Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
The S&P 500 (SPY), Nasdaq 100 (QQQQ) and Russell 2000 (IWM) respectively gained 0.55%, 0.29% and 0.04% over the five-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 0.44% loss this week. The portfolio consists of the 5 top-ranked world ETFs as of October 8, which marked the beginning of the current 4-week holding period.
Our current Buy signal remains in effect.
With stocks well into their second month of a rally, it's
always worthwhile to understand what's providing the optimism
that is sending stocks higher and do a gut check on the
market's assumptions. This rally has been spawned by the
notion that the Federal Reserve's program of buying bonds
for the second time around will provide further support
for an economy trying to get its sea-legs; presumably enough
support that economic data will continue to nudge higher
and just maybe the most stubborn of indicators, unemployment,
will begin to improve.
It's important to realize that this recent market focus
is very U.S.-centric. That's a key point because it was
only a few months ago that markets were obsessing on the
woes of European debt and, somewhat in the background, China's
attempts to slow growth. These worries sent stocks reeling
in May and June propelling the U.S. dollar to an almost
10% rise in a matter of a few weeks.
If stocks are focused on the U.S. right now and the Fed's
continuation of a policy that really has been little changed
for over a year, are investors unreasonably minimizing the
ex-U.S. factors?
Earlier this week, we got a glimpse that such oversight
might be the case. China surprised markets by raising their
interest rate sending commodities into a brief tailspin,
the U.S. dollar leaping higher, and dealing stocks their
worst one-day tally in a good while. That this interest
rate increase was surprising is the real surprise. China
has been consistent all year (and then some) in taking steps
to try and slow down its torrid growth and prevent what
some say is a real estate bubble (in China). The fact that
the market loses sight of this reminds us how short-sighted
markets can sometimes be. In understanding the market's
mindset, we can see how stocks react to this news not just
on the first day, but thereafter. Thusfar, the tone has
been decent enough in that there has not yet been further
selling. indeed, after that one-day burst of selling, investors
quickly stepped in to buy the dip.
And what of the European debt woes? The Euro has seemed
to overcome all those worries about Greece, et al. and returned
back near its highs for the year. This recent strength in
Euro being in part pushed by this love of the U.S. Fed's
QE2 chatter. This strength in Euro combined with QE2 suggests
that investors, at least for now, have a good amount of
confidence in the world's central banks and their ability
to stave off post-recession demons. We'd bet this confidence
is still fragile, however.
This is a market rally driven by a weakening dollar, which
has beget higher commodity prices, stronger emerging market
stocks, which usually brings the developed (already emerged?)
stocks along for the ride. Thus, we must pay attention to
the state of the U.S. dollar as a read on this rally. Chart
1 below shows that the U.S. dollar is nearing a strong support
level technically. This provides some near-term pause for
the bulls as it also coincides with many stock indexes approaching
their April highs. Looked at from a slightly different perspective:
- have things changed so much that currency investors are
willing to sell the U.S. dollar at a new low price?
- have stock investors become so enthused that they are willing
to buy stocks at a new higher price?
These two questions,
occurring in near-unison, should create at least some pause
in the action as some investors will want more information
before stepping onto new soil. Should support hold, the
next question will be whether investors are ready to believe
in a stronger economy scenario and let that give stocks
the next boost. Whether they believe the economy is ready
to graduate from suckling at the Fed's teat. That would
mean a scenario such as we saw in March and April of this
year where the U.S. dollar and stocks move higher in tandem.
It is that scenario that investors need to get comfortable
with for this rally to truly find firm footing.
Chart 1: U.S. Dollar approaching long-held support
Recently, the financial media got caught up in a blitz of
news about the "foreclosure mess". The basic story
is simple enough. The nation's lending process primarily
for residential real estate was caught up in a drug-induced
high and is now suffering one heck of a hangover. The
latest bout of this hangover is shoddy paperwork at the
banks. For a good overview of the situation, we point you
to Liz Ann Sonders' commentary on the topic. This mess could
generate some truly horrific outcomes. For now at least,
the forces overseeing this situation appear to be well aware
of it and actively working to stay ahead of the storm. For
the sake of all investors, we'll hope that continues. At
least we can rest somewhat better knowing we have a way
to protect our investments should the proverbial fan get
hit with flying debris.
Dirty (Paper) Work: Foreclosure Mess Gets Messier
Liz Ann Sonders
Warm wishes and until next week.
The TimingCube
Staff
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