My thinking was that a poor PPI would raise hopes for a dovish Fed in June, which would put pressure on the US$ and completely overwhelm the BOJ's Yen dumping activities.
The reaction was first a "rates will be raised" type of move, quickly followed by a reversal.
But even with dovish rate expectations, the e-mini ended the day rather negatively.
The culprit is of course the rate differential between the UST and Japanese Gov bonds. This differential still points down, which makes US assets LESS attractive. As you can see, there is a strong correlation between the S&P500 and the rate differentials (except for the few arrows in blue at the left of the figure.) Note that I also added the US/German rate differentials figure, but did not draw similar arrows.
I would also like to put the PPI into perspective: the rather positive PPI figures relate to sales in April, while most retailers have been providing low guidance for the coming quarter. This guidance is forward looking, while the PPI looks at past figures.
It is interesting to note that the next PPI figures will be published on June 15 at 8:30, the day of the next FOMC announcement. The Fed will find there good reasons not to raise rates.
Junk bond ETFs are under selling pressure now...
and the 20DMF issued a short signal on Friday.
Pure technicians might take note that the S&P500 closed below its 50MA and is in a H&S pattern.
I do not believe such a technical analysis carries much weight, but I always find the three little hats rather cute.
Conclusions:
Everything looks and is very negative. There is no other path for the market than to decline...
But, not so fast, because this week is options expiration, which carries a positive bias.
The most shorted stocks might snap back up just to render options worthless.
Also, the BOJ could always go Nirp-ier, which would revert the rate differentials and would be US equities positive. For now, this is science fiction: a simple Yen debasement seems to be working fine!
Anyway, markets continue to present challenges. I have been lucky with a few good trades that allowed me to make up for losses in February, and then some.
I will post on the Stocks Selection free forum a few trading ideas that could be profitable during this options expirations week.
