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One of the largest factors causing the current turmoil in the markets is yen repatriation. For far too many years, hedge funds and investment arms of banks have availed themselves of cheap Japanese capital. They would borrow yen at drastically lower lending rates than were available elsewhere – often less than 0.5% - and sell the proceeds for dollars or euros to be invested in higher yielding instruments such as US Treasuries. Since the Japanese economy remained weak, the yen as a result was a weak currency and there was no imminent danger of an increase in the value of yen vis-à-vis the dollar or euro. The average Japanese saver even exercised their right to put their savings into foreign investments and did so with gusto.

However in the past few weeks, fear in the markets drove a flight to safety and caused an abrupt rise in yen repatriation especially with euro investments on the other side of the trade. Therefore the euro-based investments were sold and the currency was re-converted into yen. This action snowballed as reports increased of the near term sharp drop in the EC economy.

The dollar has also benefited from this wave of selling as global investors rushed to invest in US Treasuries or simply to buy and hold dollars instead of euros, which were quickly losing value. The consequence of all this fear and trading has meant that the value of the yen and the dollar have risen sharply versus other currencies in the past month. Ironically, Japan depends on its exports for whatever economic strength remains and a higher yen is certainly going to put a damper on those exports and hence corporate profits. In the case of the US, rising exports have been the sole bright spot in the economy but with the sharp and sudden rise in the dollar, this growth is likely now to be cut off at the knees.

If yen repatriation were all that was worrying in global currencies, the shift would naturally rebalance investments in various currencies and the situation would stabilize. But that isn’t the case. Iceland is being called the canary in the coal mine after the government nationalized its three largest banks with debts in excess of twelve times the national GDP. In the two weeks since, the IMF has agreed to a bailout of Iceland and followed this with announcements this weekend that both Hungary and the Ukraine would be receiving bailout packages in the coming days as well, in response to their own deteriorating situations. That puts the count at three European countries and prompts the question, which one will be next as this contagion spreads?

Meanwhile the Japanese government, ever keen to prevent a further rise in the value of the yen, has stated Sunday evening that it will intervene in currency markets to sell yen in an effort to cap the rise. This action may slow the yen’s upward movement but is unlikely to halt its progression.

Technically Speaking

Stocks markets extended their losses this week with the tech sector taking an even harder hit than the broader markets. The Dow Jones Industrials and the S&P 500 fell between 5% and 7% while the Nasdaq twins lost between 8% and 10%. All of these markets saw lower volumes for the week and weekly stochastics are generally oversold indicating that selling might have subsided enough for a modest rebound to occur. Stochastics on the daily charts do not confirm this potential for rebound however and as such, we would tend to move cautiously.

It is worthwhile to keep in mind that declining volumes in a bear market are perfectly normal and that it isn’t so much a broad effort to sell that drives markets lower but rather an absence of buyers. This current market is populated more and more by investors sitting on the sidelines and hoarding what cash they have left.

New Buy Recommendations (in order of preference):

None.

New Short Sales

Johnson and Johnson (JNJ) – JNJ met much resistance at the 200-day moving average on its very recent rebound from below $60. As part of the subsequent slide, it registered a Lindahl sell signal in mid-week as it gapped lower and that gap has remained open through Friday’s trading. Resistance is strong at the $65-66 level and should contain any attempts at rebounding. On the weekly chart, it traded an inside week but this is likely to have been a period of digestion after the sharp fall of two weeks ago.

Wal-Mart (WMT) – Consumer retrenchment will not leave WMT unscathed. Retail sales have been hard hit in recent surveys and with the holiday season nearly upon us, retailers have begun ratcheting down expectations. The daily chart of WMT has developed into a pennant shape over the past three weeks and pennants are normally resolved in the major direction, which for WMT is downward. Moreover, there is significant resistance at the $56 level, an area that had acted as support earlier this year and corresponding roughly to the 200-day moving average.

Procter & Gamble (PG) – PG is also closely tied to the consumer and as such, is finding its stock price tumbling. Its chart has many similarities to the previous two others with notable resistance around the $64 level. As we saw in JNJ, there is a Lindahl sell signal that occurred in mid-week and a sizable gap opened at that time, which remained open by Friday’s close. Volume tapered off this week, but unlike the other two companies, PG did not have an inside bar on the weekly chart.

Stock Positions to Sell/Exit:

None.

Portfolio Comments:

New stops have been added in bold to the list while others have been modified. Those that have blanks are being carried unstopped for now. Please see our complete list of stops in the table below.

List of Current Stock Recommendations:

Action Ratings. The following is the legend for designating immediate action
for our stock recommendations. The first is B, meaning the stock is timely
to buy but the case for doing so right here is not overwhelming. Either the
stock may have gotten ahead of itself and may be vulnerable to a retracement or
else the stock has been performing disappointingly but may simply be
regrouping. B+ and B++ indicate stocks for which there is a technical case
to buy now, with plusses adding weight according to how many there are, up
to a maximum of two. Stocks rated H are ones to hold, awaiting confirmation
to buy more or to sell. SELL, of course, means what it says. It seldom pays
to override this designation. In the case of stocks held short, the rating is S where positions should be retained. S+ and S++ indicate stocks for which there is a technical case to add to the positions with plusses adding weight similar to long positions. The maximum number of plus signs is 2.

N.B. There are no longer restrictions on foreign stocks held in Canadian retirement savings accounts.

New stops in BOLD

* Stop on a closing basis

** Buy if above entry price

*** Split-adjusted price