August 27, 2015

August 27, 2015 The Carry Trade Is Over In my conclusion to Monday, August 24, 2015 report (see archive), we drew this conclusion: "As for stocks, if you have dry powder, use some here, down 480. Save some for tomorrow morning, especially if we open lower, say back well under S & P 1900. If we open higher, be patient. Watch China and what they do to intervene. Watch the Euro and the Yen. The currency decline versus the Dollar back to normal levels, Euro 1.12 and Yen 1.22. If we get back to these levels, then the risk off trade has abated. What we lack is volume, in terms of a selling "climax". This is panic, but perhaps not a climax. Then again, not all markets end in a selling climax. Don't start getting negative here. That time has passed. There is no base of consequence, but those looking to January for total return, I think that the door is open to start using capital here." First, peaking Monday was the carry trade, short the Euro and Yen and long equities. That unwinding, indiscriminate in selling stocks as it was, produced an unrealistic climax low. There were plenty of prints that were way out of sync. Some you can make excuses for, i.e. Starbucks at 42 and McDonalds at 87.50. They have a growing presence in China. However, there are others that, while also a presence in China, were way out of whack, i.e. Facebook at 72, JP Morgan at 50, or Apple at 92. Scanning the ETFs was a nightmare. The Vanguard ETFs were off 20% to 35% in the first 10 minutes of Monday. The NASDAQ was off nearly 18% from recent intra-day highs, prompting calls for this to be a "Bear Market", requiring a decline of 20%. To achieve this, we would need more than a disruption in global markets. We need a recession. As we mentioned, we are entering the start of the consumer driven cycle, where back-to-school buying, Halloween, Thanksgiving, Christmas, and New Years drives huge consumer sales. Since consumer spending is 70% of GDP, we need to pay attention to the consumer as a driver of the economy. Next week's University of Michigan Consumer Confidence Survey will be quite telling. They survey right up until the day before, so it will reflect how people felt about the selloff. All the talk of $2 gasoline by Christmas may have been overblown, especially in light of crude jumping 10% just on Venezuela wanting to have an OPEC meeting to see if they can convince members to curtail production. Still, crude is in the low 40s and faces the same issues related to supply if Iran is allowed to export and if Russia finds a way around sanctions. A pop in crude did help energy stocks rally yesterday. The Vanguard Energy ETF, VDE, jumped 5.32%. Chevron led the Dow, up 6.38% and Exxon Mobil up 3.52%. These are badly beaten down names that had a good bounce, helping lift the Dow. This is good news for earnings, potentially, but we care a bit more about the consumer and them spending their new-found gasoline savings on other goods and services through the end of 2015. Another item helping lift spirits on Thursday was the 2nd quarter revision to GDP. Annualized growth was revised to 3.7% from 2.3%. A revision to inventories helped, but it was really business spending that provided the big lift to the revision. Overall, the bounce off of a weak 1st quarter was stronger than anticipated, and that puts our economy on a stronger footing heading into the second half of this year. China's devaluation and market disruption will have an impact, but our economy is doing well, and we should expect that the market will reflect this by the end of the year. While I often like to end on a positive note, let's look at the market technicals, because the technicians will tell you that this isn't over. We have no base of consequence. We haven't had a "bear market" since 2009. Market lows are usually tested. All true. However, the low we witnessed wasn't exactly real for an economy growing. Therefore, the "test" should hold at a higher level. Starting with the Dow, which has significant exposure to large multinational companies, is and should be the hardest hit. Resistance at 17,280 is formidable, and I don't think we get there on this bounce. Something shy of 17,000 before testing 16,000 would do. Timing-wise, Friday's can be tough heading into the weekend. Too many unknowns. If up several hundred points, taking some off the table for a better spot would be advisable for short-term traders. Long-term, be comforted by the fact that we've likely seen the worst of it for a while. The S & P broke key support at 2040, now resistance. If we get to 2010 - to 2020, look for resistance to gain the upper hand. he target for a pullback would be 1910 to 1920. The NASDAQ's spike to 4292 represents an 18% decline. We shouldn't be going there. It's 200-day at 4912 is the target overhead. 4877 closes a gap down, so look for the test to start from around here and a low of 4500 to be a buy. Tests tend to be, on average, 8 days out from the spike low. Monday was weird. Tuesday was real. That means we could bottom sometime around Thursday/Friday next week. This is strictly technical analysis on a short-term basis, but worth watching. Month end is on Monday, last day to trade and maybe to sell some big losers, so stocks that didn't bounce might be targets of getting dumped on Monday. I continue to feel that we should not get too overwhelmed by the market decline. The US is in better shape and entering a favorable period. September's can be negative, as hedge funds often use this month as the end of their fiscal year for tax purposes, less so than previous decades, but still may have some bearing. We have time to buy. Be picky, but be willing to seek out opportunities.
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