Archive for the ‘Stocks - U.S.’ Category

What Can We Expect From The Fed This Week?

Tuesday, August 19th, 2014

Minutes Coming Wednesday

With the Fed hinting at an interest rate increase sometime in 2015, the financial markets have tended to be jittery before any new Fed-related information comes to light. As noted by The Wall Street Journal, this week is more than Jackson Hole:

Minutes of the Fed’s July meeting, to be released Wednesday, could provide fresh clues on how officials are thinking. One issue that warrants attention: Will the Fed in the future target a specific interest rate, as it did before 2008, or an interest rate range, as it does now? The strategy the Fed is developing strongly suggests it will be the latter at least for a few years.

Handicapping Yellen

On August 18, we hypothesized Janet Yellen may err on the dovish side at this Friday’s gathering in Jackson Hole. MarketWatch provided a similar outlook:

Federal Reserve Chairwoman Janet Yellen will deliver a simple message from Jackson Hole this week: Don’t be fooled by the sharp drop in the unemployment rate. Economists expect Yellen to give a master-class explaining why she believes there is still a lot of slack in the job market…Economists don’t think Yellen will signal any shift in the easy stance of policy at the conference in western Wyoming. Fed officials remain comfortable with their guidance that the first rate hike will come sometime in the second half of next year, said Jan Hatzius, chief economist at Goldman Sachs, in an interview with MarketWatch.

What Is The Fed Watching?

The Fed has a dual mandate; keep prices stable while fostering an environment to achieve maximum employment. The chart below shows interest rates have been held at low levels in an attempt to jump-start hiring.

While the impact of Fed policy on employment is a subject of constant debate, the figures published by Uncle Sam do show an improvement in the unemployment rate.

Support Held Last Week

Since showing the chart below on August 7, the S&P 500 has rallied sharply.

Investment Implications – The Weight Of The Evidence

Based on the improvement in the big picture risk-reward profile for equities, our market model called for an incremental bump to the growth side of our portfolios Monday. Tuesday’s improvement reached levels calling for another “add” to the equity side.

The charts below provide a few examples of “observable improvement”. On August 14 (left below), the S&P 500 remained below several forms of possible resistance, including the 50-day moving average and downward-sloping trendline C. This week, the S&P 500 has successfully cleared both hurdles, telling us the probability of the current rally carrying further is higher today than it was on August 14.

Are there hurdles above? Yes, there are always things to be concerned about both technically and fundamentally. The Fed minutes or something out of Jackson Hole could either propel the markets higher or spook them into a reversal. Therefore, we will enter Wednesday’s session with a flexible stance.

Janet Yellen image from DonkeyHotey Flickr creative commons. The source image for the caricature of Janet Yellen is a photo in the public domain available via Wikimedia. The mimeograph is based on an image in the public domain from Wikimedia. The dollars are adapted from Nadya Peek’s Flickr photostream.

Jackson Hole: Covering Excuses To Keep Rates Low?

Monday, August 18th, 2014

Theme of This Year’s Conference Telling

While the important thing will be the market’s reaction to what will be said in Jackson Hole this week, we may be able to garner some insight by examining the title for this year’s gathering of “prominent central bankers”, which is “Re-Evaluating Labor Market Dynamics.”

Why Does The Market Care?

What is this meeting in Jackson Hole all about? It is described by the Kansas City Fed as follows:

Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world. The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion.

Re-Evaluation Of Labor Market

It may be the title of this year’s conference, Re-evaluating Labor Market Dynamics, turns out to be a politically correct way of saying, “we know the employment data has been improving, but let us lay out the case for keeping rates low for an extended period”. From CNBC:

The topic is broad and offers the opportunity for a lot of discussion. In re-evaluating labor-market dynamics, she must address the changes in the labor market itself. She must discuss why there is still so much slack in the labor market, how much longer she expects the recovery to be, what has been the impact of Fed policy on the labor market and why it has NOT achieved the desired results after 5 years of stimulus. She can talk about the continued weakness in wages and what that really means for labor market dynamics and the future of the U.S. economy.

Market’s Reaction Matters Most

Since it is the market’s interpretation of what is said at Jackson Hole that sets asset prices, our approach will be the same as it is for any Fed-related event. We will wait to see how the market reacts to Jackson Hole and make any necessary adjustments. For now, the title of the Jackson Hole conference has a bullish vibe that aligns with the other areas of improvement we have seen recently.

