Choppy week ends with a day of selling just to make things more confusing. As you would expect in a choppy directionless market news takes center stage embellished by speculation. In my notes Wednesday I stated that the FOMC meeting next week was taking on significance relative to interest rising all week. Well today, the focus on the meeting took on a life of its own with speculation that the Federal Reserve would change the minutes or notes to remove the phrase relative raising rates. Well by all means if it is a rumor it must be true and lets sell bonds today on that premise. That pushed the ten-year bond yield to 2.61% and up up eight basis points on the day or 28 basis point the last two week. The thirty-year bond rose ten basis points to 3.35% up 30 basis points in the last two weeks. That is significant and the bonds have decline in accordance with the move. How much higher do yields jump? 3.5% on the thirty and 2.65% on the ten would be my short term view of the move. We recommended TBT as a speculative trade on this activity and it has been up nicely on the move. Fear is an ugly thing when it comes to investing and if the fear becomes real enough the action starts to take a toll on stocks in the path of the move.
REITs are one of the sectors in the path of the rate hike. We have stated in several updates that the challenge for the REITs would be to compete against the higher yields on bonds. In reaction to the above rumors the sector was down 3.3% on the day erasing the last three months of the drift higher in the sector. I would have to say if their is no bounce heading into next week… the exits are labeled clearly and taking one is a good thing at this point.
The mortgage REITs are in the same boat as they are subject to the higher yields impacting the price as well. REM was down 2.1% on the day and shows clearly the knee jerk reaction to the speculation. Again heading to the clearly marked exits is advisable should the speculation continue.
The lesson in this action for all of us is to understand that ignoring the inevitable and buying up prices… otherwise know as a bubble, doesn’t end well when everyone finally gets it and decides to sell. They tend to get it collectively and sell at the same time. I am not saying in any way that the move is justified, normal or anything other than emotions at work, but it is a reality when the bubble pops.
Energy is the other issue the market has been struggling with for the last couple of months. Prices in the energy stocks have been rising while the price of crude has been dropping along with the price of natural gas. Again companies function on margins to make a profit. If you cannot sell goods for more than it cost to produce them, you will lose money, simple enough! Crude is at $92.15 and back at support again. This is putting pressure on the stocks and they broke support on Wednesday. They have failed to reclaim the previous level and thus solidifying the downside short term. We hit our stop on these positions Wednesday, but some are still believers in the upside story for the sector longer term. That is perfectly fine as long as you have a strategy for managing the longer term risk of the sector. Watch for the opportunities as this all unfolds, but manage your risk in the process.
Gold is selling again on Friday as the belief above states the Fed will start raising rates sooner than later. That produces a stronger dollar which we have seen all week as well and in turn it is negative for gold. The downside broke support and is now flirting with the $1190 level of support. Not seeing much in terms of upside here and DUST (short gold miners) has been a great trade the last couple of weeks. More downside? I would have to say yes based on the current charts and activity.
Last, but certainly not least the S&P 500 index has flirted with the 1984 support level all week. We did move below that level on Friday and that raises the question of what to look at next week. We will outline that in the trading notes that will be up on Sunday. Plenty to think about and deal with going forward. As bad as the day seems it still was less than a one percent move on the downside. Plenty of room for selling, but that doesn’t make it feel any better as it unfolds.