Pipczar

As my colleague Steve B just said it best today “The best trade over the last 5+ years have been buying the indexes when their respective Central Banks unleashes Quantitative Easing.”

I can’t argue that. Here is the proof:

In November 2008 the Fed started to buy mortgage backed securities with QE1. Since then, QE2, Operation Twist and QE3 have been implemented. Obviously, going long the SPX late 2008 was the right trade.

In October 2010 the BOJ announced that they too would implement QE. However it was “Abenomics” three pronged approach that really moved the market higher following QE. Once PM Abe was elected the Nikkei took off. Also, keep in mind the BOJ also did QE back in the early 2000’s but concluded at the time that it did not work. Anyway, since October 2010, buying the Nikkei was definitely the right thing to do. It took some time, but still worked well.

On January 22, 2015 Mario Draghi of the ECB finally announced that they too would finally (long awaited) start QE. The DAX would arguably be one of the biggest beneficiaries of ECB QE and the DAX has responded accordingly.

At this stage in the game we have to ask are stocks are well priced as they were back when the FOMC and BOJ first announced QE? The SPX was falling as a result of the GFC (Great Financial Crisis) and had lost close to 60% of its value from the highs. The Nikkei had been suppressed for years and buying stocks at those levels made sense to most investors from a risk/reward scenario.

Take a good look at the DAX. Following the GFC that had crippled the world’s economies, the DAX Is up over 200%. Is the DAX (or other European markets) that well priced currently? I may not be the guy to answer that question, but I do know the DAX is closing in on a multi-year 161% extension. That’s a number known as a “Golden Fibonacci” level to technicians, and a level I always pay close attention to for reversals (Don’t mind the SPX is at the 161% now, that is for another blog). In the DAX, we trade a few hundred points from there now. I think there could be more upside, but how much more?

Why do I as a currency trader care? I care a lot because currencies are very sensitive to equity flows. “Risk on” and “risk off” carry a lot of weight in my market from what I trade to what currencies I get long or short. I am sensing we may be closing in on a pivotal high for stocks, it could potentially change my game plan in the currency market. I may be buying more USD’s and JPY in the near term.

When I was a kid, I remember at the age of 5 playing a game called musical chairs. In the financial markets, we play musical chairs all the time when a large move ends. If you don’t have a chair, or have not sold and locked in profits, when the music stops the reversals can by nasty. When you get caught in those reversals its as if the music stopped and you are frantically looking for a chair that is simply not available.

I have a feeling we are nearing the end of the song, and there are not many chairs left. Whenever the music stops, whenever that may be…my opinion is make sure you have a chair. Since the DAX has been outperforming the SPX and Nikkei recently, the chairs in the US and Japan may be taken when the music stops in Germany.

Blake Morrow

Chief Currency Strategist, Wizetrade

@pipczar

Disclaimer: I am currently long some USD’s and do have marginal long JPY exposure already.