What US Markets Are Telling Us About Risk

First, let's start with an overlay chart of Yen/US Dollar, US 30-Year Bond Futures, and Gold Futures.

These three are the typical "safe-haven" assets we see money flow into during times of market stress. During the stock market correction in February/March, all three of these led to the upside on an absolute and relative basis, however, since then they've all held up very well on an absolute basis. That begged the question of, who's right?

Click on the chart to enlarge view.

Could stocks and these three all have rallied to new highs together? Yes, but historically that's been the lower-probability outcome.

So we were left with the question of whether stocks would fall and these consolidations resolve to new highs? or if all three of these "safe-havens" would break down and help push stocks to new heights?

After months of mixed signals, we're finally getting some resolution. Yesterday (June 2nd) the Yen broke support and closed at nearly 2-month lows. Today (June 3rd), the 30-Year Note is on pace to close below critical support at 176.75 and make 2.5-month lows. And Gold is testing support below 1,700 again, though a close below 1,680 confirms a breakdown.

So the first question is if Yen and Bonds are resolving lower, will Gold too?

Our bet would be yes.

And if Gold joins the party and all three of these "safe-haven" assets are resolving multi-month consolidations in the opposite direction of their primary trend, what are stocks doing in that environment?

They're probably either flat or heading higher.

So what are the actionable conclusions here? Do we run out and buy stocks after a massive rally off the March lows and a 13% rally in the last 2.5 weeks? Not exactly.

A lot of people seem to think that if you mention a bullish data point then you're bullish everything. If you mention a bearish one then you're bearish everything. One or the other.

It's as if there are five buttons on our desk that go from: 200% long, 100% long, all cash, 100% short, 200% short. And those are our only options as market participants.

Tweet two bullish data points in a row and that's it, your portfolio shifts into overdrive...buying stocks on margin. No wait, buying options on margin. No, even better! Buying options on futures on margin.

This isn't "The Price Is Right." Managing a portfolio is a dynamic process and everyone has their own objectives, timeframes, risk tolerances, etc. Assigning a "one-size fits all" approach doesn't make any sense. The data is always shifting and we're always reevaluating our views based on that new information. There are always good point and bad.

The developments in the chart above help us frame the environment we're in by reinforcing the fact that current conditions favor buying dips in stocks as opposed to selling strength. If Yen, Bonds, and Gold are falling, where is that money going to flow? Stocks, both in the US and globally.

Have you seen some of these foreign ETFs like Poland ripping higher? They're being helped not just by people's appetite for stocks, but by a weakening US Dollar as well.

Additionally, this chart leads us to more questions we need to consider. Here are some I'm asking as we wait for more data.

1. Where do these breakdowns in Yen, Bonds, and potentially Gold, find buyers?
   1. When they do find buyers, how far do they retrace higher before they continue lower? or do they not move lower at all and instead push back above broken support?
2. Where do stocks begin to consolidate? and does that happen through time, price, or both? If the latter, how much of the recent move do they give back?
3. Do the beaten-up sectors like Financials, Transports, etc. continue to mean revert with Rates rising? What does that mean for International stocks that have a higher weighting in those areas?
4. Are High-Yield Spreads and other Bond relationships also sending the same signals as Treasuries on an absolute basis?
5. Do all of these massive breakouts in Gold and Silver Mining stocks fail or are they more resilient due to the bid in stocks?

And remember, this isn't the only chart we're performing this exercise for.

Look at the Australian Dollar/Yen chart breaking back above decade-long support/resistance near 71.50-72.50 and above the downtrend line from its 2018 highs. This is a major risk-appetite barometer for us.

After a 25% rally off the lows, is the message to go buy it right now? No, but it has shifted from a downtrend to at least a sideways trend. That's an important piece of information to consider when we're framing our broader view on the four major asset classes.

Long story long, my point is this.

A lot of people have been caught off guard by the strength in stocks. I know I have. If you look at the real world around us it doesn't make a whole lot of sense...but that doesn't change what's happening. That's why we use Technical Analysis, because it focuses on what's actually happening as opposed to what we think should be happening.

Yen, Treasuries, and Gold have had every reason in the world to go up over the last 2 months and have failed to do so. Now they're resolving lower, so whether we want to accept it or not, the market is telling us there are larger forces at work here. Money continues to flow into risk assets.

That doesn't mean don't be selective in the trades you take, but we have to recognize what type of environment we are in and trade that. Not the one that we wish we were in.

For now, the weight of the evidence continues to grow (and has been growing) in favor of buying dips in stocks. Until that changes and we start to see its most liquid alternatives begin to trend higher again, the intermediate-term trend remains to the upside in stocks.

Thanks for reading and please let us know if you have any questions.

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Allstarcharts Team