There was a quick reversal of previous week’s (ending Dec. 14) short-lived sold — almost oversold — status. As we stand at the end of the week, the market, according to my oscillator, is back into a confirmed buying mood. The impetus of change was the Fed meeting. So I will give this a more detailed look this week.
As for the Fed, the most significant event was that the feared taper was started. And exactly as predicted in my article relating to QE, it was a non-event. After all, since the main partner and client of the Fed is the banking system, any other way of doing taper would have severe consequences on that sector, and hence is a non-starter. The open commitment for low short term interest rates, something we did not hear before, was also expected. After all, the government (Treasury) is the (only) non-bank stake holder in the Fed. Hence, this was intended for them, as this is the way the government could finance maturing long term debt, once the Fed ceases to be a player (of course many months from now). The Fed balance sheet stood at around $4.oT compared to around $2.9T a year ago.
Given that the main event of the day was the Fed action, it is worth mentioning mREITs, Gold and banks. As for banks, as I suggested in my QE article, this takes the uncertainty off the table. For banks, I would be looking at individual stocks [JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), and Wells Fargo (NYSE:WFC) are in my trading set], rather than the sector. After all, the reason we still have a QE to taper is that the banking sector is still weak. Hence, it is important to stick to the winners. The remaining risk for these stronger banks is still regulatory action. Now with the Volcker rule in place, this leaves penalties and legal action as the only remaining risk for these winning banks.
As for mREITs, Annaly (NYSE:NLY) is in my trading set. The jump in the price of NLY after the Fed meeting was unjustified, and was almost reversed in the following daily market action. It is clear that uncertainty was a factor, and in the case of NLY declaring the 30 cent dividend took some of that out, but still, as I stated before, Annaly’s valuation is strongly linked to long term (30-year bond) rates. This has to do with the composition of NLY’s portfolio and with the reality that significant mark-to-market losses will be incurred on that portfolio if interest rates go up.
Finally, Gold (NYSEARCA:GLD) is a major sufferer of the Fed action. As I stated in my article on Gold, it has no way to go but down. As the Fed message was that the economy is getting better, interest rates need to be higher, and nothing is happening in a hurry, then three of the pillars of holding gold, as discussed in the article, are becoming shaky.
As for the equity indices, after a gentle consolidation with the longer term moving averages — rather than a violent correction — the main indices (S&P 500, DJIA, and NASDAQ Composite) resumed their upward trend. As much as people are thinking “overpriced,” the rate of growth of the indices is still healthy. Save the Composite, the indices are rising at a slower rate in the last 6 months than they did earlier in the year. Hence, there is no unusual acceleration, no mean-reversion risk, and the Fed has given the economy a (somewhat) clean bill of health. As a result, you can see from the tables below that I am still heavily vested.
The interest rates (5-Year FVX, 10-Year TNX, and 30-Year TYX) were the main victims of the Fed action. This was expected, as I am still of the opinion that these are going to settle with the the 10-Year at about 2% above the inflation rate. Having said that, I also believe that longer term — that is many months from now — the interest rates are going to be heading south again. This is because of my growing belief that the Fed’s problem has never been inflation, and if anything, the Fed was working to avoid deflation. Interestingly, this was one of the issues inferred from the recent Fed action.
|Index/ETF Symbol and Name||Daily 3-EMA-7||Weekly 3-EMA-7||Perceived Trend|
|SPX||S&P 500 Index||Up||Up||Positive|
|DJIA||Dow Jones Industrial Average||Up||Up||Positive|
|COMP||NASDAQ Composite Index||Up||Up||Positive|
|GLD||SPDR Gold Trust ETF||Down||Down||Negative|
|VIX||CBOE Volatility Index||Up||Neutral||Neutral|
|FVX||CBOE 5 Year Treasury Note Yield Index||Up||Up||Positive|
|TNX||CBOE 10 Year Treasury Note Yield Index||Up||Up||Positive|
|TYX||CBOE 30 Year Treasury Bond Yield Index||Up||Up||Negative|
Important to note that FVX, TNX and TYX move in the opposite direction of the underlying treasuries (Positive for Yield is Negative for Bond price).
As for my trading set, the oscillator stood at +48%. This is in contrast of the (almost over sold) reading of -58%. I have to admit that this is the largest shift I have seen in one week. After all, the reading is based on 40 equities in about a dozen or more sectors. Hence, this is indicating, in my mind, a general and sudden sentiment shift. Note that we are not in an overbought region yet. As such, it seems this latest rally has some more upside left. Having said that, one should be careful that the last market correction has been around 2 1/2 years ago, in summer of 2011. That is, we are on the longer side of such corrections not happening.
|Symbol and Company Name||Daily 3-EMA-7||Weekly 3-EMA-7||Perceived Trend||Is a Current Holding?|
|jcp||JC Penney Company, Inc.||Down||Down||Negative|
|jpm||JPMorgan Chase & Co.||Up||Up||Positive|
|gs||The Goldman Sachs Group, Inc.||Up||Up||Positive||Yes|
|wfc||Wells Fargo & Co.||Up||Up||Positive||Yes|
|nly||Annaly Capital Management, Inc.||Down||Down||Positive||Yes|
|mo||Altria Group, Inc.||Up||Up||Positive||Yes|
|vz||Verizon Communications Inc.||Down||Neutral||Negative||Yes|
|gps||The Gap, Inc.||Down||Down||Negative||Yes|
|anf||Abercrombie and Fitch Co.||Down||Down||Neutral||Yes|
|dis||The Walt Disney Company||Up||UP||Positive|
|mdlz||Mondelez International, Inc.||Up||Up||Positive|
|ba||The Boeing Company||Up||Up||Positive|
|lmt||Lockheed Martin Corporation||Up||Up||Positive||Yes|
|de||Deere & Company||Up||Up||Positive|
|emr||Emerson Electric Co.||Up||Up||Positive||Yes|
|dow||Dow Chemical Co.||Up||Up||Positive||Yes|
|adm||Archer, Daniels, Midland, Co.||Up||Up||Positive||Yes|
|pot||Potash Corp. of Saskatchewan Inc.||Neutral||Down||Positive||Yes|
|bmy||Bristol-Myers Squibb Company||Up||Up||Positive||Yes|
|csco||Cisco Systems, Inc.||Down||Down||Neutral||Yes|
|ngg||National Grid plc||Up||Up||Positive||Yes|
|wmb||Williams Companies, Inc.||Up||Neutral||Positive|
|wm||Waste Management, Inc.||Down||Up||Neutral|
|nsc||Norfolk Southern Corp.||Up||Up||Positive||Yes|
IMPORTANT DISCLAIMER: It is important that you understand and agree that all information provided in this newsletter rely on publicly available data and tools with no guarantees of quality or suitability for any purpose, and that I can be long or short in any of my trading-set equities, at any time, with or without regard to indicated trends and described analytics, and that I do not give buy or sell or any other financial recommendations, and that any and all actions based on this commentary are solely the responsibility of the reader.