A much stabler dollar yen exchange rate since June 24, 2016 and the S&P 500's four consecutive day rally from June 28 to July 1, 2016 to within one half of a percent of its June 23, 2016 close portends that the world's leading stock index will go to an all-time high before it experiences its next correction of 5% or greater.
Based on the S&P 500's action after the index fell by 6% in the two days following the stunning headline event it appears that the Brexit had been discounted as originally predicted in my June 23, 2016, article "S&P 500 To Eclipse All-Time High Before NIRP Signal Reverts Back to Orange". My watching the S&P 500 collapse within hours after I had made such a bold prediction on the eve of the Brexit was the impetus for my June 27, 2016 "2008 Crash Haunts Markets: Devil Shall Get His Due".
The resiliency of the S&P 500 to bounce back quickly was quite impressive. It ranks as one of the best performances that I have seen by the index throughout my 40 years in the markets.
The NIRP Crash Indicator's signal was downgraded from the Red, full-crash-underway reading to the cautionary Yellow reading after the market's Friday July 1, 2016 close. The signal had been at Red since shortly after midnight on June 24, 2016. See "NIRP Crash Indicator Signal Now at 'Red, All Out Crash Underway' Reading" June 24, 2016.
Note. The S&P 500 has had a tendency to perform well when the NIRP signal is Yellow. On Tuesday May 10, 2016, the S&P 500 experienced its single biggest one day advance since March 1, 2016 after the NIRP signal was downgraded from the Orange crash-imminent reading to Yellow on May 9, 2016.
The primary reason for the signal going to Yellow from Red on the first day of July was due to the U.S. dollar stabilizing and trading in a narrow trading range versus the Japanese yen for the week ended July 1, 2016. The chart below depicts that after bottoming at 100.5 yen on June 24, 2016 the dollar recovered quickly to trade above 102 yen. The dollar than steadied and was able to close at above 102.5 yen for every day between June 28, 2016 and July 1, 2016.
While the Red signal was in effect the S&P 500 went from its close of 2113 on June 23, 2016 to an intraday low of 1992 on June 27, 2016 before closing at 2000, the lowest close since March 10, 2016. From the peak to trough the index declined by almost 6% over the two consecutive trading days before mounting a strong recovery on Tuesday June 28, 2016. The Friday June 24 through Monday June 27, plunge ranked as the S&P 500's eight biggest two day percentage decline ever and largest since August 2015. See Fox Business "Two-Day Brexit Swoon Wipes Out $3T in Global Market Value", June 27, 2016.
Note: Since the Orange or the Yellow signal can quickly change to a Red crash-underway reading that could result in a potential market crash of 5% or more the NIRP Crash Indicator can be used by an investor to protect a portfolio. 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 freely available at www.dynastywealth.com.
For the NIPR Crash indicator to decrease from the crash imminent Orange or from the crash underway Red readings to the cautionary Yellow reading 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 or Red requires the dollar stabilizing versus the yen or significant one day advance for the dollar versus the yen. 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.
There is only one logical conclusion I could come up with after I discovered that yen volatility or its significantly appreciating versus the dollar was a leading indicator of crashes. It's 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 that can be 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.
The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because the currencies of each of the underlying countries are more illiquid and have economies that are much smaller than Japan's. Additionally, the empire of the rising sun is arguably one of the most fiscally conservative countries on the planet. For all of these reasons it's the preferred currency that is utilized to short the dollar. To short the dollar or any currency requires that an investor establish a long position in another currency. All currencies trade in pairs.
The NIRP Crash Indicator's Red reading was its first ever since it was developed and further attests to its reliability. See May 3, 2016, article "NIRP Crash Indicator's Sell Signals Very Reliable For April 2016". The following reports and articles covering the NIRP Crash Indicator and the yen are also recommended:
Yen Volatility Is Leading Indicator For Market Sell-Offs, April 11, 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.
· 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)
For an overview and access to links to the subjects that I cover, including the digital economy, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net. Free access to the NIRP Crash Indicator's signals is available at www.dynastywealth.com.
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.
Additional disclosure: Please insert two videos into article.