ETF Market Direction Summary: 11-12-2009

On Thursday, equities finally hit a legitimate wall of resistance and started showing signs of a double top pattern (i.e. peaks at October and November highs). Although market news and economic data were a combination of mixed results, positive catalysts had absolutely no impact on Thursday’s trading.

ETF Market Direction Summary: 11-11-2009

On Wednesday, the "new 52 week high club" was no longer an exclusive category for the Dow Industrials as the S&P 500 and Nasdaq 100 indices both made new 13 month highs. This expanding participation in new highs is in order if bulls are to sustain their momentum. Prior to this development, one of my concerns has been the asymmetrical character of this rally whereby a disproportionate share of technical leadership was emanating from the Dow, the most narrow of major equity indices representing the U.S. economy.

By Philip Dunham

That may be a bit extreme. Of course the Fed cares about USD, but for now it is on the back burner. Last week, in its statement following the FOMC meeting, Board members effectively capped short rates when the line "including low rates of resource utilization, subdued inflation trends, and stable inflation expectations" was added. (Full text of FOMC statement with changes highlighted on page 4 of PDF.) This addition was an attempt to flatten the yield curve, without raising short rates, by reducing inflation expectations priced into the long end of the curve. In theory, this should bring long rates down marginally. However, markets bushed this off rather handily. The initial response to FOMC in treasuries was curve steepening until 30 year bonds bottomed on Friday following news that U.S. unemployment had reached 10.2%.

ETF Market Direction Summary: 11-10-2009

The most important observation about Tuesday’s session is the fact that the market was very stingy in giving back any of its 2% plus gains from Monday. Without major economic data or many earnings announcements, there were no strong catalysts to drive the market in a decisive direction. Bulls earned a well deserved day of rest after having pushed up the S&P 500 for the last 6 out of 7 trading days.

Many times just using logic an investor can steer away from problems. It seemed forever municipal bonds were considered one of the safest investments. One did not get rich by investing in municipal bonds, however they were consistent and the default possibility was almost not a possibility. Fast forward to 2009 - municipal bonds have to be one of the scariest investment choices. All one has to do is to look at State by State finances to be aware. California faces a $60 billion deficit, New York faces a $3.2 billion deficit and New Jersey faces an $8 billion structural deficit next year. If States run deficits like thi,s why would one want to lend them money? I surely would not. One could argue if a State defaulted…then the FED would bail them out. Who needs that aggravation and worry? We are in some extremely uncertain times. I hear day in and day out:
What do I do with my money?
Where is a safe place to put my money?

The answer is to diversify. Do not have more than 5% of your assets in any idea. Even leaving money in the bank is risky due to potential inflation. Now more than ever one should consider at least a 5% allocation to trend-following a basket of commodities. Trend-following strategies are liquid and transparent. When one trades commodities, one is dealing in real assets. At the end of the day, if the crisis worsens (unemployment now at 10.2% in the US), trend-following shines. People still need to eat. People still need heat in their homes. People still need to put gas in their cars. The world will not end but it stands the chance of changing very much from what we have taken for granted.

During the worst of the financial crisis, investors were eager to obtain assets that promised total safety even if that meant giving up any prospect of positive after tax real returns. In an environment where many were talking about a second Great Depression, inflation was the last risk many investors were thinking about. This behavior caused inflation expectations, as measured by the difference between the ten year Treasury Note and ten year Treasury Inflation Protected Securities (TIPS), to approach zero. For some additional background on inflation expectations and TIPS, please click on this link for a previous article covering the topic.

As the Financial Times reported Monday, inflation expectations in the United States and the UK have been reaching levels not seen since late last year. In the case of the United States, implied inflation expectations appear to be pushing past 2%. We have prepared the following chart which plots the ten year yield for regular Treasury Notes and TIPS as well as the implied inflation expectation based on the difference between the two yields:

ETF Market Direction Summary: 11-09-2009

Today I shall deviate from the usual format of the ETF Market Trends™ report and indulge in the reminiscence of the zenith of my youth some 20 years ago, which marks the fall of the Berlin Wall and a time when I was in love with a young beautiful woman from Berlin with eyes cooler than the bluest hues of any ocean and a heart warmer than the most intimate of campside fire conversations shared over a bottle of good bourbon whiskey with strangers (only a real outdoors-man will appreciate the latter comparison).

November 9, 2009



BENNY AND TIMMY WANT TO PUMP YOU UP!

“I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation but love everything that causes it.”

--William E. Simon

What the Federal Reserve has control over is to keep rates artificially low and throw enough money into the financial system. However, what the Federal Reserve has no control over is where this money goes (in terms of country or asset class).

click to enlarge

Friday’s comments will be brief due to schedule conflicts. Negative employment news had very little impact upon the major equity indices (i.e. Dow Industrials, S&P 500, and Nasdaq) which finished slightly positive while the Russell 2000 closed down by a small fraction.

Bullish events:

November 6, 2009




ASK ALICE, I THINK SHE KNOWS

Prices of Treasury coupon securities are posting mixed changes today and as the day draws to a close the belly of the curve will outperform the wings of the curve. There was some active trading earlier in the session but as the day has worn on customer interest has wanned.

In an earlier post I noted that the yield curve had steepened to near record levels with 2 year/10 year at 270 basis points and 2 year/30 year at 360 basis points. Each of the spreads has retraced some ground and each is 4 basis points to 5 basis points narrower now as I write.

WisdomTree has registered with the Securities and Exchange Commission to launch a new ETF that seeks to give investors protection from inflation.

The new ETF WisdomTree has in the hopper, the WisdomTree Real Return Fund (NYSEArca: RRF), seeks to give investors long-term returns above the rate of inflation.

ETF Market Direction Summary: 11-05-2009

From the opening on Thursday, major U.S. equity indexes started the day on positive momentum and continually added to their intraday gains to close above the 90th percentile of their daily trading range.The DIA, SPY, and QQQQ have ended their corrections and re-established their support levels at the 20, 50, and 200 day moving averages. The only exception is the small-cap IWM which remains in both short and intermediate downtrends. However, the IWM did manage to participate in attaining a new 5 day high along with the other major equity indices.