Analyzing the Seven Asset Classes

Market Story & Outlook:

Current Story of the market still involves uncertainty looking forward. One of the primary reasons for that uncertainty is the Federal Reserve ending Quantitative Easing and at some point raising interest rates. It is the uncertainty of the impact of those events that created volatility and an overall lack of interest to push the markets higher until some clarity is gained in reference to these items. Today the FOMC meeting concluded and we still don’t have the clarity many would like relative to when interest will be raise by the Fed. The Fed speak continues along with the bantering about what, when and how, but not much is being done to deal with the issue at hand. The Fed wants to engineer a positive ending for the global markets, US markets, bond markets and every other interested market. It just isn’t going to happen that way and the soon the rip the band-aide off the soon the healing process will begin.

The ended QE and markets did react to the news initially, but it will take some time going forward to fully digest how this will impact the psyche of the buyers. Some had hoped the Fed would leave the QE program in place, but that did not happen. This is an area to keep on your watch list moving forward for the full impact relative to the asset classes.

Each week it is good to take a step back and look at the broad view of the market. This allows you to dig into the asset classes of interest and know which to avoid. The current market cycle remains US driven. Simply put the US markets are driving the bulk of the profits and currently offer the best risk/reward relative to the investment markets overall. For that reason we remain cool towards investing outside the US, but continue to look for the opportunities throughout the world. Below we briefly discuss each of the seven asset classes in reference to the scatter graphs using Telechart 2000 software. You can watch a quick video here on using our desktop within their software or email Don@JimsNotes.com for more information.

Charting the 7 Asset Classes:

As you can see on the chart below the US stocks have been leading the move to the upside of the last low or pivot point on October 15th. The chart of the seven asset classes reflect what I stated above about the US markets continue to lead the upside. For now all things are good relative to the upside working higher for stocks and bonds are working lower as interest rate rise modestly. Key points outlined below.

7 Assest Classes

Points of Interest:

  1. US stocks have bounced more than 7% off the low on October 15th and essentially completed a ‘V’ bottom from the correction.
  2. Treasury bonds continue to move opposite US stocks showing a normal market flow.
  3. Commodities are struggling against the dollar and demand issues, and no sign of that easing anytime soon.
  4. REITs moved higher and show strength with interest rates remaining low.
  5. The EAFE index is tagging along with the US markets as it has no drivers in place of it’s own.
  6. Emerging Markets continue to struggle relative to the strong dollar and weak commodities. Bouncing off the lows, but a trade only don’t see this developing yet into a longer term holding.

1) US Equities:

Using the latest pivot point (October 15th) The overall trend is up for the broad index. The leadership is coming from healthcare and industrials with energy attempting to join the fun. This is not the best leadership if the overall market is going to resume the uptrend and move through the previous highs. Earnings remain a hinderance and then their is the Fed we referenced above. Watch, manage your risk with stops and look for other sectors to join in the push higher. Without financials, technology and consumer services the broader index will not be able to maintain the drive to a new high.

SP500Scatter

Points of Interest:

  1. Healthcare is driving and biotech is the underlying reason. If this is to continue we need to see the other sub-sectors join in on the fun. Be patient and take what it gives going forward.
  2. Energy moved lower on the downside move in crude oil prices. The stability at the $80 level is helping with a bounce of the lows and this will be important going forward to help the broad markets maintain it’s momentum.
  3. Financials continue deal with the fallout of the financial crisis with regulations and regulators hampering growth. Higher interest rates would help, but that is not in the foreseeable future for now.
  4. Technology was showing solid leadership off the October 15th low and earnings have derailed that effort with the latest coming from both Twitter and Facebook. Still like the long term prospects for the sector and we continue to look for the opportunities.

2) Currency:

We are working off the June 30th bottom for the dollar we can see the solid uptrend for the dollar. However, since hitting the high on October 4th the buck has struggled and moved sideways of late. It is still outpacing the other currencies compared below and the a break of support could open some short term opportunities in other currencies.

Currency

 

Points of Interest:

  1. Canada (FXC) has bottomed and showed some upside momentum,  but no breakout yet. I like the opportunity.
  2. All of the others pictured above show some signs of improvement versus the dollar, but still nothing standing out at this point.

