Captain America Is Back – Fear Index

Taken from CNN

Fear N Greed Index And we are in pretty Extreme Fear zone now.

Fear N Greed ExtremesWow.

If this is Extreme Fear, then I guess we cannot get worse and the stock market will be rallying back in no time ?

You see, Captain America is back and the US dollar is calling all the shots.


If we examine last year between May – July  when we hit Extreme Fear. It was the same.

wcrs 2013

One commonality is the Chinese yuan and China sticking out like a beacon of hope in the sea of fear.

Yet this time round, we have a China slowdown and we really do not have Europe and Japan to run to which makes America stand out alone.

If we examine the Fear this time. It is not just about the Fed rate hike that sparked off the panic like last year, leading to fears over China which never materialised.

It is a combination of alot more than that, including record stock markets, an explosion in the junk bond market, European disinflation and elevated unemployment, disappointment in Japan, global geopolitical risks, crashing commodities and growing concern on inequality.

I am supposing we can say this Fear is real and has been seething away for a while. And with the BIS, IMF and G-20 coming out to warn of excessive risk in the marketplace, I think the time for a reality check is ripe.

US growth is linked to the world’s and just as the world affects America.

Table taken from JP Morgan.

The US affects the developed and emerging world as much as China affects the emerging markets with a time lag.

With all this Fear and uncertainty, markets are heaping their bets on the US and expecting safety like we noted in August that it was common sense to buy the USD and our DXY target of 85.

And the spillover hit the EM as expected then.

Into the 4th quarter of 2014, we have pretty much hit support and resistance levels for everything and what remains would be an equity market correction (ie. 5-10%) which we have not seen in 2 years.

Yet we cannot have a sell off as long as the central banks are supporting markets. And that would lead to a deadlock situation where everyone is pouring their money into America.

Example : Table taken from JP Morgan showing the level of foreign currency deposits in countries like Philippines increasing sharply in 2014
php usd deposits

Well, Captain America has his problems too these days with their Congressional elections coming up on 4 Nov and Obama’s popularity fading into unpopularity.

The Federal Reserve is sitting helpless on a situation of excessive bubbles and potentially derailing growth if they raise interest rates. And investors have no where to run to for safety because stocks and bonds are the riskiest asset classes now.

I am not sure if I am thinking too much or too hard or not thinking straight, but despite my bullishness on the USD so far, I think we may be caught wrong footed in the weeks ahead.

Just like markets bought into the EM rally, the test of faith will be when Captain America does not have the answers to the geopolitical mess and income disparity problems.

And all the jaded Mrs Watanabes will just go home.

eurusd 5 yearEURUSD 5 year chart

audusd 5 yearAUDUSD 5 year chart

usdjpy 10 yearUSDJPY 10 year chart

I will not trade the reversals now because it is plain dumb to challenge momentum.

But I will not be suckered into those trades in the mail box telling clients that they should be selling AUDUSD or buying USDJPY at this level.

My indicator since July has been Silver which has been the hardest hit and sitting at a 4 year low.

silver 10 year chartSilver 10 year chart

If Silver holds into month end, I think we have something to talk about besides Captain America, my favourite Superheroes this year which I have had so much faith in. But after watching the movie, don’t you think he is not quite strong enough ?

Give me Godzilla !