four count and is now reversing. In theory, if this is truly the fifth wave, then we should see the index trading through the recent lows.
- We can also see a firm rejection of horizontal resistance at 4340. For me, this is the clear place for stops on bearish positions.