Investment Implications – The Weight Of The Evidence

Last Thursday and in the video below, we noted two key bull/bear guideposts: (a) the S&P 500’s 50-day moving average, and (b) Friday’s intraday high of 1964. As shown on the daily S&P 500 chart below, both guideposts were exceeded Monday.

Does Monday’s action mean we are ready to sound the “all clear” for stocks? No. Closing above the 50-day and above Friday’s high tells us the probability of the rally continuing in the days and weeks ahead is better today than it was Friday. Our market model tracks numerous inputs. The S&P 500’s 50-day is one example of observable improvement in the market’s risk-reward profile. This week’s stock market video covers the big picture in more detail.

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.



Incremental Bump To Stocks

Based on numerous pieces of hard evidence aligning with a lower-risk environment, our market model called for an incremental increase to the growth side of our portfolios Monday. We added exposure in large caps (IVW) and technology (IYW). With Fed minutes coming Wednesday and Jackson Hole kicking off Thursday, we will maintain a flexible stance and see how things unfold.

Jackson Hole image by Jeffery Wright. Kansas City Fed image from ctj71081.

Most Recent Comments Via Twitter

Monday, August 18th, 2014

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.

Stock Market: Divide and Conquer

Saturday, August 16th, 2014

What type of market battle are we fighting now?

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.



Still Relevant Big Picture Risk Management Articles - Weekend Reading.
More links and charts on Twitter.

Video Via Link

Friday, August 15th, 2014

The video should be up on the CCM Channel between 8:30 pm EDT and 11:30 pm EDT.

Most Recent Comments Via Twitter

Friday, August 15th, 2014

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.

Why Are The Bulls Regaining Momentum?

Thursday, August 14th, 2014

What A Difference A Week Makes

A week ago today the S&P 500 dropped 10 points bringing the weekly bearish tab to 15 points. Seven days ago, the only real positive was the potential support we noted on August 7 (see chart below).

Putin Eases Some Of The Tension

Since August 7, the S&P held support and has rallied 45 points. What happened? While there are countless inputs influencing the decisions of billions of consumers/investors around the globe, one factor has been decreasing fear relative to the Russia/Ukraine conflict. More stress relieving news came Thursday. From Reuters:

Putin told Russian ministers and members of parliament in Crimea that Russia would stand up for itself but not at the cost of confrontation with the outside world, easing off months of tough rhetoric over Ukraine.

Possible Resistance For Stocks

The busy-looking chart below shows several areas of possible S&P 500 resistance between 1953 and 1958. A close Friday above 1958 would increase the odds of an ongoing rally in equities. It is not possible for stocks to push significantly higher without first closing above trendline C. Therefore, as long as the S&P 500 remains below 1958, we will exercise some short-term caution relative to our cash.

Easy Central Bankers

On August 13, we outlined the “good news is bad news” theory. More supporting evidence for the Federal Reserve to keep rates low longer came in the form of a weaker than expected labor report Thursday. From Bloomberg:

Applications (INJCJC) for unemployment benefits in the U.S. rose more than forecast last week, interrupting a steady decline to pre-recession lows. Jobless claims climbed by 21,000 to 311,000 in the period ended Aug. 9, the highest in six weeks, a Labor Department report showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for 295,000.

Financial markets love low rates. The European Central Bank (ECB) has data in hand to consider not only a continuation, but expansion of their easy-money policies. From The Wall Street Journal:

The euro-zone economy stalled in the second quarter, raising the ugly prospect that the region’s recent weak recovery after its long debt crisis has already lost momentum as it faces fresh headwinds from Russia and Ukraine. Germany’s economy shrank for the first time in more than a year, a development economists largely attributed to a mild winter that boosted activity in the first quarter at the expense of the second. The bigger concerns, they say, are France and Italy, where respectable rates of growth aren’t even in sight.

