Weekend Strategy Review June 25, 2016

Posted by OMS  at June 25th, 2016

OK, so we lived through Black Friday.  Now what?

Assessing the damage, the Dow plunged over 600 points, closing at 17,400. It was down 274 points for the week.  The NASDAQ finished down 206 points on Friday and down 92 points for the week.

Before Brexit, I mentioned that if the Brits voted to leave the EU, we could see the pound drop 10 percent.  At the close on Friday, the pound was down by 9% against the dollar, making this one of the biggest one-day declines on record.  The pound’s decline put UUP, the ETF for the Dollar, back on the Dean’s List.  So right there we know that US companies doing business in the UK and Europe are going to face strong headwinds.

We saw this with a stock like Acadia Healthcare (ACHC) on Friday.  Acadia has about half of its hospital beds in the UK.  So it got hammered on Friday, dropping 7.02 points or about 11 percent.  Does this mean the world is going to end for Acadia?  I think not.

Yeah the stock got hammered.  But Monday is a new day.  On Monday morning, people all over the world will wake up, get their coffee, and go to work.  Sick people will still have to be cared for.  And Acadia’s hospital beds will remain full.  The fact that the British decided to exit the EC will not stop people from getting sick. 

Just remember this next week when you hear talk of five other countries, including France, the Netherlands, Austria, Finland and Hungary, leaving the EU.  If France could vote today on EU membership, 70 percent of its people would vote to leave.  This would swamp the UK where only 52 percent wanted out.  All this tells me is that the EU is going to unravel in the months ahead.  Working people in France are tired of having to pay for Greek problems.  The Dutch don’t want to turn their country into a melting pot.  They want to keep their identity.  They want immigrants to learn their culture and speak Dutch.  This is why the concept of a united Europe, with a common currency, free trade zones and open boarders, will fail.  At the end of the day, people want to make decisions for themselves.  They don’t want bureaucrats in Brussels doing it for them.

There’s one thing that students should understand about what happened on Friday.  The Brexit vote was all about how people govern themselves.  Nothing that happened on Friday or will happen during the next few months or years will stop people from getting sick, or needing hospital care.  Companies like ACHC will still be needed as long as people continue to live. All the Brexit vote did was adjusted the price of these companies. It brought them back to earth.

For the past few months I have been talking about the fact that stocks have become overvalued.  This had a lot to do with the Central Banks and their policy to juice the economy with QE type programs and low interest rates.  This policy has created a massive amount of debt which will must be serviced.  The fact that the we’re paying so much of our income to service this debt is one of the factors causing the current slow growth economy.  This policy has helped the banks on Wall Street, but it has done nothing to help average Americans.  Real unemployment remains high, and wages remain low. Seniors are getting crushed by the low interest rates.  And because seniors need income to live, they are being forced into the equity markets for income (dividends). But as we saw on Friday, this can be a very dangerous game. 

Last week, I talked about money flow.  I said that money has to go somewhere.  I mentioned Con Ed (ED).  On Friday, while the Dow was dropping over 600 points, ED was rallying, up $1.55!!!

I also mentioned gold.  GLD was up 5.9 points.  ABX was up 1.26 to 20.47. 

The money has to go somewhere.

So let’s not fret over what happened on Friday.  Instead, let’s try to figure out what happens next.

If you look at the indicators on the cockpit, all you see is Red.  Does this mean that it’s time to panic?  No. The drop we were expecting from Brexit has happened.  The pound is now down 9 percent and stock prices have adjusted accordingly.  Does Brexit mean the pound is going to zero?  Or drop another 50 percent, or 20 from current levels?  Probably not. The UK still is still a pretty large economy.  It’s goods and services will still be needed by Europeans and others even after Brexit.  BTW, I’m already starting to hear talk of making the UK an ‘associate partner of the EU’.  The UK will survive nicely.  The moronic socialists in Brussels might not. 

From a technical perspective after Friday, the market is oversold.  The 2-period RSI Wilder finished with a reading of 16.97.  The VTI while having turned negative, is NOT in the Trend Mode.  Actually, with a reading of 44.6, it’s still appears to be several days away from the 30 level which would indicate that a down trend has started. 

So with an oversold market and NO Trend in place, there’s a good chance that the market will bounce on Monday. 

Now I’m not saying that this will happen.  I see all those Red indicators on the cockpit, and I respect them.  But the technical pattern currently on the Board, the Broadening Top, allows for a lot of volatility.  So with an oversold market, if we get a bounce, I will use the opportunity to put on a few shorts. 

Remember too that from a technical perspective, Friday’s low did not break the 20 April low of 17,331.  When the Dow fell to 17,356, it bounced.  In other words, it is still possible that the Dow is still in Major Wave 2 up and that Major Wave 3 down has not started.

If 17,331 is broken, then I would have to say that the Dow is headed back down to 15,500.  But this has not happened yet.  And with oversold indicators and no trend in place, a bounce is a real possibility.

If the market does bounce early next week, I do not expect it to last long.  Maybe a few days to relieve the oversold conditions and develop a Blade for Friday’s down stick.  Then once a Blade develops. the Dow will likely re-test and break the April low.  If this happens, the February lows of 15,500 will start to come into play. 

Bottom Line:  The world is not ending.  The markets are just adjusting to artificially overpriced conditions caused by incompetents running countries and Central Banks.  It’s time for them to leave.

Be calm and have a great weekend. 

That’s what I’m doing,

h

BTW, just for grins I scalp traded both ACHC and CERN to the long side on Friday and made a few bucks.  I just wanted to see if it could be done.  I figured that since both were in trends, once the initial shock of Brexit was over, both would start to rebound  The post open bounce in CERN was good for 1.5 points.  The late day recovery in ACHC was good for about 60 cents.  If the market bounces on Monday, I will continue to look to scalp both stocks.  When I added the gains in CERN and ACHC to the pop I had I gold, Friday turned out to be a very nice day!

Market Signals for

06-27-2016

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