Weekend Strategy Review August 12, 2018
Posted by Laurie Liessmann at August 12th, 2018
U.S markets had their worst daily drop since late June amid a broad global equity retreat that was fueled by a mounting currency crisis in Turkey. The Dow fell 196 points, closing at 196. It was down 149 points for the week. The NASDAQ was down 55 points on Friday, but still managed to finish up 27 points for the week.
Friday’s decline turned several of my key indicators negative. It’s still too early to tell if the currency crisis in Turkey will lead to a contagion into other markets, but it’s possible.
Several weeks ago, I talked about how several European markets were forming patterns that appeared to be approaching major tops. This was one of the reasons I thought the U.S. markets would have one final rise, Major Wave 5 up, into the early fall before starting the next Bear Market.
Europe is swimming in debt, and once interest rates begin to rise, this enormous debt will become unserviceable, precipitating a decline in equities.
However, because of recent political decisions that were made in Tukey, a member of NATO, with respect to buying Russian weapons, President Trump doubled the tariffs on Turkish steel to 50 percent, and 20 percent on aluminum. This caused the Dollar to rise with respect to the lyra, putting enormous pressure on Turkish and Russian financial markets, which spilled over to the rest of Europe on Friday.
The currency crisis is further exasperated by last week’s sanction of two ministers in Erdogan’s government over continued detention of an American pastor in Turkey. In other words, as President Trump recently tweeted, relations with Turkey ae not good.
All this will likely become a problem for Turkey early next week once it realizes it will need to borrow funds to support its falling currency. The issue will be where will the get these funds? From the U.S supported IMF? This will take some doing. It’s basically Erdogan asking Trump to bail him out. From Germany? Probably not; Merkel has her own political problems, mostly caused by Erdogan. From Russia? Hmmm? As you can see, getting the funds to support the lyra could be difficult. And if the lyra continues to fall, thousands of Syrian refugees now living in Turkey will migrate into Europe because of rising prices, further exasperating the political and financial crisis. It could become a contagion.
Bottom Line: What happened in Turkey on Friday could hasten the end of the Bull,Market. It’s too early to tell right now, but the indicators are starting to turn negative. The volume portion of my combination VTI-volume indicator on the Dow turned negative. If the selling continues into next week, the VTI portion (momentum) will turn negative generating a Sell Signal. The VTI-volume indictor on the NASDAQ is also on a Neutral Signal.
The Sector Ratio fell to 18-6 positive after Friday’s session. This is still a very positive ratio, but the fact that it’s starting to decline is something to watch. If the Ratio turns negative, I’d be concerned. But not now.
The leading sectors have become defensive again with Telecoms, PharmaBio, Food Drugs, Household Products, Transportation, and Foods leading the List. Leisure, Healthcare, Material, Computers, Semiconductors, and Financials make up the Weak List.
Gold was flat on Friday and remains on a Sell Signal. Friday’s rise in the Dollar did not help gold. UUP, the ETF for the Dollar, remains on the Dean’s List with its VTI-volume indicator on a Buy Signal. Again, as long as UUP remains on the Dean’s List, U.S. companies doing business overseas will remain under pressure. Right now, a lot of what happens to the stocks of these companies and gold will depend on what happens to the Dollar.
Watch the Dollar.
That’s what I’m doing,
Have a great weekend.
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