Special Report: Market Breadth, Yen Carry-Trade & The Trades

The extreme market conditions warrant a special report that talks about: 1) Market Breadth, 2) Yen Carry-Trade & 3) The Trades (if a correction ensues)

• It started of in China, which saw a 9% decline. Although this move had nothing to do directly with the Yen carry-trade (China has closed capital accounts, which means you can’t move money in and out of the country freely).
  
  
• That said, it doesn’t take much to make investors nervous. So when many people who've borrowed in Yen and invested in higher yielding Pounds and Global Equities & Bonds decide to cut the size of their positions, you tend to get extreme moves like we’re seeing today.
  
  
• Volatility Index (VIX) jumped 63% to 18.27 on the market weakness. Long-story-Short, the market was coming off a complacent recent peak, where the Volatility Index (VIX) had just hit under the 10 level about a week ago, near all-time lows. When no one expects any volatility is precisely when the contrarian should expect the opposite, in this case plenty of volatility to come to catch the herd by surprise.
  
  
• According to Alexander Trading, NYSE breadth closed today a net negative 2406 issues. This is an extreme that has occurred only eight times in the past ten years. Nasdaq composite breadth closed at a negative 2537 issues. That level has been exceeded one time since 2000, reaching negative 3373 issues on April 14, 2000.
  
  
• In the eight instances in the past ten years following a breadth extreme such as we saw on Tuesday, the S&P formed at least a short-term low within three days. Several times a significant low was put in place coincident with the day of the extreme breadth decline.
  
  
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• Dr. Steenbarger analyzed 25 occasions in which we've dropped 3% or more in a single day. At just about every time frame from one to twenty days out, returns following such a large single-day drop are quite bullish. One day later, the S&P averaged a gain of .47% (17 up, 8 down), much stronger than the average single day gain for the rest of the sample of .03% (2256 up, 2023 down).
  
  
• Twenty days later, the S&P was up by an average of a whopping 4.47% (20 up, 5 down), again much stronger than the average 20-day gain of .73% for the remainder of the sample (2641 up, 1638 down). In all, large down days have tended to represent buying opportunities since 1990. (Source: Trader Feed)

The Trades: If a more severe correction ensues look to-

• 1) Short Indian ETFs. If you notice, IFN fell 2x as much as the US Indicies. Why? Recall, from the Jan 15th Monday Edition- FDI flows account for 83% of total capital flows in India vs with an avg. of only 32% for a basket of other top EM such as: Russia, Mexico, Turkey, and China. This is a staggering piece of data, because unlike FDI flows, portfolio flows can – and often do – reverse suddenly and without warning (Source: IGM).
  
  
• 2) Short Commodities- China's economy has continued to grow at 10% annually, which has led to enormous Chinese appetite for the world's major raw commodities. If the Chinese economic catches an the flu, many markets around the world would suddenly get the "Asian Flu" cold (From Gold to Grain Futures to Steel etc)
  
  
• 3) Short High-Beta Tech Names: What I like to do specifically is scan the Nasdaq for high-beta stocks that have been go-to names for institutions, especially ones with betas of 1.5 and higher. As risk appetites decline, so will these tech stocks. A few names on my watch lists: AAPL, FFIV, CSCO.
  
  
• 4) Long ProShares Ultra Short QQQ (QID): I should warn you this is a leveraged play. I like QID the best as its got the highest average volume amongst leveraged and non-leveraged short ETF plays.

Hope this helps.