MAGGIE LAKE: Will the US inflation data out this week show prices moderating, or does the Fed have more work to do? Hi, everyone. Welcome to the Daily Briefing. Real Vision's global markets editor Weston Nakamura and Dave Floyd, founder of Aspen Trading, are both here with us today to walk us through what to expect and what part of the markets we should be paying the most attention to. Hi, gentlemen.
DAVID FLOYD: Hey, good afternoon, Maggie. How are you?
MAGGIE LAKE: Good. Yes, that's right. Weston's joining us a day ahead really which double trouble for us today, which is awesome. But we're going to need all of your help, because it feels like, and Weston, let's start with you. Because I want to focus on inflation on the data for a minute, because we did see the yield on US Treasury back off slightly, but it just feels like we're in this holding pattern and everything or so much, at least, is going to hinge on the CPI release on Wednesday. What are you watching?
WESTON NAKAMURA: Watching the CPI release on Wednesday. So, basically, as of this most recent FOMC, Jay Powell ditched this practice of forward guidance and said that we are going to be month by month, meeting by meeting and we're going to be data dependent. What that means is that when there are major data releases like CPI on Wednesday, those are now the new FOMC press conferences, because he's not going to apparently do that anymore in press conferences and he's going to be data dependent.
So, we have an FOMC press conference coming up on Wednesday morning Eastern of US CPI. What I'm watching and every time I'm here with you, I sound like a broken record saying ad nauseam, but the end, specifically USD/JPY and the significance of that because the yen is a Fed trade or a policy divergence trade so BOJ holds yields firmly capped via yield curve control, and therefore JGB yields are static. And then when the Fed is perceived to be hawkish and US yields rise, while JGBs stay put, then the US/Japan yield spread widens, dollar/yen rises, or the yen gets shorted.
And vice versa, when the Fed's conceived as dovish or behaving more in line with the BOJ on permanent Punchbowl easing, then it flips to policy convergence, yield spread narrows and dollar/yen falls. And so, the dollar/yen cross rate really is like, not nothing is very pure, but it's the most pure reading that you can get of a broader market reaction from something like CPI or whatever it may be, or any of the other datapoints that came across recently.
MAGGIE LAKE: Was this trade as crowded as it was? Because I know a little bit ago, we saw a reversal, and it was just like a crazy move, because so many people were on the same side of the trade. I noticed why you've been watching it really closely. Is it still that magnet? Or do we still have it really crowded?
WESTON NAKAMURA: Yeah, that's a great question. So, Brian, can you put up chart one. So, this chart is basically-- this is just simply yen futures from CME with the volume as well. And then I've overlaid on the blue shaded area, dollar/yen spot rate just for reference's sake. But to answer your question, Maggie, the answer is no, not as crowded, because the short squeeze that you can see, basically, you can see July FOMC, that's when the short squeeze really took hold. Then a day after that, you have US GDP, which came in to record two straight quarters of negative growth and therefore a technical recession, therefore, a dovish Fed, the yen get short cover, and then it gets basically short cover all the way up.
But then you get something like a strong US ISM services PMI, and then you get the July non-farm payrolls print from last Friday, both of which signal a stronger economy, therefore, a more hawkish Fed, and then the yen gets shorted again. So, some of that did get cleared out, that very crowded short position, but then it could very well start to get put back on again, but by and large, it is still very, very, very crowded, though.
MAGGIE LAKE: So, so you have been rightly all over this, because it is where all this market action has been centered and you've been putting out videos and through that conversation, we've had a lot of questions from the community and from viewers about, okay, so if this is a Fed play, basically, how can someone put on a trade?
What are the best vehicles for doing that? Does it have to be in forex? A lot of questions as people try to understand this. So, I know you're putting out a whole edition responding to those questions, but what's your thinking around that right now?
WESTON NAKAMURA: Yeah, so I'm actually working on a video about that. Because Real Vision, this is a two-way conversation so this is not just me putting stuff out. So, this is basically in response to somebody who asked this question of like, okay, so great info on price action, all that kind of thing. How do I actually trade this? And he said without options and futures and listed derivatives, he asked about the yen ETFs. And so, what I--
MAGGIE LAKE: Gert question by the way, great question to ask.
WESTON NAKAMURA: It's a really fantastic question, because it seems like a really simple question, but it's not. There are many ways to do it. And there are many ways that that I basically put together a video that are unconventional ways to have directional exposure to the yen. So, for example, so Brian, if you could put up chart two, this is just an example from the video, this is one of the unconventional ways to do it.
This is without even touching a forex trading account or anything like that, right? What you can do is you can do a long, short market neutral pair. What that means is that you short something, you take those proceeds and you buy your long position, so your cash outlay is zero. So, essentially, it's a very capital non-intensive trade to put on. And what you do is there are two ETFs listed in the US. One of them is EWJ that is the largest Japan index ETF, and then the other one is DXJ, which is currency hedged ETF. Now, they're not the same exact makeup but more or less they're the same.
