Last week’s could be best wrapped up by this heat map from Finviz showing the one week performance for the ETF universe. Unless it was inverse or tied to volatility, it was nothing but shades of green last week as the FOMC officially ran out of patience but the doves delivered an unexpected surprise via the dot plot. Continue reading
The Yinzer Analyst has always been a fan of Baron Rothschild’s famous advice to buy when there’s blood in the street and after reviewing the charts of the damage wrought by the dollar’s strong advance you won’t find any markets bloodier than the emerging markets. EEM may be down 2.5% in 2015 but that doesn’t begin to compare to the trailing 1 year performance (down 2.5% compared to SPY’s 13.32 advance) and the even worst 3 year number (up 2.5% to the SPY’s 16.04% advance). It’s been a rough ride for the emerging market nations ever since the Fed embraced QE and the recent run-up in the dollar hasn’t helped the situation this year, but the bloodshed has reached an extreme that has me wondering if the time has come to embrace the fallen angels. Continue reading
It was another busy weekend for the Yinzer Analyst, this time celebrating the victory of my University at Buffalo Bulls over Central Michigan in the Mid-Atlantic Conference. Like every alumni, I’m proud of my school but only when it wins and we’re talking about Buffalo here so wins are few and far between. I might have to do join all the other alums in buying a tee shirt. If the Buffalo Bills ever make it to a post-season the whole city might just go up in flames. What would we do without all the empty buildings and grain silo’s? Continue reading
Spring may have come to Pittsburgh but it’s been a sad few days for the Yinzer Analyst as we mourn the death of Sir Terry Pratchett, creator of Discworld and one of the greatest fantasy writers of the last thirty years. His gift for creating worlds where he could both explore and parody the logical underpinnings of our own had no equal and with characters like Rincewind, Sam Vines and Lord Vetinari offered me an escape from the dull day-to-day drudgery that was grad school. I think I learned more about microeconomics from “The Truth” or finance in “Making Money” than I did by going to class and in a world where Hollywood seems focused on “rebooting” movies that were made in the last decade; he offered something truly unique and wonderful. I’d encourage you all to learn more about him here. But there’s more to today’s posting than just mourning the passing of a great author; today’s action in the market has me more convinced than ever that the time has come to get serious about reducing my equity exposure. Continue reading
The Yinzer Analyst is on the road, so just a short post tonight because there was no way Friday’s Treasury bull slaughter could go by without comment. The Treasury sell-off started with Friday’s Employment Report which was so far above expectations that even the most ignorant trader couldn’t ignore what we’ve been talking about for the last few weeks; that rates are going higher and the Fed isn’t even trying to hide the fact from you. So why dig in and fight it? But the sell-off in Treasuries and the spreading margin calls led to bleeding throughout the market as profits were taken, positions stopped out and heads buried in the sand. The sell-off was so brutal we need Champ Kind to come in and moderate this one for us:
Let’s start with the carnage in the Treasury market where the ten year yield blew through the downtrend channel and pushed back to last December’s highs. Maybe the 200 day moving average can contain it.
You can see a similar story for the 30 year yield although the sell-off wasn’t nearly as severe:
And finally Mr. TLT wasn’t feeling the love although he wasn’t the worst casualty by far on Friday:
That spot was reserved for the gold miners; whether on profit taking or the fact that a Fed rate hike will raise the lease rate and opportunity cost of holding gold (and cutting demand for the metal), the miners took it on the chin and blew through support at $20:
The possibility of a rate hike spilled over into the defensive yield trade where both REIT’s and utilities took it on the chin:
What about the Yinzer Analyst’s favorite trade in long European exposure?
You can see on the daily chart that there isn’t a whole lot of support between $38 and $37 and after that we’ve got the upper boundary of the downtrend line at $36-$36.50 to provide support. Looking at the weekly charts for a longer-term picture you can get a better sense of not just the support at $36 and change but how the uptrend might still be in it’s infancy (fingers crossed.)
What about the picture for domestic equities? Using SPY for the S&P 500 you can see on the daily chart that the market was again denied while trying to breakout of the prior ascending wedge pattern leading to a retracement of the year’s meager gains but for now we’ve got prior support at the 50 day moving average at 206 and then nothing until the 202.5 level.
