S&P & DOLLARYEN CORRELATION BREAKS – WHICH WILL REVERT?

The chart below is somewhat interesting to us. Since the beginning of the year the S&P 500 and the dollaryen FX pair have been moving largely in lockstep but in the last several days, this has broken with S&P embarking on yet another of its periodic melt ups on no real volume while the yen pair resolutely refuses to move.

One of 2 outcomes is likely to happen – either the S&P falls back or the yen weakens and we see 105 shortly. How to play this? An S&P Nikkei pair perhaps. If the USDYEN pair surges then the Nikkei, which is presently sharply oversold, will likely tear back above 15000. If it continues to fall then the S&P should, all things being equal, fall back sharply and by a greater amount than the Nikkei. Just remember to get your pair amounts equal on a GNE basis!

With the US equity market now up 8 out 9 days and stretched from its 9 day ema by an amount that typically acts as a brake, our money’s on the downside correction, particularly considering the high to low move in the S&P is some 100 points in just 9 days. As such, an outright short is our preferred play here, certainly when looking at the chart below where there are 2 gaps in the mid 1700’s to fill and it seems that a back test near the old highs may be in order before the rout reasserts. Bear in mind it is also option expiry week next week too and Presidents day on Monday so shortened trading hours. Classic squeeze environment…

The AAII sentiment is also supportive of a roll over with heavy near term bearish sentiment reversing and bulls popping their historical average (see below). Our proprietary indicators are now flashing red and tell us the upside is far less than the downside on a weekly basis. Additionally, this headline caught my eye –

“Fast Money fave Carter Worth, however, is staying bearish. The S&P 500 may have bounced, he says, but big names such as Home Depot, Citigroup, and Starbucks continue to roll over. “The only way the S&P stays in an uptrend is that you have these steep circus freaks like Facebook. But it’s the message of parts deteriorating that I think is the important thing.”

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