Most Recent Comments Via Twitter

February 1, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Video Link

January 30, 2015

The title is “Stocks: The Good, The Bad, And The Ugly”. You can find it here.

Why 1976 Is Relevant On The S&P 500 Index

January 30, 2015

Math plays a big role in nature and the financial markets. Many trading algorithms use Fibonacci retracement levels to identify areas where buyers may become interested (support). The math below may be helpful to us in the coming days – at a minimum, it is prudent to be aware of the possibility of a bounce near 1976 should the market test that area:

The S&P 500 closed at 1862.49 on October 15; then rallied to a closing high of 2090.57 on December 29, which is a 228.08 point gain. A 50% retracement of that gain is 114.04 points, which means the 50% Fibonacci retracement level is 1976.53. The S&P closed Thursday at 2021.25. Therefore, the S&P would need to drop 44.72 points on Friday to reach 1976.53.

GDP – Not Too Hot, Not Too Cold

As we hypothesized on January 29, it is possible the “within the consensus range” GDP report will assist in calming the markets a bit. While Friday’s GDP reading of 2.6% growth reduces the odds of an imminent bear market in stocks, it does not take the correction scenario off the table. Therefore, as always it is important for us to remain flexible and open-minded, especially near 1976 on the S&P 500.

How Will We Use 1976?

It is simply a probabilistic reference point – nothing more, nothing less. As long as the S&P 500 can close above 1976, we can add a “try to be patient” factor into the equation. For us, a close above 1976 may not allow for a “do nothing” session since the readings on the market model (a.k.a. the hard evidence) align with a less favorable risk-reward profile for equities. Regardless, 1976 is a relevant guidepost over the next week or so.

Golden Rectangle image from Patrick Hoesly.

Some ETFs Beating The S&P 500 This Week

January 29, 2015

Friday Brings Another Market Mover

January 29, 2015

Broadest Economic Measure

The U.S. stock market remains in a bullish posture, but the term vulnerable applies. Friday’s GDP report will test those vulnerabilities.

Near Consensus Could Calm Markets

The Bloomberg consensus for Friday’s report is 3.2% growth, with forecasts ranging between 2.2% and 3.5% growth. With interest rates still near historically low levels and Europe on the QE train, a number that falls within the 2.2% to 3.5% range may calm jittery investors. If we look at the GDP figures since 2010 below, it is difficult to classify them in the “we are on the cusp of a recession and bear market” category. Friday could reaffirm that classification or force the market to reassess the strength of the U.S. economy.

Bears Could Leverage A Big Miss

If Friday’s report brings a big miss to the downside and the S&P 500 closes below 1988, the market’s risk-reward profile will have deteriorated in a manner that will most likely call for another incremental reduction in our exposure to equities coupled with another incremental add to the conservative side of the equation. Despite the vulnerabilities, the S&P 500 has not made a meaningful lower low (a requirement for a bearish trend to evolve). This video clip explains the chart below and the rationale for using levels as “we can be patient until” guideposts.

Most Recent Comments Via Twitter

January 28, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Fed Impacted By Currency Concerns

January 28, 2015

Currency War Brings Strong Dollar

Sometimes the news stories on Wall Street fit neatly together like a jigsaw puzzle. Japan has been trying to devalue their currency for some time. Quantitative easing was announced last week in Europe to combat slow growth and low inflation. All of the attempts to devalue have created demand for the U.S. dollar. On January 8, The Wall Street Journal noted the challenges a strong dollar brings to the Fed’s Open Market Committee, which is releasing their latest statement Wednesday:

U.S. policy makers would be furious if other countries try to “steal” growth by putting American exports at a disadvantage. But there is probably little that can be done to stop these competitive devaluations once they begin. The Fed could theoretically keep interest rates at or near historic lows far beyond 2015, hoping that this would reduce the attraction of owning dollars. But this is problematic if the recent spurt of U.S. growth continues or accelerates. The Federal Open Market Committee is committed to bringing interest rates up to a historically more normal level. Aside from the dollar legally being a Treasury Department responsibility, the Fed’s primary concern is the systemic risks from domestic asset bubbles if policy is not tightened as growth picks up, not baby-sitting countries that are devaluing.