Looking to the weekly charts, you can see we remain mired in another ascending wedge (bearish) pattern with more strong support at 205 level, so while the market might open down and drift lower we should expect more stickiness around that level.
Which is confirmed by looking at a weekly chart of the S&P 500 itself:
But there were a few flowers blooming amidst the rubble on Friday and not surprisingly found in the financial sector. The possibility of a summer rate hike has helped spark new life in a sector weighed down by the financial repression of a low rate environment. With the possibility of higher interest rate spreads and loan growth through an expanding economy, return on assets might finally get itself out of the low range it’s been stuck in for the last several years. But before you rush out to buy the bank stocks, keep in mind that regional banks are likely to see the biggest boost to EPS (and they outperformed XLF by 150 bps or so on Friday) and even Friday’s rally wasn’t that strong. Two of the largest regional bank ETF’s (IAT and KRE) saw strong buying pressure give way to late afternoon selling as profit taking kicked in and pushed their one-day CMF scores into negative territory. Hardly reassuring:
That’s all folks, now get out there and try to make some money!
This Sunday night I thought we’d try something a little different here at the Yinzer Analyst; more charts, less chit-chat. Maybe it’s the season affective disorder or maybe the death of one of my childhood idols but let’s be honest, if you’re reading this it’s either really late and you have a bed to get to or very early and you need to start planning your trades for the day. We’ll save the deep posts for when you need them, but think of Sunday Night Chartology like Headline News with Robin Meade. A mile wide and six inches deep. All we need is a beautiful newsreader for the podcasts…any volunteers?
First up, let’s look at the broader market using SPY for the S&P 500:
SPY has broken out of the consolidation patter and even fought its way back into ascending wedge pattern but ran out of steam soon after. Momentum has turned and Friday’s close at the low sent the CMF score lower.
On a weekly basis SPY is still stuck in another ascending wedge pattern while momentum hasn’t confirmed a breakout strong enough to make me change my opinion on the strength of this market. I wrote on Saturday that momentum has been slowly weakening since the great Tapering Announcement in December of 2013 and until something changes to add new life to this market, new highs might continue to be seen but the action will be more volatile.
What about domestics bonds? Our last post was bond heavy so tonight we’ll just keep it brief with a chart of TLT:
While last week’s rally was enough to give some traders hope that a decent bottom was forming, I think it’s still too soon to get the “Mission Accomplished” banners ready. The strong January rally had legs all along the $132-$136 range, offering plenty of opportunities for any rally to stall out.
And since it’s hard to separate bonds and the dollar in any discussion of the market this year, let’s move on to Uncle Buck (here using UUP):
On a short-term basis, UUP looks to be almost at the end of it’s consolidation patter and offering the possibility of another move higher this week, but moving to a long-term basis we see a different picture:
Last week’s rally brought us right back to the old high and has me wondering how much more room is there to run for UUP.
And what kind of dollar conversation can you have without talking about gold and commodities? Start with the MarketVectors Gold Miners ETF (GDX):
On a daily basis GDX found support along the 50 day moving average and close to prior support at $20, but will overhead resistance and the 200 day moving average keep GDX from running higher? The weekly charts aren’t much more promising:
Using DBC for our broad commodities benchmark, you can see on the weekly chart that the fund is fighting hard to get back into the downtrend channel that kept it bound for much of 2014. Will a rising dollar sent it back to the recent lows?
It certainly hasn’t helped the recovery in the energy complex:
Or those countries heavily reliant on commodities for their financial well-being like Argentina:
And finally, my two favorite charts showing the continued breakout of European equities versus the S&P 500:
EZU has outperformed SPY by nearly 500 basis points this year and while the weekly charts show that the breakout could be in it’s early stages, the short-term daily charts makes it look like we could be entering a consolidation period for EZU relative to SPY. You might see the fund lose ground against domestic equities, especially if UUP continues to gain ground against FXE.
See, we’re keeping it brief tonight here at the Yinzer Analyst. Good hunting out there tomorrow people!
