The Dow transports are at a 52 week low. The Russell 2000 Small Cap index is at a 52 week low. The DJIA, SPX and Nasdaq are all below their major moving averages. Today alone the Dow was down 237 points and the Nikkei down 320 points so far tonight. So traders have had to cover their margin calls with their profitable trades, which have been their carry trades. As they sell these high yielding currencies, they pay back what they sold them against which was typically the Japanese yen. This buying back into yen is propelling these carry trades down even further and the stock sell off just reinforces it.
The health of the major stock averages is in jeopardy. For instance right now the Dow and S & P 500 have produced double bottoms that have to hold in order for a recovery to happen. If they don't (and my bet is that they don't) then it's not going to be pretty. The Nasdaq is trading below its 200 day moving average now also. This means that there are many long term holders of Nasdaq stocks that are now under water and losing money. When this happens it makes it to where sell offs can happen all the more easier upon the slightest bad news that comes out.
]I know everyone's said that a recession is not coming but rarely have we been able to come out of a slow down without hitting a recession first. With stocks breaking down and all rallies being sold, it tells me that the "big money" doesn't seem to see a bright future in the near term either.
So watch out because more carry trades could be liquidated shortly. If so, then these pairs may be some of the first to be sold off: EUR/JPY, GBP/JPY, NZD/JPY, AUD/JPY, CAD/JPY.
Sean Hyman
Editor, www.money-trader.com
Comments