S&P 500: YE(ar)N-ing for clarity

<p>Almost exactly a month ago, we shared our view that, regardless of what market you’re trading, “We’re all USD/JPY traders now.” In that report, we […]</p>

Almost exactly a month ago, we shared our view that, regardless of what market you’re trading, “We’re all USD/JPY traders now.” In that report, we noted that that USD/JPY has become “the de facto measure of risk appetite of late, leading to correlated moves in equities, commodities, bonds, and even other currency pairs.”

Over the last four weeks, that dynamic has remained in play, with a 50-day USD/JPY-S&P 500 correlation coefficient of over 0.95. Unfortunately, because USD/JPY has remained relatively stationary in the 118.50-121.50 range, markets like the S&P 500 have also been rather lackluster of late. That said, this view of the market does go a long ways toward explaining the “counter intuitive” rally in stocks today.

Over the last 24 hours, Fed Chair Janet Yellen came out with a relatively hawkish outlook on monetary policy, stating that she still expects a rate hike “later this year,” that US economic prospects “generally appear solid,” and that the FOMC does not expect recent global financial developments to significantly affect policy.” In other words, Yellen appears to be trying to guide the market back toward a possible December rate hike, reiterating the recent comments from her colleagues. While this would typically be interpreted as a negative for US stocks, the associated rally in the correlated USD/JPY has driven equities higher so far today.

Meanwhile on the other side of the Pacific, Japanese policymakers appear to be heading in the exact opposite direction. In its monthly assessment, the Japanese government lowered its outlook for the economy for the first time since October 2014, while BOJ Governor Kuroda again dodged the question about the need for more easing. At least based on the current correlations, an expansion of the BOJ’s QE program could have a large stimulative impact on global equities.

Turning our attention to the chart, the late August swoon (for both USD/JPY and the S&P 500) did plenty of technical damage, so we’re taking a cautious approach toward long equity positions for now, despite the near-term bullish RSI divergence. The key areas to watch before turning more constructive on the index will be the 1995-2000 zone on the S&P 500 and 121.50 on USD/JPY. Bulls would like to see both of those resistance areas conclusively broken before feeling comfortable wading in with fresh buy trades.

sp500usdjpy9-25-2015 3-14-16 PMSource: City Index

*NOTE: Correlations can change, and there are other factors beyond USD/JPY that impact the S&P 500.

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