Mid-Week Update: Ideal Scenarios & Setups to Watch Here

Revisiting the historic playbook — and where we may be today.

Over the past two weeks, I’ve covered the dangers of a potential shift in Volatility into late July — and the risk that such a shift could trigger a Deleveraging event into later Q3 (here, here and here).

My core U.S. Equity view remains:

History was not kind to High-Beta Momentum Stocks, particularly when the market was caught Short Volatility, and Dollar-Yen was developing a Major Top. Both of these risk factors look to be in play today.

From our most recent report:

“Stock leaders are vulnerable to a deleveraging event. Upside Alpha is turning into downside Beta — evidence suggests Short Momentum could begin to work, for the first time in more than a year. This is the first time in a year I’ve begun scanning for Shorts in leading groups.”

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So far, there has been no meaningful bounce — reviewing Core Signals today, we’ll cover some potential short-term scenarios to consider. (With the caveat that short-term signals are more prone to failure, so let’s not lose sight of the big picture.)

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Further, it’s important to reiterate USDJPY’s critical role historically, when forming a potential Major Top — from July 11 (link):

“I think it’s time to finally stalk what could be the biggest FX opportunity in years. This is a major shift in my thinking: I’ve been largely Long USDJPY for over a year (Q2 2023). Last week I closed this core position (link) and stepped aside as it finally reached my long-standing targets — both PRICE and TIME were achieved in perfect symmetry.”

Similarly:

“Major Tops in USDJPY were followed by a crisis and significant decline in U.S. Equity markets. Those declines created huge losses for carry trades, which were using the Japanese Yen as a funding currency — and when the carry trades stopped working, the unwind quickly drained liquidity out of global markets. (The tide went out and we saw who was swimming naked.) Lastly — we should note — if history is a guide and USDJPY falls similarly to past major turns, it could be the *ultimate hedge* to a Long Equities portfolio. Maybe the best hedge out there, at present. Because of all these reasons, I believe USDJPY could become a critical component in a global portfolio over the next 6-12 months.” (link)

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In today’s update, we’ll revisit that original historical analysis published two weeks ago — this time, adding some color to the *ideal sequence* and how things could play out from here.

This is a timely discussion, because on July 31 the BOJ *and* the Fed are both scheduled to announce policy and update their communication with the market.

Let’s get to it…