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TheStreet Open House

Global Macro: Equity Markets Signal a Reversal

Stocks in this article: VT FXY VXX

NEW YORK ( TheStreet) -- As global markets reside at record highs, there are a few financial market indicators signaling that the uptrend could be in jeopardy.

The run-up has come on the heels of loose global monetary policy and improving economic conditions. Although global economies continue to trend higher, central banks are hesitant to continue large rounds of market intervention.

The first chart below is of the Chicago Board Options Exchange Volatility Index, better known as the VIX. The VIX is an index that charts market expectation for volatility over the next 30 days. It tends to correlate inversely to equity markets. An exchange-traded fund that closely follows this index is the iPath S&P 500 VIX ST Futures ETN (VXX).

Price action has been in a strong downtrend as equity markets and riskier assets have risen to record highs. What has taken shape, however, is a strong bottoming pattern and what looks to be a reversal in the near future.

The index has traded in a volatile diamond pattern at its yearly lows, and with not much room to move lower, chart likely will break to the upside by year's end. This would signal a definite downward reversal in equity markets.

The next chart is of the yen. The Japanese currency is perceived as a safe haven in global markets and receives an influx of bids when financial market conditions begin to deteriorate. An ETF that closely tracks the movements of the yen is CurrencyShares Japanese Yen Trust (FXY).

As the yen has trended higher in a rising channel since early July, U.S. equity markets have begun consolidating at record highs.

A strong yen will weigh on riskier global assets, and could eventually topple markets as more investors sell their current holdings and rush to the Japanese currency.

The final chart is of Vanguard Total World Stock Index ETF (VT). This ETF tracks a basket of world equities. As the risk indicators above signal a potential turning of the market, the world equity index is approaching major overhead resistance.

In mid-May, before Federal Reserve Chairman Ben Bernanke revealed an exit plan for monetary stimulus, world equities failed to break above the levels they currently reside. As the index declined, both the yen and VIX turned off their lows and spiked to yearly highs.

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