MDM has switched to a BUY signal.
On yesterday's sell signal, I wrote: "But until we get a green light from the Fed on an emergency rate cut, markets will be highly volatile with the likelihood of a possible retest of recent lows given how it may take some time to completely unwind the yen carry trade. Further, if the Fed lowers rates, this will weaken the dollar thus strengthen the yen which will further exacerbate the yen carry trade."
Earlier today, we got a partial green light from the Bank of Japan (BOJ) when BOJ Deputy Governor Shinichi Uchida said the central bank would not lift interest rates when the markets are unstable. Uchida said, "I believe that the bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile." He added that the BoJ’s interest rate path would “obviously” change if market volatility affected its economic and price outlook, its view on risks, and the likelihood of durably achieving its 2% inflation target. "In contrast to the process of policy interest rate hikes in Europe and the United States, Japan’s economy is not in a situation where the bank may fall behind the curve if it does not raise the policy interest rate at a certain pace,” Uchida said. "Therefore, we won’t raise interest rates when financial markets are unstable." Investors felt his reassurance acted like a financial security blanket signalling continued protective intervention by the BOJ.The Nikkei stock market rallied on the news and USD/JPY bounced reflecting a potential reversal of trend.
That said, markets could still retest lows at some point in the months ahead due to further unwind of the yen carry trade. Estimates are that it has only unwound about 40-50%. The amount depends not so much on the level of the interest rate differential but the change in the interest rate differential. Indeed, when the Fed lowers rates, this will weaken the dollar thus strengthen the yen which will boost the amount needed to be unwound. This would likely, once again, spill over into global markets as has been the case since it began on July 11, thus markets could retest lows.
That said, the current bounce is more likely to carry further though with volatility, ie, 2 steps forward, 1 step back, due to various cross currents such as a slowing economy. But the FIMA repo facility which was created by the Fed is a stealth form of QE along with sizeable sums of QE from major central banks. These factors are likely to favor an uptrend. Japan is one of the largest buyers of US Treasury debt, or at least they were, until the yen carry trade began unwinding. To prevent Japanese banks from selling US Treasuries to buy Japanese bonds in order to prevent their rates from rising, Japanese banks are being given cash via the FIMA repo facility. The US cannot afford further deep unwinding of the yen carry trade so will print what is required to keep Japanese banks whole. The amount could range between $300 B and $1.05 T between now and year end. Since 2008, QE is the reason why we get 'V' bottoms in the major averages.
Heightened volatility risk remains in play so position size accordingly. There are a lot of potential bumps in the road during this unique time in market history. This certainly has been one of the most challenging times for market timing with the massive one-off out of Japan.
Suggested ETFs (Note: Many members buy the standard ETFs or their preferred ETFs. This list serves as a guide as to which ETFs we think may outperform, but the key point is to be on the right side of the market regardless of which ETF or ETFs one chooses.)
1-times
SPY (S&P 500)
QQQ (NASDAQ-100)
2-times
SSO (S&P 500)
QLD (NASDAQ-100)
3-times
UPRO (S&P 500)
TQQQ (NASDAQ-100)
TECL (Direxion Trust Technology)
NOTE: This is a suggested list. Investors may wish to become acquainted with the full range of available ETFs, and should make an effort to understand how these ETFs are created and what their components are, as well as being aware of the downside risks involved, especially with leveraged ETFs. Certain ETFs may be more appropriate depending on one's risk tolerance levels. Typing in keyword 'ETF' into the FAQ keyword search bar or going here https://www.virtueofselfishinvesting.com/faqs/search?p=1&q=etf and visiting this site https://etfdb.com/ can be instructive.