Ok, another August week rolls by and, as so often seems to occur in August, we have a continuation of these choppy non directionally bias asset markets. We are by nature looking for direction across markets so we can expect a jump in volatility heading into September. This August looks very similar to August 2016 and even August 2015.
Looking at the sp500 the breadth divergence has not improved, nor on the nas100 across several breadth measures. So we can clearly see that these recent price highs have been achieved on a very narrow, highly selective basis of stocks across many indexes.
Sentiment remains at elevated levels, albeit off recent highs. Put call ratios have come off super bullishness and some participants have bought some protective puts here but its not significant yet by my measures. (ie its not a full trade by any means). But timing is everything in markets of course so these micro tactical moves need to be watched on a real time basis for any shifts that allow us to take a preferentially entry. For my money the ideal entry is not showing today short. But i strongly expect this entry to show in the next 10 to 20 days or so. CTFC readings showed no significant hedging in the futures markets of equities. The extremes of long euro last week were telling, as they often are.
There is more than enough evidence of a forthcoming correction. Its severity could surprise to the downside if it occurs alongside geopolitical heat. I am looking for entries to the short side on US equities as hedges for other longs, for the moment. I am aiming to achieve a 50% sort of hedge in the next 10 days or so. Instruments will be a mix of etfs, and options. FX wise, we have seen such strong euro momentum that we should see a few more attempts to gain higher highs at the least. Therefore its too early for me to look for a major FX allocation shift and US$ longs a yet. Tactically this $ strength could sustain a little but the euro should come back a few times before we see a trend resumption of full US$ strength. Therefore in my opinion its too early to look for end of inverse $ trend related assets. (Ie commodities, and we must be careful to respect the positive correlations to Tips and war for this asset class).
We can see that Fitzpatrick and the Swiss team are both in the camp of a continuation of this secular $ strength and I concur, once this high momentum euro bounce fades.
Bullion is a tricky asset class here. We have various cross winds from bonds (2.6% on the UST still the important level) to risk off to geopolitical to the coming US$ rebound. So many cross winds we should expect, at the least, extreme volatility due to this. I remain a gold bug at heart so at these levels a hold for my book.
We have had storms in the Balearic islands due to the extreme heavy humid heat we have seen. The storms have cleared the air and now we have a more sustainable heat and cloud clear days again to enjoy. Markets have also become heavy following their H1 run up. We also need to clear the market also. A sharp healthy correction will set up the end of year bull run and allow at least the q1 run up.
Cycles are natural phenomena that central planning policy makers would do well to stop endlessly fighting. We would all be much richer if they allowed them to occur.
All the best guys and enjoy what remains of the summer. September will likely be busy.
Rich
Here the swiss team:
And here Fitzpatrick:
Here Yardeni on sentiment:
And here Scotia on the most recent CFTC:
Rich