Equity markets are all firmly in the red today even after having opened higher. Despite hitting 1380 in early trade, the S&P 500 is now below 1360, making a new short-term low and marking its lowest trade since early August. While our timing regarding a long yen trade was not fortuitous given the yen’s big fall today, we still believe that risk aversion will take the dollar and yen higher against other currencies, and that the decline is not over for risk assets.
The yen is falling today on hopes for more monetary easing due to the Japanese prime minister calling to dissolve parliament. However, with the FOMC’s minutes today showing that they plan on extending QE3 into 2013 (big surprise), we believe the yen will continue to have fundamental support against the dollar. The long-term problems surrounding Japan, including their massive demographic problem and unsustainable debt, continue to exist. However, in the shorter-term, market participants will turn to Japan as they usually do in times of stress.
In equities, financials are leading the way down today, with tech also not performing great. While the relative strength indicator on the S&P 500 is nearing oversold levels, the VIX remains at highly complacent levels below 18. Even with today’s sizable fall in stocks, the VIX is up only 6.7% today. To us, the low VIX combined with the low put/call ratio signifies that investors are not nearly bearish enough to indicate a bullish reversal is imminent.
With the downtrend in risk assets firmly entrenched, we believe traders should stay in or increase exposure to short risk asset trades, until a more panic-type selloff is witnessed. If markets continue bearish action, like opening higher and finishing lower and other more hopeful periods, we believe it is indicative that the bear move still has a ways to go.