Morning Comment: The Japanese Yen Has Become Extremely Oversold

At the beginning of week, we said that this week could/should be an important one for the stock market. Well, we still think it is…and today could be the most important day of the week. We say this because it was disappointing that the stock market followed its recent strong rally with such a meaningful decline yesterday. HOWEVER, as much as a drop of more than 1% is disappointing, it was not a disaster by any means. (This is especially true when you compare it to the huge advance we’ve seen over the past week or so.) Also, yesterday’s drop came on even lower volume that Tuesday’s…and the breadth was not horrible. (It was more than 4 to 1 negative for the S&P 500…and more than 5 to 1 negative for the NDX 100. Those aren’t good numbers, but they’re not overly bad either.)

This brings us to today. Will yesterday’s decline turn into a one-day wonder…and be followed by another strong advance? Or, will yesterday’s drop accelerate…and take us lower (on higher volume and more negative breadth)? Right now, the futures are pointing to a higher opening, but since we’ve seen so many reversals recently, we’ll have to see how things playout once the stock market actually opens for trading…..Over the next two trading days, whether the stock market bounces back nicely…or rolls back over and resumes its decline from yesterday should be important as to how the market acts into the end of the quarter.

Our call yesterday that said investors should avoid the bank stocks (and the financials in general) over the short-term worked out very well…as the KBE bank ETF and the KRE regional bank ETF both fell more than 3%...and the XLF financial stock ETF declined by almost 2%. This drop seemed to be caused by the catalyst we indeed thought it would be…a drop in the yield on the 10yr note. However, the drop to 2.32% from 2.37% was hardly a significant development. We’d also note that the 10yr yield has been able to bounce back to near its recent highs this morning…which has the KBE and XLF bouncing a little bit as well in pre-market trading.

However, there is no question that the Treasury market is still very oversold (yields overbought) and sentiment has become very bearish for bonds. Therefore, we still believe a counter-trend pullback in rates is likely over the near-term…and that the banks/financials will take a breather for more than just one day.

Moving to the other side of the world, the BOJ is facing a conundrum. Unlike many other global central banks, the BOJ has kept an ultra-loose monetary and have signaled their intention to maintain this policy. However, this has weakened the yen in a substantial manner…especially over the past three weeks. Some in Japan worry that this will hurt consumption in Japan…and weigh on the earnings of certain key sectors in that country, like the retailers.

Given what the BOJ has said recently, it might be hard to think that they’ll do anything to change their policy in a significant way in the near future. However, there is no question that the yen has become incredibly oversold. Its RSI chart has reached 15…its most oversold condition in 8 years! Again, it doesn’t sound like the BOJ is going to change their course…or even jawbone their currency higher in the coming days and weeks. However, currency traders should take heed…and be careful about any short positions they might have in this currency. Also, as a very smart fellow we know pointed out to us, this weakness in the yen could be a sign of Japanese selling of U.S. Treasuries and buying U.S. stocks. Therefore, if we start to see a bounce-back in the yen over the coming days, it could/should have implications for many different traders…not just currency traders!

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Mar 24, 2022 — 8:03 AM
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