Financial markets are anticipatory systems. Savvy market participants are constantly trying to anticipate what the majority of market participants are likely to do and then construct their own strategies that take advantage of the herd’s moves.

That’s why financial markets are so frustratingly difficult to predict. That’s why sometimes good news is bad news and bad news is good news. That’s why the most obvious answer is rarely the right thing to bet on.

Today we are faced with an unexpected global event fraught with long-term political and economic consequences – the decision of the United Kingdom to leave the European Union.

It’s a big deal … it’s just not obvious what it will mean for your investments.

The initial reactions of the financial markets to this exogenous event are the obvious ones. The British pound is sharply down. Stock markets are down. US Treasuries are up. Interest rates are down. Gold and silver are up.

The first response of financial markets to a crisis, however, isn’t always the final response – especially in the short run.

That’s why we love our indicators. We love to understand a crisis in the context of the larger ebbs and flows of the markets, rather than just as a one-off event. That’s why today I would like to share with you an alternative scenario that could catch many investors by surprise – a rally in the share prices of British companies.

Why would I even propose such a scenario? It’s partly because of first-hand experience of being on the losing side of popular views. It’s also because of this:

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EWU is an iShares ETF that tracks the performance of large and mid-size publicly traded companies in the UK. Back in early May of this year it triggered an SSI Entry signal. It then dipped briefly into the SSI Low Risk Zone and then rocketed back out.

The current volatility quotient (VQ) on EWU is 13.2%. In order for EWU to be stopped out by the SSI system, it will have to close 13.2% below the recent closing high of $16.55. The stop price is currently $14.36. As of this writing, EWU is sitting at $14.60.

I’ll be keeping an eye on EWU. I’m not looking to buy it here in the Low Risk Zone but if I see it rise back out of the Low Risk Zone after such a sharp down move, I’ll be interested.

Another reason I’m intrigued by the long EWU idea is because my proprietary time cycles indicators suggest a bottom in EWU right around this time.

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Time will tell.

The US stock market as captured by SPY, the ETF that tracks the performance of the S&P 500, is in a similar situation. We’ve been writing in these pages about a likely pullback in the S&P 500 for quite some time now. That pullback is here. Here’s a current chart of SPY and our SSI indicators:

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As of about noon today, SPY is sitting right around the 204.30 level. There is plenty of room remaining between 204.30 and the current SSI stop loss on SPY which sits at 188.89. SPY hasn’t even moved into the Low Risk Zone. It would take a move below 197.84 to accomplish that. As of now, this is a garden variety correction in the US stock market.

The big question is whether or not this is a crisis … or an opportunity.

As for gold, and I know that everyone is interested in gold, I continue to have my short-term concerns. I’m sure that some of you are frustrated with me at this point as I continue to preach caution for our favorite precious metal. I can only tell you, however, what I continue to see in the charts.

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The commercial hedgers continue to be big sellers of gold at these prices and I can’t find an instance from the past where such strong selling by the smart money didn’t lead to a significant short-term correction. A strengthening US dollar is also a headwind for all commodities – gold and silver included.

I already own my sleep at night levels of gold and I’m not selling. On the other hand, I’m definitely not speculating on higher gold prices at current levels. I’m more interested in selling calls into what I believe is likely to be a short-term buying frenzy.

So tune out the noise … and tune in to TradeStops. Position yourself for your favored outcome but be prepared in case you’re wrong. There’s no shame in being wrong. You just don’t want to be wrong … and lose all your money.

Have a great weekend … and don’t forget to turn off that telly!

Sincerely,
Richard_Signature
Richard M. Smith, PhD
CEO & Founder, TradeStops