“Will they, won’t they” the question that raged all week across the financial blogosphere as investors, speculators and the tin foil hat wearing crowd debated whether the FOMC could perform the first rate hike in nearly nine years as early as this June. While investors reacted positively to Janet Yellen’s testimony before the Senate on Tuesday, giving the S&P 500 it’s only positive day for the week and pushing the iShares Treasury Bond 20+Year Fund (TLT) up nearly 1.31%, the mood shifted with the changing tone of the economic data released this week as the market tried to digest what the end of the Fed’s “patience” might bring. With every other financial professional throwing their hat in the ring, it’s time for the Yinzer Analyst to get off his duff and explain to you why the Fed will be raising rates and how you can prepare your portfolio for when it happens.
I’ve talked at length about the Federal Reserve and why it might choose to raise rates now, the impact that it might have on the market and while standing by what I’ve said already, I think it’s to add a new dimension to our thinking. So much of the conversation about the first rate hike in nearly a decade is about whether or not it’s premature, overdue or whether Chairwoman Yellen is just playing chicken with the market to push risk premiums higher. While you can find almost any evidence to support any of those arguments, take it from my years of experience as a portfolio manager that playing those logic games when it comes to the Fed is simply setting yourself up for failure. Plenty of far better money managers that I tried to predict what the Fed was going to do between 2008-2014 and lost WAY more money than they could afford to in the process.
(The Yinzer Analyst thinks this week’s bounce in TLT has more to do with hitting prior resistance than any fundamental case for lower bond yields being made)
The worst part of all was that their mistake was simple; they weren’t just trying to predict the likely course of the Fed and the timing of a rate hike, which is a herculean task in itself (and success largely comes down to luck when you start involving two potential outcomes and a diverse board like the FOMC) but whether explicitly stated or not, their analysis was always tainted by the thought “The Fed SHOULD do this.” With their minds clouded by the belief that they alone knew the correct course of action, they let their opinions on the proper course for the Fed influence their decision making and the rest can write itself. Ben Bernanke one more than one occasion talked about the power of QE to support asset prices and create a wealth effect that would push the market higher and raise investment (more here at the Big Picture.com) He was telling you exactly what was going to happen because he WANTED it to happen and telling the market was the best way to bring that about. Think of it as a self-fulfilling prophecy that many in the market largely ignored.
So what should an honest investor due in a situation like this? First, focus on what the Fed is telling you and look at the same charts they are. Yes, it takes a doctorate in dissimulation to make sense of their minutes and prepared statements, but once you learn to read the signs, the road they’ve been laying out for years is easy to follow. Once you’ve done that, you can start preparing your portfolio for the shape of things to come.
So if the FOMC going to raise the Fed Funds rate in 2015? Yes, they have literally been telling the market for years that they wanted to end what they consider to be extremely accommodative monetary policies and getting off the zero bound is the final step. Everything that’s come out of the Fed recently from Janet Yellen or Stanley Fischer has been reinforcing that hikes are coming in 2015 no matter what the Fed Fund futures are indicating. Remember, they never wanted rates to stay this low for this long and in their minds, the Fed was forced into this. After the politics around the American Recovery and Reinvestment Act of 2009, the national debate shifted from supporting economic stability by maintaining spending to keeping the debt/GDP level tied to a useless target derived from now discredited research. As government spending dropped and actively subtracted from economic growth for years, the focus shifted to loose monetary policy to keep personal consumption expenditures and investment from collapsing. By and large, they’ve succeed; in fact, they are well past the point when they would have raised rates in prior downturns.
Let’s look at a few charts and starting with the headline employment report, during the last two recessions, the Fed Funds rate began to rise around the time that the year over year percentage change in total employment turned positive. No one would argue that the Great Recession was different; employment fell much more drastically than in previous recessions and the average length individuals were unemployed skyrocketed, but from the point of view of the FOMC members, employment growth has been strong and sustained with many members arguing that QE3 was largely pointless and that rates should have risen long before now.
A similar story can be told with real personal consumption expenditures which even in the lowered GDP revision released on Friday are now growing at their fastest rate in years and contributed nearly all of growth in economic output in 2014. Again, the Great Recession saw the largest sustained drop in real PCE since the 70’s and while the growth has stabilized at a lower level seen in prior recoveries, it has gone on for a much-longer period without a rate hike than in other cycles.
