The vehicles that constitute “the four horsemen of the apocalypse” are as follows:
- US Treasuries
- US Dollar
- $VIX Volatility Index
Why the four horsemen? Because when you see all four of these rise at the same time, the underlying message is very, very ominous.
Under normal circumstances, these market bellwethers are not correlated. The “horsemen” generally do not ride in the same direction. When gold is going up, the dollar and USTs are normally going down, or vice versa and so on.
When all rise together, however, it indicates an extreme correlation of “risk off” and diminished risk appetite across the board.
US treasuries rise via their designation as the ultimate deep liquidity safe haven instrument.
Gold rises as the “alternative currency” not subject to a printing press — the safe haven for those who fear USTs are booby-trapped.
The dollar rises as US investor capital is repatriated from emerging markets (and foreign investor capital flows into bonds).
And the VIX rises as equity risk assets are being shunned…
Why is this happening now? One possibility is rising concern over the “fiscal cliff,” and the likelihood of partisan deadlock, as the threat of automatic tax hikes loom (via the expiration of time limited reductions). Some believe that the heavy selling we are seeing, especially in market bellwethers like Apple (AAPL), is at least partially the result of capital gains lock-in prior to a higher taxation period.
The selloff could also be for reasons related to our thesis, “What if recovery is actually bearish?” With the US economy on a muddle-through uptick, the law of diminishing returns for stimulus is coupled by greater likelihood of the Federal Reserve staying its hand… or not seeing much benefit from additional half-hearted efforts (likely not enough to offset deteriorating corporate profit margins and revenues anyway)…
By the way, a quick word on AAPL… there was no reason for traders to be caught long in this murderous downdraft. AAPL, for so long the market darling, is now in a full-fledged bear market. The stock has sliced through its 200 EMA like butter.
In warning on AAPL various times on Stocktwits these past few months — in respect to the signs as clearly shown on the chart — we were repeatedly challenged by permabulls.
The latest round of permabull responses was the most amusing, to the effect of “I know a guy who bought four years ago and he is still very happy…” Well good for him. If he wants to completely ignore warning signs that’s his business…
One thing that many traders, let alone fundamental investors, do not understand, is that technicals are very useful as a form of risk control in terms of providing warning signs as to when a position is markedly deteriorating…
Even if you don’t believe in charts at all, and make all your decisions based on fundamentals, charts can be useful in telling you something. As the saying goes, no one rings a bell at market tops. But topping is frequently a process, with plenty of signs and signals to go with, and the time to especially pay attention to technical warning signs is when the technicals align with a plausible fundamental case as to why a stock could be topping out… which is exactly what we saw in AAPL, re, possibilities of “peak euphoria” combined with intensifying market competition and product maturation cycles in the iPhone 5 and iPad mini.
To the above some will say “Okay wise guys, why weren’t you short AAPL then?” To which we say, we are short AAPL, more or less… as documented and time-stamped in the Mercenary Live Feed, we are short QQQ from October 19th @ 66.95. Because AAPL is roughly 20% of QQQ’s weighting, we felt the position in the Q’s was worthy to express our doubt and skepticism there.
We will ring the cash register on our QQQ short position this morning (Friday Nov 9th), however, as the AAPL carnage, at least short term, now looks maxed out / near overdone… while there is real “four horsemen” potential building for a full-on market blowout (or even a crash) in coming days, we have a good number of other attractive shorts on — apart from the multiple we are cashing in on today — and will also be establishing a large new position soon (if the signal follows through) to exploit potential crash conditions.
As usual, to see all our positions, entry setups, position sizing, and detailed rationales in real time, check out the Mercenary Live Feed…
p.p.s. follow us on Stocktwits & Twitter! @MercenaryJack and @MercenaryMike