When I did my customary checks before today’s open, I was struck by one thing. Many, many markets are trading right at or near incredibly critical technical levels.
Currencies. Commodities. Bonds. Stocks. Investments of all sorts are sitting on a knife’s edge — ready to make major moves in one way or the other. To cite just a few examples …
The Australian dollar is testing the 69 cent level against the U.S. dollar for the third time since last August. A break below would open the door to a move down to the bear market lows from 2008.
On the flip side, the Japanese yen is banging its head against overhead resistance that dates all the way back to fall 2014. If this level gives way, we could be looking at a very, very powerful move higher against the buck.
|World markets are at critical levels — meaning you can expect some big moves in the near term.|
The yield on the 10-year Treasury note tested key support around 2.13% at the end of last week. A break below that could lead to a sharp plunge below 2% or even 1.8%.
S&P 500 futures dropped as low as 1,895 in the overnight session. If these levels can’t hold, it puts lows from August 2015 (1,831) and October 2014 (1,815) into play.
Or how about the Dow Jones Industrial Average? We’re only a few hundred points away from the key 16,000 level. If we breach that, it will look like the Dow has carved out a massive “head and shoulders” top on its weekly chart. That, in turn, could signal a move lower of potentially a couple thousand additional points.
Bottom line: We are at an incredibly important point in time. Major moves could be right around the corner, in a whole host of markets. So what strategies make sense?
Well, let’s say you’ve been “short” a stock that’s closing in on a key level. You may want to consider lightening up on the position. That way, you’ll lock in some profit in case you see a major upside reversal at support.
But don’t close out the entire position, either. That’s because a breach of that key level could cause the targeted stock to accelerate to the downside as investors on the other side of your trade capitulate.
What if you don’t have an investment in a given market at all? Then consider adding a half position at or near the key level in question.
Let’s say you ultimately want to have a $10,000 short position in the S&P 500. You could buy $5,000 of the single-leveraged inverse ETF that targets the index, the ProShares Short S&P 500 (SH). That way, you have some skin in the game if the level gives way and the move accelerates. But if we see a major upside reversal, your SH losses will be less than if you owned a full position.
And what if the S&P 500 is only able to manage an anemic, counter-trend bounce here? Then that would be a sign of underlying weakness. You could use that bounce to add to your SH position in anticipation that the key level won’t hold on the next test.
If you’re a less aggressive investor, another strategy would be to simply lighten up overall as key levels get closer. Get out of some “iffy” positions, and wait to see what happens. Brokers hate it when you go to cash … but cash can be your best friend in vulnerable or falling markets. And that sure as heck is what this one looks like! These are just some of the strategies I’m putting to work in my Interest Rate Speculator service, with quite a bit of success lately.
Meanwhile, I’m interested to hear what you have to say. Are you implementing any of these approaches, or do you have other techniques you’re using in this market? The comment section is a great outlet, so make sure you take advantage of it.
Last week was a disaster for the equity markets, with stocks suffering their worst start to the year ever (as measured by the Dow Jones Industrial Average, anyway). So what does that say about the outlook going forward? Are we close to stabilizing, or on the brink of an even more-painful decline?
Reader $1,000 Gold said: “A day like Friday makes me realize everyone should own stocks. If you never make a dime, you’ll at least walk away a better person. Nothing builds character better than overcoming your fears and following your convictions, especially when there’s money on the line that makes it real.
“Also, I don’t think anything can build character better than a group of grown men who are 180 degrees apart in their opinions, yet show respect for one another as you do. I appreciate your open mind and hearing my side of it.”
Reader Scott responded with the following view: “Playing ‘Catch the falling knife’ is rarely fun or profitable. Hope you have close stops. If it bounces from here, make your stops break even.
“According to indicators and other metrics, this bear market is just getting started. I’ve been flat since June 2015, and don’t see anything that makes me want to get back in. Except oil and gold. Those markets are bottoming now.”
Reader Gordon added his take as well, saying: “I am looking for some buying opportunities to come around, but am being extremely cautious. Cash will be king for awhile until this all sorts out. Maybe buy late spring when we can determine what the hell is going on. Until then, good luck to everyone!”
Finally, Reader Badger10 said: “When I see the country starting to pay down its escalating debt, I will start to buy stocks. Until then, we are in a bear market that will humble a lot of people.”
Thanks for weighing in. If you have any other thoughts or advice to add, let me hear them below.
China continues to monkey with the markets in an attempt to find something that works. Policymakers apparently decided not to aggressively intervene in the stock market, leading to a greater-than-5% decline in the benchmark averages there.
But they look to have intervened in the offshore currency market, leading to a short-term rise in the value of the yuan. Unfortunately, liquidity in Hong Kong is tightening in response to those moves — with a benchmark short-term borrowing rate there soaring more than nine percentage points to 13.4%. More from Bloomberg on what this means.
Morgan Stanley joined Goldman Sachs in the “$20-a-barrel oil” club. But Morgan’s view is that a potential dollar rise would be the primary driver behind a renewed plunge, whereas Goldman believes bloated supplies will leave crude with a “two handle.”
I believe M&A activity will continue to slow as deal financing gets more and more expensive. But that doesn’t mean some transactions won’t be able to run the gauntlet.
Shire PLC (SHPG) just said it would buy Baxalta (BXLT) for $32.2 billion in order to bolster its heft in the pharmaceutical market, adding treatments for hemophilia, cancer and select rarer diseases. The companies originally discussed the deal when market conditions were friendlier in early August, but took a while to finalize it amid concerns about the tax implications of the transaction.
Lastly, the famous musician David Bowie died from cancer at the age of 69. The experimental artist produced a number of well-known songs over his multi-decade career, including “Changes,” “Heroes,” “Let’s Dance,” and “Under Pressure.”
What do you think of China’s latest effort to calm the currency market? How about Morgan’s $20 oil call — do you agree or disagree with it? Any other thoughts on M&A, or other stories I did or didn’t cover here? Add your voice to the discussion below.
Until next time,