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Overbought conditions can be resolved in one of two ways: Either through price or through time.

The major U.S. indices appear to be resolving through time, grinding sideways rather than correcting lower. The potential for a fear-induced sell-off catalyst remains high, but bulls are gaining traction.

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The Dow Transports were previously non-committal, a fly in the ointment of the bull case for the major U.S. indices. On Wednesday the Trannies resolved bullish.

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In further bullish confirmation, long bonds are accelerating to the downside, suggesting a rotation out of safe havens and into risk assets.

What is some possible reasoning for this?

In addition to the central bank "wrapper" - bad news gets stimulus, good news means equities still king in a zero-interest world - general perception may be sinking in that Europe has stabilized. This could be a completely wrong perception, but absence of a fear-mongering macro catalyst (at least in the short run) lends a strong argument to equities.

Conditions remain hostile with macro risk elevated and the VIX at low extremes. The counter to this is that the VIX can stay low for extended periods of time, as equities grind higher in the absence of fear catalysts.

Notable piece from WSJ on reaching for yield down under. In-flows into Australian bonds have kept the currency strong.This phenomenon is interesting for multiple reasons:

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The source of AUDUSD strength explained. This presents a clearer picture of why the Aussie dollar short-term bottomed on July 1, 2012. Incoming capital flows buoyed the currency.

Dangerous assumptions re, China revealed. Those "reaching for yield" via Australian debt are implicitly assuming China's hard landing will not destabilize Australia's heavily natural-resource-leveraged economy (with housing bubble to go with). This could prove an exceptionally bad assumption.

Potential double negative for AUDUSD moving forward. If the global slowdown grows more serious, strongly impacting base metals prices - as others have noted, copper looks very vulnerable - then assumptions of China avoiding a hard landing could be proven false, severe decline in base metals prices could follow, and the double down Aussie carry trade could unwind in severe fashion.

On the other hand, if the "risk on" rally in Western assets appears sustainable, AUDUSD could decline anyway as foreign capital withdraws from Australian debt holdings and returns to local opportunities.

In this low conviction macro environment, we still very much like the big-picture drivers for short AUDUSD.

China continues to look like a train wreck in slow motion - fiscal crisis delayed but not denied. The ripple effects will be felt.

Tame CPI numbers and economic weakness around the edges support the possibility of Fed QE, at least in stimulus hopers' minds. A further interesting factor in the possibility that options sellers are seeking to pin the S&P to 1400, thus providing more incentive to maintain an extremely dull range.

Europe is still a disaster in waiting. The question is how long of a reprieve we get before the shit hits the fan again.

How crappy has forex been as a return generator these past few years? Epically crappy:

Brevan Howard, which managed $36.7 billion at the end of June, started Ding's Macro FX in 2009. The fund has produced an average annual gain of 3.6 percent since its inception in November 2009 through June of this year, compared with a 3.7 percent rise for the broader industry, according to data compiled by Bloomberg and Chicago-based Hedge Fund Research Inc.

Other hedge funds that trade currencies based on global economic trends produced an average annual loss of 0.9 percent from November 2009 through June of this year, the most recent data available from Hedge Fund Research.

This is just ridiculous:

Paulson, 56, has lost 23 percent so far this year in his Gold Fund and 18 percent in the Advantage Plus Fund, in part because of wrong-way bets on mining companies. Advantage Plus, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, declined 51 percent last year.

It makes me want to shout, WHAT THE HELL HAPPENED TO RISK MANAGEMENT? Does Paulson somehow get a pass on risk management, just because he manages billions? And now he is "doubling down" on his gold bets… already down +20%… What is wrong with these guys? What is wrong with their investors?

More Bullish Setups

Part of our process involves scanning hundreds of charts (typically 400+), both mechanically and visually, on a daily basis. The feedback of this scan gives additional flavor as to the character and positioning of the market.

We are starting to see more bullish setups pop up now, and more winning stocks separate themselves from losing stocks. The picture is consistent with bulls gaining traction as overbought conditions resolve through time rather than price.

Notable technical developments:

  • High-yield consumer staples weak. Time for rotation out?
  • Utilities vulnerable? Another sector exposed to rising yields / risk rotation.
  • Solar stocks possible bottom. TAN long downtrend over?
  • Junk bonds resolving bearish. Shift out of high yield as well?
  • Silver hanging tough. Possible refusal to break means imminent rise?

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Source: Global Macro Notes: Falling Bonds, Rising Transports, Vulnerable Aussie