You could also look at the growth in commercial and industrial loans; typically rates begin to rise when the year-over-year change in loan growth becomes positive. Like unemployment and real PCE, the Great Recession was far worse than prior ones, but the time has long since passed when rates would begin to rise.
And what about the counter argument that low-inflation means the Fed should commit to keeping rates low (like zeroish) until they have finally broken above the 2% range. We’ve talked about this in prior posts but there are two points against this argument; first is that while many investors may think of inflation as historically running at 3% or 4%, using core CPI to strip out the highly volatile energy component has run far below those levels and in fact has been close to or at the more recent rates for some time. I don’t want to get into some Shadow Stats argument, so just take a look at this chart of the Fed funds rate and core CPI then look at the two solid lines. The first is the average year-over-year change in core CPI for the last ten years, the second is for the twenty year period. Over the last ten years core CPI has been at 1.9% and only slightly higher at 2.1% for the last twenty. You can see we’ve already touched the ten year average in this recovery without sparking a rate hike, something that has driven the hawks on the FOMC mad.
The second argument comes from Stanley Fischer who on Friday noted that the recent rise in economic activity is directly attributable to the FOMC’s policies and that impact is now being felt is only in its early stages. Remember that the Fed is a backwards looking agency; their divination’s for the future rely on recently collected data that is matched to historical patterns for interpretation. Yes, that maybe oversimplifying the situation (and making it somewhat akin to augury) but it’s the truth. The Fed has been terrified of letting inflation creep too high because once the cycle starts, they might not be able to stop it without drastically overshooting the target.
Remember when QE3 was first proposed and then Chairman Bernanke said he was determined to get inflation to 2% or above? Well he lied; neither he or Yellen is at all comfortable with the idea of inflation getting to 2% or above and essentially started talking the market down from its QE3 highs as soon as inflation expectations got anywhere close to 2%. They why comes to down to something we’ve already talked about before; the idea that rising rates will actually increase the velocity of money, raising potential GDP and potentially adding even more inflation to the economy. You can read more about it in a previous post here, but the idea is well documented and with the end of QE3, M2 velocity has begun to stabilize while even the modest rate hike forecasts could be enough to encourage more investors to drawn down their liquid positions and invest the capital.
The final reason (and most important )why the Fed will raise rates is something we’ve talked about extensively here at the Yinzer Analyst, but the Fed is terrified about not just being on the zero bound and having no room to maneuver if the economy weakens but that they’ve deliberately altered how risk is perceived in the market. Let’s start with a few charts:
Investors are willing to commit to 10 year Treasuries for a rate slightly above that of core inflation over the last 10 years. On a 30 year basis they’re willing to lock in a potential risk premium of something like .7%, not exactly confidence inspiring is it? If investors are willing to commit to rates like that, what does it say about the growth outlook in America going forward? Even with the recent collapse in energy prices, is it at all likely that deflation will take hold here at home?
But more importantly, the Fed’s actions have had a major impact on the equity risk premium as well. You can approach it either mathematically where a “risk-free” rate is a vital component of every calculation and in every model used to determine the rate of return for equities. With risk-free rates that were low (or negative) as up until recently, you could justify incredibly high valuations; a situation that has already been slowly unwinding as investors begin to perceive the regime change in the market.
The second way to look at is something we’ve talked about extensively here, most recently on December 14th, the idea that the Federal Reserve has been the prime mover that has kept this market barreling higher. Remember these charts we showed that demonstrated how the major moves in the market coincide with the Fed’s QE programs?
Do you think it’s another coincidence that the market has gone essentially no-where since the end of QE3? While the S&P 500 continued to advance in 2014, it was a highly volatile year compared to 2013 and until the famous Evans rally in mid-October the year was setting up to be a push. With QE3 officially over and the prospect for rate hikes on the table, it’s no wonder the S&P 500 is consolidating while capital continues to flow into European equities at a tremendous rate; capital is going to where monetary conditions are the easiest and escaping where they’re the most uncertain.
