US$ & NYSE Signal Early Stages Of Sell-Off
Victor Hugo
Dramatically, the US$ has signalled it will go weaker, after some tap-dancing noise. Wall Street indicators say a meltdown is underway, that may accelerate into a sell-off. Momentum swing counts say perhaps back to October 2002's levels ( "soft landing" ) and perhaps back to 1995's levels - e.g. to S&P500 535 ( an unexpected "hard landing").
Which indicators say a meltdown is underway? Well, have a look at the massive price relativity patterns being tested or already showing support failure on the US Dow Jones Industrial Average, Dow Jones Transports, US Airline Index, NASDAQ Composite Index, S&P 500, S&P Retail Index, Morgan Stanley Consumer Index, Philadelphia Bank Sector Index -- and while speaking about banks, have a look at J.P. Morgan ["JPM" -- NYSE] . $Gold gapped up $8.00 today.
Meanwhile the VIX, an indicator derived from put and call ratios and which measures volatility and complacency, shows levels at about 14.5 three weeks ago, up to 19.3 today as complacency begins to shift to uncertainty or fear..... Compare 19.3 now, to August 2002's high fear point at 45 when a broad rally started. Suggests some perspective as to how far markets can still react down now -- to the extent markets run on sentiment.
Those who are used to reading trend and trend changes and supports and resistances will appreciate the vulnerability that is developing. If Wall Street sells, other markets tend to do that as well. That's why it's important to keep an eye on our American friends in whom much of the world has invested over an extended period. The US$, the Dow, the $Gold price and the US 10 year and 30 year Treasuries -- and I suggest the VIX -- are primary indicators.
America's problem is that it has quite a lot of difficult and mounting pressures, despite general complacency . We've talked at length before about suspect growth figures in the US, the sluggish response to the Fed's stimulatory tax and interest rates, the growing US trade deficit, dangerous levels of national, federal and personal debt, the impact of higher oil prices, forefront in a war against terrorism -- all happening in a world which in its turn, depends on the US for its growth.
The Chinese and Japanese have done a deal with the US -- buy our goods and services -- and we'll hold and buy US Treasury Bonds and other US assets and that way help keep the US$ strong.
If anything comes along to upset that deal, such as better investments elsewhere, or the US consuming less -- guess who the sellers will be of US Treasury Bonds, Wall Street stocks and US property? So why should that happen? The answer gets into the realm of chicken or egg first? .......but the bottom line is confidence. The US$ is the best way to measure that. The US$ Index is not rallying or reversing to up - despite all the commentators who think it will. In fact much to the consternation of those wanting a stronger US$, the US$ Index after rallying a meagre 3.5% from 87 on 19th July to 90, today fell back half of the gain. The SA Rand did a rocket from the $ZAR6.30 area to 6.10, a critical point to show which way next.
So what does the average investor do? Protect capital. If that means selling some investments that may be vulnerable to deep or long falls, make cash and stand aside a bit until the bottom signals. As we said on 17th May already, depending on individual investment and risk strategy, get defensive. That means being proactive about protecting gains of last year and this year, making sure you have some cash to take advantage of the coming dip or sell-off lows. It means that money market switches for retirement savings and long term investments may in some cases be feasible and advisable. Get pro-active professional advice from someone who can assist to implement it without undue delay. It means that recently out of favour long- short funds and hedge funds are going to make money on shorts again and in subsequent bounces.
The stressed journalists who huddle around coffee machines at the newspapers and convince each other that a strong Rand is no good for SA -- will be yelling again how exporters are suffering and how many jobs are being lost. Especially when the Rand goes under $ZAR6.00 again, nearer to 5.60 because of US$ selling. The new jobs from new investment into SA and the building boom are benignly forgotten. Have they stopped to think what we would be paying at the fuel pumps if the Rand had been in 7.00's where so many experts say it "should" be? Have they forgotten the pain of inflation and higher interest rates?
Oh well, entrepreneurs those who really add value and create wealth and jobs -- know that a stronger Rand is worth every atom of the short term pain. Let the complainers stay blissfully unaware what an important indicator the weak US$ is. The US$ will show how much money is already flowing into South Africa and how much more can come when other US assets are dumped.
By one calculation, US assets held by foreigners amounts to $4 trillion. If one of those trillions moves elsewhere in the next two years and just 2% of that money comes to South Africa - what a bull market we will have once the noisy dips and dumps are out of the way!
By that time $Gold may be above $500+, $ Platinum above $950+ and developing Southern Africa managing some growth. In contrast to most of the world which by then may be battling stagnancy or recession. Enough to confound those Africa doubters around the coffee machines.
Even if the Rand is in the lower $ZAR5.00's in a few months, nearer to the 3.00's of only 10 years ago - resilient South Africa will adapt and do okay -- then thrive - unless politicians get in the way.
The RSA 153 government bond yield is signalling I am right about a stronger Rand and lower interest rates coming.
Wait on those golds - the RGold price has to signal a turning point louder first. Wait also on those "cheap " IT's.
Have some cash to buy the JSE and property dips that could soon be coming. Remember the VIX though - it teaches to wait for the highest levels of fear ( lowest share prices).
The third and fourth quarters this year could be quite a ride!
Victor Hugo
www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com
6 August 2004
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