MoneyShow's Jim Jubak reviews the recent increase in volatility both in the US and the Japanese markets, and shares his opinion on the most likely outcome.
I know the market from...well, the last week of May, the first week of June...has seen scary, dangerous, very volatile. It's been very volatile. You've had days when the Nikkei has been down 3.8%, 3.7%. So the New York market wakes up and goes "Oh my God," and then you've had Dow days where you've seen 200-point drops on the Dow.
The thing to remember is that as of, say, June 5, the drop has been very orderly. It is from here that it really starts to get kind of messy.
What we've done is fallen back to major resistance levels. The S&P has retreated about...it's given back about 50% of the gain that it showed in April and May, and fallen back to 1,604, 1,608, 1,610, which is where that 50% retracement comes in, which is where the 50-day moving average is.
So the market on the S&P has dropped...really to support on the yen, which seems really, really volatile, and then was falling, falling, falling, and has now rallied, rallied, rallied. But really all it's done is carved out again a trading range between 99 and 103.5. And on June 5, the yen closed at about 99.2.
Remember that as the numbers for the yen go down, it means it's getting stronger, because it's 99.2 yen to the dollar. That's also major resistance support, major support for the yen or the dollar depending on how you look at it. Anyway, it's a major technical level. So the question is, do we hit these levels, bounce around here for awhile and then go up? Or at least stay here? Or do we plunge through those levels and then find another place for support?
It's the plunge through the levels looking for another place for support that could get messy, because moving through these levels will make people nervous. It will put on a whole other set of trades, because people who have said, "Oh, I can be okay at 99 yen to the dollar," won't be okay at 92 yen to the dollar. So you'll have a lot of volatility anew.
So the question is, do we hold here, do we move up, do we move down, or just simply stay in the relatively narrow trading range. That would give the market some shot at stability.
On the stability side, the Federal Reserve would not be likely to do what everybody's worried about, which is cut back, taper off on its buying program, $82 billion in Treasuries and mortgage-backed assets, if the economy is weak. And so far the economy looks sufficiently weak, so it'll probably stay on the sidelines.
In Japan, you've got elections coming up for the upper house. The Liberal Democratic Party that rules Japan really wants to win that-it's the only part of the government it doesn't control. So they're likely to do whatever they can to stabilize the market and make sure that things don't get much worse right before the election. So that argues for stability.
You've got wildcards in the form of reality. We don't know exactly what the economy's going to do. We get job numbers for May usually at the end of the first week in June, so that'll be around June 7. We don't know what those are going to look like ahead of time, so that might mean that we fall back through those levels, and we don't know what other numbers are going to look like.
So one of the reasons the market is nervous about the Fed is the Fed has said it's data-driven. It will make a decision based on the data, and right now we don't know what the data is, so we're at one of those inflection points. We can either have stability or some more worries. I'd say stability, but I don't know the data points any better than the Fed does.
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