3)  Bond/Fixed Income:

You can see on the graph below the Vanguard Total Bond ETF has almost flatlined since the last pivot point on September 17th. Because of the ‘V’ bottom move in stocks the bonds show the tale of two cities. The Treasury bonds move higher as fear rose and the convertible and high yield bonds moved lower. Risk/reward is the primary mover when this happens, but there was the fear of higher rates behind the move. For now Fixed income has settled, but the Fed¬†news and actions will keep bond investors on their toes.

Bonds

 

Points of Interest:

  1. Treasury bonds have moved lower as stocks have bounced higher. Watch interest rate movement relative to Treasury bonds going forward. A move higher will push the value of the bond lower.
  2. Preferred stocks (PFF) have picked up as the markets bounce back and the dividend yields become attractive with interest rate risk on the back burner and a positive outlook for stocks currently.
  3. High Yield bonds bounced back along with stocks after selling lower. I would look to exit these positions as the values hit back at previous levels.
  4. Utilities will move lower if yields creep higher and I would tighten my stops on those positions.
  5. REITs lwill move lower as well if yields move higher. Tighten your stops and protect your gains.

4) Commodities:

The commodity index (DBC) made a pivot lower on June 20th and has not looked back since. It is important to note the bottoming attempting to take root the last two weeks. This has been a result of the dollar being stronger and the demand being lower. Until this reverses near term the downside remains in play and not much on the horizon that would change this direction other than for a trade.

Points of Interest:

  1. Gold was attempting bounce and put in an uptrend move micro term. That has not materialized and the metal is testing lower again.
  2. Base metals (DBB) are showing some upside progress with copper, steel and aluminum making a upside move.
  3. Platinum is moving higher in the precious metal component.
  4. The water index (FIW) has made a nice reversal as well attracting investors.

Commodity

*DBC –¬†PowerShares Commodity Index ETF¬†(click to view) Composite of 14 commodities tracking index.

5) Global Markets: 

The global markets have shifted to in conjunction with the US markets at least as far as the EAFE index is concerned.

Points of Interest:

  1. China has made a nice bounce this week and looks to regain some of the previous upside momentum.
  2. Emerging markets bounced, but looking for some confirmation on this before willing to venture into the risk pool.
  3. Watching the commodities bounce and potential impact it will have on the global markets like Canada, Latin America and Australia.

Global Mkt

“EFA –¬†iShares EAFE Index ETF¬†(click to view)¬†10 Developed Countries making up Europe (66.6%), Australia (8.9%) and Far East (24.5%). (Weighting of fund) Not most balanced, but give indication of global markets.

6) Real Estate (REITS):

The REITs moved off the September 24th low and started a new upside move, but could stall if rates start to rise. This is an interest sensitive asset class as it is based on the dividends first and long term growth of the underlying assets second. Adjust your stops to account for the risk of the Fed in the sector and how interest rates effect them moving forward. The chart below shows the ten largest REITs that make up the US Real Estate ETF.

Points of Interest:

  1. Topping pattern in EQR and VTR which have been two of the key leaders in the sector. This puts emphasis on the comments above.
  2. PLD, HCN HCP and SPG have been showing some upside acceleration, but watch how the current FOMC meeting impacts this move going forward.
  3. MLPs bounced back from the sharp selling, but have equal risk to manage as energy commodities struggle for price stability.

Real Estate IYR

7) Global Fixed Income:

Using the Vanguard Total International Bond Index Fund as a bench mark we find it is still leading over the higher risk assets in the sector.

Points of Interest:

  1. VTIFX – Flat lining as the interest rates globally flatten out, but still leading component in our survey.
  2. PAFCX Р1% dividend. Traded down nearly 4% the last month and starting to base again. Still not interested in risk.
  3. PICB Р3.1% dividend. Still too much risk int he fund for the trade.
  4. EMB – 4.5% dividend yield. Bounce off the lows first of October and has moved up nicely short term. Like the outlook short term.
  5. PCY Рcurrent dividend yield is 4.8%. Bounced as well off the lows the first of October and upside move in play. Trending micro term.

Intl fixed income

Watch and trade¬†according to your risk tolerance. Everyone has different trading styles and you have to find what works for you and your personality. Don’t put yourself in positions you don’t understand or take risk you can’t tolerate. Not every trade results in a profit, but controlling your risk will limit the downside losses.