Why does the Fed care about a strong dollar? The blurb below is from the front page of today’s Wall Street Journal:

The stronger dollar is slicing sales and profits at big American companies, prompting them to put renewed emphasis on cost cutting and cramping the broader U.S. economy. The currency effects are hitting a wide swath of corporate America—from consumer products giant Procter & Gamble Co. to technology stalwart Microsoft Corp. to pharmaceuticals company Pfizer Inc. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping up with dollar-based costs.

All of the above should make for a very interesting statement from the Federal Reserve later today.

Puzzle image based on clip art with liberal reuse terms.

Market Scenarios: Winners And Losers

January 27, 2015

Durables Miss In Big Way

The slow growth/low inflation story gained additional traction Tuesday when durable goods orders came in well below expectations. From The Wall Street Journal:

U.S. businesses broadly cut capital spending in the final months of 2014, raising red flags about the economy’s ability to sustain momentum amid troubles around the globe. Orders for durable goods—products like cars and kitchen appliances designed to last at least three years—fell 3.4% in December from a month earlier, the Commerce Department said Tuesday. Orders have fallen four of the past five months.

Bonds Win In Two Of Three Scenarios

From an investment perspective, there are three major scenarios likely facing investors. Scenario one is an ongoing period of slow growth and low inflation, which can be favorable for both stocks and bonds. Scenario two, slower growth, has gained some momentum with the recent trends in earnings and economic data. Scenario three involves a stronger economy and a shift toward higher inflation. You can see a larger and economically-broader version of the flow diagram below via this link.

The least likely outcome in the short run appears to be scenario three (stronger economy). Given the stock market has not broken down in a meaningful way yet, it seems reasonable to assign the highest probability to scenario one, which is more of the same (slow growth and low inflation). The broader market’s failure to make a new high over the last seven months tells us scenario two (slower growth/recession) is creeping higher on the probability ladder. The video below puts some additional fundamental and historical context around the three scenarios.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Strong Dollar Hits Earnings

The fundamental backdrop includes increasing fear of deflation, which has helped increase demand for the world’s reserve currency, the U.S. dollar (UUP). A strong dollar has some negative consequences for U.S. corporations. From Bloomberg:

The dollar’s surge is reducing earnings at American companies from Procter & Gamble Co. (PG) to Pfizer Inc. (PFE) and DuPont Co. that make a large portion of their revenue abroad. P&G, the world’s biggest consumer-products maker, today reported profit that missed analysts’ estimates in the quarter ended Dec. 31 after what Chief Executive Officer A.G. Lafley called “unprecedented” foreign-exchange rate fluctuations reduced sales by 5 percentage points. DuPont and drugmakers Pfizer and Bristol-Myers Squibb Co. (BMY) all posted annual forecasts that trailed predictions, in part because of the dollar.

Investment Implications – The Weight Of The Evidence

In two of the three scenarios described above, bonds can perform well. Consequently, we have been slowly been ratcheting up our fixed income (TLT) exposure in recent weeks. Until the broad stock market breaks down, we can afford to remain patient with our equity-based ETFs (SPY).

Wednesday brings the latest from our friends on the Federal Reserve’s Open Market Committee. If we are willing to pay attention with a flexible and open mind, the market will guide us in the coming days and weeks.

Most Recent Comments Via Twitter

January 27, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Greek Vote To Test Eurozone

January 25, 2015

Eurozone Exit Talk Will Increase

Just when you may have thought it was safe to jump back into the European waters following the ECB’s stimulative party, elections in Greece may rock the boat. From The Wall Street Journal:

Greek voters have thrown down a gauntlet by handing an impressive victory in Sunday’s elections to Syriza, a radical left-wing party that had campaigned on a promise to secure debt relief. Greece and the eurozone now need to swiftly convince the markets and ordinary Greeks that they can reach a deal. Prolonged uncertainty would lead to capital flight and even bank runs that would inflict serious damage on the Greek economy, potentially leading to Greece’s exit from the eurozone. Much hinges on how all sides conduct themselves in the hours ahead. The markets assume that the risk of Greece exiting the euro is small, but officials close to the situation are not complacent. Some fear that the compromises required on both sides may prove too difficult.

Markets Remain On Edge

The news from Greece is not surprising nor particularly unexpected, which aligns with the still tentative nature of the risk-on vs. risk-off ratios covered in this week’s stock market video.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Investment Implications - The Weight Of The Evidence

While the broad market continues to move sideways (see chart below), the bigger picture may call for a reduction in growth exposure this week. In addition to the news from Greece, a Fed announcement is coming Wednesday and GDP figures Friday.