AI mania has proven exceptionally strong against the geopolitical backdrop. I was expecting a pullback from the upper bound of the broadening pattern, followed by a final euphoria rally before we see a generational collapse. ES1! briefly dipped below 7.2K on Monday and has since reversed much higher. If SPX manages to sustain above the upper bound of the broadening pattern I outlined in Tactical Positioning last weekend, this scenario could be nullified.
Semis are getting overextended again on both the weekly and monthly charts. We tried to short both NVDA and SOXX last week. NVDA was stopped out at breakeven, while SOXX was trailed out with a modest profit before it reversed 15% higher. This is precisely why risk management is essential in the current environment. I will be looking for opportunities to rebuild our SOXX shorts in the coming weeks, if not days.
Every bubble has very similar traits. Each feels revolutionary, and a good portion of them actually are. But when the market has priced in decades of future profits, a correction may be due. It is imperative to understand that bubbles usually do not burst on major headlines. We usually get the market top when everything seems to be running at full speed.
On the geopolitical front, we got rumors of a potential peace deal during the Asia session. CL1! briefly traded below 90 and BZ1! briefly traded below 100 before recovering half of their losses before the U.S. open. I stand by my view that a peace deal is hard to reach. If I am right, oil should grind back above 100. Again, a breach below 80 would suggest real progress on a peace deal. Any volatility that fails to achieve that should be treated as noise.
We believe the BOJ has intervened four times since 04/30. Each attempt saw USDJPY dump to the 155 level.. Despite these efforts, USDJPY technicals remain intact. Note that no matter how deep a country's FX reserves are, if the fundamentals are bad enough, the line will eventually break. As the fundamentals continue to deteriorate, the credibility of each BOJ defense declines, and we should see faster and faster recoveries after each intervention.
If I were the BOJ, I would buy yen much more aggressively and force USDJPY to trade below 150 for a few days. This would create realized losses for market participants holding USDJPY longs. It would devastate global markets in the ST, but it could also bury the other side. Once the technicals turn in the BOJ's favor, algos will join the BOJ's side as well. That would be a better use of reserves than simply buying when USDJPY grinds back toward 157-158, which would drain reserves more quickly.
There are only two things that can truly turn the yen higher:
1) a sharp and sustained decline in oil prices
2) BOJ rate hikes
Japan has almost no control over the first one. If the Iran war drags on, we will likely see the BOJ forced to hike, and the resulting carry-trade unwind would be devastating for global risk assets.
Speaking of rates, it is also worth noting that global long-end yields are rising rapidly and synchronously, as we had expected. That is not a good sign.
