Analysis of major stock markets around the world.
Performance of the All Ordinaries during the 1997 Asian financial crisis and ensuing Russian financial crisis in 1998.
The index gained 7.9% in 1997 and 7.5% in 1998 despite the upheaval in Asian markets. Australia is now a lot more reliant on exports to Asia, however, than in 1997/98.
Reversal of 13-week Twiggs Money Flow below zero warns of long-term selling pressure. Follow-through of the All Ords below 5000 would confirm a primary down-trend.
Here is the performance of the S&P 500 during the 1997 Asian financial crisis and the ensuing Russian financial crisis in 1998.
The index gained 31% in 1997, and 26.7% in 1998, despite the upheaval in Asian markets. Global markets are nowadays a lot more interconnected, however, than in 1997/98.
All the same, gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure — a secondary rather than a primary movement.
Dow Jones Shanghai Index broke support at 440. Expect more government efforts, near the close, to shore up support. As futile as attempting to hold back the tide. Target for the breakout is 330*.
* Target calculation: 440 – ( 550 – 440 ) = 330
The 1990s featured two significant upheavals in global financial markets. First, 1990 saw the Nikkei collapse from its high of 39000, reaching an eventual low of 7000 in 2008.
The collapse followed strong appreciation of the Yen after the September 1985 Plaza Accord and the ensuing October 1987 global stock market crash. The Plaza Accord attempted to curtail long-term currency manipulation by Japan who had built up foreign reserves — mainly through purchases of US Treasuries — to suppress appreciation of the Yen against the Dollar and maintain a current account surplus.
Seven years later, collapsing currencies during the 1997 Asian financial crisis destroyed fast-growing economies — with Thailand, South Korea and Indonesia experiencing 40%, 34% and 83% falls in (1998) GNP respectively — and eventually led to the 1998 Russian default and break up of the Soviet Union. Earlier, rapidly growing exports with currencies pegged to the Dollar brought a flood of offshore investment and easy credit into the Asian tigers. Attempts by the IMF to impose discipline and a string of bankruptcies spooked investors into a stampede for the exits. Falling exchange rates caused by the stampede led to a further spate of bankruptcies as domestic values of dollar-denominated debt skyrocketed. Attempts by central banks to shore up their currencies through raising interest rates failed to stem the outflow and further exacerbated the disaster, causing even more bankruptcies, with borrowers unable to meet higher interest charges.
What we are witnessing is a repeat of the nineties. This time it was China that attempted to ride the dragon, pegging its currency against the Dollar and amassing vast foreign reserves in order to suppress appreciation of the Yuan and boost exports. The Chinese economy benefited enormously from the vast trade surplus with the US, but those who live by the dragon die by the dragon. Restrictions on capital inflows into China may dampen the reaction, compared to the 1997 crisis, but are unlikely to negate it. The market will have its way.
Financial markets in the West are cushioned by floating exchange rates which act as an important shock-absorber against fluctuations in financial markets. The S&P 500 fell 13.5% in 1990 but only 3.5% in October 1997. The ensuing collapse of the ruble and failure of LTCM, however, caused another fall of 9.0% a year later. Not exactly a crisis, but unpleasant all the same.
The domestic US economy slowed in the past few months but increased spending on light motor vehicles and housing suggested that robust employment growth would continue. Upheaval in financial markets (and exports) now appears likely to negate this, leading to a global market down-turn.
The S&P 500 breached primary support at 1980, signaling a primary down-trend. The index has fallen 4.5% from its earlier high and presents a medium-term target of 1830*. Decline of 13-week Twiggs Money Flow below zero would confirm the signal but descent has been gradual, suggesting medium-rather than long-term selling pressure.
* Target calculation: 1980 + ( 2130 – 1980 ) = 1830
The CBOE Volatility Index (VIX) spiked upwards indicating rising market risk.
Bellwether transport stock Fedex broke primary support at $164, confirming the primary down-trend signaled by 13-week Twiggs Money Flow reversal below zero. The fall warns of declining economic activity.
Canada’s TSX 60 broke primary support at 800, confirming the earlier bear signal from 13-week Twiggs Momentum reversal below zero. Target for a decline is 700*.
