Never A Dull Moment
You can say a lot of things about working in the money management business, but you cannot include the words dull or boring in your commentary. The markets finally got past the overly anticipated September Fed meeting, which allowed the political posturing in Washington to move to the forefront. From the Washington Post:
On Friday, the House passed a measure that would keep the government running through mid-December. But it came with what Democrats consider a poison pill: It defunds President Obama's signature health-care law, known as Obamacare. There is no way whatsoever - think pigs flying - that the Senate will agree to the House plan. Senate Majority Leader Harry M. Reid (D-Nev.) said the House bill was "dead," then for emphasis added: "Dead." That sets up eight days of brinkmanship between the Republican House and the Democratic Senate and White House, leading to midnight Sept. 30, when much of the government will shut down if there's no deal. Leaders on Capitol Hill expect the face-off to go right up to the deadline, if not beyond. Below is a day-by-day look at how it's all likely to play out - with the caveat that events can change quickly.
Aggregate Interpretation Still Bullish
Traders and money managers use charts to monitor the aggregate opinion of all market participants, since it determines the value of assets. While the stocks (VTI) have shown some weakness in recent days, the market's pricing mechanism still favors better economic times ahead.
This week's video provides a summary of our market model's readings at the one minute mark. We also draw some helpful analogies between handicapping football games and stock market (SPY) forecasting.
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.
Anecdotal Crack In Housing Market?
There is a little voice in the back of our minds that says is it possible to have a sustainable run in housing so soon after such a massive real estate bubble? Maybe some of the large players in the market have the same little voice in their head. From Reuters:
Oaktree Capital Group is leading an effort to put up for sale roughly 500 fully-leased homes, an indication some early investors are looking to cash-out on the recovery in U.S. housing prices, according to sources familiar with the market. Oaktree, which manages about $76 billion, and its partner Carrington Mortgage Services are entertaining bids for the portfolio of fully-leased homes as they seek to exit from the buy-to-rent trade that has become popular the past two years with hedge funds and private equity firms.
There is never a perfect time to do anything in life, which includes having exposure to the stock market. If you are waiting for conditions to be perfect, you will be waiting a long, long time. The current hot topics to be concerned about are (1) the budget battle, and (2) the Fed's endless tapering saga. Markets and the global economy have an almost infinite number of moving parts, which makes accurate forecasting difficult.
Known With A High Degree Of Certainty
We all know the future is uncertain, but we also know the present is known with a high degree of certainty. If the political posturing or Fed's taping quest kicks off a new bear market, we know certain observable shifts will occur in the market's pricing mechanism. How close are the markets to a concerning look relative to how investors perceive future risk? Answer: as of Monday afternoon, not very close.
China Completes Turn
The chart of VTI above describes a "bullish look" in the lower right corner. On September 9, we wrote about improving economic conditions in China. The chart of the China ETF (FXI) was improving then and still looks healthy. The labels 1, 2, and 3 show FXI has completed the three steps necessary for a bullish trend change: 1 - broke a bearish trend line, 2 - made a higher low, and 3 - made a higher high. The observable evidence is not alarming, which means the perception of future economic outcomes in China is favorable.
Leadership Not Alarming
We have written for weeks that we have exposure to small caps (IJR) and technology (QQQ). What is the market's pricing mechanism telling us about those investments and what does it say about the bigger picture? At 2:00 p.m. EDT Monday, IJR was making a new weekly high and remained clearly in a bullish uptrend.
Apple (AAPL) Helps Tech
Our stake in technology was also printing a new weekly high Monday afternoon, thanks in part to a favorable launch for Apple's new iPhone 5. From Reuters:
Apple Inc sold 9 million new iPhones in an opening weekend for the product that included China for the first time and almost doubled sales from the last iPhone launch, and the company issued a more optimistic financial forecast.
The volatility of the last three sessions thus far can be classified as volatility to ignore, which means we hold our long positions in U.S. and foreign stocks. The situation in Washington will remain on our radar. If it derails the bulls, it will show up in the market's pricing mechanism. It is difficult to look at the charts presented here and conclude the markets are pricing in gloom and doom.