Positioning in Safe Haven Assets – How Extreme is it?
Most pullbacks typically follow a three-wave pattern: An initial ‘wave one’ of selling; followed by a ‘wave two’ relief rally (in which some of the ‘wave one’ losses are retraced); and then a ‘third wave’ back to the wave one lows, or lower.
Over the past week, key indices have been rallying (wave two), following on from their significant (wave one) pullbacks from mid-July up to the 5th August lows. The S&P 500, for example, is up 4.9% from its intraday lows last Monday, the Japanese Nikkei 225 is up 12.2%, while the DAX is +3.8% with all of those indices, therefore, retracing a portion of their mid-July to 5th August losses.
As is also typical of a ‘wave two’ relief rally, classic ‘safe haven’ assets have sold off this past week. The Japanese Yen, for example, is down 4% (against the dollar), the Swiss CHF is down 3%, whilst US 10-year bond yields have backed up to a 3.95% yield (with prices falling).
The key question now is: Where are we in this sell-off? Does it have much further to go?
Certainly from a positioning perspective (in safe haven assets), it’s clear that the risk-off behaviour has started. Our ‘safe havens’ positioning model* (fig 1 below) has moved rapidly back to/towards BUY levels. We are not, though, yet at the extreme ‘strong BUY’ levels typically seen at a major local low (i.e. after the end of ‘wave three’). This indicates that (from a safe haven perspective) there is still some capacity for a further shift in positioning towards safer assets, and therefore more potential downside in a ‘wave three’ sell-off.
Closely monitoring safe haven positioning over coming weeks, therefore, is a key ‘piece of the puzzle’ to help navigate the market's next phase in this pullback.
*A positioning-based model which includes the following assets: JPY, CHF, gold, VIX, US 10 year Treasury bonds. Positioning data is available only up to last week’s Tuesday’s close. Therefore, positioning reflects the market environment amid the ‘wave-one’ sell-off phase.
Fig 1: ‘Safe havens’ positioning model vs. S&P 500
