The NIRP Crash Indicator's signal has been downgraded from the Pre-Crash Orange to the cautionary Yellow and crash less imminent reading. The signal had been at Orange since June 1, 2016. The primary cause of the signal going to Yellow is because of the U.S. dollar stabilizing versus the yen for an extended period. Additionally, both the dollar and the euro spiked up versus by 1.32% and 2.22% respectively overnight.
The stabilization of the dollar versus the yen for an extended period followed by a spike up is a very bullish short term indicator. This happening while the outcome of the Brexit was uncertain was especially significant. Based on this new development I predict that the S&P 500 will eclipse its all-time highs before the NIRP Crash Indicator's signal reverts back to Orange. The S&P 500 advanced by 4% while the signal was at Yellow during the entire month of March. After the NIRIP Crash Indicator went from Orange to Yellow on Monday May 9, 2016, the S&P experienced it single biggest one day advance since March 1, 2016 on Tuesday May 10th.
The chart below depicts that during the period that signal was in effect the dollar fell from 110.71 yen to a new 19 month low of 104.25 yen on June 16, 2016, a peak to trough decline of 6%. For the seven day period ending June 23, 2016, the dollar's trading range narrowed to between 104 and 105 yen. After the week of consolidation the dollar spiked to 105.95 before the opening of the U.S. markets.
While the Orange signal was in effect the S&P 500 closed at 2099 on June 1, 2016 and opened at 2092 on June 23, 2016. Based on the beginning and ending points in which the Orange signal for the NIRP Crash indicator was in effect the S&P 500 was unchanged. However, during the 22 days that signal was in effect the S&P 500 ranged from 2071 to 2119.
Since the Orange signal can quickly change to a Red crash-underway reading with a potential market crash of 5% or more the NIRP Crash Indicator is best utilized by an investor to protect a portfolio while it is in effect. See May 11, 2016 report "NIRP Crash Indicator Ideal for Futures Hedging and Trading".
The NIRP Crash Indicator was developed from research conducted on the Crash of 2008, which revealed the metrics that could have been used to predict the Crash of 2008 and its V-shaped reversal off of the March 2009 bottom. See my Seeking Alpha "Japan's NIRP Increases Probability of Global Market Crash" March 4, 2016 report. The metrics are now powering the indicator. Information about the NIRP Crash Indicator and the daily updating of its four signals (Red: Full-Crash; Orange: Pre-Crash; Yellow: Caution; Green: All-Clear) is available at www.dynastywealth.com.
For the NIPR Crash indicator to change or be downgraded from the crash imminent Orange or a crash Red reading to Yellow requires that the exchange rate between the yen and dollar be stable for an extended period of time or that the dollar advance significantly or spike up versus the yen. An increase in the indicator's reading from Yellow to Orange requires a steady advance or a significant one day advance for the yen versus the dollar. The relationship between the yen and the euro is a secondary indicator.
The primary metric that I discovered that now powers the NIRP Crash Indicator are sudden increases in volatility for the exchange rates of the yen versus the dollar and other currencies. The significant changes in the yen-dollar exchange rate accurately predicted the crash of 2008, and the recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 11, 2016 "Yen Volatility Is Leading Indicator For Market Sell-Offs" SA post and my video interview below entitled "Yen Volatility Causes Market Crashes", I provide further details on the phenomenon of the yen being a leading indicator of market crashes.
The only logical conclusion I could come up with for yen volatility or significant appreciation versus the dollar being a leading indicator of crashes is because the Japanese yen and the U.S. dollar are the world's two largest single country reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar - by far the world's most liquid and largest safe-haven currency - is susceptible to dramatic declines until the storm has passed.
Savvy investors know that the U.S. is, unquestionably, considered the world's leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar versus the world's second leading single-nation currency. The yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world's top reserve currency, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union's member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because each of the underlying countries has economies much smaller than Japan's.
The following reports and articles covering the NIRP Crash Indicator and the yen are also recommended:
- NIRP Crash Indicator Signal Elevated to Pre-Crash Reading, June 1, 2016
- Crash Imminent Warning Removed by NIRP Crash Indicator, May 9, 2016
- NIRP Crash Indicator's Sell Signals Very Reliable For April 2016, May 3, 2016
- Yen Volatility Is Leading Indicator For Market Sell-Offs, April 11, 2016
The impetus for the development of the NIRP Crash Indicator was from the research conducted on negative rates and the extreme volatility that they are causing for the capital markets. See "Japan's NIRP Increases Probability of Global Market Crash", March 4, 2016
Based on my continuing research coverage of the spreading negative rates and the devastating effect that they can have on the global banking system the probability is high that the major global stock indices including the S&P 500 will begin a significant decline by 2018 at the latest. My April 11, 2016 article entitled, "Negative Rates Could Send S&P 500 to 925 If Not Eliminated" provides the rationale as to why the S&P 500 could potentially decline by more than 50% from its May 2015 high. I highly recommend my 9 minute 34 second video interview by SCN's Jane King entitled "Why Negative Rates could send the S&P 500 to 925" be viewed.
The Dow 30 (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) ETFs and all of the leveraged ETFs listed below can capitalize from the powerful currency moves by the euro and the dollar versus the yen which are now underway:
- Ultra QQQ (NYSEARCA:QLD)
- Ultra Pro QQQ (NASDAQ:TQQQ)
- Ultra Dow 30 (NYSEARCA:DDM)
- Ultra Pro Dow 30 (NYSEARCA:UDOW)
- Ultra S&P 500 (NYSEARCA:SSO)
- Ultra Pro S&P 500 (NYSEARCA:UPRO)
Conversely, I am recommending all of the short-oriented ETFs below be avoided:
- ProShares Short S&P 500 ETF (NYSEARCA:SH)
- ProShares UltraPro Short Dow 30 (NYSEARCA:SDOW)
- ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU)
- ProShares UltraPro Short QQQ (NASDAQ:SQQQ)
- ProShares UltraPro Short Russell2000 (NYSEARCA:SRTY)
- ProShares UltraPro S&P 500 (NYSEARCA:UPRO)
- ProShares UltraShort Dow30 (NYSEARCA:DXD)
- ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT)
- ProShares UltraShort QQQ (NYSEARCA:QID)
- ProShares UltraShort S&P 500 (NYSEARCA:SDS)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.