Investment Implications – The Weight Of The Evidence

The tweet below from Thursday’s trading session sums up the current state of affairs:

Therefore, our model is still calling for some S&P 500 exposure (SPY). We also have some folding money complimented by bonds (TLT). If the S&P 500 can close over 1958, our model will most likely call for an incremental shift from cash to growth-oriented assets. While we have not made any calls yet, our short list includes technology (IYW), healthcare (XLV), real estate (IYR), materials (XLB), Asia (AAXJ), and U.S. growth stocks (VUG). We will enter Friday’s session with a flexible, unbiased, and open mind.

Most Recent Comments Via Twitter

Thursday, August 14th, 2014

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.

Are We Back To Bad News Is Good News?

Wednesday, August 13th, 2014

Market Has Numerous Crosscurrents

A retail sales report released Wednesday was the weakest since January, when bad weather was cited as the reason for anything that was disappointing on Wall Street. The Street cannot use the meteorological excuse this time. Then why did stocks rally after a weak retail report? While there is never a single reason for any move in the broad U.S. stock market, we can throw out two possibilities:

  • The softness in retail may allow the Fed to stay ultra easy short-term.
  • The market reacted to the perception of reduced risk in Ukraine and Iraq.
  • Bonds gave some credibility to the Fed theory above; long-term treasuries (TLT) rallied 0.65% Wednesday.

    How Meaningful Is The Current Rally?

    Wednesday’s close above 1944 gave the rally a bit more credibility since it represents a higher high on a short-term basis. From an investor’s perspective, the current rally would start to become much more meaningful if the S&P 500 can break above 1958, and remain above 1958. Wednesday’s close was 1946.

    Geopolitical Risks

    The level of distrust between Russia and Ukraine has spilled over into humanitarian aid. A convoy of trucks was in the news Wednesday. From The Guardian:

    There is no reason not to believe that there are blankets and sleeping bags and canned food and wound dressings and drugs on board, although there may be other things as well. But it turns out that neither the Red Cross nor the OSCE have actually endorsed the convoy, although they have been informed, in what seems a deliberately sketchy way. Similarly, Kiev, while not objecting in principle, has not agreed to anything, and it is now saying it will not allow the convoy to enter, unless a number of conditions are observed. The only problem with that position is that Ukraine does not control long stretches of its frontier with Russia.

    Use of “ground troops” by a White House official would typically spook the markets, but in the context of Iraq it was digested more easily. From The New York Times:

    A senior White House official said on Wednesday that the United States would consider using American ground troops to assist Iraqis in rescuing Yazidi refugees if recommended by military advisers assessing the situation…But he drew a distinction between the use of American forces to help a humanitarian mission and the use of troops in the battle against militants from the Islamic State in Iraq and Syria, something he said the president had rejected before and continued to oppose.

    Investment Implications – The Weight Of The Evidence

    Fortunately, the support levels we showed on August 7 helped us maintain a reasonable exposure to equities. Our allocation to stocks heading into this week remained in line with the market’s profile as of late Wednesday afternoon, meaning we have made no changes this week.

    The S&P 500 (SPY) levels we outlined Tuesday remain relevant heading into Thursday’s trading day. During Wednesday’s session, the Dow cleared the area of resistance shown below and described on August 8.

    If Thursday’s report on jobless claims and Friday’s reading on producer prices can help the weekly chart of the S&P 500 morph into the “look” shown in the lower left corner below, we would likely add to our equity (VTI) exposure.

    Fed image from DonkeyHotey.

    Can The Market Break Through?

    Tuesday, August 12th, 2014

    Patience Needed Until Market Tips Probability Hand

    While the S&P 500 rallied impressively last Friday, it is too early to tell how meaningful it was. The rally will gain some additional probability credibility if the S&P 500 can close above 1944, and more importantly above 1958ish. From a bearish perspective, if the S&P 500 closes below 1904, it would represent a lower low. If we pair a lower low (below 1904) with the recent lower high (1944), then we have the makings of a possible downtrend. 1897 is also noteworthy as an area of possible support.

    On the weekly S&P 500 chart below, there are two noteworthy items: (1) the weekly trend remains down until proven otherwise, and (2) a weekly close above 1967 would increase the odds of “good things happening.”

    The current mixed-bag state of the market is telling us to remain patient with our cash. If the levels noted above are taken out, we will learn more about the market’s risk-reward profile. The concepts used on the weekly chart are described in this video clip.

    Image from U.S. Navy Flickr - creative commons license.