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ETF Blog 12/9: Better Economic News; Awaiting The Fed

|Includes: BBH, PJP, PPA, Invesco QQQ ETF (QQQ), XLK

Market Moving News (Summary of 27 Articles)

Personal spending in the last few months is the strongest since 2009, the first year of recovery. Vehicle sales marked their best month since early 2007, attributed to vehicle aging. Statistics on Black Friday were mixed, with one report calling it a success and another indicating a week-to-week decline. The government Personal Income and Outlay report showed consumer spending rising slightly in 4Q, with strong auto sales.

Personal income was weak, the first decline since January, following two strong months. Wages were up .1% vs. .4% and .6% in the prior two months. Inflation was up .1%.

Manufacturing output increased in November in the Markit Economics report and was the strongest in 2½ years in the separate ISM report. The Factory Orders report, regarded as the most influential, was flat.

New home sales surged 25.4 percent in October to $444,000 million annual rate. This is the highest rate since early in the year. The median price fell 4.5% in October to $245.8K This was the first good month in a while and may not indicate a trend.

Exports increased in October, reducing the trade deficit. Non-petroleum goods and services provided most of the increase.

GDP was stronger than expected in 3Q, mainly due to growth in inventories. Demand numbers were unchanged. Personal consumption grew. Annualized inflation was 2%. In a separate report, the services increased in November.

Corporate profits increased 11.5% vs. a 2Q gain of 8.5%. Annualized, the gain is 5.8%.

Private payrolls grew in the ADP report, which often is at odds with the government's numbers. Layoffs are running at 2-year highs, down slightly vs. October. Claims fell last week; however Thanksgiving numbers can be volatile. The 4-week average is down 5 weeks in a row. Continuing claims are at a recovery low, as is the continuing 4-week average.

The widely-followed November Employment Situation Report triggered a 180-point gain in the DOW on Friday, with total payroll jobs increasing by 203K, following 204K in October, beating estimates. The unemployment rate fell to 7% from 7.3% in October. The gains were in the private sector, and government jobs declined. Government jobs gained only 7000.

Sentiment Metrics

Sentiment is improving, as is often the case during the holidays. The Bloomberg Consumer Comfort Index reached its highest level since early October and the best Thanksgiving week value in the past 6 years. The index is much weaker than its long-term average. The Consumer Sentiment report showed the best reading since July, with strong gain in its current conditions component.


The VIX reacted sharply to tapering speculation, and fell back on Friday. This will be a good indicator next week on the effect tapering could have on the market.

The Market (S&P 500)

The S&P 500 dipped during the week, breaking the primary trend but bounced off support at 178 and regained half the loss on Friday. If there is uncertainty next week, it could cycle between 178 and 182.

Small Caps (IWM)

Small caps had a sharper drop-1% more than the S&P 500, but did not break the primary trend. Notice the series of dojis, candlestick patterns indicating uncertainty.

Core Relative Strength

The core holdings are relatively flat, although Friday's rally brought everything up. Note the sharper increases in finance (NYSEARCA:XLF), healthcare (NYSEARCA:XLV), foreign stocks (NYSEARCA:EFA), and emerging markets (NYSEARCA:EEM). Note only transportation (BATS:IYT), retail (NYSEARCA:RTH), tech (NYSEARCA:XLK), and healthcare outperform small caps (NYSEARCA:IWM). I still have a sell on IWM, but will buy if it establishes an uptrend next week.

Composite Relative Strength

The strongest major index during the last 36 days is the Nasdaq 100 (QQQ, red). This is the basic portfolio holding for next week. ETF's that beat or equal QQQ are Pharma (NYSEARCA:PJP), technology (XLK), aerospace (NYSEARCA:PPA), and biotech (NASDAQ:BBH).

My goal is to keep only a few holdings, because I expect the market to get volatile ahead of the Fed meetings on the December 17 and 18.

Trades Last Week

On Friday, I bought QQQ.

Due to the dip at the beginning of the week, I sold IYT, PJP, IWM, and PPA, in a deliberate effort to lighten up ahead of tapering.

Conclusion and Action

The economic news is mixed (as is usually the case), but better this week, capped by the strong employment report. Housing is improving, manufacturing is slightly better, and the trade balance is in the U.S.'s favor. The market was worrying early about the December 17/18 Fed meeting, dipping down until the employment report kicked all the indexes higher on Friday, making up about half of the week's losses.

There has been so much discussion about "tapering" that the topic is falling into the category of, "when everyone thinks something is going to happen to the markets-it doesn't." I expect a spasm on the 18th when the Fed announcement comes out, but no severe reaction. Tapering is an indication that the economy is improving, which is good for stocks. However, I am skeptical that the Fed will taper next week, because while better, the jobs data is mixed.

That said, I also disagree with the notion that Janet Yellen is "the doviest of doves." Materials I have read characterize her as data-driven and pragmatic. She will taper and raise rates when the data dictates.

My guess is that the market will trade in a range until the Fed meeting. A guess is not a forecast. I'll follow the momentum of the market, but be prepared for a surprise reversal.

My buy list for next week is deliberately short ahead of the Fed meeting, but I will follow any continuation of Friday's rally. I will track QQQ, IWM, PJP, BBH, XLK, and PPA closely, as they are relative strength leaders. Most charts have the same pattern. My stops will be just below support levels indicated on the charts above, at least until after the Fed meeting.

Disclosure: I am long QQQ.