I know that too often I fight major trends. I get it that this is probably one of my failings as a trader. I should be much better at just climbing aboard the major moves and not worrying about all the things that could go wrong.


To be fair, I understand full well the lunacy of the current environment. Although I think stocks could suffer a flash crash at any moment, I assign an equal chance of a no offering melt up.

Remember the October US bond market spike?


It’s hard to really appreciate the stupidity of that move. The ultra long bond future went up 9 handles on nothing! The offerings disappeared and the shorts panicked. Next thing you know the market had risen by a mind boggling amount. This is supposedly the most liquid market in the world, and it basically went “no offer.”

This could easily happen in the US stock market. I am not some perma-bear who thinks stocks have to go down.

But what really amazes me is that when you step back and think about what it is happening, it is shocking how sanguine everyone is about the condition of the global financial system. The Bank of Japan is monetizing their balance sheet with stock market purchases. Yes, I know that the stock market purchases are a small amount of their total monetization. But stop and think about that for a second. Foreign Central Banks are trying to devalue their currency by printing money and putting it to work in the stock market.

This post is straying dangerously close to full blown rant, and that was not my intent. I wanted to highlight an interesting chart that might be flashing a warning sign for the stock market. But I wanted to stress that this environment is far from natural. Regular relationships can break down at a moments notice.

After that disclaimer, I present the following chart of the AUDJPY cross rate versus the S&P 500.


Over the past couple of days, the AUDJPY cross rate has been hammered. Yet the S&P 500 has so far hung in there.


Will the AUDJPY dip prove temporary? Will the AUD either rally, or the JPY decline resume shortly? Or does this foreshadow upcoming weakness in the US stock market? Or will this be yet another relationship that breaks down as the stock market continues its relentless ascent?

I don’t know, and I am not some perma-bear clinging to the one tiny bit of potentially bad news trying to justify my short position. Yet at the same time, this worries me.

Be careful out there. There are not a lot bears left which will make any decline all the more wicked. This market is way more scary than most realize.