To The Moon

A recent string of mismatches between macro data and capital flows has revealed a new direction for the rotation across global asset classes.

After deeply reviewing the latest non-farm payrolls (NFP) data, the U.S. Dollar Index, the yen's trajectory, and U.S. equity fund flows, I want to discuss a new trading thesis that may differ from what many people think: the pressure that a rising Dollar Index puts on global equities is not over. Bottom-fishing is not currently suitable for U.S. stocks, but it may be relatively suitable for U.S. Treasuries.

Why do I say this? To sum up my current logic chain: although over the past week the Dollar Index staged a pullback at its major resistance around 101.3, judging from the performance of the yen — the dollar's second-largest counterpart — and the trajectory of China's Shanghai Composite Index, the pressure that a rising Dollar Index places on global equities is not over.

$China A50 Index - main 2607(CNmain)$ $SSE Comp(000001.SH)$ $Hang Seng Index - main 2607(HSImain)$ $Hang Seng Tech Index - main 2607(HTImain)$

Against this macro backdrop, we take a cautious view on U.S. stocks going forward. Although the twin minor positives of a 'cooling NFP' and a 'rising Dollar Index' may support U.S. stocks in a period of high-level, range-bound trading, judging from the S&P's clear topping pattern and the latest weekly data showing institutional money flowing heavily out of the Magnificent Seven tech stocks (M7), the cycle of steady upward movement in U.S. equities has very likely already ended. The more cost-effective trading logic right now lies in a 'stock-to-bond switch':

As the dollar stays strong and rate-cut expectations gradually ferment, global safe-haven and yield-chasing capital is highly likely to pull out of richly valued U.S. equities and rotate into the relatively undervalued U.S. Treasuries, whose yields are locked in. U.S. stocks face the pullback risk of being 'blood-drained' by the fixed-income market, while U.S. Treasuries, sitting at historic lows, are entering a relatively suitable window for left-side accumulation.

Let's go through them one by one:

The Payrolls Shock and the Dollar's 'Fake Stumble'

This narrative has to start with last week's jaw-dropping non-farm payrolls report.

This time the NFP data came in shockingly far below market expectations. The unexpected drop in new jobs threw a bucket of cold water on the overheated economic outlook, and successfully knocked down the market's pricing of a Fed rate hike.

$E-mini S&P 500 - main 2609(ESmain)$ $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $Micro E-mini S&P 500 - main 2609(MESmain)$ $E-mini Nasdaq 100 - main 2609(NQmain)$ $NASDAQ(.IXIC)$ $Invesco QQQ(QQQ)$ $Micro E-Mini Nasdaq 100 - main 2609(MNQmain)$ $E-mini Dow Jones - main 2609(YMmain)$ $Micro E-mini Dow Jones - main 2609(MYMmain)$ $Dow Jones(.DJI)$

This actually fits nicely with the Trump administration's current political intent to cool rate-hike expectations and create an easy-money environment ahead of the midterm elections. Together with the sharp drop in crude oil prices, we can basically conclude: at least before the November elections, the odds of further rate hikes are already low.

$United States Oil Fund LP(USO)$ $WTI Crude Oil - main 2608(CLmain)$ $Micro WTI Crude Oil - main 2608(MCLmain)$ $E-mini Crude Oil - main 2608(QMmain)$

The cooling of rate-hike expectations did give commodities a breather and a rebound, and the Dollar Index also pulled back to some extent in front of the strong 101.3 resistance — but it still held its decline above the important support of the 20-day moving average.

But note: this is very likely just a 'fake stumble' by the dollar. Why? Because beyond rate-hike expectations, there is another extremely important force driving this leg of dollar strength — the weak yen, the dollar's second-largest counterpart.

On the weekly chart, the yen's downtrend is not only far from over — it is, if anything, intensifying. The latest CFTC (U.S. Commodity Futures Trading Commission) data show that institutions' bearish sentiment toward the yen has not reversed; hedge funds' degree of bearishness on the yen has even reached its lowest level since the bursting of Japan's real-estate bubble in 2007. Alongside the yen's plunge, the number of Japanese corporate collapses has also hit a multi-year high.

