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NIRP Signal Now at Bright ORANGE

The NIRP Signal's rollercoaster continues...
Michael Markowski writes for equities.com.
Michael Markowski writes for equities.com.

The NIRP Crash Indicator has gone to its ORANGE pre-crash from its YELLOW caution reading. The signal had been at YELLOW since the market’s close on January 6, 2016. The signal change was due to a decline of more than 2.00% for the US dollar versus the Japanese Yen over the last 24 hours.

That the dollar’s percentage decline over the last 24 hours was its steepest for any 24 hour period since the 24 hour period covering September 5th and 6th in 2016, which also resulted in the NIRP going to ORANGE speaks volumes. During the September 6th through 13th period, in which the ORANGE signal was in effect the S&P 500 declined by 2.7%. The percentage decline for the week during September was the largest for any period in which a RED or ORANGE signal had been in effect since the NIRP’s inception.

The likely cause of the pickup for the volatility of the global currency, bond and equities markets was the harsh statements that President-elect Trump made about the pharmaceutical industry during his January 11, 2017 press conference. The NIRP’s YELLOW could be the signal that the honeymoon that the market has had with Trump may be over. In the days since he was elected, Trump has also attacked the US defense and auto industries. My December 2, 2016, “Hangover from Trump Market Party to Cause Recession; History Repeats Itself” and also January 3, 2017 “Markowski: Predictions and Top Pick for 2017” articles provide details on why I am predicting that the S&P’s close at year end 2017 will be lower than its close at year end 2016.

The NIRP’s Signal going to ORANGE after the dollar had steadily increased by approximately 15% to 118.2 yen at the post-Trump election high from the low of 103.1 for November should not be discounted. A run up by the dollar to 121.7, its 2016 high on January 30, 2016, from 116.9 yen in two weeks that was followed by a shift in global sentiment, when the Bank of Japan announced that it was instituting a negative interest rate policy (NIRP) on January 31, 2016, resulted in the S&P 500 crashing to its lows for 2016 in February 2016. The sudden weakness in the dollar could very well be signaling a change in sentiment for Trump.

During the recent four-day period in which the YELLOW signal was in effect the S&P 500 increased by as much as 0.4% and declined by 0.1% from its open on January 8, 2017, to its open on January 12, 2017. Since the NIRP Crash Indicator became operational on March 1, 2016, it has proven to be a very reliable crash indicator. The NIRP Crash Indicator became operational on March 1, 2016.

With the exceptions being January 6, 2017 and November 9, 2016, the NIRP Crash Indicator signal has been at YELLOW for 78 of the last 80 days. The NIRP crash signals:

  • RED – all out crash
  • ORANGE – pre-crash-imminent
  • YELLOW – caution
  • GREEN – clear

The declines based on the lows for the S&P 500 during the seven periods in which the RED or ORANGE warning signals were in effect ranged from 0.2% to 4.91% and averaged 1.78%. The maximum decline for the S&P for any of the eight warning periods was 2.7% for week that began on September 6, 2016 and ended on September 13, 2016. The maximum increase for the S&P for any of the seven warning periods was 1.7% from November 9th to the 10th. During the periods that the NIRP Crash Indicator was at ORANGE or RED the aggregate increase for the S&P 500 was 0.67%, a small percentage to pay for crash insurance. .

Statistics for Periods NIRP Crash Indicator Warning Signals in Effect 3/1/16 to 12/30/16, Total Days, Days to Low, S&P 500 % Changes @ Low, and at End of Warning Period

Signal

Period

Total
Days

Days to Low

% Change
@ Low

% Change
@ Period End

ORANGE

4/01/16 – 4/22/16

15

4

-1.49%

0.91%

ORANGE

4/29/16 – 5/09/16

8

5

-1.00%

-0.63%

ORANGE

6/01/15 – 6/23/16

17

11

-0.89%

0.93%

RED

6/24/16 – 7/01/16

8

2

-4.91%

-0.04%

ORANGE*

7/26/16 — 7/27/16

N/A

N/A

0.00%

0.00%

ORANGE

7/29/16 – 8/08/16

6

3

-1.0%

0.5%

ORANGE

9/06/16 – 9/13/16

5

4

-3.0%

-2.7%

RED

11/09/16 -11/10/16

1

N/A

-0.2%

+1.7%

ORANGE

01/05/17 – 01/06/17

1

N/A

-0.3

+0.20

*Signal changed from YELLOW after market closed and back to YELLOW before market opened.

