Well, that didn’t last long.
After inching above the 16,000 level two weeks ago to great fanfare, the Dow Jones Industrial Average was sliding lower Tuesday as it lost its 20-day moving average for the first time since September.
Technically, this isn’t all that unexpected. Last week featured multiple “hammer” candlestick patterns — indicated by intraday rallies that were reversed into the closing bell — that are representative of buying exhaustion. Breadth also has been disappointing, with the percentage of NYSE stocks above their 50-day moving average at just 60% now vs. 85% in October.
So the Dow Jones’ push above 16,000 was on relatively narrow support that is petering out quickly.
Can the bulls quickly recapture that level? Or will the selling pressure persist? Two things have me concerned that this is the start of a more protracted pullback.
For one, the “yen carry trade” that has supported the rise through Dow 16,000 is starting to unravel. This is the persistent weakness in the Japanese yen, as the Bank of Japan gets increasingly desperate to weaken the yen to boost export competitiveness as so-called “Abenomics” loses its verve, which hedge fund types sell short to fund speculations in stocks.
For it to work, the yen must weaken — mainly against the euro, but also the dollar.
But Tuesday, the yen bounced off of support from its May low. If the rebound continues, the hedge funds will be forced to unwind the trades, selling stocks, euros and dollars to buy yen. The unwinding will precipitate more unwinding and more stock selling, as it did back in May and June.
For now, I’ve recommend clients book the profits we earned in the ProShares UltraShort Yen (YCS) over the last few weeks in anticipation of this.
The second dynamic that has me worried is the rise in crude oil amid rising tensions in places like Libya, Lebanon and Egypt, as well as a general disappointment with the Iran nuclear deal that was penned last week. Crude oil, as represented by the U.S. Oil Fund (USO), is posting its first significant upside breakout since July.
That’s a problem since higher energy prices will not only weigh on consumer confidence during the crucial holiday shopping season — which has gotten off to an inauspicious start with shopper traffic down 4% over the Black Friday weekend, according to Shoppertrak — but higher inflation expectations will also limit the Federal Reserve’s ability to forestall tapering its ongoing $85 billion-a-month bond purchase stimulus.
That’s a big deal, since low inflation has been one the key reasons the Fed has kept its cheap-money morphine drip going for so long.
Long story short, I’m not a buyer on this dip yet.
For now, I continue to recommend my clients profit from the turbulence via the VelocityShares Daily 2x VIX Short-Term ETN (TVIX), which is surging higher as options traders pile into put option protection against additional losses.
I’m adding the TVIX to my Edge Letter Sample Portfolio. I’m also adding the ProShares UltraCrude Oil (UCO) to my holdings.
As of this writing, Anthony Mirhaydari has recommended TVIX and long crude oil to his clients.