So what does a rising rate environment mean for equities going forward and what can your portfolio do about it? Check in for your next few posts on protecting your portfolio and the importance of knowing your risk free rate.
So after all that hype and weeks of build-up, are you as disappointed as I am? FOMC Minutes, Greek debt extensions or the very lame Neil Patrick Harris, the let-down is the same. At least in Europe you might see the finance minister of Greece start a fist fight. The Fed continued its policy of non-enlightenment while the Syriza party pulled back from the brink of the abyss and went back to Frankfurt with their begging caps in their hands. Everyone is focusing on the big win by the S&P 500 this week that put it to a new high, it was the announcement that Greece have caved in on most of their demands that gave the market the boost it needed and my preferred European etf (which I am currently long) still managed to strongly outperform on the week. While the Yinzer Analyst is wondering if he can pull a Harry Crane and ride one good idea to wealth and fame, the strong performance by European funds (especially the unhedged variety) has me wondering if a bigger change is about to come to the market.
Starting off here at home, it was another big week for the S&P 500, not only setting a new high but breaking through recent resistance in the process. For me, the big question is how convincing of a move was it? The market was flat on the week heading into Friday and it was only on the rampant speculation of an impending deal with Greece that gave it the spark it needed to close about the 2100 level and even then it was on weaker volume. While the weekly CMF score rose on a close just off the high, momentum hasn’t confirmed the breakout. Janet Yellen’s testimony this week could be what it takes for resolution one way or the other.
Investors look for resolution from the FOMC will have to wait till March as the release of the meeting eventually rise, yes but the FOMC is on a “data dependent” path which means the chances of them sending YOU a big signal in their commentary is pretty low. After a brief one-day pop on Wednesday, TLT struggled for the rest of the week but managed to close outside the downtrend channel and above prior support. The question now is can it stay there?
The real excitement this week was in Europe where the complete abandonment of the hardline stance that dominated their election platform by the Syriza party was met by a resounding chorus of “I told you so” by literally everyone everywhere. At least that’s how it seems but hindsight is 20/20. While volume dipped this week, the iShares MSCI EMU index had another strong week and pushed right into the 50 week moving average. Negotiations between the troika and Greece will continue on Monday and if a deal can’t be reached another meeting of the ECB finance chiefs will take place Tuesday. Volatility will be the order of the day.
Now what really has me interested is what happens later this week after we have a six-month extension in Greece and Janet Yellen magnificently demonstrates the ability to answer questions without saying anything. After the rout in Treasuries this year I think you would be hard put to find anything as potentially “overvalued” as the U.S. dollar. Thanks to a combination of factors including the winding down of QE3, existential uncertainty in Europe and higher risk-free rates, Uncle Buck enjoyed a hell of a run in 2014. Here I’m using UUP and FXE but it’s hard to find a currency the dollar didn’t decimate last year.
But what’s interesting to me is that regardless of when the debate over when rates might rise first heated up here at home, Uncle Buck really began losing steam on February 1st, the first trading day after GREK hit its lowest point following the election that brought the Syriza party to power. February 1st also marked the day that the January Treasury rally finally cracked as the S&P 500 bounced at 2000 and the risk on/off switch decisively switched to “on.” Besides Treasuries another casualty of the risk on trade has been the U.S. dollar which of course means that the Euro (and most other major currencies have been gaining ground) versus the buck.
Now my inner conspiracy theorist says that Janet Yellen and the rest of the Fed are of course secretly thrilled by this. The major increase in the dollar has dampened inflation even as the domestic economy showed signs of heating up, putting the Fed in an unenviable position. Do they raise rates even though GDP growth is likely to only be in the 2.5% range and while the global economy continues to sputter or do they risk higher inflation down the road? If the dollar continues to lose ground and commodity prices begin to stabilize, personal consumption expenditures will likely weaken as real disposable incomes stagnate but the Fed won’t have to pull the interest rate hike trigger in the near future. As much as the Fed hates the current status quo, I think it’s just as terrified by the thought of what could happen when interest rates finally do rise. They don’t want to repeat the mistakes of European leaders in 2011 when they raised rates prematurely and killed their nascent recovery and helped sparked the crisis of 2012.
