Archive for category: Investing

Bottom Line—It’s About “Considerable Time”

If there was one specific reason stocks have traded “heavy” for over a week now (Friday’s rally aside), it’s Fed expectations.  This market remains Fed-dominated, plain and simple.  And, levels of Fed angst are slowly on the rise as we near the Sept. 17 FOMC meeting.

In particular, there is the worry that the Fed will remove the term “considerable time” from the official statement.  This “considerable time” pertains to when the Fed will raise rates after QE stops this October.    So, the current statement says the Fed won’t raise rates for a “considerable time” after QE ends in October.

But, quietly there has been a movement gaining steam in the FOMC to remove that phrase from the statement. If that happens next Wednesday, it’ll be taken as mildly “hawkish” because logically markets will assume rates will rise sooner than later.

That growing expectation, along with the apparent break in the European bond buying fever, is what’s weighing on Treasuries and stocks—and it underscores a very important point.

If we are in for a sell off/correction of some sort, then it likely will come with both stocks and bonds going down—so the expectation that even if stocks drop we can hide in bonds will no longer be valid in the short term  – assuming this bond rally of 2014 really has broken (which I believe it has).

Bottom line is you have to respect this rally, but this market continues to feel heavy to me.  I would not be adding any new long exposure here.  JNK continues to be under pressure (down again yesterday and well below 41.00) and I maintain that is a leading indicator, and because there are so many “late longs” in this market that begrudgingly added long exposure during the last three weeks, the potential for a very ugly day between now and the FOMC meeting next Wednesday is on the rise.

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JNK Is Rolling Over—That is A Warning Sign

JNK, the junk bond ETF, accurately forecast the July/early August decline in the stock market. Now, it’s rolling over again—providing a potential warning sign that we may be in for another dip.

In the July 22 issue of the Report, we included a chart that showed how junk bonds had broken a 2014 uptrend, and warned it could be a negative sign for stocks.

Likewise, we kept watching JNK as the leading indicator for the stock market during the late-July/early August sell-off. We pointed out on Aug. 13 that JNK was close to breaking back above resistance at $41 and, if successful, could signal an end to the stock sell-off.  JNK did break resistance, and over the next week the S&P 500 rallied 50 points in a straight line …

So, to recap:

• JNK topped on 6/23/14.
• SPY basically topped on 7/3, 11 days after JNK.  (The SPX did make a nominal new high on 7/24 but really the market was chopping for those three weeks.)
• JNK declined -4.21% peak to trough, bottoming on Aug. 1.
• SPX declined -4.25% peak to trough and bottomed on 8/7, one week after JNK.

So, JNK peaked and bottomed one week before SPY, and the declines were almost identical.

And, while nothing in the market is 100% guaranteed, it sure seems like JNK acted as a leading indicator for stocks.

And, that makes sense fundamentally.  If we are going to see a decline in stocks, it’s going to be due to fears about the Fed getting too hawkish, which will come with higher rates.  And, when rates do start to rise, junk bonds will get hit the hardest because they are the sector of the bond market that is the most overbought, thanks to years of QE and the subsequent reach for yield.

Turning to the present, JNK is rolling over, as the chart on pg. 1 shows.  JNK peaked on 8/26 and is now down 4 days in a row, again below support at the $41 level.

Point being—JNK acted as a leading indicator for stocks 2 months ago, and I believe it’s continuing to do so now.  Does that make me outright bearish on stocks?  No, you can’t fight this tape and have to respect the rally.  But, it is a warning sign we need to monitor, and it may be an indication that we’re in for another sell-off in the coming weeks.

Is This As Good As It Gets for the S&P 500?

The outlook for U.S. stocks remains positive, as the “Four Pillars” of the rally remain intact:  Global central bank accommodation (this was mildly solidified last week by the ECB and the soft jobs report), a clear macro-economic horizon (also further solidified by the Ukraine/Russia cease-fire), global economic recovery and reasonable valuations.

But, one characteristic of last week’s market that I didn’t like is there was no real desire for buyers to push stocks higher. The two failed rallies at 2,010 in the SPX are representative of the sentiment that this may be as good as it gets in the U.S:  Economic growth (according to most metrics) is accelerating, but any material improvements will be met with a “hawkish” Fed.  Washington is coming back into focus via the mid-term elections (the absence of any tomfoolery from Washington has been an underappreciated tailwind for the market).  And from a valuation standpoint, even if the economic data stay “Goldilocks,” you’re buying an SPX that is trading at 15.4X 2015 earnings—again not prohibitively expensive, but not cheap, either.

Now, to be clear, I’m not saying there’s anything wrong with the market and/or to de-risk. But unless we get some additional multiple expansion by an uptick in earnings, I’m not sure what else out there is going to carry stocks higher in the near term. So, I think a consolidation/chop sideways is in order.

Adding to this is the growing attractiveness of Europe (and to a lesser extent Asia).  European stocks, while mired in slow growth at the moment, are about to see the implementation of growth-stimulating programs. Meanwhile in Japan and China, both the respective governments and central banks are intent on helping their economies.  And, the above regions trade at a significant discount on a valuation basis compared to the U.S.

So, point being, while I wouldn’t materially decrease U.S. equity allocations, I would point any new or tactical capital toward some other regions (especially Europe) as there is just a lot more room for improvement over there than there is in the U.S. at this moment.

ECB Decision

The ECB shocked/surprised markets last week by announcing a targeted, private-market QE program that will begin in October. This decision, combined with the start of the TLTRO, represents a significant bullish tailwind on the euro zone that should not be ignored.

What Happened:

The important event you need to be aware of from the ECB today was the announcement that it would begin purchasing “Asset-Backed Securities” and “Covered Bonds” starting in October.  This amounts to a “private-market QE” program, which was not expected by the market (and is very dovish).

Why It Is Important:

The ECB can’t do the type of QE we have here in the U.S. because there is no European equivalent to Treasuries.  Instead, there are individual countries’ bonds.  So, if the ECB were to try and do traditional QE on the scale of the Fed or Bank of England, it could very well end up owning all of smaller European countries’ debt (like Portugal, Ireland, etc.). So, public QE isn’t an option.

Instead, the ECB needs to do a more-targeted, private QE program, and that was what today’s announcement was about.

By buying ABSes and covered bonds (which are basically higher-rate ABSes), the ECB is directly funneling money into the real EU economy, which should help spur economic growth and, eventually, inflation.

This is how it works:  A European bank will now be able to bundle and sell performing loans on its books to the ECB. It would get cash in return, which it can then turn around and lend to businesses, thereby creating inflation (eventually) and economic growth.

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