Today’s Global Financial Markets


New Worlds

Jun 27, 2016 / By Walter Deemer

However prices react in the short term, volatility is likely to remain extremely high until highly-leveraged hedge funds readjust their positions to reflect the new political and financial worlds we are now living in.

The political and financial worlds are much different places today than they were on Thursday morning. Global financial markets staged some absolutely breathtaking moves on Friday in response. Following are the most significant.

The most dramatic move of all was in the pound sterling. This is a five-minute chart of the trading in the pound on Thursday night and Friday; trading which resembled moves in a highly-speculative stock much more than in a major currency.


Source: Walter Deemer

The roiling in the foreign exchange markets helped push the NYSE Financial Index down 6.27%. In the process, its relative strength line, the bottom line on the chart, broke its all-important February-April lows. Bulls will say “but the lows were only broken by 27 basis points,” while bears will say “a new low is a new low.”


Source: Walter Deemer

European financial stocks fared even worse. (Note: This relative strength line is verse the Vanguard Europe ETF, which was down 11.3% Friday, not the usual S&P 500, which was down “only” 3.6%.)


Untitled4Source: Walter Deemer

Credit Suisse, Barclays, and RBS beat Deutsch Bank to a new low among major banks. They were joined on the new low list by a number of peripheral European banks in Italy, Portugal, and elsewhere.

Untitled5Source: Walter Deemer

Finally, the S&P fell 3.6% on Friday; not as much as other global markets, but a dramatic decline nonetheless. The S&P, however, did manage to hold above the key 2025 level, so it has not yet broken down from an intermediate top. (This is a daily chart.)


Source: Walter Deemer

And this is the weekly chart.


Which all leaves us—where? Well, Friday was a 92% downside day, and 90% downside days are usually followed by some sort of stabilization attempt either in the area of the 90% downside day’s low or somewhere below it for a few days. This tendency gives the market a short-term window of opportunity here, and what it does with the window will determine what is likely to happen next. If, for example, financial stocks—both here and abroad—remain weak during any near-term stabilization effort, as I expect them to, further weakness in the general market is almost certain to follow.


And, of course, no stabilization effort at all—which is all too possible given the amount of dust that now has to settle—would be telling. Meanwhile, whatever prices do or don’t do over the short term, volatility is likely to remain extremely high until highly-leveraged hedge funds readjust their positions, either voluntarily or in response to margin calls, to reflect the new political and financial worlds we are now living in.

More importantly, from a longer-term standpoint the internal deterioration in Lowry’s work plus the mere age of the bull market appears to be starting to take its toll. This whole episode, therefore, appears to be part of the ending process of the bull market extension, a stock market development which I have discussed at great length in the past. Even more importantly, it is almost certainly going to be followed sooner or later by some sort of further test—and ultimate break—of the August-February lows.

The bottom line: I continue to believe that longer-term risks are closer to 30% than 20% (i. e., greater than 25%, which is 1600 in the S&P 500.)

Sector funds we follow: Sixty-nine percent positive versus 62% a week ago. Switching program holdings: #1 gold, #2 natural gas, and #5 telecommunications.

This week’s political markets:
Probability per as of June 26 that the democrats will win the White House: 68% (-2).
And yes, PredictIt got Brexit wrong too; their market basically followed the bookies’ odds. The interesting takeaway from this is that Ladbroke’s Leave was favored by a 62/38 margin based on the number of people placing bets. The average Leave bet, though, was only 75 pounds while the average Stay bet was 450 pounds, so the margin based on the total amount of money wagered (75×62 vs. 450×38) was almost three to one in favor of Stay. The people, in other words, got Brexit right while the “big money” didn’t.

I am going to have to think a lot about this in case there is a lesson for market analysts here.

(Though officially retiring in 2011 after more than 50 years in the business, market technician Walter Deemer offers Horsesmouth members his valuable market insights periodically. Deemer was Market Technicians Association’s Annual Award winner in 2015 and was interviewed as one of 13 technical analysis experts in Bloomberg Press’s 2009 book The Heretics of Finance: Conversations With Leading Practitioners of Technical Analysis. He was also published in The Journal of Wealth Management, co-authoring “A Way Forward” (PDF), and in 2012 published Deemer on Technical Analysis: Expert Insights on Timing the Market and Profiting in the Long Run. Not one to remain idle in retirement, Deemer published The Essential Basics of Technical Analysis for Financial Advisors in January 2014.)