Archive for March, 2014

Yellen Speaks, Yields Rise, the Sky is Falling?

Thursday, March 20th, 2014

tnx

Yesterday Federal Reserve Chair Janet Yellen answered a reporter’s question about when would the Fed start to raise rates. She said it would be a considerable time after the end of the current tapering, maybe six months.

That clarity of time frame scared both the stock and bond markets, and it sent bond yields higher – you can see the exact moment she uttered the words “six months” on the graph above.

But what does that actually mean in terms of a time frame? At the current pace of tapering, the Fed will end their bond buying a bit under a year from now. If you add six months to that, you get a rough time frame of September 2015 for the first increase in the Fed Funds rate.

Historically, the initial shock of increased short-term rates sends stocks down but it is generally overcome by increased economic activity, higher employment, and increased corporate earnings. However, as the series of increases push rates higher, economic activity slows, unemployment increases and corporate earnings decrease, sending the stock market down.

There is a lot of time between now and September 2015 – and I truly believe that if the economy continues to stumble along at a 1.5% GDP growth rate and continued high unemployment, the likelihood that they will raise rates is slim. But we will see.

The sell-off in the stock and bond market yesterday was premature if it was based upon the fear of rising short-term interest rates – the sky isn’t falling but we do have more clarity into what the Federal Reserve is thinking, and clarity is always a positive for equity investors.

Mark

Got Gold?

Friday, March 14th, 2014

gold
Click on any image for a larger view

As the S&P 500 Index is back negative for the year I thought you might like to see an asset class that is having a great year: gold.

I have annotated the chart above to give you a feel for the trend, but the most important thing on the chart I want to point out is the brown circle on the price chart – several days ago, the price of gold moved above the 200-day moving average (a bullish sign) and in the circle you see that the 50-day moving average is making an attempt to cross above the 200-day moving average (a very bullish sign).

These two cross-overs (if the second one happens) are signs of a trend change that could see gold move from its current $1379 per oz to the $1550 per oz level where there is significant technical activity (several instances of broken support and resistance over the past couple of years). I haven’t drawn it on this graph of GLD (the index fund I am using to represent gold for you) but it would be at the $150 per share level on this graph.

I have also drawn in several other annotations, but I want to point on the series of upward tilting blue trend lines – all indicate that investors are beginning to move money back into gold in the early stages of this rally.

However, if you see the two red arrows, they are pointing out that near-term, our sentiment indicators show that the move has become overbought and we could see a bit of a pullback before this developing trend continues.

I think we are seeing a lot of interest in Gold right now due to the Ukraine situation, particularly with Russian Troops massed on the border and US surveillance drones being shot out of the air – you can read about it by following this hyperlink to Yahoo News..

If tensions subside over the weekend, we will likely get a pullback that will ease the overbought condition – and then we will get to see if the fledgling trend that started before the Russian military action began will continue.

Markets moving higher are always more interesting than those moving sideways to slightly down – so we will continue to keep an eye on Gold and keep you informed here on the blog.

Have a great weekend of Big Ten basketball!

Mark

PS – Gotta love Barry White!

Resistance Returns

Thursday, March 13th, 2014

sp-resistance
Click on Any Image for a Larger View

After today’s big drop in the market we are back below the resistance line that you’ve seen here several times in the past.

What caused the drop? Could be the report from the BBC that Russian Troops are amassing on the Ukrainian border. Could be the report that China is cutting back on bank credit to its industrial companies. Could be that given the predominance of bulls in the market, some traders decided to take the other side of the trade, go short, and sell the stuff that has gone up the most this year.

Take a look at this Industry Heat Map from an excel spreadsheet I maintain:

industry-heatmap
Click to see a larger view

If you look at the industry groups in green (those groups closed higher today – the ones in red closed lower), you will see that they are predominantly the groups that have underperformed last year and this year-to-date or they are high dividend payers or both. Those are groups people buy when they are scared.

So if investors are scared, then we should see the Volatility Index (VIX) starting to tick up:

vix

We are starting to see a bit of volatility enter the trading world – note the three peaks on the right side of the graph, and each one is marginally higher than the last. They are no where nearly as high as we got in February’s (comparatively) big sell-off in the S&P 500 Index, but maybe the third higher high in the VIX is pointing to more selling to come?

Should we be concerned that there is something happening that is a threat to the financial system (like a major war in Europe)? When that sort of issue is out there – and those typically lead to either a 20%+ market pullback – I go to my old friend the TED Spread (it is a gauge of risk in the financial system that demonstrates the flow of funds out of EuroDollar denominated deposits into Treasuries – the Treasury Security represents a flight to quality at times of international crisis):

ted

Right now, there is no spike higher telling us that whatever is happening could lead to a 20%+ correction. When that sort of reading is present, we automatically raise cash in client portfolios. I have been using the TED spread since the 1987 stock market crash. In every instance that it had a spike higher, a major crash or pullback in the market 20%+ occurred – so I take it very seriously. However, it does not work the other way – you can have significant market pullbacks without the TED Spread moving higher.

What do I watch to give me a perspective on a coming major pullback? You’ve seen them here before but we should look at them now since its been a couple of months:

The Kansas City Federal Reserve Financial Stress Index:

kcfsi

You can see what it did prior to the 2008 stock market crash – we have no reading like that now.

