Update: Week Ending December 28, 2013

by: Nasser Khraishi

The equities continued their upward march this week. The levels that the DJIA and S&P 500 are at represent all-time-highs. As for the NASDAQ Composite, these are levels not seen since early last decade - almost 13 years ago. The monthly charts are starting to show an increasingly worrisome separation from moving averages, hence hinting that we may see a correction, as opposed to the usual consolidation. Interestingly, both the daily and weekly charts are tame, with only the Composite showing some overheating signs.

You see, normally the weekly charts are a good intermediate proxy between the daily charts that do not tell the whole picture, and the monthly charts which tell the fundamental story. It seems the weekly charts are now hiding the gradual separation from the mean that is happening at the systemic or fundamental level. If you accept, like I do, that mean-reversion is a fact of the market, you will arrive at the same conclusion that a decent correction-- at least of the caliber of the summer of 2011-- should be in the works. When? I think 12 periods would be too much at this current rate, so unless there is a slowdown in the rate of price appreciation, then some time before the end of 2014 seems like a good candidate.

On the interest rates front, for the first time in more than 2 1/2 years, the 10-year treasury yield (TNX) closed above 3%. The world did not end, even though the reaction of Gold was interesting, in the sense that it went up, contradicting my belief that higher interest rates are depressionary as far as gold prices are concerned. Given that the stated Fed goal for inflation is 2%, it should be that TNX still has 1% more to go. Having said that, I need to repeat that my growing belief is that the Fed's problem has never been inflation, and if anything, the Fed was working to avoid deflation - for most of its history. You see, most of human history is deflationary, and naturally so, because of the continual technology improvements and innovations. The Fed has held deflation at bay, despite a brief loss in the 1950s, for most of its post-depression history. Thinking about all the deflationary pressures due to innovation-- from robots to "free" communication and to the China effect, I do frequently ask myself, how come deflation is not already upon us?

In essence, if I were to make a prediction for the coming year, as is customary at New Year Eve, then my prediction will be that the Fed will briefly achieve higher inflation, possibly in the 1.5% range, with TNX around 3.5-4%, and once they start lightening their foot off the pedal, interest rates will head "south" as opposed to "north" as they would want it to. After all, I am more convinced, as time passes by, that the essence of fighting deflation was the continually easier availability of credit. Hence, if you check the TNX chart for the the last 18 years, you will see that after each Fed intervention ended, the 10-year rates rose to a lower peak than the last time around and then headed south again. Effectively, 10-year rates were more than halved over these - almost - two decades.

My usual tables, as of the end-of-day December 27, 2013, follow.

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 Neutral
VIX CBOE Volatility Index Down Neutral Negative
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 Positive

It is 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, my short term "Perceived Trend Oscillator" stood at a strictly overbought +78%. This is in contrast of the (almost overbought) reading of 48%. As such, in my trading, I will be more careful in the way I am replacing holdings sold due to triggering "sell" signals with new holdings that have fresh "buy" signals. In essence, I will be lightening the load by being more aggressive on the "sell" and less aggressive on the "buy." Note that this is not in reaction to my predicted correction sometime in 2014. As a matter of fact, my trading approach should care less whether the market is going up or down. We are talking about a short term overbought signal here and not what is read from the monthly - decade+ - charts.

Symbol and Company Name Daily 3-EMA-7 Weekly 3-EMA-7 Perceived Trend Is a Current Holding?
gern Geron Corporation Neutral Up Negative Yes
jcp JC Penney Company, Inc. Neutral Down Positive
jpm JPMorgan Chase & Co. Up Up Positive
gs The Goldman Sachs Group, Inc. Up Up Positive
wfc Wells Fargo & Co. Up Up Positive Yes
nly Annaly Capital Management, Inc. Down Down Negative Yes
mo Altria Group, Inc. Up Up Positive
t AT&T Inc. Neutral Down Positive Yes
vz Verizon Communications Inc. Neutral Neutral Positive Yes
gps The Gap, Inc. Down Down Negative Yes
anf Abercrombie and Fitch Co. Down Down Neutral Yes
jwn Nordstrom, Inc. Neutral Up Positive Yes
dis The Walt Disney Company Up UP Positive
mcd McDonald's Corp. Neutral Down Positive
mdlz Mondelez International, Inc. Up Up Positive
ba The Boeing Company Up Up Positive Yes
lmt Lockheed Martin Corporation Up Up Positive Yes
cat Caterpillar Inc. Up Up Positive
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
mon Monsanto, Co. Up Up Positive
pot Potash Corp. of Saskatchewan Inc. Up Down Positive Yes
pfe Pfizer Inc. Down Up Neutral
bmy Bristol-Myers Squibb Company Up Up Positive
abc AmerisourceBergen Corporation Up Up Positive
aapl Apple, Inc. Up Up Positive
intc Intel Corporation Up Up Positive Yes
csco Cisco Systems, Inc. Neutral Down Positive Yes
hpq Hewlett-Packard Company Up Up Positive
cvx Chevron Corporation Up Up Positive Yes
bp BP plc Up Up Positive Yes
ngg National Grid plc Up Up Positive Yes
ni NiSource, Inc. Up Up Positive
wmb Williams Companies, Inc. Up Up Positive
wm Waste Management, Inc. Up Up Positive Yes
cnw Con-way Inc. Down Neutral Neutral Yes
csx CSX Corp. Up Up Positive
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 relies 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.