The January rout has shown this years hand early.  Most have been punched in the face and are now bloody and bruised.  The two day bounce in equities has provided momentary respite however, I believe it may be short lived.  The supply waiting for the current dip buyers is enormous, and it will further shock the uneasy hands to the sidelines.

First up, the Russel 2000; while technically a work of art, it has been a great way to gauge the market.  The target is the 2007 top around $850.  The current dead-cat bounce we’re experiencing should not go above $1077 or I am wrong.  More likely it will reverse around $1040, then head lower to $850, which is -16.7% from current levels:

 

Next, the Dow 30; dust off your “Dow 14,000” hats from 2007 because we are headed back to those levels (a 13% pullback from here).  The good news is we will likely bounce from there sometime in Q2:

 

So the bottom line for equities is this, prepare for the bounce to end and the downtrend to resume.  The downside targets are the former 2007 top levels.

On the bright side however, I believe the rest of the world is more screwed than the US.  Take Europe for example; the Europe 350 Index ($IEV) has not been holding up well.  Another -17% appears in the cards – somewhere around the $31 level – perhaps more before 2016 is over:

 

For homework I will refer you to the Japanese Nikkei – talk about ugly.  That may be the best short of them all, especially if you enjoy taking on “whatever it takes” Central Bankers.

Now, where it gets trickier is bonds.  Could bonds also pull back in the face of an equity correction?  I don’t think so, but the zero-boundary for rates is a natural wall – until the Fed changes the playing field again.  Refer to the 7-10 Yr. Treasury Bond ($IEF) chart below:

 

Will that trend line hold, and more importantly, what does it imply about our world if it doesn’t?

Lastly, I will touch on currencies.  I first presented the USD/JPY and the EUR/JPY crosses in my article Calling All Degenerate Oil Gamblers!! last December.  Some of you thought those levels were apparently too far-fetched to be approached anytime soon…

I’ll therefore leave you with an update to the USD/JPY chart:

 

Is the US Dollar rally coming to an end?  Or is this simply a healthy pullback?  Will the Fed reverse course, causing the dollar to also reverse course – which would trigger my currency levels?

I try to picture a world that the charts are suggesting.  For example: equities pulling back to 2007 levels, bonds breaking decade long up-trends, currencies suggesting the US Dollar rally may be over (at least in Yen terms), Europe is screwed, Japan is more-so screwed.

This is all just food for thought at this point.  I welcome your thoughts/comments below.  Follow me on Twitter @dyer440.

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Since everyone seems itching to get long oil exposure – being the degenerate gambler myself – I’m going to share with you my own “trigger signals” for commodities in general.  First of all however, a bit of a history lesson:

The Oil crash during the Great Recession of 2008-9 was followed-up by a huge rebound as central banks around the world went all-in on various stimulus measures.

This has led some of you to have recency bias.  So first of all I would say:

Check your age, and bias at the door of this casino before entering.

Secondly, I believe the current Oil crash to be primarily a result of Saudi Arabia posturing, and the Saudi’s have played this game before.  Who remembers the mid 1980’s?  I don’t, I was under 5 at the time but I’m from Louisiana and my dad worked off-shore for Schlumberger (he got laid off).  Now I live in Houston and the old-timers here still talk about it.  They like to say:

Last one leaving Houston, please turn off the lights.

Anyway, it’s part of my life history – sort of a mythology of the time period.

After OPEC took the stance that they were going to capture market share – they didn’t stop pumping until everyone else was in real pain.  There’s no reason to expect the Saudi’s to change the playbook this time around.

If you were trying to bottom pick energy exposure back in the mid-80’s you had a tough time of it; there were 3 waves up in price, each followed by another collapse.  The rout finally ended when everyone gave up, then crude prices languished for a decade before anyone made real money in the space.

Now, most of you realize that commodities priced in US Dollars are therefore correlated to the US Dollar.   Did you know that over the past 10 years, they are 74% correlated on an annual basis?  One of my favorite Twitter follows (@TheEuchre) shared this:

 

My “trigger signals” on the commodity space are therefore currency related.  I don’t think you can overlook the currency impact if you are speculating on Oil or Oil related exposure.

I like to view the US Dollar in two ways, in USD/JPY and EUR/USD, as opposed to simply the US Dollar Index by itself.  I think there is more detail to be gleaned from it that way, and it provides more confirmation when both pairs signal the same thing.

So Here’s the Trade:

Stay away from Long Oil exposure (and commodities in general) until:

1) The USD/JPY cross falls below 115.50, AND

2) The EUR/USD cross trades above  1.148

Refer to the charts and levels below:

 

 

Sure, you might miss out on the first 15% of the move, but you may just save yourself from sleepless nights monitoring futures and more importantly, the huge opportunity costs associated.  There are opportunities out there that offer better risk/reward scenarios, so stay out of long energy exposure until the coast is clear.

Better yet, stay short; refer to the following posts for ideas:

• Yell Laughing at Commodities
• OPEC Is Dead
• Commodity Not-So Super Cycle

 

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