And so, if you look on this chart two, you'll see that EWJ is basically more or less flat for the year while DXJ is-- or DXJ is flat for the year, EWJ is down significantly. That's the FX nonhedged one. Brian, chart three, if you put that up, this is just the TOPIX index. So, if you want to see like, oh, well, what's the makeup of the-- this is what more or less a broader index of Japan stocks looks like.
And then the next chart, chart four finally, what the difference obviously, between those two, the green and the red is the currency, one's FX hedged, one is not. So, if you're long short the DXJ and EWJ, so you're basically shorting EWJ and using its proceeds to buy DXJ, and so you market neutral pair, that ratio, that pair trade matches up pretty much exactly with dollar/yen in terms of percent price action, and you're doing so again without any capital outlay. And you're not even touching the yen. Because essentially, what you're doing is you're neutralizing the long shorts, neutralizing the equity long and short part of it and just leaving you with this currency hedged part.
So, this is just one example of the way, in my video, ways that you can actually trade dollar/yen and more to come.
MAGGIE LAKE: Amazing. Thank you for giving us a little teaser, and Weston's our markets editor and the guy loves a good challenge. So, keep those questions coming. Before you go, Weston, I want to ask you a question about Softbank, because they were out with-- yeah. This is horrible. Out with another huge loss.
What is going on here? How can they keep sustaining this massive-- certainly, they're not the only one, by the way. But how can they keep sustaining these massive losses? Is there going to be fallout? Or is this coming to a head anytime soon?
WESTON NAKAMURA: This is not a surprise. Everyone knows what they're long. And so, we saw this coming from a mile away. What I think is, honestly, I'll just say straight up, this is a terrible decision from Masayoshi-Son's part is, alright, fine. If you want to go long leverage long tech stocks at the all-time highs, fine. Do that. If you want to sell the lows, you can do that as well.
If you want to like fire some of your 300 employees of the Vision Fund to cut back on expenses while authorizing a 600-billion-yen buyback at the same time, that doesn't sit right with me. So, yeah, there's a lot of questions surrounding Softbank. It is not a single stock earnings thing, though. This is a broader thing, obviously. And so, I would keep an eye on Softbank.
I will know however, the last I think it was three quarters, they missed terribly on earnings and the stock rallied double digits the next day, so probably get that happening in a few hours from now on the short cover.
MAGGIE LAKE: Wow. All right. Weston, as usual. Thank you so much. Can't wait to see that video, and we'll talk to you soon.
WESTON NAKAMURA: Thanks so much.
MAGGIE LAKE: Thanks. So, Dave, come on into this conversation. And it's really interesting. And I know that as a technical trading strategy guy yourself, I'm sure that you were loving some of the things that Weston was pointing out, but I'm interested in how you're setting up because we've got this big inflation number.
We've seen big market moves after that, especially as Western says, this is the same thing as a Powell press conference, everyone is waiting to jump on this thing. So, as somebody who looks at the market through that lens, how are you preparing for this?
DAVID FLOYD: Well, thanks for having me back, Maggie. Yeah, it was a really interesting conversation early on there. In terms of preparation, I think in the show notes that I sent over to you earlier, there's a million ways you can cut it. You can look at the inflation data as to what it has been, what it might be. But the thing that we never know is, what's the market reaction going to be? And that's really the hard thing.
And even the people at the most sophisticated level in terms of analyzing macro developments, meaning the release of the CPI on Wednesday, it's always hard to know what the markets going to do and how it's going to react. So, for me, I try to keep it really simple, which is looking at price levels that if broken, would suggest that the market's going the other way, or even at a more simplistic level, if you look at what the markets have been doing for the last two, three weeks, all the dips are being bought, and I'm referring mainly to the S&P and stocks in general.
So until something proves otherwise, stocks look pretty firm. Now, I will say today, they did close below 4150, which I had as a level that was key for this week. Now, it's a very minor break, we've only closed five or six points below that. But that was after ripping out of the gate early on, we went from like 4140, all the way up to 4180. And then right back down. So the jury's out. But I think to put a bow on the answer to your question is that right now, stocks look bid.
And until that proves otherwise, I think trying to outguess what the CPI report might do that I think is basically a binary outcome that I don't think traders want to be putting on because there's no inherent edge right there.
MAGGIE LAKE: Yeah, that's so interesting, Dave, and I think a lot of people are torturing themselves trying to do is game the reaction. So, if you're looking at your charts as a roadmap or looking for signals in it, and you've seen this one little signal flare for you about closing below that level today. And how do you approach it from this? It sounds like you're saying the market has a bias in a bid right now. So, it seems like it has support. What else are you going to look for to see whether that has changed?