* Target calculation: 800 – ( 900 – 800 ) = 700
Germany’s DAX broke medium-term support at 10700. Expect further medium-term support at 10000 but reversal of 13-week Twiggs Money Flow below zero warns of selling pressure. Breach of 10000 would indicate a test of primary support at 9000.
* Target calculation: 10700 – ( 11800 – 10700 ) = 9600
The Footsie broke 6450, signaling a test of primary support at 6100. Reversal of 13-week Twiggs Money Flow below zero warns of (long-term) selling pressure. Breach of 6100 would offer a target of 5000**.
* Target calculation: 6450 – ( 6800 – 6450 ) = 6100 **Long-term: 6000 – ( 7000 – 6000 ) = 5000
The Shanghai Composite reflects artificial, state-backed support at 3500. Declining 13-week Twiggs Money Flow warns of long-term selling pressure. Withdrawal of government support is unlikely, but breach of 3400/3500 would cause a nineties-style collapse in stock prices.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
Japan’s Nikkei 225 appears headed for a test of 19000. Breach would test primary support at 17000 but, given the scale of BOJ easing, respect is as likely and would indicate further consolidation between 19000 and 21000. Gradual decline of 13-week Twiggs Money Flow suggests medium-term selling pressure.
* Target calculation: 21000 + ( 21000 – 19000 ) = 23000
India’s Sensex is holding up well, with rising 13-week Twiggs Money Flow signaling medium-term buying pressure. Breakout above 28500 is unlikely but would indicate another test of 30000. Decline below 27000 would warn of a primary down-trend; confirmed if there is follow-through below 26500.
Commodity-rich Australian stocks are exposed to China and emerging markets. The only protection is the floating exchange rate which is likely to adjust downward to absorb the shock — as it did during the 1997 Asian crisis. 13-Week Twiggs Money Flow below zero warns of (long-term) selling pressure on the ASX 200. Breach of support at 5150 is likely and would confirm a primary down-trend. Long-term target for the decline is 4400*. Respect of primary support is unlikely, but would indicate consolidation above the support level rather than a rally.
The 1990s featured two significant upheavals in global financial markets. First, 1990 saw the Nikkei collapse from its high of 39000, reaching an eventual low of 7000 in 2008.
The collapse followed strong appreciation of the Yen after the September 1985 Plaza Accord and the ensuing October 1987 global stock market crash. The Plaza Accord attempted to curtail long-term currency manipulation by Japan who had built up foreign reserves — mainly through purchases of US Treasuries — to suppress appreciation of the Yen against the Dollar and maintain a current account surplus.
Seven years later, collapsing currencies during the 1997 Asian financial crisis destroyed fast-growing economies — with Thailand, South Korea and Indonesia experiencing 40%, 34% and 83% falls in (1998) GNP respectively — and eventually led to the 1998 Russian default and break up of the Soviet Union. Earlier, rapidly growing exports with currencies pegged to the Dollar brought a flood of offshore investment and easy credit into the Asian tigers. Attempts by the IMF to impose discipline and a string of bankruptcies spooked investors into a stampede for the exits. Falling exchange rates caused by the stampede led to a further spate of bankruptcies as domestic values of dollar-denominated debt skyrocketed. Attempts by central banks to shore up their currencies through raising interest rates failed to stem the outflow and further exacerbated the disaster, causing even more bankruptcies, with borrowers unable to meet higher interest charges.
What we are witnessing is a repeat of the nineties. This time it was China that attempted to ride the dragon, pegging its currency against the Dollar and amassing vast foreign reserves in order to suppress appreciation of the Yuan and boost exports. The Chinese economy benefited enormously from the vast trade surplus with the US, but those who live by the dragon die by the dragon. Restrictions on capital inflows into China may dampen the reaction, compared to the 1997 crisis, but are unlikely to negate it. The market will have its way.
Financial markets in the West are cushioned by floating exchange rates which act as an important shock-absorber against fluctuations in financial markets. The S&P 500 fell 13.5% in 1990 but only 3.5% in October 1997. The ensuing collapse of the ruble and failure of LTCM, however, caused another fall of 9.0% a year later. Not exactly a crisis, but unpleasant all the same.