So if Uncle Buck does continue to slide, could it mean that commodities might finally be able to stand their ground after so many difficult years? It’s way too early to speculate but now that every institutional investor has stripped out their commodity bucket and dumped it into U.S. equities, who’s left in the market? Could we see the beginning of a new bull cycle?
Now it’s time to get back to the Oscars and see if Neil Patrick Harris can finally land a joke. Good hunting out there tomorrow.
The Yinzer Analyst has been on a journey these last few weeks; first a series of interviews with firms in Pittsburgh and beyond and then a journey of self-discovery, learning more about himself, plumbing his depths and mostly discovering how much he hates shoveling snow every freaking day. I’m sorry it’s been so long since the last post, but after a powerful two week rally and with volatility dying down before tomorrow’s FOMC minutes release, now seems the time to get back in the swing of things and take the pulse of the market. And tomorrow is also Ash Wednesday; a perfect time to stop and reflect on what’s going on around us and what lessons we could be taking in but one nice thing about coming back after two weeks off is getting a chance to revisit my last post and see if my charts came to anything or not. And this week, the Yinzer Analyst is doing a serious victory lap.
In my last post I talked about how the market seemed to have reached new extremes; Treasury yields had plummeted in January and were at levels not seen even at the worst of the Lehman crisis while domestic equity momentum was close to the lowest levels of the 2009 bull cycle. As much as I hate using labels like Treasury Bear/Equity Bull, I had to face up to the fact that yields had dropped way too quickly and were more likely to move higher while equities were likely to continue consolidating around a sticky level of 2030. The thesis behind that logic was simple, I like to call it my “Cleveland Brown” system because it’s so simple that anyone can get it…”S$%T got too damn expensive.”
Since that post, TLT has dropped 8.5%, going from overbought to nearly oversold in two weeks while sisters in the “hunt for yield” trade like utilities (XLU -6.6%) and REITS (IYR-1.42%) followed it and the S&P 500 made a 5.28% gain. Let’s start our investigation by looking at the extremes and in February, nothing has been more extreme that the major shift in the sentiment towards Treasuries.
We asked the question then of whether Treasuries had come too far, too quickly and we got it right almost to the day. After plunging in January, the ten year yield has not only pushed its way back into the 2014 downtrend channel but is threatening to break out of it to the upside. The thirty year yield is telling a similar if not quite as extreme a story.
So what gives? Is this all due to the major shift in equity sentiment that began in late January? Wasn’t it just last month that “global deflation” was the buzz word everyone was spewing? While there’s been some improvement in the economic outlook in Europe and here at home, it certainly hasn’t been substantial enough to completely erase the “global deflation” scare. Or was it the fact that the economy is still on enough of a solid footing for rate hikes to be a serious concern later this year?
The answer is that human sentiment or if you prefer, behavioral finance, has more to do it with it than anyone would really like to admit to. I remember in 2013 the conversation was “well of course rates are going up, so get out of Treasuries (or bonds all together)”, then 2014 it was “well rates are going up, but we don’t know when so it’s back to Treasuries” and so far we’ve had both extremes in 2015. I know one local manager who in mid-January decided to REDUCE duration because he felt rates had come too far too quickly and got an unholy amount of S$#T for it. Guess who’s laughing now?
But the problem for us now is to figure out whether Treasury yields have gone too far in the other direction and what that could mean for the equity outlook going forward. For the technicians let’s start with a few charts.
Starting with TLT, we’re back to prior support but there doesn’t seem to be any sign of a momentum reversal in the immediate future. We could continue drifting lower back to the $122-$123 before a base begins to form. Moving to long-term charts, TLT looks like it could have been in a classic “bump and run” formation meaning a move back to prior support at $122.50 or even below that at $120 could be a best case scenario. But what it could really mean is that the worst of the bond sell-off might already be behind us.
Moving to equities, the S&P 500 has gone from some of its worst momentum readings since the start of the bull cycle to some of the strongest of at least the last year. Given how weak equities have been over the last few months, we would just drift and consolidate for the next week or two and allow some of the buying pressure to cool off which has already been dissipating. Look at the weak volume since the start of the rally; the improving CMF score was more about weak days dropping off than strong buying pressure pushing the market higher. Again, I have to wonder if the best has already come.
