Today I closed out my 50% position in the US Dollar. I still believe the dollar will perform well in 2016; however, with the current market downtrend the dollar broke my targeted support level. If conditions continue to deteriorate then the dollar will likely test the lows from August which would be a 4% decline. Should that occur, I would probably buy back into the dollar.
As to general market conditions, stocks may be temporarily oversold (for now). The weakness in the Chinese stock market has spooked Wall Street but that’s just a symptom. The problem is the overall slowdown in China. Their manufacturing and export data continues to disappoint. Watch for them to devalue the Yuan (RMB)…that’s what precipitated the flash crash of August.
The S&P500 has broken support and if it can’t recover I expect it to test the low of August- around 1865ish. Depending on secondary indictors, that could be an opportunity to “buy the dip”.
If it drops below 1820, then we’re likely in for a full 20% correction which would put it below 1700ish. We’re long overdue for a correction of this magnitude. It would be healthy and I’d welcome it as a buying opportunity. I’m not expecting a 2008 meltdown but things could get ugly with S&P500 levels in the mid-1600s. That would require Oil to drop well below $30 and systemic fear of commodity producer bankruptcies and defaults.
If you think a full 20% correction is hyperbole, consider the fact that almost half the S&P500 stocks are trading 20% or more below their 52 week high. But don’t get too pessimistic, not yet. This week’s deterioration could be premature and thus an oversold market could present a short term buying opportunity. This is the start of earnings season and positive announcements could provide a relief rally.
Regardless of earning announcements, I expect the market to perform poorly through at least April. Analysts and government institutions continue to revise US & Global 2016 growth and profits DOWN.
As always, invest with caution.
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