Weekly market review Aug 5 – 9 , 2024 ( Yen strength is still exerting gravitational pull on worldwide stock market, WHEN will yen strength decline ? )

Will BoJ do something stupid again ? this is a question that is on everyone mind. It’s not inconceivable for BoJ governor to turn hawkish to cause an earthquake to erupt again. And as usual, we need to look to USDJPY and Nikkei 225 for clue again in the week ahead.  

Nikkei 225 and USDJPY movement is still an important contextual info

Scenario 1 : if USDJPY and Nikkei 225 co-movement is strong/ positively correlated, then everything is subservient to Yen short unwind positioning risk

Scenario 2: if USDJPY and Nikkei 225 Co-movement is broken/exhibit initial signs of negative correlation, then market may likely get relief rally, and possibly emerge from Yen short unwind stress.

Order book depth

Per Goldman Sachs book depth is shallower than before, therefore We are in low liquidity and high volatility regime, which also mean less volume is needed to move price, and therefore we’re likely to see a bigger price swing.

Broad market overview

Market is relatively flat after rallying on Thursday. There are very little separating everyone.

S&P 500 11 sectors overview

Wouldn’t read too much into it until the dust settles.

MOVE index

Move index drop 4 consecutive day to 108.26.

bond price implied volatility is expected to be around 10.83% per annum. Higher MOVE points to (implied) higher bond market volatility going forward.

Bond volatility moving higher translates into more haircut to bond, in which less liquidity can be extracted from the collateral pool.

NYSE & Nasdaq market internals

after 80% up Day on Thursday, market revert back to a neutral state

On August 9 2024,

1.09 to 1 NYSE Advancer to Decliner ratio (1444/1326 )

1.19 to 1 Nasdaq Decliner to Advancer ratio (2227/1871 )

% of SPX stocks above 20D 50D 200D moving average

Breadth rebound as price rebound

% of SPX stock above 20D MA : 47%

% of SPX stock above 50Day MA :  58%

% of SPX stock above 200Day MA : 68.4%

Bitcoin

According to the foremost Global Liquidity Expert, Bitcoin track the Global Liquidity relatively closely, lagging only by about 6 weeks, it display the quickest responsiveness to changes in liquidity conditions.

Bitcoin daily chart

Price attempt to breach above 200D MA but is unsuccessful so far, 200D MA is around 62K.

USDJPY chart

As long as Nikkei 225 and USDJPY maintain a positive correlation, looking at USD JPY movement would give us a clue to next directional market movement.

USDJPY is forming a triangle and maybe breakup or break below.

There are 4 possible path for USDJPY here, join my paid subscription to know which one is the most likely scenario.

Path 1 : Break up, violate downtrend line while bringing relief to stock market.

Path 2 : Break below for a headfake movement, possibly as low as retesting Aug 5th bottom 

before rising to violate downtrend line

Path 3 : Break below, subsequently retrace slightly before heading down again to create a new low while dragging down stock market worldwide

Path 4 : Break below Aug 5th bottom , retrace and then head down to create a new low while exerting strong gravitational pull on worldwide stock market

But then again, by the time USDJPY given any directional clue, stock market would have fall or rally simultaneously, rendering the effort to monitor USDJPY movement a moot point ?

What if I told you there are several clue that would allow you to judge whether this is the start of a bigger decline in stock market or we’re actually closer to the bottom ?

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3)      my thoughts on latest market development

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As long as BoJ do not suddenly shock market with it’s hawkish view, then we are able to lean on the following 3 evidence, to infer that market bottom may be in ( a retest of  low still could not be rule, but dips are buyable ), therefore probability of each USDJPY path are , path 1 = 30 , path 2=50% , path 3 = 20%, path 4 = 0%

5 Supportive evidence that USDJPY bottom and stock market bottom is in,

Evidence 1 : 10Y yield differential jaw/gap with USDJPY is closed down

USDJPY has been tracking US 10 Year Yield & Japan 10 Year yield differential closely.

as US 10 Year Yield & Japan 10 Year yield  differential go down since April (due to surging

Japan 10 Year yield , a Jaw/gap is created)

Jaw/Gap was subsequently narrow as USDJPY decline accelerated around mid july till now

This is one of the supportive evidence for USDJPY bottom

Evidence 2 : Commitment of trader, speculative positioning for Japanese Yen

According CFTC Commitment of traders report, Yen non-commercial ( speculative ) net positioning data shows a sharp move from -180K to -11k

This shows that Yen short positioning has been reduce significantly, from more than 180K short in early July to 11K short by this week ( Aug 9 release for aug 6 data ), the significant paring back in Yen point suggest that the unwind is getting closer to the end, and Yen exertion should weaken going forward which will allow stock market to emerge from it sooner than expectation.  

Evidence 3: Removed and remain hidden

Evidence 4 :VIX backwardation

high ratio of of 1M VIX vs 3M VIX indicates backwardation, aka, extreme fear of current month vs future months, potentially pointing to a bottom

Evidence 5 :  GS prime book – highest money flow into info tech sector since April this year.

Hedge fund has been buying tech from Aug 1 – 7, per Goldman Sachs

As always, we will continue to monitor the charts, assess the bullish/bearish evidence day-by-day to make appropriate capital allocation and investment decisions on all time frame ( short, mid & long term )

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