The Bank of Japan (BoJ) stunned the world last week by holding off on expanding monetary stimulus. With the yen rising and inflation continuing to fall, it was believed that the BoJ has little choice but to pursue even looser monetary policy. Some are grumbling that they were pressured to hold off on additional stimulus to help encourage continuing weakness in the U.S. dollar.
The reactions across global asset classes were immediate and impactful. Gold, silver, and miningstocks popped higher as the U.S. dollar weakened. The yen surged while the Nikkei set the standard for the term “stop run” by falling more than 1000 points in just a few minutes.
A man looks at an electronic stock indicator of a securities firm in Tokyo, Thursday, April 28, 2016. Japanese stocks tumbled and the yen surged Thursday after the central bank dashed investors’ hopes for more stimulus, leading declines in most other world benchmarks after the Fed left interest rates unchanged. Japan’s benchmark Nikkei 225 index erased earlier gains, falling 3.6 percent to 16,666.05. (AP Photo/Shizuo Kambayashi)
More importantly, gold and bonds have decoupled for the first time in over a year, with the stock market now moving down along with bonds. At first glance, bonds selling off doesn’t make sense, especially with weak economies and negative interest rates around the world. Welcome to the world of hedge funds. This is what happens when big trades around the globe are all tied into the same idea – in this case continuing loose monetary policy. The unwinding of those trades can take months, and cause a seismic shift in asset prices and correlated relationships.
Although soaring earnings helped push stocks higher over the past several years, it’s been loose global monetary policy that has kept this bull market alive well beyond the normal five-year stretch. If the mechanism for keeping the market propped up is coming to an end, then the trade needs to be closed.
Money is flowing into energy, mining, and utility stocks. It has to come from somewhere. That somewhere is technology.
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My favorite conservative short here is the PowerShares QQQ ETF (QQQ). This is a non-leveraged exchange traded fund that represents the Nasdaq 100 index. While other indexes are holding their recent uptrends, technology as a sector has been the first to crack – even with Facebook FB +0.89%, Inc. (FB) making new all time highs. I’m looking for this index to retest – and breakthrough – its February lows. For options traders, buying slightly in the money August put options is another way to play this move. With this strategy, an investor doesn’t have to tie up as much cash and has a fixed amount of risk based on the price paid for the option.
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