Andy Krieger's Thoughts on the Market - 2 January 2024

In my last several write-ups, I discussed my view that dollar yen had finally started its long-awaited powerful reversal from its multi-year highs around 151.90. In almost textbook fashion, the dollar staged a sharp, but brief, reversal from 141.50 back to 145.00, before then resuming its downtrend. The dollar closed today at its lowest closing level since July around 141.00, looking like it will continue its overall descent against the yen after another short-lived corrective cycle to work off some oversold conditions.

There are multiple reasons for the yen to start strengthening, and depending on how the fundamentals play out, we might be at the early stages of a staggeringly powerful move. Just three years ago USD/JPY was trading just above 102.00 so it isn’t hard to imagine a much, much lower dollar over the next twelve to eighteen months, potentially retesting or even breaching that level within the next two years. At a minimum, there should still be plenty of room left in this move before we experience a more serious correction. Several obvious targets would be around 137.30 and 127.30, but it is too early to fine-tune the timing.

The dollar overall is oversold in the short term, and it is due for some corrective rallies against most majors, but over time the yen should outperform the other currencies. If the Bank of Japan finally abandons its hyper-loose monetary policy, then the yen’s outperformance could be extreme. Otherwise, it will likely be a more modest move until the Fed starts its next cycle of lowering rates. For the time being, the Fed is on hold, but the inflationary data certainly looks promising for softer interest rates over the next six months. I am not in the camp that is expecting the Fed to aggressively cut rates any time soon unless macro-economic factors start to look quite dismal. In fact, I am now expecting interest rates in the U.S. to recover a bit from the recent low levels. We have had a very strong drop in yields from the 5.18% level in the 30-year bonds, and a decent bounce in yields is imminent.

Overall, I would expect the British pound and the Canadian dollar to underperform on the crosses, so I remain negative on CAD/CHF, with further downside quite possible over the coming weeks and months. So far, it has performed as forecasted, ratcheting lower in a pretty controlled pattern, making successive all-time lows regularly. It is a little difficult to pick a precise target because the currency pair is making successive all-time lows, and the market can continue to move lower beyond all “sensible” levels. In that sort of scenario, I prefer to use trailing stops rather than pick a specific level. As we have seen, markets can over-extend to ridiculous levels, so it is best to let the market tell us how low the cross can go. Like most other markets, this cross is overdone right now, so I am expecting a bit of a bounce.

The pound versus the Swiss franc is also in a very powerful downtrend, with a possible move lower to test the all-time lows from September 2022 around the 1.0175 level after a short-term corrective cycle. Rather than just playing the short position in GBP/CHF I prefer a blended position with short pounds against both the Swiss franc and the yen. In GBP/JPY the move is just getting started, and the potential magnitude of the move is enormous. The initial move should get us back below 160.00 GBP/JPY, although eventually I wouldn’t be surprised to see a huge move even lower than that level.

In the equity markets, my call for a sell-off in December was clearly premature. My forecasts on stocks have been largely out of sync this year, with only a couple of well-timed short entries. This is a perfect example of why I prefer to use limited risk option strategies when I am taking structural views on the markets. This enables me to still generate excellent returns when I my timing is off in one or two markets.

Historically, my market calls have tended to be quite good in the big picture, but early. In fact, this has been my pattern since I first started trading in the mid-1980’s. Well-structured option strategies allow me to express my market views safely and still make lots of money despite often being early in many forecasts and wrong in some others. Once the moves are underway, and the market views have been confirmed, then the winning strategies more than overcompensate for the losing positions. My calls in gold, interest rates, and a few of the currency pairs this year have been more the exception than the rule, as the timing in those cases was spot on.

In any event, as noted, the stock market continued to rally into year end, making new all-time highs in several of the indices. Previously, I was expecting a more modest correction before we made a new all-time high, but now that we have already made the all-time highs, I think we are close to a very significant move lower. I persist in my thinking that equities are close to a major turning point, if not already there. My forecast for the Nasdaq is particularly bearish, although I expect widespread selloffs in multiple equity markets. There is just too much optimism built into the markets, and I don’t believe these levels can be sustained.

With regards to gold, I feel that the trend is developing very nicely. After a fierce initial rally from the corrective lows around $1810 per ounce up to $2147 per ounce, the market retraced perfectly to $1973 per ounce shake out the weak longs. Now it seems that gold’s base is well established above $2000 per ounce, on its way to much higher levels. This won’t happen without periodic corrections, but the trend seems to be intact.

I am excited about the trading opportunities we will have in 2024. It should be a great trading year with enormous volatility. Wishing you all the best of luck.