For the ten periods that the NIRP Crash Indicator’s YELLOW signal was in effect the aggregate increase for the S&P 500 was 15.2%, an average increase of 1.52% per period. The best performing YELLOW period was March 1, 2016 through April 1, 2016, with an increase of 7.00%. The worst performing period for the YELLOW was April 22, to April 29, 2015, with a decrease of 0.94%.

S&P 500 Performance Statistics for NIRP Crash Indicator: Periods When YELLOW Signal Was In Effect 3/1/16 to 12/30/16, Total Days and % Change for Period

Period

Total Period Days

% Change @ Period End

3/01/16 – 4/01/16

24

7.00%

4/22/16 – 4/29/16

4

-0.94%

5/09/16 – 6/01/16

15

1.71%

6/23/16 – 6/23/16

0

0.00%

7/01/16 – 7/26/16

16

3.5%

7/27/16 – 7/29/16

2

0.00%

8/08/16 – 9/06/16

22

0.15%

9/13/16 –11/09/16

40

0.6%

11/10/16 – 01/05/17

37

3.3%

01/06 – 01/12/17

03

-0.1%

The impetus for development of the NIRP Crash Indicator was my research conducted on negative rates and the extreme volatility they caused for the global markets from February through November of 2016. SeeJapan’s NIRP Increases Probability of Global Market- Crash Probability“, February 26, 2016.

For the NIPR Crash indicator to decrease from pre-crash ORANGE, or full crash RED, to caution YELLOW requires that the exchange rate between the yen and dollar be stable for an extended period of time, or that the dollar advance significantly versus the yen. An increase in the indicator from YELLOW to ORANGE requires a steady advance or a significant one-day advance of the yen versus the dollar. The NIRP Crash Indicator cannot go to an all clear GREEN signal until the negative interest rate policies being utilized by the world’s central banks and the negatively yielding securities trading in global markets have been eradicated. When the NIRP Crash Indicator was developed there was no intention for there to be a “buy” signal other than GREEN. However, because of its proven reliability the YELLOW signal, by default, became the buy signal for those who wish to trade the markets.

The primary metric that powers the NIRP Crash Indicator, is the sudden increase in the volatility of the exchange rates of the yen versus the dollar and other currencies. The significant changes in the yen to dollar exchange rate accurately predicted the crash of 2008 and recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 9, 2016, article entitled “Yen Volatility Puts Market on Precipice of Crash“, and my video interview below entitled “Yen Volatility Causes Market Crashes”, further details are provided on the phenomenon of the yen being a leading indicator of market crashes.

The only logical conclusion for yen volatility, or its sudden and significant increases versus the dollar being a leading indicator of crashes, is that the Japanese yen and the U.S. dollar are the world’s two largest single-nation reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar – by far the world’s most liquid and largest safe-haven currency – is susceptible to dramatic declines until the storm has passed.

Savvy investors know that the U.S. is, unquestionably, considered the world’s leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar. Because Japan has the world’s second leading single-nation currency the yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world’s top reserve currency for liquidity and circulation, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union’s member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound sterling during times of crises because each of the underlying countries has economies much smaller than Japan’s.

The only way to trade or hedge a currency is by pairing it with or tying the currency to another currency. Therefore, to effectuate the equivalent of a short sale for a currency (e.g., U.S. dollar) would require that the seller utilize dollars to purchase a currency (e.g., Japanese yen) that they believe will appreciate versus the paired currency (e.g., U.S. dollar).

My focus throughout my 40 year career has been to find and research extreme anomalies which can provide substantial returns. See SmartMoney.com November 24. 2003, “The Best Stock Picker on Wall Street?“. In 2016, I discovered two new anomalies. The first enabled me to develop the NIRP Crash Indicator. The second was my discovering that the micro-cap market had crashed in 2016 to its lowest levels ever. The crash which was caused by Dodd Frank has created a once in a lifetime opportunities to acquire shares in companies which can have a significant positive impact on a portfolio.

The 4 minute 34 second video below titled “Diverging Market Creating Rare Investing Opportunities” is about the divergence of the markets, which was created by Dodd Frank and the search for the 100 micro-caps.

For my predictions for 2017 and my articles in support of them see January 3, 2017, article titled “Markowski: Predictions and Top Pick for 2017”. For an overview about me and access to links to the subjects that I cover, including the digital economy, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net.

For an overview about me and access to links to the subjects that I cover, including the digital economy, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net.

The signals for the NIRP Crash Indicator which has been monitoring the markets for crashes since March 2016 are freely available at www.DynastyWealth.com and are updated after the close of the markets each day.