Going to a fundamental case on bonds, the battle royale is going to be between economists who feel that there’s a strong likelihood for a rate hike as early as this June and traders who continue to hold large Treasury positions because they feel the Fed will use the weak global economy to justify holding to the ZIRP for even longer. Fortunately tomorrow’s release should shed some “light” on the Fed’s thinking, but given the surge in imports and personal consumption, the economists “might” be right this time.
One of my major mistakes in my past life was confusing what I thought the Fed should be doing with what they were actually signaling their intentions were and while it’s an extremely common fallacy among financial professionals, it doesn’t absolve me of the sin. While the Fed’s statements and commentary will remain obtuse because their function is to obscure, investors need to keep an eye on a few key trends that should determine how likely the Fed is to raise rates:
- Value of the Dollar: As long as Uncle Buck stays strong and keeps commodity prices under check, the Fed should be reluctant to raise rates. Long-term, the textbooks say that the difference in interest rates should lead to a falling dollar and eliminating any arbitrage opportunities, but it could take years for that to adjust. What’s more likely is that after the initial run-up in rates, Treasuries could stay attractive relative to low global yields and led to a further run on the dollar as more money finds its way to our shores. Worst case, you could get a mini-repeat of the mid-2000’s where foreign credit flooded the U.S. and helped fuel the housing boom…and bust.
- Real Incomes: As inflation remains low and commodity prices continue to fall, real disposable incomes have continued to expand even while the average workweek and take home pay have remained static. Real DPI in 2014 increased as its fastest rate in December and was up 2.3% in 2014 compared to -.3% in 2013. With unemployment already low and U-6 falling, the Fed is terrified that this increased in real DPI will get translated into more consumer spending and rising imports (a real possibility as the value of the dollar rises.) Personal consumption expenditure contributed more to GDP in 2014 than in any year post-Lehman while the Federal gov’t almost added to GDP for the first time in years.
- Employment: Seems like a no-brainer to keep your eye on unemployment, but with the headline number falling steadily over the last few months, the FED might become reluctant to raise rates right away…especially with a rising participation rate. If more workers come back into the workforce just as the FED raises rates to slow economic growth, the unemployment rate could skyrocket and cause a major credibility crisis.
Tomorrow every trader in the world is going to be picking through the FOMC meeting minutes looking for clues including comments about those three bullet points above to figure out which way the FED might be preparing to tack. And a lot of traders are putting their money where their mouths are, look at the chart below from the COT Report; open interest in the 10 year has fallen and the rally in January led some to close out short positions but with a whole lot of nothing between tomorrow and the March meeting, why would you want to have a strong position going either way.
So if the FED keeps up the chatter and the market comes away with a strong belief in a June rate hike, we could see more selling pressure in TLT. If Yellen doesn’t really deliver anything new, the market will turn its focus back to Greece and TLT could get a chance to bottom out.
What does that mean for you patient investor? It means get turn on Bloomberg, get out your red pen and be prepared to go through the transcripts with a wary eye!
It’s true, the Yinzer Analyst loves the Super Bowl and for the simple reason that there isn’t any other event as “American” as the Super Bowl. You all know the Yinzer Analyst loves his Buffalo Bills, but the Super Bowl isn’t just a showcase for a sport only played in America (and our close cousins to the north), but announcers who are way too busy talking and not listening, commercials where the combined cost for air time could feed a small country for a year and a half-time show that features a typically “has been” celebrity lip syncing to their favorite hits while wearing a skimpy outfit. And here in America, the roads are empty as we all stay home to enjoy the spectacle and hope for another wardrobe malfunction.
All I have to say is “Merica”
Speaking of America, with January closed and in the books, let’s take some time to look at the charts and see what February might have in store for us.
Swan Song for Domestic Equities:
Starting with the S&P 500, Friday’s close at the low pushed the market out of the consolidation pattern while the heavy volume and declining PPO score confirm the broad weakness we’ve talked about for a while now. Barring any major surprises with earnings this week; it’s likely that the market will bounce back into the consolidation pattern although how far it goes is debatable.
