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Right now the game is analyzing charts that, at first glance, might all look the same. Scanning them this weekend led me to believe more strongly that the weight of the evidence is leaning hard in the direction of a risk sell off. I don’t have a view as to how long it might last or how far things like the S&P index might fall, I just see that it is, on balance, a terrible risk reward right now to try and make money on the long side. It also looks like the dollar could breakout against almost all currencies. The only ambiguity I see is with respect to gold and the euro. But if a selloff gains enough speed or length, I would be shocked if these two didn’t get dragged down too.
It’s true that investors are still negative and for the most part under-invested. It’s also true that in my view there’s an asset shortage that goes well beyond high quality bonds. These factors make it difficult to get aggressively short for any length of time. But I do think, at a minimum, there has been a decent amount of FOMO buying in the last few weeks that could be shaken out. If the data and/or earnings in the aggregate turn out to worse than expected (not a low bar with the current level of negativity), or investors come to believe the economic hold down will last longer than now thought, a sell off could go beyond a simple FOMO shakeout.
Here are the charts I’m looking at for leading clues about a selloff. Most of them have a link to commodities, often a leading vehicle of expression for global growth pessimism.
All of these charts (with the exception of USDCNH) show variants of a WAB (weak-ass bounce) that’s rolling over. USDCAD is obviously inverted, and USDCNH doesn’t quite fit the pattern because it’s managed against a basket. But even the USDCNH pattern shows a clear likelihood IMO of a continuation up move.
It’s also worth pointing out that the angle and magnitude of the bounce can be used to interpret relative strength. For example, the bounces in EEM and Copper aren’t as steep and didn’t retrace as much as, say SPX and AUD. This might not matter much if you are looking at short term trading. For that, it’s probably more important to try to identify where the recent buying has been heaviest and which assets feel most crowed. This criterion tends to work best in the initial phase of a sell off. However, if you are thinking about longer term positioning, shorting the weaker asset tends to be the best way to go.