DAVID FLOYD: Well, it really just goes back to what most traders should be doing on a day-to-day basis, which is gauging how the market reacts throughout the day. What is it doing? And again, if we look at the last two to three weeks, I indicated that if you looked at all the dips intraday, they all got bought, didn't matter what the news was on that day, didn't matter how crappy the news was, or how good the news was.
Sometimes the moves were counter to what the news was, meaning that the prices sold off on the news and then rallied back and people who were like, well, that means they're going to raise rates more, and that's really bad for stocks. Well, the market's telling you, they don't care, the market's moving higher. So, what I'll be looking for now is 4150 now is the inflection point for me, we close below there, although futures haven't technically closed yet, they're open for about another 45 minutes, but if we close below 4150, that's going to be my inflection point.
If prices managed to stay below there, meaning we get rallies into that level and they get sold off, that's going to start to change the tone. And that's not me having to guess, or have a theory, or analyze the news flow. That's just me looking at prices. It's telling me sellers are stronger at 4150. The buyers can't seem to get above that. Then, as we go into Wednesday, maybe that 4150 level is still in play. Maybe it's been resolved, nobody knows. But that's when you have to start looking at technical levels again.
What are some levels that are above and below where we are right now that if those get broken, that tells you that the markets either bullish or bearish? And again, I know that sounds overly simplistic, but that's all we can know as traders. And that's without trying to overtheorize and overspeculate on things. And that's maybe a little bit more applicable to me since I tend to be a little bit more shorter-term trading.
But I don't really think that's the case. I think the market will leave you clues if you're paying attention, it will indicate if it has a bid or if the market's feeling offered?
MAGGIE LAKE: No, I think it's a great point to bring up right now because we are all asking a lot of sentiment questions. So, let me pose this one to you. Does it matter to you whether this is a bear market rally or not?
DAVID FLOYD: Not really. It matters on the standpoint of we had a big sell off at the beginning of the year, and we've only partially retraced that. So, it doesn't matter that it's a bear market rally. Not really to me, I'm just saying this is a rally within a contextual downtrend, meaning the downtrend since the beginning of year. So, does that lead me to believe that at some point, we might have another leg lower?
Yeah, of course. But I'm not trying to factor that in. I'm not trying to find levels to sell into because, again, recent history is telling me that selling rallies is not working, that everybody's buying the dips, and until proven otherwise, you have to go in with that. Now, eventually, you might get your hand slapped. You buy that dip one last time, and you get your hand slapped.
But if you've been selling rallies over the last couple of weeks, you've been steamrolled. And most people that have been selling rallies is because the Fed's going to have to raise again. If they're going to have to raise again, that's negative for stocks. Well, logically, yeah, that makes sense. That's finance 101. But the market's doing something different and the market's always right.
MAGGIE LAKE: That so interesting. So, this is a great question from Bo on the RV site. I'm reading about retail craziness, FOMO, meme stocks again, traders baffled. I don't buy it. But I'm more concerned with what you think about the recent price action, Dave. So, you've been laying out some levels you're looking at, but can you address that other level that I think is confusing people?
Because we do see this what you might call froth too in certain parts of the market. What do you do with information like that? Or, again, is that just something that you put to the side as noise?
DAVID FLOYD: No, it's not noise. And a lot of it comes from experience. I've been at this 25 years, these phases that the market goes through, whether it be bullish or bearish, they always last longer than you think. Because everybody's looking at these meme stocks and going, this is insane. Again, everybody's looking at it logically. How can AMC be rallying and still losing money? Well, if you want to get paid for arguments, you're in the wrong business, you need to be an attorney, because that's where you get paid to argue.
So, I factor that in from the standpoint of it'll probably last longer than we think. But then when the market starts to look-- it's not look, pardon me. When the market starts to look, not look, but actually act weak, braking support levels, like we did today. And then if it can't get back through that, then I take that argument and say, okay, we know we got a lot of froth on the way up, that's probably going to add some firepower as we now move back lower. So, that's how I would factor that in.
MAGGIE LAKE: Right. Great point.
DAVID FLOYD: I coughed, I'm just getting over a weird 48-hour cold in the middle of the summer. I have no idea.
MAGGIE LAKE: Yeah. Listen, I think all of our immune systems are probably back to baby stage, because we were locked away for two years. So, anything hits us and we're felled. I feel you, Dave. So, if we see-- are you looking at cryptocurrencies as risk-on? Is it grouped together? Are the charts saying they're behaving differently now? Because we have, in the past, there was a strong correlation with the NASDAQ or with tech stocks. So, does that correlation still hold? Or how are you thinking about cryptocurrencies here?
DAVID FLOYD: Well, I'll answer that question. Just with a little bit of a disclaimer, crypto's not my day-to-day focus. I do keep a very broad view on them for our clients. But I'm not going to be the go-to guy, but I can be the go-to guy from a technical perspective. And right now, what we're seeing is that crypto seems to be catching up with this rally in the S&Ps. It's dead for a while, it's just