Yes, boring trends make money. Since the August low the market has been in a uptrend. With the only challenge coming from a pullback in November. The methodical move has provided opportunities in virtually every sector. However, the outside influence on stocks has been rising over the last two months giving rise to analyst and investors presenting a case against equities. We need to be aware of the issues facing the markets, but the trend has the final say. The shrinking dollar, rising commodity prices, the threat of inflation and rising interest rates are warnings, but to this point they haven’t been able to break the trend. Today we take some time to review and update the events taking place in each of these areas.
Ride the euro-coaster as the value moves up and down against the dollar. Last week on the Scan Video we discussed the dollar-euro relationship and based on the charts the dollar looked ready to rally off support near the $22 level on UUP. The bounce or rally has begun with the dollar rising and the euro moving lower. FXE has moved down from $137.7 to $134.34. I bring this up because the move is near the initial target of $22.75 for the dollar, but the news from Germany today (slower GDP growth) could take the dollar to the next target of $23.30. A strong dollar plays against the price of crude oil and we could see more downside pressure on oil which closed at $84.88.
Speaking of crude oil, the price dropped after rising to $86.52 it steadily declined throughout the day. The announcement from General Electric to acquire Britian’s John Wood Group, LLC sparked a rally in the energy sector sending both XLE and IEZ up more than 2%. This pushes XLE near our target of $76.68 and extends the move to new highs. This is also caust to raise your stops on plays in the sector as it is getting extended on the run from the August lows. Watch IEZ as well as it broke above resistance at $62.26 and close at a new high.
Inflation remains an area of concern for me as commodity prices have been the biggest impact to date. The Fed doesn’t recognize the current rise of 30% in gasoline as inflation, nor do they consider the cost food up 20% at the wholesale levels to be a problem on the inflation front. However, the average person driving a car or heading to the grocery store experiences this almost daily. It is and will continue to impact the consumer. Since November we have seen some signs in the economic numbers, but watch the January and February data for more impact. This remains a concern looking forward. Both the CPI and PPI inflation data are out later this week and anything higher than expected could be a negative. Commodity inflation is in play and the impact will be felt over time regardless of the Fed’s thoughts.
Being short the long end of the yield curve has become a popular trade of late. TBT, ProShares Ultrashort 20+ Year Treasury Bond ETF has seen volume nearly double on up days (when yields rise). We stated in last Wednesday’s update the current yield had hit 4.76% and you may want to tighten stops. The yield is testing support short term at 4.62% as well as the uptrend line. Protect your profit, as the risk of the equity markets rise, money could migrate toward the safety of bonds. This leveraged ETF can fall as fast as it rises.
The markets remain in a solid uptrend with plenty of rumbling about the extended levels. The key is to follow the trends and when they end, exit. Sounds simple enough, yet we spend so much time fighting the trends and building arguments relative counter opinions. Take what the market gives and stay focused on your goals and risk management.