U.S. Weekly Market Outlook
Summary & Recommendation
Week of August 11, 2013
Last week, on Monday we saw another Federal Budget Balance deficit of -97.6B forecast called for -95.3B. Japan's aggressive monetary policy has apparently worked well, at least in the short term as Prelim GDP q/q came in at .6% forecast was 0.9%, while missing forecasts is usually not a good sign, decent GDP growth is and that is reflected in the Prelim GDP price index y/y which saw improvement of -.3% forecast was for -.7% much better than expected. On Tuesday Core Retail Sales m/m barely beat forecasts and came in at .5% for the month giving a slight lift to the market. Before the sell off Wednesday and Thursday when stocks took a hit amid Unemployment Claims which came in better than expected at 320K welcoming back tapering fears.
Much of the talk among traders over the last couple of weeks has been 1. Where are interest rates going? 2. September Taper? Interest Rates will continue to roll higher. The highs on the 10 and 30 yr should get taken out and head towards 3% 10yr. The selloff in bonds can be correlated to two things. 1. A 10yr bond bubble is popping 2. The market is getting ahead of pricing in future US Growth & September Taper.
Tapering could not be further away from reality at this point. What it all boils down to is a debate among FOMC participants on whether the US economy is improving (taper) or not growing at a substantial enough pace to support its self (more $85B QE).
Something that caught my eye last week was the Philly Fed Manufacturing Index which well below estimates at 9.3 forecasts were 15.6 compared to last month's reading of 19.8. This pins the fundamental problem with the equity markets right now, are we trading on the Fed, the quick answer is at these levels, yes! Based on the data, which keep in mind, is the same data the Fed is also looking at, shows that at best, the US economy is marginally improving but nowhere near where it's projected pace. The interesting thing will be to watch does the Fed disengage from what they have been saying and taper in September or do they stick to their guns and allow the data to come in and then taper QE? If the Fed has not been telling the truth this whole time and their plan has been all along to taper in September we will almost certainly see a stock market crash. If the Fed stays consistent with their message throughout the year there is a 0% chance of a September taper and I would but a December taper at about 25% odds right now purely based on the data.
Throughout the year many economists and traders have written various articles declaring that either a stock market crash is imminent or that a stock market bubble may be in the midst of forming but have failed to detail why or how this event may happen. The truth is, "always forming" somewhere at sometime so to just say, "a bubble is forming" is not very specific. The next few months will prove to be a key inflection point for the markets. If QE is here to stay through September and December as I suspect and as data warrants, the markets will have no choice but to move higher on the news that the punch bowl is here to stay for quite some time into the future. At that point you will begin to see a bubble form as data continues to trickle in at a pace not fast enough for tapering but slow enough to still warrant QE. This combination of mild data and continual QE is THE BUBBLE THREAT.
QE is a vital part to the rally and without it growth would almost certainly begin contracting however, the "QE forever" mentality is a dangerous recipe for an equity bubble and eventual stock market crash that everyone talks about. On the flip side if QE were to be removed prematurely in September it would almost certainly cause a crash. The Fed has told this market exactly what it is going to do at a grade level 1 comprehension i.e. look at data, and yet the market has still had trouble dissecting Fed speak and where equities should move. A reoccurring theme throughout this year has been sell stock because of taper worries or a taper tantrum. We should also remember that the Fed has always followed the markets, it is hard for me to imagine a world where the Fed is going to taper in the midst of a correction knowing that the end to the full $85B QE would only cause more disruption to an already complex situation. The Fed understands unlike the markets what it wants to do and what its ultimate goal is, which is of course to make sure the recovery and growth is stable. The Fed will not allow the markets to decide when QE will end after almost $3T has been spent in total on QE programs. By the time we get to the end of QE I would not be surprised to see the total Fed bill to come out to over $3T.
