Stocks crash into the close, USDJPY under 107 and heading to 105

October 14, 2014

I wrote in April and then again yesterday why I am 100% cash in my super.

Readers here will understand why – Uncertainty, Mandlebrot and Minsky.

It seems now when we look at the price action of the past week and the grim finish on Wall Street this morning that markets are now coming around to my way of thinking. I’m short USDJPY as the best way to trade this from an FX platform view and of course I’m 100% cash in my super.

That is not a position for everyone obviously but with the S&P Physical dropping down and through the 200 day moving average sentiment has clearly turned.

Interestingly based on my long term Jimmy R indicator/system this is still just a pullback and hasn’t even kicked off properly yet as John Hussman tweeted earlier.

Anyway for the moment it looks like the psychological fabric of stock traders seems to have taken a material hit if the price action and weak close overnight are any indication. Pictures paint a thousand words as David Gates and Bread sang in the 70′s and the chart of the S&P 500 futures says it all.

After trying to rally stocks and futures traders sold aggressively into the close. This tells us that uncertainty for the outlook has risen materially and the buy the dip meme which has so permeated US stocks since the start of QE3 is under pressure. The question is how far and how fast this pressure to the downside builds and whether or not it will cause the fed to delay either the end to QE this month or the normalisation of rates in 2015.

At the close the Dow was 223 points lower for a fall of 1.35% closing at 16,321. The Nasdaq was down 1.46% and the S&P 500 dropped 31 points or 1.63% to 1,875. Futures, which are about a 10 point discount to the physical look biased to 1,800.

In Europe stocks closed when the US markets were doing better with the FTSE up 0.41%, the DAX up 0.25% and the CAC up 0.13%. But given the US drives everything at the moment Europe will play catch up until the US comes in tonight so it is somewhat irrelevant.

Locally almost all of yesterday’s gains on the SPI 200 were erased with the December futures down 28 points to 5,106. Iron ore was up a ripping $3.25 so FMG might have another good day and the local market might defy the US for the second day in a row – maybe? In Asia it was a mixed days trade with the Chinese trade data rescuing Shanghai from its lows at 2,341 but the close of 2,366 was still 9 points or 0.36% lower on the day. The Hang Seng had no such worries rising 0.24% while in Tokyo weaker lead from the US and a yen was threatening, and has now broken, 107 has Japanese stocks under pressure. The Nikkei dropped 1.15% to 15,301.

On currency markets the Aussie dollar has done very well up at 0.8772 now this morning and looking like Bill Evans and Rob Rennie at Westpac were right about a rally toward year end. It’s a strong performance in the context of USDJPY’s reversal from a 107.62 high to 106.80 now that stocks settled so much lower. Euro is higher as well to 1.2754 so this looks like a USD move.

But as you can see in the chart above the overall dominant and very long term down trend remains in place.

I’m looking for another 200 points lower in USDJPY.

On commodities iron ore was higher as mentioned above but Newcastle coal remains under pressure with December futures losing another 60 cents to fall below $65 a tonne to $64.70. Elsewhere Nymex Crude was down 0.9% to $85.05 a barrel, gold is up at $1,235 finally doing its job as a fear gauge and copper rallied to $3.04 a pound. On the Ags corn was up 3.44%, wheat rose 1% and soybeans were 2.15% higher.

On the data front today the most important single release each month for the economy is released the NAB Business Survey. This is an excellent snapshot of so much of the economy. Also out is the ANZ-Roy Morgan weekly consumer confidence at 9.30. New Loans are out in China and tonight we get a raft of CPI releases across Europe and the ZEW survey in Germany. In the US its redbook night.

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