The Recession Probabilities Index:

recprousm156n_max_630_378

You see the reading it had prior to the 2008 Recession – we have no reading like that now.

There are others that I follow, but all show the same indication – there is nothing right now to indicate a major correction is nearing – however, with valuations as high as they are and so many people leaning on one side of the boat, the bullish side, you can reach a tipping point quickly.

Geopolitical events, like the standoff over Ukraine turning into a Russian invasion and NATO responding, can turn dangerous fast and send the TED spread higher to worrisome levels in a very short period of time. A beautiful Spring day can turn into something ugly based upon political ambitions that cannot be factored into valuation formulas and require moves to build a cash cushion as a risk management action (except for those folks that want to be 100% invested at all times – they are exempt from this activity). Because of this, the TED Spread is something that I watch nearly daily and take action on as necessary when it gets jumpy.

At this time, all indicators are that this is just a pullback to Resistance because investors were not confident enough to move the index higher in a sustainable manner. We could see some more selling or we could have a recovery back above the Resistance line – we didn’t close on the low of the day, as you can see on the graph of today’s action below, but we were not much above it.

today

So, based on this, I think it will all be a news-related market for a day or two and depending upon what happens overnight with the reported headlines, we will either see a recovery of today’s sell-off or further selling as more folks move into capital preservation mode and sell the news. First quarter earnings reports are still a few weeks away, so the headlines are likely to rule in the meantime.

For now, it doesn’t appear to be anything critical but we will monitor things and report back to you here on the blog if something changes.

Mark

Happy 5th Anniversary Post Crash Recovery

Monday, March 10th, 2014

long-term-trading-range

As I look back at the blog posts from the 2008 crash and the time leading up to March 9th, 2009, I see some interesting things – it was clear now that fear was pervasive among the investment community. The liquidity-driven crash (or more appropriately, the lack of global liquidity that was caused by the failure of Lehman Brothers) had otherwise smart investors cashing out at the bottom because they could no longer take the pain of the market grinding lower day after day.

However, on March 10, 2009, I wrote a blog entry entitled The Market Is Putting In a Sustainable Bottom [you can click the hyperlink to check it out if you’d like]. I gave you several reasons why I believed the market had stopped going down and that we were moving to an all-in position on equities. This was contrary to what many people were still hearing from the folks on TV or from other investment managers, but we were resolute in our belief that we had hit a low-risk entry point so we took all of our clients to their maximum equity exposure.

For investors who rode out the drop without casing out and have ridden the market back up, they have clearly been winners. For those folks that listened to the pundits on TV telling them to sell and go to cash after the market had already fallen and who missed out on much of the recovery, they are the ones who are still feeling the impact of the crash.

Five years is a long stretch for a bull run higher without a significant pullback. If you look at things from a valuation perspective, we are near the levels where the market peaked in 2007:

shiller-pe-2014-03-10

But, just because the market peaked near here before does not mean we are due for another crash. We certainly could sustain a pullback – its pretty unprecedented to go as long as we have without a trip to the 200-day moving average. You can see on the graph below that November 2012 was the last pullback to that level.

200-day

However, corporate earnings are projected to continue to grow and US GDP is likely continue to be in slow growth mode – which means the Federal Reserve will keep interest rates low. Growing earnings and low interest rates have historically been positive to stock prices, and since that trend is clearly in charge, we will continue to be fully invested until the market shows us otherwise.


Click here to watch today\'s video on YouTube

Mark

Rule of Three Failure

Monday, March 3rd, 2014

screen-shot-2014-03-03-at-70402-pm

Well, we were not able to sustain the break through resistance and the three closes above it to turn resistance into support. You can see on the graph above that we were able to close between the two support/resistance lines on the graph that we’ve discussed the past several blog posts. You can see how even when we dipped below the lower support line during the day (remember this is a two hour graph so there are four bars to each day) it retained its support characteristic and we were able to close above it.

spx-annotated

Here is a chart of the S&P 500 Index in a format that you’ve seen several times in the past. It’s annotated to make it easy to spot a couple of things.

The two purple circles point out short-term momentum indicators.

The one near the top shows that the over-bought condition on the 7-day Relative Strength has fallen below the indicator line, so it is no longer indicating a pull-back. Given that it is a 7-day indicator, it reacts quickly to changes in the market, like today’s sell-off.

The one further down on the graph is the 14-day Stochastics. It is showing a reading that is still above the indicator line saying that we are probably due for a bit more of a pull back. Since it is a 14 day indicator, it is slower to react to market movements like today’s sell-off.

Since these are giving conflicting signals, there is a no definitive indication. However, today was a news driven sell-off and they tend to bounce back the next day once that news is past – unless there are follow-on headlines. The thing in favor of a positive day tomorrow, maybe even an attack on the resistance level, is that we closed above the lows of the day with buying interest going into the close.

We do have to work off the over-bought reading on the Stochastics, but that can be done with a series of movements that equate to a sideways move – the market doesn’t have surrender to a major down draft as passage of time can work off the over-bought condition.


Click here to watch today\'s video on YouTube

Mark