The domestic US economy slowed in the past few months but increased spending on light motor vehicles and housing suggested that robust employment growth would continue. Upheaval in financial markets (and exports) now appears likely to negate this, leading to a global market down-turn.
The S&P 500 breached primary support at 1980, signaling a primary down-trend. The index has fallen 4.5% from its earlier high and presents a medium-term target of 1830*. Decline of 13-week Twiggs Money Flow below zero would confirm the signal but descent has been gradual, suggesting medium-rather than long-term selling pressure.
* Target calculation: 1980 + ( 2130 – 1980 ) = 1830
The CBOE Volatility Index (VIX) spiked upwards indicating rising market risk.
Bellwether transport stock Fedex broke primary support at $164, confirming the primary down-trend signaled by 13-week Twiggs Money Flow reversal below zero. The fall warns of declining economic activity.
Canada’s TSX 60 broke primary support at 800, confirming the earlier bear signal from 13-week Twiggs Momentum reversal below zero. Target for a decline is 700*.
* Target calculation: 800 – ( 900 – 800 ) = 700
Germany’s DAX broke medium-term support at 10700. Expect further medium-term support at 10000 but reversal of 13-week Twiggs Money Flow below zero warns of selling pressure. Breach of 10000 would indicate a test of primary support at 9000.
* Target calculation: 10700 – ( 11800 – 10700 ) = 9600
The Footsie broke 6450, signaling a test of primary support at 6100. Reversal of 13-week Twiggs Money Flow below zero warns of (long-term) selling pressure. Breach of 6100 would offer a target of 5000**.
* Target calculation: 6450 – ( 6800 – 6450 ) = 6100 **Long-term: 6000 – ( 7000 – 6000 ) = 5000
The Shanghai Composite reflects artificial, state-backed support at 3500. Declining 13-week Twiggs Money Flow warns of long-term selling pressure. Withdrawal of government support is unlikely, but breach of 3400/3500 would cause a nineties-style collapse in stock prices.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
Japan’s Nikkei 225 appears headed for a test of 19000. Breach would test primary support at 17000 but, given the scale of BOJ easing, respect is as likely and would indicate further consolidation between 19000 and 21000. Gradual decline of 13-week Twiggs Money Flow suggests medium-term selling pressure.
* Target calculation: 21000 + ( 21000 – 19000 ) = 23000
India’s Sensex is holding up well, with rising 13-week Twiggs Money Flow signaling medium-term buying pressure. Breakout above 28500 is unlikely but would indicate another test of 30000. Decline below 27000 would warn of a primary down-trend; confirmed if there is follow-through below 26500.
Commodity-rich Australian stocks are exposed to China and emerging markets. The only protection is the floating exchange rate which is likely to adjust downward to absorb the shock — as it did during the 1997 Asian crisis. 13-Week Twiggs Money Flow below zero warns of (long-term) selling pressure on the ASX 200. Breach of support at 5150 is likely and would confirm a primary down-trend. Long-term target for the decline is 4400*. Respect of primary support is unlikely, but would indicate consolidation above the support level rather than a rally.
The rally in bellwether transport stock Fedex was short-lived and it is once again testing primary support at $164. Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend. Breach of support would confirm, suggesting a broad slow-down in US economic activity.
The Freight Transportation Services Index reinforces this, declining since late 2014.
But the LoDI Index contradicts, continuing its climb.
The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.
Growth in retail trade (excluding Motor Vehicles, Gasoline and Spares) also declined for the last two quarters but remains above core CPI.
On a positive note, however, light motor vehicle sales are climbing.
New housing starts are edging upwards while building permits jumped sharply, indicating further increases.
And overall construction spending is steadily rising.
Solid rises in spending on durables suggests further employment growth. This makes me reasonably confident that retail sales and freight/transport activity will recover. All the same, it would pay to keep a weather eye on Fedex and the transport indices.
The rally in bellwether transport stock Fedex was short-lived and it is once again testing primary support at $164. Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend. Breach of support would confirm, suggesting a broad slow-down in US economic activity.
The Freight Transportation Services Index reinforces this, declining since late 2014.
But the LoDI Index contradicts, continuing its climb.
The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.
