Maybe it’s without cause.
Alright, let’s talk about the obvious.
The Brexit vote made everyone jump on the sell button, and it could be we’ll see more of the same as the week gets going.
With that in mind, let’s examine a few key features of the decision and have a look at some charts before we move ahead on the trade front.
Number One – the market has been in a state of zombie-like anticipation for at least a quarter now, waiting for a chicken-little, sky-is-falling event to sell off, and the Brexit results obviously provided them with that reason. Heading into the vote, sentiment on all fronts was already as bearish as it gets. For at least a month now, we’ve produced charts that demonstrated that despondency.
With the open on Monday, there’s going to be some follow-through selling that adds to that pessimism, pulling sentiment to likely its worst levels in a decade.
And from a contrarian perspective, that’s significant. Sentiment readings are most meaningful at the extremes, and if we’re indeed presented with an all-out millennial cataclysm of despair by, say, mid-week, that would raise a lot of eyebrows in the contrarian caucus and probably result in some sustained buying.
Again, we’re not there yet, but we’ll be watching the numbers and will certainly keep you posted.
From Melancholy to Sanguinity
Number Two – the fundamental driver of Friday’s selling was a flight to safety, from currencies the world over, mostly the Pound and Euro into the U.S. Dollar. After Britain fell, the question of whether other European nations like Italy and Spain (the latter of which holds federal elections as we write) choose to remove themselves from corporate ‘Europe’ moves to the fore.
As of now, the bet is that a surging nationalist tide on the continent will further the ‘Exit’ camp’s agenda and undermine the notion of a united Europe altogether.
Take a look now at a chart of the U.S. Dollar Index –
Overall, the action in the dollar has been steadily higher, as the divergence in RSI and MACD indicators demonstrate (in green).
But the chart also shows that Friday’s incredible one-day surge couldn’t carry above the long term moving average (in yellow). DXY jumped a startling 3.7%, from 93.2 to 96.75 in the session, before slamming lower, below the long term moving average, indicating that the market is not yet ready to regard flows into the U.S. Dollar as a sustainable trend, a done deal, as it were. We may see that move tomorrow, or next week, or never, but as of now, nothing’s settled and it’s possible the dollar will bounce around in its current range as it has since February 2015.
If that proves to be the case, then Friday’s burst upward was nothing more than a knee-jerk fear reaction from those with less than a long term read on the market, to put it politely.
We’ll keep an eye on the dollar to see how the money flows develop.
Number Three – worries in Britain and Europe, coupled with ongoing fears of a contraction in China, have been steadily accruing to the favor of U.S. equities.
The U.S. market has attracted an increasing percentage of global investment flows since the bull market began in March of 2009. Weakness in Europe and the Far East, along with the Brexit decision last week, we believe, may create the perfect storm for American equities, one that could flip the levers and pressure the fulcra to the max, sending the Dow well over 20,000, and very likely 25,000, within the next 12 to 18 months.
Have a look t the following chart –
The light blue line is a representation of the value of U.S. Stocks as a percentage of the global total. And as you can see, the U.S. has gradually been clawing back its share of the global equity market from China and India predominantly, after losing it in the early 2000’s.
It’s been stuck just below 38% for a year now, but appears ready to pop higher at any time. This is the perfect storm we see materializing.
As confidence in the China and Japan and Europe wanes, the U.S. will attract increasing flows of capital, forcing the equity market here abnormally – freakishly – higher.
Pump and Dump
We’ll discuss the Brexit vote’s effect on the global elite in a coming letter, but for now let’s just say that these folks are running scared and have everything to lose if the status quo unwinds any further, as it appears it may in November here in the US.
They’ll do everything in their power to reassure the world that all is well while seeking a means of stealthily extricating themselves from the market.
But that’s for another time.
Right now we’re looking at a previous trade and offering you a new one.
In our June 14th letter called Copper Top Battery, we highlighted Freeport McMoran stock (NYSE:FCX), saying as follows –
The stock’s support at $10 has been tested repeatedly in the last month, with buyers emerging on at least five occasions to buoy the shares. At this point, though, it’s do or die, as several moving averages are now pressing down from above, and both RSI and MACD have descended below their respective waterlines, the threshold level for many technicians looking for a sell signal.
And what happened?
Indeed, our call was right, the stock fell, but not enough to turn us a profit. We told you to consider buying the FCX June 24th 12 PUT for $1.73, and as of last Friday’s expiry FCX closed at $10.58.
We’re in-the-money $1.42 on the options, but alas, off $0.31 for the trade.
But Not Out!
With the current volatility in the market, breakouts will be occurring left and right, and because FCX has traded so long in a range (see below), it, too, will see a reckoning in short order.
Have a look at the chart –
RSI and MACD are flat-lining along their waterlines as price bounces between ten and twelve: a situation that won’t persist in the current environment.
A situation that calls for a ‘strap strangle’.
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With kind regards,
Hugh L. O’Haynew