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6 Worries Shaking the Market

Factors from the U.S. economy to Iraq and the Ukraine are finally starting to rattle the bulls

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economic indicator rsx chart
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Pushed off the front page but not forgotten, the situation in Ukraine took a turn for the worse Thursday. Natural gas negotiations between Kiev and Moscow broke down amid reports that Russian “rebel” tanks are crossing into Ukraine.

Russia also upped the political pressure on Ukraine by introducing a draft resolution to the UN Security Council condemning Kiev’s alleged attacks on residential and civilian facilities in the east.

In sympathy, the Market Vectors Russia ETF (RSX) looks like it could be ready to drop back below its 200-day moving average.


The upcoming 2014 midterm elections look like they could be even more exciting in the wake of the surprise primary loss of House GOP Majority Leader Eric Cantor to a tea party-backed candidate. Whether this is indicative of a broader shift to the right or perhaps an energized Republican base remains to be seen.

But if the GOP takes the Senate, we could see another round of bruising battles between Congress and the White House of issues like the record deficit, the $17.5 trillion national debt, and more that could rattle markets — as it did in 2011 after the GOP, energized by the tea party, took the House.


economic indicator rsx chart
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I’ve written before about the importance of yen carry trades in the market — where hedge fund types have used a weak yen to fund speculations in stocks and bonds. It has been a major support of stocks over the last few months, but it’s starting to unwind now.

There are many reasons for this, from inflation beginning to bite in Japan to Europe’s new stimulus push, but what you need to know is that earlier Thursday, the S&P 500 reached a statistical correlation of nearly 97% with the dollar-yen exchange rate. That means that nearly 97% of the tick-by-tick movement in the stock market was explained by what was happening in currencies.

Not only is that not normal, nor is it healthy, but it’s also dangerous given the technical breakdown I’m seeing in the yen carry trade, with the euro-yen exchange rate in particular collapsing out of a multimonth consolidation pattern.

That will weigh not only on U.S. markets, but Japan’s as well in the overnight Asian session.

What’s next?

economic indicator euro chart
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Given the extreme low volatility/extended sentiment behavior of the market lately, the arrival of all these negative catalysts is likely to have a large impact on overconfident investors.

You’re seeing that in Thursday’s scramble into safe haven assets like the CBOE Volatility Index as well as precious metals. The Market Vectors Junior Gold Miners (GDXJ), which I’ve recommended to my newsletter clients and discussed in a recent article, soared 5.8% as it jumped over its 200-day moving average for the first time since February.

I think gold and silver could really get a run going here not only on the geopolitical situation but also on rising inflation expectations.

Recent recommendations to clients and readers include New Gold (NGD), up 5.6% Thursday and up 11% since I added it to my Edge Letter Sample Portfolio on June 5.

NovaGold (NG) is up nearly 15% during this time.

Disclosure: Anthony has recommended GDXJ, NGD and NG to his clients.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.

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