Growth in retail trade (excluding Motor Vehicles, Gasoline and Spares) also declined for the last two quarters but remains above core CPI.
On a positive note, however, light motor vehicle sales are climbing.
New building permits for private housing retreated in July but the trend remains upwards and new housing starts are increasing.
Overall construction spending is also rising.
Solid growth in spending on durables suggests further employment increases. This makes me reasonably confident that retail sales and freight/transport activity will recover. All the same, it would pay to keep a weather eye on Fedex and the transport indices.
[August 19th – This post was updated for Fedex and today’s release on Housing Permits and New Building Starts]
The Federal Reserve, Bank of England, European Central Bank and Bank of Japan all expanded their balance sheets (commonly referred to as quantitative easing or QE for short) post-2008 to counteract a contracting money supply and prevent a deflationary spiral. These actions also have the beneficial effect of weakening the currency and improving international competitiveness.
China was considered immune because of its persistent current account surplus and $4 Trillion in foreign reserves. But the recent sharp contraction in Chinese exports to the EU suggest otherwise.
The People’s Bank of China (PBOC) responded by effectively devaluing the Yuan. So far the “one-off adjustment” has been repeated on three consecutive days.
The Euro appreciated considerably against the US dollar as CNY carry trades are unwound.
Gold broke out of its narrow rectangle between $1080 and $1100 per ounce as investors scuttled to the safety of bullion.
* Target calculation: 1100 – ( 1200 – 1100 ) = 1000
The Yen displays little net gain or loss.
The Dollar Index does not include China’s Yuan and is falling primarily because of the Euro. The Broad Trade-Weighted Index which includes the Yuan is calculated weekly; so it will take a few days before we can assess the impact.
Competing devaluations are likely to continue as each state (or trading block) attempts to maintain an export surplus. This is a zero sum game, so each action will inevitably elicit an equivalent response from major trading partners. Currency markets are awash with vast sums of liquid capital and an estimated $9 Trillion in carry trades (where hedge funds borrow in a low-interest-rate currency and invest in another at higher rates). Any beggar-thy-neighbor escalation is likely to destabilize financial markets and the precarious balance may prove difficult to restore.
During the 1997 Asian Financial Crisis George Soros called for international regulation of financial markets to prevent a reoccurrence.
It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? …. To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism.
~ George Soros: The Crisis of Global Capitalism (1998)
Earnings results for the second quarter of 2015 remain on track. Of the 354 stocks in the S&P 500 that have reported, 252 (71%) beat, 26 met and 76 (21%) missed their estimates.
The S&P 500 has lost momentum since March 2015, consolidating below resistance at 2130. Gradual decline of 13-week Twiggs Money Flow suggests buyers remain interested and this is a secondary formation. Breakout above 2130 would signal an advance to 2200*, but there is no indication that this is imminent. Reversal below support at 2040/2050 is unlikely, but penetration of the rising trendline would warn of a reversal — confirmed if support at 1980/2000 is breached.
* Target calculation: 2130 + ( 2130 – 2050 ) = 2210
Dow Jones Industrial Average is weaker than the S&P 500. Breach of support at 17500 would test primary support at 17000. Reversal of 13-week Twiggs Money Flow below zero would warn of selling pressure.
The CBOE Volatility Index (VIX) remains low — typical of a bull market.
Canada’s TSX 60 broke through the upper trend channel, suggesting the correction is over. Follow-through above 875 would indicate another test of 900. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal.
Germany’s DAX respected support at 11000. Follow-through above 11800 would indicate another test of 12400. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.
* Target calculation: 12500 + ( 12500 – 11000 ) = 14000
The Footsie similarly respected support at 6500. Follow-through above 6800 would complete a double bottom reversal, indicating a test of 7100. A 13-week Twiggs Money Flow trough above zero flags buying pressure.
* Target calculation: 7000 + ( 7000 – 6500 ) = 7500
The Shanghai Composite continues to reflect selling pressure with declining 13-week Twiggs Money Flow. Withdrawal of government support is unlikely, but would cause a breach of 3400/3500.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
Japan’s Nikkei 225 is respected support at 20000, indicating another test of 21000. Breakout above 21000 would offer a target of 23000*. Decline of 13-week Twiggs Money Flow has leveled off. Reversal below support at 20000 is unlikely but would warn of another test of 19000.
