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I have been investing for over 40 years, evolving from investor to trader. The bear part comes from my degree from Cal: Go Bears! From 1982 to 2000, I managed a 17% return trading mutual funds on the basis of relative strength. This success was, of course, helped by an historic bull market, but... More
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  • ETF Blog For 9/23: A Strong Market Hobbled By Congress 0 comments
    Sep 21, 2013 8:08 PM | about stocks: EEM, XLV, PNQI, EWZ, EZU, SMH

    Market Moving News Summary of 20 articles, 9/20

    Retail sales are down somewhat post back to school. Manufacturing showed small gains on varying reports. Tame inflation presaged the FOMC announcement, which delayed tapering on weak economic gains, more concern for deflation than inflation, and fears of fiscal irresponsibility by Congress.

    In economic and trade measures, foreign investors came back into the U.S. in July, after several months of outflow, having sold treasuries in anticipation of tapering that didn't happen. The current account deficit came in below the first quarter numbers and is down 0.1% as a percentage of GDP. In the weekly domestic crude oil report, production exceeded imports for the first time-a milestone. Refineries are operating at 92% of capacity, as inventories are falling while oil prices are increasing.

    The housing market index is unchanged, with present sales strong and buyers paying cash. In contrast, new home sales have been weak. Permits fell 3.8% eliminating July's gain. Sales of existing homes beat consensus and July levels, attributed to buying ahead of rising mortgage rates. The median price fell slightly. Sales are being held back by shortages of homes on the market.

    Job and continuing claims fell last week to recovery lows, but remain above the the FOMC target zone.

    Sentiment Reports

    (click to enlarge) The VIX

    The Consumer Comfort index moved higher after a dip over the last three months. Pessimism on the economy's direction is high. The Index of Leading Economic Indicators was sharply higher due to manufacturing orders and a longer factory workweek. Expectations for cost increases are for a rise of 1.9% over the next year, in line with many forecasts.

    I view sentiment as generally positive, with the exception of caution over Congress. The VIX shows that most institutions are not yet concerned. It's possible that government shutdown dramas are becoming "cry wolf" events that the market is starting to ignore.

    The Market (S&P 500)

    (click to enlarge)

    The markets jumped on the Wednesday announcement of FOMC delayed tapering, but gave back most of the gain, on Thursday and Friday, an indication that with the Fed direction established for the next few weeks, attention is turning to Congress.

    Friday's drop broke the recent uptrend but is not technically bearish. In fact, a drop to the middle of the cup that has formed over the next week or two could create a bullish cup-and-handle pattern that takes the market higher when political risk abates. The pullback in small caps (NYSEARCA:IWM) was not as severe as in the SPY. The charts are strong and a geopolitical event will be required to reverse current trends.

    Core Relative Strength

    (click to enlarge)

    With everything in the core chart tilting down, we may see buying opportunities. The chart is led by emerging markets (NYSEARCA:EEM), followed by foreign stocks (NYSEARCA:EFA) and retail (NYSEARCA:RTH). Real estate popped with the Fed announcement, but slipped back. It could easily be hit by a surprise taper. Healthcare (NYSEARCA:XLV) remains a stalwart, and energy (NYSEARCA:XLE) is strong on rising oil prices. The remaining funds underperform the Russell 2000, small caps (IWM), which is still on an upward trend.

    Sector Relative Strength

    (click to enlarge)

    Solar (NYSEARCA:TAN) continues strong but volatile, with a 17% gain over the last 18 days, followed by Internet (NASDAQ:PNQI)

    Selected ETF's

    From the charts above, I will be watching EEM, XLV, and PNQI. Looking at my total list of 36 ETF's, I found the strongest to be Brazil (NYSEARCA:EWZ), European Union (BATS:EZU), semiconductors (NYSEARCA:SMH), and gaming (NYSEARCA:BJK). I got out of SMH, but will buy back in if its trend continues. If the volatile mortgage REIT sector takes off, I may buy the strongest of the group, NYMC. Other stocks of note are AMZN, AAPL, and NFLX.

    Trades Last Week

    Bought: XLV, MOO, PPA, IGV


    Holding: XLV, SMH, SOCL, XLI

    Guess on Next Week

    There is no major change in economy, and I held through Wednesday, because I didn't expect the Fed to taper because inflation is below their targets, low, unemployment remains high and economic statistics continue slowly higher.

    On Thursday, as the focus shifted to Congress, I began selling that continued on Friday, when the market dropped 185 on the Dow after the House passed the go-nowhere continuing resolution. I wanted to capture the gains of Wednesday and thin out my portfolio so I wouldn't have to track as many positions if there is a big sell-off.

    While the market may ignore much of the follies in Congress, I don't think prices will rise much until there is more certainty. My plan is to stay mostly out of the market over the next two weeks, because I prefer to be looking for opportunities to buy than waiting for existing positions to sell on sudden negative news. If there is another rally, I'll add to existing positions to maintain simplicity.

    Foreign stocks may be less affected by politics, so I will be looking at the selected ETF's, and NMYC, a volatile mREIT that may recover after a major sell-off.

    Disclosure: I am long XLV, SMH, SOCL, XLI.

    Additional disclosure: Longs have positive delta, but are covered with puts, except for SOCL

    Stocks: EEM, XLV, PNQI, EWZ, EZU, SMH
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