As long as capital markets involve human beings (frequently overlooked component) you will always have bubbles. Just as the bond bubble of 10 years is coming to an end as we speak, eventually a stock bubble will form and pop. The likely hood of one getting ahead of a crash like 87' or any other stock market crash is almost impossible and I will explain why. Investing at its roots is about the psychological state of the markets; this is in part why I enjoy using the High Low Logic Index which measures complacency or fear in the markets by taking the lowest total of either 52wk highs or lows and dividing that number by the total amount of shares traded. As bubble forms there is actually a sort of order to their rise and fall in which you can plan accordingly. In general, prices usually tend to rise in the face of skepticism and prices tend to fall when facing over exuberance or euphoria. Taking this year 2013 as an example, think back to investor sentiment on stocks by the "experts" if you remember correctly is was in general very corrective on stocks and you had very few people telling you to go out and buy the S&P 500 at 1550. You ask that same question today and you will get the completely opposite response, which is in part why I have said for the last 3 weeks now to sell stocks, move to cash and get ready to reload when fear starts to capitulate in the market. Another important thing to remember is that prices fall 3X as fast as they go up. This has been tested and proven by many people before but I first came across this information in Tom DeMark's books Market Timing Techniques & New Market Timing Techniques. This concept has perplexed investors for decades and will probably continue to for many more. I am by no stretch of the imagination a contrarian, that strategy alone does not provide enough information in which to consistently form a trade or thesis. Taking a contrarian view can be better utilized by taking advantage of extremes in investor sentiment and psychology.
Last week I wrote;
"This week will also be pivotal for Gold as it looks to work its way back up to 1350 and possibly beyond. Gold will probably be a nice place to hide this week as investors pile out of stocks and still will not buy bonds."
Last week we saw Gold /GC bounce from 1313.50 blasting through resistance @ 1350 to close at 1375. GDX and other miners had a nice week as well. The next key level to watch will be 1400 for /GC. I expect Gold will hold steady or correct just slightly getting ready to make a major move once again in the coming weeks. Whether you have been in this trade since we spotted the lows around 1180 or since our call last week, Gold still looks good here along with the miners, GDX is another great way to play the Gold rally.
Last week we wrote;
"The markets will correct 15-20%"
The markets definitely started a significant correction opening the week at 1688 and closing the week down about 2% @ 1655.83. This week you can expect at least another 2-4% on the downside for equities as the markets continue to correct from their all-time high 1709 in the S&P 500.
Last week we wrote;
"Bonds will continue to follow equities and sell off and watch for them to test and break the 131'25 low."
Last week we also saw the yield in 10yr & 30yr increase dramatically taking out the old highs. The 10yr yield seems to want to head to 3% and I think it can get there by late this week early next week. It will be interesting to study the effects of a 3% 10yr yield. Will we flatten out at 3% or continue to march higher? Regardless of where the yield heads over the next 6 months a 3% 10yr yield will certainly begin to unwind the housing trade and market, unless there is a sudden boom to wage growth and or jobs growth.
Last week we wrote;
"The tone in the market is poised to shift as fear capitulates."
This theme will play out as the week moves on. There is no US data out on Monday or Tuesday that would cause any kind of monumental shift in the markets. I suspect we will see range bound action in anticipation of the FOMC minutes on Wednesday. It is important to note that these minutes will probably take a more dovish tone which should provide a temporary lift to markets unless there is a fundamental change of language that the market is unable to digest in which case we would see a deep selloff. The likely hood of this month's minutes taking a hawkish tone is very low despite a decent unemployment claims number earlier last week.
High Low Logic Index;
10 Wk Exponential Moving Average- this week: 6.62 vs. 6.39 last week
Still deep in correction territory, and continuing to trend up (bearish), we would expect there to be a low amount of 52 wk highs after this week, allowing the HHLI to come in a bit (bullish). Whether or not this week will prove to be the bottom remains to be seen but it is hard to imagine more than 200 52 wk high being set this week, which would give early indications a bottom is forming.
American Association of Individual Investors- Weekly Sentiment Survey;
Week ending 8/14/2013
Despite the 2% drop last week investors still remain relatively bullish on equities, probably means we have more room the downside. I would like to see at least 1/3 of investors take a bearish tone in the markets before I will consider moving back to a bullish stance on the markets.