There’s a good chance that the biggest financial story on Wednesday August 5 won’t be a financial story at all.
In a stunning turnaround North Korea’s Kim Jong Il has pardoned two American journalists and ordered their release from a North Korean prison. The “special pardon” to Euna Lee and Laura Ling came after a surprise visit to Pyongyang from former President Bill Clinton. In March the two women had been found guilty of entering the country illegally and in June they had been sentenced to 12 years at hard labor.
I’d expect that financial markets in Asia will rally overnight on the news. The slightest sign that anyone can negotiate with the North Koreans over anything will soothe nerves in a region set on edge by more than a dozen tests this year by North Korea of rockets capable of hitting the country’s neighbors.
Clinton’s success in secring the journalists’ release is already being called a “turning point” in U.S.-North Korean relations. That is, of course, complete balderdash. But this is the kind of news that will make investors cheer in Tokyo, Seoul, Hong Kong, and across Asia.
And it should be enough to give a little more life to a U.S.stock market that’s looking increasingly exhausted.
With the Standard & Poor’s 500 stock index and the NASDAQ Composite index crossing above the psychological barriers at 1,000 and 2,000, respectively, stocks will need a little something to keep them going. The technology sector, which had led the market through much of July, has been the weakest sector in the last two weeks. That’s left it to the financials to pull the freight with whatever help they can get from a weak dollar pushing up commodity prices and commodity stocks.
On a slightly deeper techical level this market has started to flash the kind of sell signals that indicate a correction–and that’s really all I’m expecting here. Nothing worse than a 10% pull back to establish a new base for the next stage in this rally. The RSI (Relative Strength Indicator), a commonly followed technical tool, hit 75 on Monday August 3. Many technical analysts regard a reading of 70 as a sell signal.
Trimming positions to bring your portfolio back into balance and selling partial positions to cash in some profits is perfectly appropriate here. But I don’t see the need–yet–to do major selling. I think a pause here is exactly what this rally needs.
A major move downwards awaits a change in psychology. Right now investors are reading the economics news as evidence that we’re on the edge of a global recovery. It’s going to take some disappointing headlines to change that thinking around.
I remain convinced, however, that we’ll see at least one more round of exactly that kind of disapointing news within the next 12 months.