The uncertainty in the markets continues to create swings up and down resulting in sideways activity through the first quarter of the year. With today ending the quarter why not have a theme of ten things to watch going forward. I know it sounds cliche, but what the hell, it was a challenge coming up with ten ideas based on the current environment. So let’s get to it…
1) Interest rates – Yes, it is still one of the top issues in the market and realistically could be the number one issue facing stocks and investors going forward. I am not going to get into the speculation on when or how much the Fed will adjust interest rates, but we need to focus more what and where the greatest impact will occur. The most obvious is Treasury bonds. Yields have leveled off since the FOMC meeting pre-response and post-response. Both the ten and thirty-year bond are near the 50 day moving average for yields and that is where we would peg it looking forward. Moving higher offers TBT (short bond ETF) as trade and move lower offers TLT (long bond ETF). Keep it on your watch list and daily peak at how it is unfolding. If it hits the headlines and speculation erupts play defense and protect your positions if you have them in the bond or dividend classes.
2) Crude Oil – Another area that has been over hyped, but it still is a commodity and sector of interest for investors. $42.45 is the bottom end of the current range and $54 is the top end of the range. As I look at it something will have to act as a catalyst to move the commodity in either direction beyond the current range. Thus, trading the range is one strategy or avoiding it until it breaks one direction or another. The sector of stocks remains equally in a range and offers better trading opportunities within the range if you are inclined. The dollar is stronger and that puts some pressure relative to pricing. Supply is still outstripping demand and that has a greater impact on pricing. Unless one of the top five or six oil producing countries is willing to cut supply this is not likely to change going forward.
3) Europe – long term you have to like the stimulus play. Short term you will need a padded suit and a seat belt to survive the bumpy ride. Greece, Ukraine, Portugal, Italy, Spain… and others are still strangling on the bailouts and debt. This is not going to be resolved short term, but the longer term view is positive. Stimulus from the ECB has started and it will stir investing at the least. Build a long term view and trade the volatility with the swings. Be patient and let it all unfold.
4) S&P 500 Index – stuck in a short term trading range or consolidation pattern since the December highs. With first quarter coming to a close the index is up 0.75% year-to-date. Not exactly setting the world on fire, but the swings up and down have offered some opportunities, but the challenge looking forward is negative growth year-over-year for earnings, slowing economic conditions and the overhang of the Fed wanting to hike interest rates. Not the best picture to look at, but we will need some type of catalyst to push the index in either direction. Neither the sellers nor the buyers want to take control. It is like a game of hot potato for now. Economic growth and earnings growth are my choice for the catalyst and in the coming weeks we are going to have plenty of both to determine how it unfolds near term.
5) Leadership – biotech (IBB) and semiconductors (SOXX) have been the strength of the broader market… they are showing signs of weakness technically as we move towards the earnings period for first quarter. Growth stocks have struggled of late to maintain any momentum… little wonder considering the data points and projections. Rotation has been to the global markets, but that isn’t going to help the US outlook. Need leadership if the broad market is going to proceed with the current long term uptrend. Watch for rotation and if fails to materialize cash is still a sector and one that is out of harms way.
6) The dollar – strength in the dollar will favor small and midcap stocks. It will hurt gold, oil and multinational companies. watch how it unfolds.
7) First quarter winners FXI, EWG and TAN – China, Germany and Solar. How do they do going into the second quarter? China is promoting stimulus and if they follow through the upside will remain in play. If this is another rumor without a follow through they sell off. Germany is improving economically, but still not stellar in growth. Most of the move has been on the rumor of growth… now it has to validate it or the selling with return. Solar is all about competing at a price level that the end user can justify. That is happening, but the stocks have jumped on anticipation or rumor that life is good in the solar business. Like the others the proof is in the details… produce and we go higher… disappoint and the selling will be ugly.
8) First quarter losers DBB, KBE, and GDX – Base metals, Banks and Gold Miners. Any chance these improve into the second quarter? Commodities are dependent upon demand and inflation. Demand is not looking good, inflation has a shot, but we will have to see how the Federal Reserve addresses that issue in the coming months. Not big on either, but GDX could offer some trading opportunities if gold finds momentum. If not, the short side of that trade is still attractive. Banks were hoping for the rate increase from the Fed and that has lost all momentum of late. This is one to watch as an opportunity as we head into and out of the next FOMC meeting.
9) Home Builders – the data has favored a heating up housing market. Low inventories, good sales, maybe a spark in the builders as more lower end priced homes are needed. ITB broke above resistance at the $28 level and stalled, but this is one to watch collectively and the individual stocks for the leaders. Hindrance to the move higher… first, higher interest rates if they materialize. Second, lending from the banks to individuals and the builders. Job market, income data, etc. are not supporting the upper end of the market… yet. Plenty of moving parts, but there are also plenty of opportunities if this unfolds going forward.
10) Patience. To me this is the most important. When the market gets choppy… play golf, travel, read a book, anything fun, but don’t force trades. Please refer to number four above… 0.75% for the last ninety days… not worth the risk… plain and simple. I understand the master of the universe syndrome we all get believing we can trade the moves. It seems easy in theory, but few achieve it in reality. Measure the risk of what you are doing and make sure it fits your personality. Too much risk and it causes brain damage. Take what the market offers, never assume anything, always protect your downside risk and remember tomorrow is April Fools Day… don’t be the markets fool.