you cannot ignore the probability of a recession in the UK and Europe is real

We hope everyone in the U.S.A. had a great holiday weekend with their family and friends. It was a nice break from the torrent news cycle we have been in the last two weeks. Yesterday, we peeked at the futures throughout the day and found overseas markets muted for the most part. This morning however, they appears to be leaning towards the downside. European markets are open and trading lower by -1.80% on average. The Dow futures are down over -100 points at the moment, but we are still one and a half hours away from the opening bell. Lots can happen in that time period. As a precaution, we double checked our model data over the weekend and found nothing which altered our signals from last week. Good news there.

Having spent the last week reading and listening to analyst after analyst speculate on how Brexit will affect the UK and European countries, we can see a dominate theme emerging. Again, we still will not know what the real situation will be, but investors still need to make a few decisions on how they will deal with the unknown for the interim term. So, with the emotionalism subsiding and more rational thoughts prevailing, let’s discuss the emerging theme. At this point we have to consider the damage done so far and how it will affect investor behavior going forward. The biggest impact to the British people was the devaluation of the sterling (-10%). In essence this increases the cost of all imported goods by roughly ten percent. Ouch! Real estate sales have stagnated and business optimism has declined substantially. The probability of a recession in the UK and EU has grown higher as they expect the GDP to decline -0.50% going forward. Coupled with a flattening yield curve and an expected decline in business and consumer investment, you cannot ignore the probability of a recession in the UK and Europe is real. When could this occur? That is anyone’s guess. If it’s coming, signs should start to emerge over the months ahead. Heads up and eyes open.

The unknown as well as the higher probability of a recession will definitely have investors in a risk off mode for the near future. Is it time to short again? We could get a sell signal today if the markets close substantially lower. A lot will depend upon the breadth of the markets. If we do get a sell signal, we will email you as soon as possible. If you played the upside coming out of last Monday, take your profits this morning. It is also possible, albeit less likely, we could experience a few days of choppiness before a significant move evolves. Stay tuned.

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