Wednesday, August 14, 2013

Japan’s Troubles Threaten the World’s Economies…and Iceland?

“Japan has receded from the headlines of late but that's about to change. In the next two months, it's expected the Prime Minister Shinzo Abe will make a decision on whether to increase Japan's consumption tax from 5% to 8% in April next year. If approved, consumer spending will take a significant hit and given that it accounts for around 60% of GDP, hopes for an economic recovery could be dashed. If the tax hike is delayed on the other hand, rating agencies are likely to downgrade Japanese debt, resulting in increased interest costs - the last thing that the massively indebted country needs. International investors would also lose faith in Japan's turnaround strategy. Either way, it appears a lose-lose situation.

Much less talked about is the impact on Japan from possible QE tapering in the U.S…[and that may cause rates to rise world-wide]…only a small rise in rates would result in its government debt burden becoming overwhelming - interest rates increasing to just 2% would mean interest expense on government debt equating to 80% of government revenue.

Either of these events may bring forward a Japanese sovereign debt crisis...Unlike Greece or Cyprus, Japan matters. It's the world's third largest economy and a key trading partner to all of the large powers. How Japan plays out for the remainder of 2013 will be of critical importance to everyone.”  Story at…

"The inevitable unmasking of Iceland's dubious economic recovery could have severe consequences for the rest of Europe. Since 2008, the small island nation has been able to avoid an all-out economic meltdown thanks largely to government-imposed capital controls that have kept its currency from imploding. At the same time, the nation's zombie banks have managed to avoid total collapse thanks to delay tactics that have allowed them to avoid settling with their creditors.

But the walls the government and its banks erected to shield its population from the outside elements have finally started to crumble. Unfortunately, there is not much Iceland can do to save itself at this point; it will need to face the music eventually. The bigger concern is what impact another Icelandic currency crisis could have on Europe in the months ahead. After all, Iceland's spectacular collapse in 2008 helped set the European debt crisis in motion as it exposed weaknesses in the region's banking system. Another Icelandic meltdown could easily reignite investor fears, leading to yet another panic on the continent…investors will be watching what Iceland's new government does intently. If it begins to falter, the rest of Europe could be next.”  Story at…

Just when the news from Europe has been getting better. 

Wednesday, the S&P was down 0.5% to 1685 (rounded).
VIX was UP 6% to 13.04.

The S&P 500 is about 2% above the 50-dMA, now at 1655.  That is a point that traders will be watching for support.

The 10-day moving average of stocks advancing on the NYSE fell to 45% at the close.  Usually a value below 50% signals additional trouble for the markets.   For the day only 32% of stocks advanced.

New-lows of 236 outpaced the new-highs of 92 today leaving the spread at -144 with the 10-day change in spread heading down.

Today’s reading of Internals is negative on the market and suggests the market is likely to continue its downward trend.

Wednesday, the overall NTSM analysis was HOLD at the close. 

Indicators follow:
  VIX switched to neutral today.
  PRICE is positive.
  SENTIMENT remains negative.  The 5-day sentiment value is 65%-bulls, based on funds invested in Guggenheim/Rydex funds that I track.  That’s still an extreme bullish value and that is generally negative for markets.
  VOLUME remains neutral.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!) 

I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.