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Doom seekers: Where Wall Street sees red flags

Traders on Wall Street are always looking for the next land mine. And, despite having eight monitors in front of them, they're usually just focused on a few indicators that may dictate significant investment decisions.

In 2006, everyone was focused on housing. In 2008, all eyes were on credit which was a major reason for the move down, and in 2011, everyone in the equity markets was fixated on Europe.



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I reached out to fund managers, portfolio managers, traders, sales traders and analysts to see what they're watching today and what would cause them to a boxer-brief change.

China

China is the second largest economy in the world. Concerns about the Chinese market are causing investors globally to sell risky assets. Everyone I spoke with has China on their radar.

"I'm not worried about China slowing," said a hedge-fund economist. "But the real risk is if it's halting. That's a huge cause for concern." He added that China's economy will dictate almost every facet of the global economy.

China's stockpiling of commodities such as oil and metals has only fueled worries that it is looking to further devalue the yuan.

Doomsday Scenario: If there's a sharp devaluation in their currency of more than 3 to 4 percent, you should get your sell tickets ready because everybody's out.

The U.S. dollar

The dollar has outperformed some of the world's pre-eminent currencies since 2010. And it's been tremendous for the U.S. economy. The rise is primarily because of other currencies being much weaker. But it's all relative. The expectations are that the U.S. will begin to tighten monetary policy (raise interest rates) between now and 2018 when other central banks will just begin their own process.

"The dollar is driving everything," one analyst said. "Tell me which way the U.S. dollar index (DXY) is going and I can figure everything out."



Doomsday Scenario: If the U.S. dollar falls sharply, then the Fed can't raise rates. That will cause company earnings multiples to move higher. And it will allow other currencies to catch up to our own recovery.

Fund flows

Mutual-fund flows don't account for institutional money and the individual investor, but they're a great gauge of sentiment.

"All my guys are paying close attention," said a derivative sales trader who covers mostly hedge funds. "They're looking for the equity outflows to take a breather. Every week in 2016, we've see more money leaving the markets."


Doomsday Scenario: If sequential equity outflows continue, it will create a whole new speculation on the market and will become a self-fulfilling prophecy.


Crude oil

In normal markets, lower crude prices create a very long lag to expansion of GDP, which is good for the markets. But this isn't a normal market. There's been some relief feelings like we've been billed out as prices went from $27 a barrel to $46 a barrel.

"We think oil has topped out here, " one portfolio manager said. "This is chronic oversupply and it's just going to keep coming."


Doomsday scenario: If oil prices stay too low for too long, it will create significant risks for every financial institution that has lent money to the oil industry. There could be massive write-downs which could end up having a domino effect on the overall markets.

Commentary by Turney Duff, a former trader at the hedge fund Galleon Group. Duff chronicled the spectacular rise and fall of his career on Wall Street in the book, "The Buy Side." Catch him on CNBC's "Filthy Rich Guide." He's also a consultant on the Showtime show, "Billions," starring Damian Lewis and Paul Giamatti. Follow him on Twitter @turneyduff.

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