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Daniel R Moore
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Daniel Moore is the creator of FinancialRelativity.com, a web portal created for the purpose of tracking the status of financial markets and providing investment analysis and portfolio management insights to investors. Based on the systematic investment research, he writes about the market and... More
My company:
FinancialRelativity.com
My blog:
Financial Market Vigilante
My book:
Theory of Financial Relativity
  • Will The Ukraine Crisis Derail The Fed Driven Stock Party? 3 comments
    Mar 3, 2014 11:56 AM | about stocks: SPY, DIA, QQQ, TLT, SHY, OIL, GLD

    To help investors looking for a system to track the relative attractiveness of the U.S. equity market, the Financial Relativity Index has been created based on a set of leading indicators derived from the research contained in the book, Theory of Financial Relativity. The index is a heuristic used to gauge the relative attractiveness of investing in stocks at a given time based on the interaction of major market forces and the resulting impact on the rate of change in the price levels of stocks (DOW Signal), money (Interest Rate Spreads) and energy (Oil). All of the signals in the multivariate model possess characteristics which have a high probability of being exhibited prior to a sustained equity market downturn accompanied by economic recession; and likewise remain within certain parameters when the equity market is more attractive as an investment such as during a post recession rebound or an economic expansion.

    Signals Advise More Equity Investment Caution

    The status of the Theory of Financial Relativity leading equity market indicators as of 2/28/2013 is show in the table below.

    At the end of February, the major US stock market indexes (NYSEARCA:DIA) (NYSEARCA:SPY) were increasingly becoming less attractive investment alternatives. The trend in the market signals were pointing to potential market instability progressing into the spring of 2014 due to the unsustainable basis for the market valuation and increasing international unrest. This assessment is based on ample evidence that the primary basis for holding the record stock index highs at the end of February was a Fed driven shortage of US dollar investment alternatives. With the advent of much higher international tension, the US equity market was precariously perched for a downturn if the economic war between east and west escalated.

    Due to continued historically high levels of quantitative easing by the U.S. Federal Reserve, the Financial Relativity Index signals were not yet indicating an imminent large scale market breakdown. Fixed income safe investment alternatives were in short supply and additionally most Treasuries were providing negative inflation adjusted returns. This market environment was not conducive to creating a sustainable run on stocks. However, the oil market, and the heavily correlated gold market were both severely undervalued relative to dollar based equity and fixed income investments. International tensions driven by Russia's aggressive acts of war in the Ukraine buoyed increased buying activity in these markets, triggering a higher cautionary alert by the leading indicators for equity investors.

    The strength in the oil and gold markets relative to USD based Treasuries and equities were a direct indication of growing dollar based weakness as the international events in the Ukraine were unfolding. In addition, the safe haven Treasury trade became more pronounced as capital began to flee to Treasuries of all maturities driving down rates across the board. Should the tensions of potential war in the Ukraine continue without immediate resolution, the threat of a sustained U.S. equity market breakdown will rise.

    Historically when the market is ripe to roll-over, research shows that it is almost always driven by a disruption from an international source which forces the Federal Reserve to respond with tighter credit conditions to maintain the value of the U.S. dollar. The most reliable signal of deteriorating conditions that instigate Fed intervention is the oil market because it clearly shows the relative strength of the non-western alliance currencies to the USD. As of the end of February 2014, because of the weak U.S. economy, the magnitude of an oil spike required to precipitate a market downturn may not be as large as in the past. Typically a run up of 50% to 100% is required. Based on the relatively high valuation of the market at the present time, any sustained run in oil prices at the previous all-time high in the range of $140 a barrel for WTI should be viewed as a very unwelcome sign for investors with over-exposure to U.S. equities.

    Daniel Moore is the author of the book Theory of Financial Relativity: Investment Portfolio Guidance in a Federal Reserve Driven Bubble Prone Deflationary Era. All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SPY, DIA, QQQ, TLT, SHY, OIL, GLD
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  • change is the only constant
    , contributor
    Comments (2245) | Send Message
     
    Daniel-

     

    You said-

     

    "Typically a run up of 50% to 100% is required. Based on the relatively high valuation of the market at the present time, any sustained run in oil prices at the previous all-time high in the range of $140 a barrel for WTI should be viewed as a very unwelcome sign for investors with over-exposure to U.S. equities"

     

    If there is no quick resolution; both oil and gas will rise; and China and the US will have significant economic problems. Your analysis' conclusion may be too conservative...this is a very unwelcome sign to all equities. Global growth comes to a screeching halt. You did not scream sell (now!), but it seems smart.

     

    And for better or worse (imho) the conflict looks more like it will be a siege rather than an invasion.
    3 Mar 2014, 05:19 PM Reply Like
  • Daniel R Moore
    , contributor
    Comments (289) | Send Message
     
    Author’s reply » I actually did not make a call buy or sell, yet. Certainly I am not a fan presently of new equity positions. But I also realize that alternatives for sold positions are limited. I remain positive on energy positions as I have been for well over a year on the blog, and gold since December as re-balancing options. The interesting aspect of energy in U.S. GDP is that it is both an economic growth tax, and an input to GDP. Oil is actually positively correlated with nominal GDP through time. Everyone wants GDP growth; under the present government economic policy that means higher energy costs and inflation. And inflation is the political scapegoat which will force the Fed to back off easy money. I have repeatedly posited in my blog posts that certain parts of the world would not sit by idly while the Fed and other central banks busily printed money at $1T clips. Syria last August was Act I. The Ukraine looks like Act 2. And so on until the system breaks down, and finds a new equilibrium. These events seemingly have nothing to do with energy and the economy in the media perspective, but they certainly do from an investment perspective.

     

    I am still looking for certain indicators to be convinced the equity market can truly go down hard at this time. It still seems like this process may take some time, and quite possibly is a prelude to election year political games - both 2014 and 2016. But, I do think the smart money is, and has been, preparing for this type of event at least since last May.

     

    One last thought, and that is the intriguing push to use economic sanctions as a means of pushing back on Russia. This path may introduce unintended consequences into the investment equation that are completely unpredictable.
    3 Mar 2014, 06:46 PM Reply Like
  • change is the only constant
    , contributor
    Comments (2245) | Send Message
     
    Daniel-

     

    "This path may introduce unintended consequences into the investment equation that are completely unpredictable"

     

    Agreed. I have found in my experience, that waiting for confirming evidence is often accompanied by the sound of the exit door slamming shut. And the road less traveled means those who have been through suffering the consequences and survived.
    4 Mar 2014, 08:00 AM Reply Like
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