May Election Mess Stalls Stocks

US stocks surged to record highs last Friday on the assumption Primer Minister May would strengthen her ruling coalition as the errant polls suggested. The surprise losses have created uncertainty and caused profit taking in high flying tech stocks and the British Pound. The Pound should continue to falter as long as their is speculation that May’s party could replace her. The support target for the British currency is the 125 to 126 zone.

Further weakness in the Pound would briefly hurt US stocks, but more important for our market is the carry trade with the Yen. When the Yen appreciates (Yen inverse ETF depreciates) their is a reduction of borrowing in the lower yielding Yen to buy Stocks. Normally stocks move with the inverse of Yen prices. Over the past 2 weeks this relationship has diverged. It’s unlikely new highs in the Yen (new lows basis inverse Yen) will continue without stocks correcting further.

Watch for stability in the Pound and an uptrend in the “inverse Yen (symbol YCS) to indicate stocks are ready for another record leg higher. Currently stocks are negatively diverging from the Yen basis YCS.