* Target calculation: 21000 + ( 21000 – 19000 ) = 23000
A higher trough on India’s Sensex suggests buying pressure. Rising 13-week Twiggs Money Flow confirms. Breakout above 28500 would signal another test of 30000. Decline below 27000 is unlikely.
The ASX 200 encountered stubborn resistance at 5700. Rising troughs on 21-day Twiggs Money Flow continue to indicate buying pressure. Respect of support at 5550 would be bullish, while breakout above 5700 would indicate another test of 6000. Failure of 5550 is less likely, but would test medium-term support at 5400.
I find the idea that you can introduce democracy by military force a very quaint idea. Moreover, if I wanted to choose a testing ground for doing it, Iraq would be the last nation I would choose.
~ George Soros (2004)
The next update for S&P 500 and ASX200 Prime Momentum strategies will be on the weekend, so that investors can place trades on Monday, 3rd August 2015, the first trading day of the month.
Bellwether transport stock Fedex respected primary support at $164, rallying strongly to form a bullish engulfing candle on the weekly chart. Recovery of 13-week Twiggs Money Flow above zero would confirm the bull signal, suggesting a target of $184. Breach of $164 is now unlikely, but a primary down-trend would warn that broad economic activity is contracting.
The reporting season got off to a shaky start with Apple and Microsoft disappointing but the ship has steadied. Of the 187 stocks in the S&P 500 that have reported so far, 138 (74%) beat, 14 met and 35 (19%) missed their estimates.
The S&P 500 found support above 2050, the higher trough on 21-day Twiggs Money Flow indicating increased interest from buyers. Breakout above 2130 would signal an advance to 2200*, but further consolidation below the resistance level is likely. Reversal below support at 2040/2050 is unlikely.
* Target calculation: 2130 + ( 2130 – 2050 ) = 2210
The CBOE Volatility Index (VIX) indicates low volatility typical of a bull market.
Canada’s TSX 60 rallied off the lower trend channel but is likely to encounter resistance at the upper trend channel and 855. Declining 13-week Twiggs Momentum below zero warns of a primary down-trend. Breach of support at 800 would confirm.
Germany’s DAX is testing support at 11000. A fall-off in export sales to China may be weighing on the market. The decline in 13-week Twiggs Money Flow has leveled off and a trough above zero would signal long-term buyers are driving the market. Recovery above the (second) descending trendline would suggest another advance; confirmed if resistance at 12400 is broken. Reversal below 10700 is unlikely.
* Target calculation: 12500 + ( 12500 – 11000 ) = 14000
The Footsie found support at 6500. Recovery above 6800 would complete a double bottom reversal, indicating a test of 7100. Completion of a 13-week Twiggs Money Flow trough above zero would also flag buying pressure.
* Target calculation: 7000 + ( 7000 – 6500 ) = 7500
The Shanghai Composite experienced strong buying at Wednesday’s close. Support resumed at 3800 on Thursday but efforts to restore stability are likely to undermine credibility of stock prices. The large divergence on 13-week Twiggs Money Flow continues to warn of selling pressure.
* Target calculation: 4000 – ( 5000 – 4000 ) = 3000
Japan’s Nikkei 225 is testing support at 20000. Respect would indicate another test of 21000. Breakout above 21000 would offer a target of 23000*. Decline of 13-week Twiggs Money Flow has leveled off, but failure of support at 20000 would signal further selling pressure and another test of 19000.
* Target calculation: 21000 + ( 21000 – 19000 ) = 23000
India’s Sensex retreated below 28000, suggesting another test of primary support. Respect of the rising trendline and support at 27000 would indicate the primary up-trend is intact, while breach of 26500 would signal a reversal. A 13-week Twiggs Money Flow trough at zero would confirm buying pressure, while decline below zero would warn of a primary down-trend.
The ASX 200 is testing resistance at 5650/5700. Breakout would indicate another test of 6000. 13-Week Twiggs Money Flow leveled off, suggesting that selling pressure has eased and the primary up-trend is intact. Reversal below 5400 is unlikely, but would warn of a test of primary support at 5150/5200.
It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.
~ George Soros
