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Global Macro: Flight to Safe Havens Signals Downturn

By Andrew Sachais

NEW YORK ( TheStreet) -- The chaos that has hit the markets recently highlights the importance of program trading and volatility. When enough variables shape up to signal a bearish environment, heavy selloffs are the result.

The retail trader needs to be aware enough to see these environments shaping up and position accordingly. Intermarket trend analysis is a way of sifting through relative movements and understanding where markets are looking to go.

Monday looked like a perfect storm, starting with weak GDP in the East and ending with apparent acts of terror in the West. The Chinese data highlighted that our global recovery is moderate, despite the recent, rapid rises in equity.

Weak data out of the major economic powers China, U.S. and eurozone signal a flight out of risk. In the currency arena this is seen in a flight to the U.S. dollar and Japanese yen. They are liquid currencies and are usually sold during carry trades for higher-yielding currencies such as the Australian dollar. When the pair trades out, the dollar and yen are bought back, giving rise to demand for the two.

Courtesy of stockcharts.com

The major decline in currencies is partially due to dented optimism in global growth, but also the waning patience of inflation expectations. It looks like consistent and significant months of growth will be the only thing to make inflation a legitimate threat.

The chart above shows the PowerShares DB US Dollar Index Bullish (UUP) over an equal-weighted CRB commodities basket, the PowerShares DB Commodities Index Tracking Fund (DBC). The breakout yesterday of the ratio signals the move towards such a risk-off environment.


Although we have yet to experience major equity selloffs and a break of the uptrend, the U.S. market is positioning defensively. Utility stocks, as measured by the Utilities SPDR (XLU) ETF, have been outperforming the S&P 500 benchmark SPDR S&P 500 ETF Trust (SPY) recently, which signals the flight to stability over risk.

Another indicator is the iShares Russell 2000 Index (IWM) over the iShares Russell 1000 Index (IWB). This ratio correlates positively with risk assets, and has shown major weakness lately.

Again, equities have yet to falter considerably but the intermarket trends signal an impending intermediate bearish turn.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a senior at Georgetown University earning a degree in Economics.

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