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Summary

  • China and Europe are considering additional stimulative measures that could offset the Fed’s desire to take a step back.
  • Debt, a recurring theme, continues to spark discussions of further intervention from the ECB.
  • The U.S. stock and bond markets have been trading in a manner indicative of investor indecisiveness, which calls for a disciplined approach heading into next week.

Stocks Impacted By Comments Overseas

Even with the Fed trying to cut back on its stimulative efforts, U.S. investors are still being impacted by talk of new programs in China and Europe. From CNBC:

In a speech reported by state media on Friday, China's premier indicated the Beijing government was prepared to take action to bolster the world's second biggest economy, saying the government would gradually roll out targeted measures to help economic activity. And on Wednesday, Germany's Bundesbank said the ECB could buy loans and other assets from banks to support the eurozone economy, with the statement marking a dramatic departure from its previous stance on the policy.

Debt: A Recurring Theme

Europe is still trying to stimulate its way out of a debt crisis. China is worried about loans made against frothy real estate. Back home in the U.S. we have similar concerns. From Yahoo Finance:

As of March 2014, American consumers owe $11.52 trillion in debt, an increase of 1.6% from last year. The average household owes $7,115 on their credit cards and the average indebted household owes $15,252. Americans owe $8.05 trillion in mortgages (the average mortgage debt being $152,209) and $1.08 trillion in student loan debt. When combined with corporate debts the U.S. collectively owes about $28 trillion in private debt.

Investment Implications - Let The Game Come To You

We have been talking about S&P 500 levels 1,844 and 1,848 longer than any investor or trader would care to admit. For the record, those levels have been relevant for three months. Based on our master market model reading during Friday's trading session, stock bulls continue to maintain a slight edge over stock bears. The tweet below sums up the current state of affairs:

Do it yourself investors and traders tend to be "hands on, I am going to make something happen" people, which can lead to overtrading. A blurb from the Point Of The Game reminds us of the value of patience during periods of indecisiveness in the financial markets:

How many coaches have counseled anxious and pressing players, "let the game come to you." It's hard advice, even odd advice in a world of sports and professions where aggression and taking control are the preferred strategies. "Getting there first" or "controlling the tempo fly" in the face of this disciplined approach. Yet this sage advice matters profoundly for successful athletic and professional endeavor. Let the game come to you, however, takes strong virtue and character to learn the skills and insight needed to achieve it.

This week the S&P 500 closed at 1,857 (above 1,844). At a minimum, stock bears need to take out 1,844 before they can reach even modest corrective milestones. Before the bulls can make any significant progress, they need to take out the recent high of 1,878. Therefore, between 1,844 and 1,878, we prefer to remain as patient as possible within the context of our rules-based asset allocation system. The rules have been trying to "let the market come to us" as they did not call for an across the board adjustment between March 18 and March 27.

Our asset allocation system has master allocation rules and rules tied to each ETF held in the portfolio. On Friday, the rules called for an incremental reduction on the growth side of the portfolio. We continue to maintain a respecting-the-market's-vulnerability level of cash, along with stakes in U.S. stocks (NYSEARCA:SPY) and technology stocks (NASDAQ:QQQ). We will enter next week with a flexible and open mind.

Weekends - A Time To Improve

As we covered in detail on March 27, weekends are often the best time to plug holes or refine your approach to the markets, which is a quadrant 2 activity. It is difficult to visit Stephen Covey's quadrant two when the financial markets are open. Reading can often spark creative ideas. The articles below cover investment and risk-management topics that apply to all economic environments:

  1. 1994, Rising Interest Rates, And Your Approach To The Markets
  2. 5 Reasons Your Simple Bear Market Plans Could Backfire
  3. How To Monitor Increasing Risk Of A Stock Market Correction
  4. The 2 Most Important Questions For Investors

Disclosure: I am long SPY, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Foreign Stimulus Could Push U.S. Stocks To New Highs