A Market Timing Report based on the 8-02-2013 Close published Sunday August 4th, 2013
UPDATE for 8-26-2013: All charts on the “Key Charts” page (see tab at top) were updated last night. There is also lots of detailed commentary on the markets including which ETFs are being favored in this bounce available to free subscribers at SunAndStorm.com.
UPDATE for 8-06-2013: Small Cap and Mid Cap Stocks have further to fall as this comparison chart to the SP500 Index (Large Caps) shows. At the left side of the chart, they are plotted from the same point on 6-24-2013. Since then, the small and mid caps have outperformed the SP500 as noted by the gap created:
UPDATE for 8-05-2013: The SP500 Index did in fact pull off another day above the breakout point, so I added just before the after hours close.
And now for the text from the new issue…
There is still one big thing we need to be following in the coming months. And that is the interest rate on the U.S. 10 Year Treasury Note. The rise in yields has caused a major shift in what is safe vs. what is unsafe over the coming months as rates presumably rise higher and higher until they reach more “normal” levels at perhaps 4-5% if we’re lucky. So far, the jawboning of the Federal Reserve chairman, now on his way out, has not worked to keep rates down. This week at the Fed meeting, the main theme was that economic improvement is not coming as quickly as was hoped, so the Fed believes that interest rates as well as the Quantitative Easing Program can be kept as is for a period of time.
The interesting thing is that the bond market has decided that QE is going to be curtailed in September. It has ignored Dr. B. If QE ends then, interest rates will undoubtedly climb further, even though they failed a breakout above the June high on Friday. The thing is, without QE, the stock market was stuck and interest rates were still too high, which means if we reverse that by dropping QE, it will have the same effect as raising the Fed Funds rate. In the past, statistics show that rising rates initially expand stock market multiples, so I’d prefer to follow the market rather than speculate.
Why are rates so important? To see the impact look at ETF’s like VNQ, the REIT ETFs and mortgage REITs like NLY. Also look at corporate bonds (LQD) and municipal bonds (PZA) to see how they’ve fallen. There is still more pain ahead, if QE is going to disappear. Housing stocks have also retrenched, but seem to have at least temporary support here (HGX, ITB).
I’m going to digress a moment and discuss the value of housing in an environment of rising rates. What happens is that as rates rise, the cost of housing goes up for buyers. At the low end, that prevents some people from even buying a home, while for those higher up in the economic ranks, they get nervous and bid up the prices of existing homes. So housing continues to do well in a period of rising rates, unless rates go up too steeply and shut off the flow of reasonable mortgage funding.
The other thing we have operating in the current market is that perhaps a third of houses that have been bought during the crisis were bought by investors, who are either going to rent those homes or resell them to home buyers. But with higher rates, the number of people who can now afford these investment homes has shrunk. This should take some of the buying pressure from investors off the market and moderate things perhaps.
What to do? If you’ve been looking for a time to buy a home and are stably employed, it may be time to pull the trigger. Some are predicting a second dip in housing, but I would not count on it with the Fed rigging the game.
If we believe the above scenario, then after the initial shock, the housing stock market should do well for a while until rates become too punitive. If you buy housing stocks though, use a stop. We may be above support, but if rates rise too quickly, they may break down again.
What about the SP500 Index? Should we expect another 5-10% by year end? The market is now 2 days above the breakout of 1698.78. I usually like to see 3 days for confirmation even though I’ll start buying on day 1 as I did (see Twitter). Marginal new highs can be formed and then fail as happened back in 2007. Here’s the updated chart along with the other two chart updates with this issue:
Charts for Sunday’s Issue (opens separate window with all charts)
The VIX has hit support again, so it could rise as easily fall to the March low. The VIX does not help except to say that the easy money is bagged. And the Bulls could point out that we could still see the VIX fall to retest the 2007 lows, when the stock market was at a high.
And investor sentiment? According to AAII.com, the spread of Bulls – Bears indeed fell to 10.6% from 22.6% and the market moved UP, not down. That on the face of it is Bullish, because we expect investors to be eager to buy stocks at new highs as they’re joining the party late, which is their usual practice. Being more negative at a peak means there’s room to expand to more Bullish sentiment and higher highs in the SP500 before a pullback. The main change was that “neutrals” increased, not Bears that only went from 22.56% to 25%. So the confused investors are probably still holding on, not selling yet. After all, their positions are still rising in value.
I also re-bought half of my XLF position in financial stocks. Remember that this was one of my 2013 themes covered in my early January report. There is room for banks to make a lot of money as interest rates rise. Their returns improve as rates rise. There is more room between what money costs them to borrow and what they can loan it for.
Gold seemed as though it was going to recover a bit as the Fed kept jawboning its case for reducing QE only as warranted by the economic data. The Fed says it will not get in the way of economic recovery. It’s a Fed with a brain; at least they think they have a brain. Rates did pull back on Friday quite a bit after the sluggish employment data were released. 198K jobs were expected and only 162K jobs were delivered by the economy in July. But despite the pullback in rates, gold actually slipped by 0.20%. It should have rallied, so that does not say much for the demand for gold. GLD has been slipping down its 50 day moving average for 10 trading days. If it moves above 128.97, it could be a buy again. See the GLD chart update at the link above.
Emerging markets look about as good as gold. Meaning they have been in a slump. They are particularly sensitive to rising interest rates, as it slows their growth, which is their lifeblood, not to mention the lifeblood of US multinationals. To me DXJ looked better this past week, so I’m partially back in. Europe (VGK) is a buy on a dividend corrected basis, now over the 5-2011 high. Germany (EWG) on the other hand is lagging a bit and still below the 27.04 dividend corrected 5-2011 high. To find out even more, subscribe below. Once you’ve subscribed, you will be able to access my private notes on the “WSSSR Access” page. The notes I posted this am (8-06-2013) are important.
Have a great week investing and/or trading!
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