From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Defense wins championships.
It’s important to remind ourselves of this as risk continues to come off the table.
The largest stocks in the world are losing critical support levels, and even the leaders are coming under pressure. Bonds are catching a defensive bid, credit spreads are as wide as they’ve been in years, and investors are fleeing to the dollar for safety.
Meanwhile, the classic risk barometer – the AUD/JPY – is breaking to fresh lows.
This all speaks of defensive positioning.
Here’s a daily chart of the AUD/JPY:
Just a few weeks ago, the AUD/JPY was rallying to its highest level since the summer of 2015. Now it’s more than 7% off those highs. And as of this writing, it has slid more than 250 pips in today’s session alone.
This price action screams risk-off!
The breakdown in this critical risk ratio supports the risk-averse behavior we’re seeing take hold throughout the market. Even the leadership groups – energy, natural resources, and commodity-related stocks – have been hit in recent sessions.
Commodities have a target on their back. And as more and more risk assets break down, it’s only getting larger.
AUD/JPY is now the latest edition to that list.
We witnessed commodity stocks break down in April. Commodity and oil-producing countries have followed over the past few weeks. And in recent sessions, we’ve also seen new lows from a handful of commodity currencies.
We have to imagine the bears are coming for commodities next.
Don’t get caught up on the wrong side of this trade. It’s time to play defense.
Let us know what you think and as always, please reach out with any questions.
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