Crash and a Bounce — What Next?

At the end of a crazy week in the markets I thought today’s Closing Bell should outline what happened and what to focus on going forward.

There are major levels in the S&P 500 and ASX 200 that I show you in today’s Closing Bell that the market needs to hold above to remain bullish.

Even if prices fall below those levels and we see a major clear out of positions, I think it will end up as a great buying opportunity.

Waiting for shakeouts and jumping on when the trend turns up is the best entry point for successful trades.

I explain that process in a special report I have put together for you as a viewer of Closing Bell. It outlines the six major lessons I have learned over nearly three decades of trading.

These lessons really come to the fore when market volatility hits. If you would like to become a more successful investor, please check it out.

Understanding what went on this week is important because there were some great lessons to learn.

The Bank of Japan sparked a crash in the Nikkei by raising interest rates. That caused a jump in the yen against the US dollar.

They panicked during the week and said they won’t keep raising interest rates if markets are unstable.

But that is a bit of a joke because they caused the instability by keeping interest rates near zero for so long.

They raised interest rates to protect the yen from collapsing. They must have known it would have an effect on stocks. They just didn’t realise how big it would be!

They also didn’t realise the US was going to release poor economic data soon after they raised rates, which caused bond yields in the US to collapse.

That meant the gap between US and Japanese interest rates converged much faster than the market expected. That ignited the spike in the yen against the US dollar and forced carry traders to start dumping positions.

The big lesson from the week was that carry traders are investing in stocks, not just bonds.

That answered a conundrum that has had me scratching my head all year.

Why was the Nasdaq going vertical while US 2-year bond yields were close to 5%?

The AI story had seen stocks like Nvidia going ballistic. But the never ending rise in the Magnificent 7 seemed out of kilter with elevated inflation levels and interest rates.

Perhaps much of the rally in the Magnificent 7 has been due to the large interest rate differential between Japanese and US interest rates?

Carry traders helped the rally along and momentum chasers joined in the fun. It means the rally may be on shaky ground and could turn into a rout if interest rates between the two nations continue to converge.

Japan has stopped the rot for now by backing off from future interest rate rises.

So keeping an eye on the USDJPY (Japanese yen) and Japanese inflation figures will be important going forward. If the yen collapses and/or inflation becomes a major concern in Japan, they will have no option but to start raising rates again.

In today’s Closing Bell I look at the relationship between the yen and the S&P 500, then show you key levels to watch in the S&P 500 and ASX 200.