[edit] I am doing some selling, regardless of what USD is doing. If items held start to look suspect in their own right, or do not fit the balance I want going forward, I’ll take cash, which is not suspect right now. Even though the analysis was spot on before the USD bounce began, I, the faulty trader, have now been ruffled by its bounce twice! So much easier to project in advance than manage in reality.
[edit 2] With respect to the above, here is the trade log so far…
Sold for limited losses and small gains: HBM, the chart I liked lease of the 3 diversified metal stocks added (RIO, BHP), AAXJ, as I’ll hold BABA instead for now, XLE to exit Energy for now (individual items still on watch), ZM & SILV because screw bottom feeding for right now, SILV will still be there later. ARREF because its chart looked at me funny and cash pays me 5%+.
Cash now 84%. Of most interest to me beyond this summer of clowning around, is the prospect that maybe the yield curve is changing from the drudgery of the final stages of flattening/inverting to steepening, which will bring on changes aplenty, along with a fair amount of mayhem to be managed.
***
First, the US dollar is putting the screws to the de-dollarization brigade as the bounce continues. We are now getting to the nitty gritty of a bounce that will test our resolve to hold the daily bearish view or force us to abandon it in favor of the bullish bigger picture situation.
USD is still set up bearish on the daily chart with the SMA 200 (orange) sloping down, but another thing is true also. USD made a false breakdown in July that was a bear trap, at least for short-term traders. So Uncle Buck is banging resistance #1 at the SMA 50. It’s important, but of more importance than either of the other points, #2 looks viable for a test on a classic deep summer stock market hiccup/pullback/correction.
I will not tolerate a break through #1 without at least considering raising more cash or, though I don’t particularly like doing it, hedging. I will not tolerate a break through #2, period. #3 is more of a last resort marker to keep the daily chart bearish.
Meanwhile, it’s an anti-USD disturbance that was fully anticipated. USD is not doing anything we did not already project before the bounce had even started. It’s just easier to talk about it ahead of time than sit through its effects in real time. Each can manage it as they will. But the reminder is that in the near-term at least, cash is paying out nicely.
Moving on, here is an important ‘beneath the market’ indicator doing something interesting. The 10/2yr yield curve is ticking a new high to the previous mini steepening. Recall that I have viewed the renewed flattening into July as a sort of test of the one from March, from which we’d be on watch for a steepening. Well, this little double bottom with a tick to a new high certainly qualifies as a candidate. Nothing’s ever a sure bet, but if I were to bet mine would be that we are on a new and extended yield curve steepener right now.
What is the implication of that? Well, YC can steepen under inflationary or deflationary market signaling. With nominal Treasury yields rising and long-term yields rising harder the signaling is an inflationary steepener.
But also recall that the plan is for it to eventually morph to a deflationary steepener, which could happen if/as markets take a hard correction and asset refugees knee jerk into the perceived safety and liquidity of T-bills and short-term Treasury notes at a much higher rate than long-term bonds.
The upshot is that if Yield Curves start to steepen inflationary it could mean rotation to the anti-dollar stuff (commodities, precious metals, perhaps EM, etc.). In other words, the existing plan we are trying to get off the ground. Again, we watch USD’s progress. Either way it’s no grand new commodity super cycle.
But the BIG plan is for a deflationary steepening, because regardless about inflationary market signaling in bond yields today, inflation is fading in money supplies, not to mention in backward looking data now routinely being released. Our bigger plan remains deflationary with a possibility of an end to the greatest bubble ever.
Thank you for these considerations.
Who or what do you think was behind the DXY sell-off in July and the evident re-buying currnetly in progress? Proprietary trading firms with their office building floors full of computers who enjoy screwing over amateurs like us? The Russians?
The whole thing reeks of manipulation, especially when looking at the roller-coaster historical DXY chart from inception to today. Same for crude oil prices.
If you are looking at anti-USD trades, wouldn’t the trade-weighted USD index be more suitable? The DXY is heavily over-weighted the Euro and seems to be primarily a speculative vehicle.
Question for Gary and fellow subscribers: which sector is a best play for bear steepener and why? My view is insurance stocks which unlike banks do not suffer from non-preforming loans.
Utilities might do well as a defensive sector and dividend payer. Not to sound like a parrot, but in time, gold miners would theoretically do well as gold outperforms asset markets including mining costs. Cash would not be paying out with casino patrons clustered risk off in short-term bonds.
Have to disagree, Gary. Imho, trades you are describing would do well in a risk-off bull steepener (short end falling faster). While long end rising I can’t see utils do well. The only way gold do well in bear steepener imho if the narrative of “fed losing control” becomes dominant (a-la Shiff) or market sees imminent danger of things breaking up. So far its more rotation to the value, perhaps with downward bias for the whole market, but not yet persistent and deep sell off. Anyway, we shall see. And thanks for reply.
That is what I was thinking about, short end falling faster. Maybe I don’t understand the meaning of “bear steepener”. I call them deflationary or inflationary steepeners.
BTW, I looked at a couple ETFs that track the yield curve, which I very much wanted to buy. But while they are found at TradingView they are not at stockcharts.com and my broker, Fidelity, does not service them. So I was frustrated because I have a high level of confidence that a curve steepener is beginning. If anyone has ideas on how to more directly play the YC, please advise. THX [edit]: I am aware I can buy S/T bonds and sell L/T bonds, but looking for something simpler. Although maybe just buying short-term T bonds if it’s a deflationary steepener is the way to go.
Bear steepener is the inflationary one. Long bond prices falling (bearish for bonds), yields rising faster than short end.
Ah, I see. Not being a bond guy I guess I don’t know the lingo. To me, a deflationary steepener is the bear steepener because man is it going to wreck the risk ‘on’ trades when it comes. But now I get your terminology.
STPU/USTF? I can’t buy them either
I had STPU & USTP
Wait, I can buy STPU – it trades in London, currency is USD, bid/ask spred about 0.2%. Although I have to pay currency conversion fees, but that is not a problem for you. My broker is cmc markets.