Over the last few days, a wave of selling pressure has washed over the markets. Many technical indicators are flashing, suggesting a correction lies ahead. Many fear the Federal Reserve will taper their open ended bond-buying stimulus next month. Another factor is the emergence of the Japanese yen from a consolidation pattern that dates back to April.
By Anthony Mirhaydari
August 7, 2013
Since late June, I've been saying stocks are headed for new record highs. I thought we'd see Dow 16,000, but I'll settle for 1,700 on the S&P 500. And accompanying the rise has been a turnaround in the economic data as countries around the world -- China, the United Kingdom, even Spain -- are showing renewed signs of vigor.
Yet over the last few days, a wave of selling pressure has washed over the market. Many technical indicators are now flashing red -- suggesting a correction lies ahead.
On the surface, this seems odd. Europe is exiting its recession, the Chinese are easing up on their credit constraints, and U.S. GDP growth is poised to reaccelerate past a 2% annual rate again thanks to Monday's narrower-than-expected trade deficit. So what's the problem?
Most pin the blame on fears the Federal Reserve will taper their open ended $85 billion-a-month bond buying stimulus by $10 or $20 billion next month. This would come in response to a strengthening economy and comments by normally stimulus happy officials that indeed, now is the time to take a step back.
Surely, this is playing a role. And it's disappointing to see Wall Street worry more about an ever-so-slight reduction in Fed stimulus than what is developing into the best global economic tailwinds since 2011.
The larger factor, I believe, has been the emergence of the Japanese yen from a consolidation pattern that dates back to April. Stay with me here. Making sense of the currency markets is enough to make even Wall Street veterans go cross-eyed. So I can't tell you what's driving the move.
All I can tell you is that this is a big deal since "yen carry trades" -- or bets against the yen that funded stock purchases and other investments -- has been one of the primary drivers of stocks all year. Now that it's reversing, hedge fund types are selling their investments, buying the yen, and closing the trade. The faster the yen rises, the faster the trades will need to be closed which in turn will bolster the yen more.
Japanese stocks are suffering the most right now, since a stronger yen reduces export competitiveness. As a result, I am adding short positions in Sony (SNE -0.40%) and Sumitomo Mitsui Financial (SMFG -0.75%) to my Edge Letter Sample Portfolio. Emerging market stocks also look weak, so I'm adding the ProShares UltraShort Emerging Markets (EEV -1.41%). I've also sold my existing long positions.
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