Now check out the weekly chart; the market broke the first support line but only barely and given the prior resistance in 2014, it’s likely that the break lower will be “sticky” with a lot of volatility around this level.
Finally, check out the monthly chart where the January close was the closest we’ve come to a 2/10 simple moving average crossover since last 2012. I’m a firm believer in respecting when the 2 month simple moving average crosses the 10 as a signal for market weakness even though the last two instances only indicated a brief pullback. Those crossovers happened on uncertainty and strong two month pullbacks in the early part of the bull cycle while if it happens in the next month or two, it’ll be much more like the crossovers in 2000 and 2007; several years into a bull cycle and after a period of relatively stable prices. We’ll have a special posting on this later this week, but for now keep your eyes on the long-term charts.
Playing in the Alt Box:
Sticking with the broader themes, take a look at these charts of the ten and thirty year Treasury yield to show you how nuts January has been. Last week’s 7.82% drop for the ten year was only the icing on the cake for a month that saw it drop 22.81%! Seriously, not a typo. How nut’s is that? Even a move back to 1.9% would only put the yield right back into the downtrend channel.
Check out the thirty year yield, which tells a similar but slightly more horrifying story as the yield is now below the lows of the 2008 financial crisis. The global hunt for yield in a world worried about deflation has the 30 year yield only slightly above what was historically considered to be the rate of long-term inflation.
How much lower can it go? Maybe a better question is how willing are you to go long on TLT at these levels? While I’m not a Equity Bull/Treasury Bear, you have to wonder about how extreme the situation has become.
Finally, a daily chart of the MarketVectors Gold Miners’ ETF (GDX). After a strong Friday that put GDX up 2.5% for the week, the fund would now seem to be decisively above the $21.90 level but I’d like to see a push back to $23 before giving my heart back to GDX. There’s a lot of heartache there for me.
Foreign Stocks Finally Finding some Love:
Staying with broad strokes, the Yinzer Analyst’s much loved EU equity position (using EZU) had a relatively good week compared to the S&P, but still hasn’t broken out of its descending wedge pattern although momentum, using the PPO, does look to be improving and has turned slightly positive. On a relative momentum basis, EZU had a HUGE week; after all it was up .36% versus a 2.77% loss for the S&P. That was a big enough gap to shot EZU clear out of the relative momentum downtrend channel.
The action wasn’t just confined to EU equities as broader MSCI EAFE (here using EFA) also blew out of a sharp downtrend channel that began last summer. The question to ask is whether this breakout is going to be short lived like that in late 2012. EFA has a long way to go to challenge the relative momentum downtrend line that formed all the way back in 2009!
Nothing But Love for REIT’s?
Getting back to the good ole US of A, where on the surface things aren’t looking so solid but diving under the hood shows some interesting changes happening. First, let’s start with the healthcare sector, one of the strongest performers of this bull cycle and now nearly 15% of the S&P 500. After Friday’s close, XLV has cracked its 50 day moving average twice in January with a clear weakening of momentum.
On a relative basis, XLV still had a better week than the broader market but not by much and looking at the relative momentum chart you can see that while XLV is still in its dirty uptrend channel versus SPY, it has been hugging the lower boundary for some time now.
What’s worse is #2 sector financials have had a disastrous month, down nearly 7% compared to the broader markets 3.1% pullback. Check out the relative momentum chart where you can see that major beating the sector has taken this month; after a strong second half of 2014, XLF has utterly given up and is about to fall out of its momentum channel. But with XLF about to hit itss 200 day moving average, can it find the spark it needs here to stay in the game?
Finally, let’s wrap it up with the number on sector in January, real estate investment trusts which KILLED it with a 5.71% gain for the month but Friday’s close has the Yinzer Analyst wondering if the worm is about to turn. The weak showing led IYR to cracking it’s uptrend channel and while the relative momentum channel versus the S&P 500 is intact for now; when you’re sitting on 5+ years of strong gains (200 bps of annualized outperformance over the last five years) you start to wonder if you’re going to be the only one left at the party when the music stops.
And with that, it’s half way through the 4th and the Patriots are finally starting to show signs of life so it’s time for the Yinzer Analyst to get back to the game. Happy hunting out there tomorrow.