Weekend Strategy Review June 19, 2016

Posted by OMS  at June 19th, 2016

The Dow fell 58 points on Friday, closing at 17,675.   It was down190 points for the week.  The NASDAQ finished down 45 points on Friday and was down 94 points for the week.

Friday’s decline turned all of the PT indicators on the Dow and NASDAQ negative.  They’re not only negative on the Daily Chart, they’re now negative on the Weekly chart as well.  So with only four days to go before the British vole on Brexit, we need to stay on our toes. 

From an overall pattern perspective, it still appears that the markets will likely chop around within a Broadening Top Pattern.  The problem with this pattern is that it’s so big, prices could make several large moves either up or down before it completes.  So in essence, there is really no pattern at all. The only thing I can bank on now is that a break of 17,485 on the Dow would be very negative.  Other than that, with a VIX Buy Signal on the Board, the patterns still allows for the Dow to push higher for a re-test the 20 April high of 18,168. 

Many things are driving this market now, but the main factor is uncertainty.  The Brexit vote and the general elections here in the U.S. are causing investors to hedge their bets.  Businesses are not sure about the current and future regulatory environment, so they’re not investing in new plants and equipment, and they’re not hiring.  This was a major factor in last month’s horrible Jobs Report.

And with a Fed that is basically out of stimulus bullets, there is nothing left to goose the markets. We’re not only seeing this in the U.S. but it’s happening all over the world, where with negative interest rates, savers are now paying the banks to hold their money.  It’s almost unbelievable!

But even though things around the world look gloomy, we need to step back and ask ourselves a key question.  Let’s assume for a moment that the UK decides to leave the EU next week.  What will happen?  Or more specifically, where will the money go?

If the UK leaves, it’s a pretty good bet that the Pound will fall relative to the Dollar.  Same for the Euro.  I believe the Pound could fall 6-7 percent with the Euro dropping over 10 percent. The fall won’t happen overnight, as unwinding the Brits from the EU will take at least two years of negotiation. But after Thursday’s vote, the unwinding process will start. This would make US goods and services very expensive on a relative scale to those produced abroad.  So on the surface, it would seem  that U.S equities would be in for a tough time.  But I’m really not so sure.  That’s because on a relative scale, if the EU starts to breakup, the turmoil it would create for foreign stocks might cause U.S stocks to appear very attractive.  Remember, the money has to go somewhere. 

Right now, with low or negative interest rates everywhere you look in the world, people and governments are not buying a lot of Bonds. Why would they?  If interest rates start to rise, for whatever reason, Bonds are going to get crushed!  

But people have to live.  They will need income.  And right now, there aren’t many places to get it.  There are even fewer places to get relatively ‘safe’ income.  And one of those ‘safe’ places…in the view of the world, is the U.S.  So if a Brexit shakes the European continent next week, money could come pouring into the Dollar and U.S. equities.  Especially those U.S. equities that are considered ‘Blue Chip’ and pay dividends.

I believe that this is one of the reasons that while we’re seeing negative indicators pretty much across the board, the Money Flow indicator on the Dow (DIA) remains positive.  When investors are faced with a choice between the yields they could receive from banks, bonds or stocks, a ‘Blue Chip’ equity starts to look very attractive, even at the current high earnings multiples.

One of the things you should look at this week is a chart of a Utility, like our old friend Con Ed (ED).  While the Dow and NASDAQ are currently showing negative indicators, those same indicators on ED are Green.  So we know where some of the money is going.  At Friday’s close, ED is paying a dividend of 3.47 percent.  That’s pretty attractive to an investor in Denmark, Sweden, Switzerland, or Japan where the central bank has pushed interest rates into negative territory.  And the local currency is the Dollar instead of the Euro or the Yen. 

Think about this.  Let’s suppose that an investor puts money into a U.S based equity asset, like ED, that pays a 3+ percent dividend at a time when his Euros are declining 10 percent relative to the Dollar.  It means that if the share price of ED remained the same, he could receive a return of about 13 percent on his investment.  This is precisely what happened to me many years ago when I opened a small savings account in Bulach, Switzerland.  At the time (back in the 70s), many of my friends wondered why I would put money into a Swiss account that was paying less than 2 percent interest when most U.S banks were paying 5 percent.  What my friends didn’t realize was that the Dollar was falling over 12 percent relative to the Franc, so by keeping some of my money in Swiss Francs, I was actually getting a return of over 14 percent a year. 

This is what could be starting to happen now, only in reverse.  Keep your eye on the Dean’s List.  If you see UUP and EUO on the Dean’s List at the same time, you’ll know that the Dollar is getting stronger relative to the Euro.  When this happens, look for money to start pouring into Dollar based assets, especially those that pay nice dividends.  This is why ETFs like Power Shares Utilities (PVI) and REITs like VNO and VNQ are high on the Dean’s List now. U.S land assets and utilities are looking very attractive to foreigners now.

In times of crisis, money always seeks the highest, safest return.  This is also why there are so many gold and silver stocks and ETFs on the List now.  In times of political or monetary uncertainty, gold has always been considered as one of the safer places to be.  If you didn’t know that a critical vote was taking place in the UK this week, all you had to do was look at the Dean’s List.  The Dean is telling us that money is starting to seek safety.

Remember, at the end of the day, investing is not about picking individual stocks or ETFs.  It’s all about determining where the money will flow.   And right now, with the Brexit vote on the table for this week, the flow of significant amounts of money could be getting ready to change. This could impact world markets for years to come.

Protect yourself.

That’s what I’m doing,

h

BTW, on Friday, I bought a few calls on ABX. I bought the August 22s, paying an average cost of $1.06. I still consider them attractive under $1.11. I want to have a gold bet on going into Thursday.

Market Signals for

06-20-2016

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