Under such a massive wave of yen selling, large amounts of capital are converted back into dollars, so the Dollar Index's uptrend simply cannot be declared over in the short term. This means the pressure a strong dollar exerts on global non-dollar assets (especially equities) still hangs overhead like a sword of Damocles. The Shanghai Composite's recent 'drop first out of respect' — piercing its rising support line — is a direct reflection of strong-dollar pressure.

$Japanese Yen - main 2609(JPYmain)$ $ProShares UltraShort Yen(YCS)$ $Invesco CurrencyShares Japanese Yen Trust(FXY)$ $USD Index(USDindex.FOREX)$

The 'Illusion of Prosperity' in U.S. Stocks: Tech Money Is Fleeing at an Accelerating Pace

On top of the 'twin minor positives' of cooling rate-hike expectations and a slight dollar pullback, many investors still hold unrealistic optimism toward U.S. stocks, believing they can keep making new highs.

But I firmly believe: U.S. stocks are not safe right now — at least over the short-to-medium term of the next two weeks, one must not blindly stay bullish.

First, on the technicals, the S&P has already traced out a clear topping structure. Also, even though many believe the semiconductor sector has bottomed, judging from the ratio of Goldman Sachs' AI-basket composite index to the S&P (ex-AI stocks), the current 14-point pullback is not large by historical standards. And even if it has truly bottomed, the market often makes a second dip to solidify the bottom structure.

$MACH7 TECHNOLOGIES LTD(M7T.AU)$ $NVIDIA(NVDA)$ $Tradr 1.5X Short NVDA Daily ETF(NVDS)$ $Tesla Motors(TSLA)$ $Alphabet(GOOG)$

Even clearer evidence comes from the flows. The latest Goldman Sachs research coldly points out: institutional money in important seats is still continuously selling tech stocks, and exposure to the 'Magnificent Seven' (M7) keeps being reduced.

In the latest week, institutions' net outflows from equities kept widening, and individual stocks continued to be sold.

Smart money is heading for the exits. Within this huge top-of-range zone, without a decent pullback to digest the valuation bubble, it will be hard for U.S. stocks to start a new, steady up-cycle. So everyone needs to patiently wait for the market to choose its direction.

The equity-options straddle I flagged last week — I've already locked in profits for safety at more than 30 points of gains. But I think this strategy can still be considered with a light position over the coming period:

Review: US Stocks Under a Strong Dollar: Defensive Positioning with Options and Short Strategies

U.S. Treasuries: A Moment to Dig for Gold at the Lows

If U.S. stocks are too high to feel safe, where will the money go? Macro patterns tell us that when high-flying assets face risk and the dollar stays strong, global capital tends to seek out relatively undervalued fixed-income assets with stable, high yields. The answer is obvious: U.S. Treasuries.

From the current time-and-space position, TLT is now sitting at an absolute low by historical-seasonal standards.

From the latest hedge-fund positioning data, hedge funds' risk exposure to bonds is also at a historic low — which perfectly matches the classic pre-entry 'bottom-fishing rebound' signal.

This is actually a self-reinforcing logical loop: as cooling payrolls weaken rate-hike expectations, a peak-and-fall in bond yields will push bond prices up; meanwhile the dollar's strength attracts global safe-haven capital into the U.S. mainland. If that money finds U.S. stocks too expensive, the most perfect destination is U.S. Treasuries at historic bottoms.

$US10Y(US10Y.BOND)$ $10年国债ETF(511310)$ $10-YR T-NOTE - main 2609(ZNmain)$ $2-YR T-NOTE - main 2609(ZTmain)$ $5-YR T-NOTE - main 2609(ZFmain)$ $iShares 20+ Year Treasury Bond ETF(TLT)$

Once this 'stock-bond seesaw' effect takes hold, U.S. stocks are highly likely to face the risk of being 'blood-drained' by the bond market and falling further.

So on strategy: besides what I said above — keep considering the options straddle with a light position, and immediately take profit for safety whenever a large bearish index candle appears — one can also consider selling weekly puts around TLT's prior low.

Of course, the premium on that put is a bit thin, so we could instead simply wait for TLT to drop to the prior neckline (the blue line) and then consider bottom-fishing the underlying, or use long call options to bet on a Treasury rebound — these are all strategies worth building.