Indexes Push Towards the March Highs

The broad market indexes made the move towards the March highs and the questions are flying relative to sustainability and momentum looking forward. The last two weeks investors have been digesting the move to this point, and are now in the position to take on more risk. What the catalyst is or will be, will determine the sustainability of the outcome. Due to the higher levels of the markets, the catalyst will have to be convincing in order to accept the additional risk of the positions.

One big question I have is relative to the central banks, are they keeping the investor engage in the markets? The rumor of the Federal Reserve launching QE3 in September for example. Will it transpire or not? If so, is it already priced in based on the recent moves back to the March highs? Is the economic data improving enough to put them on hold? There are plenty of questions to speculate around this matter. I believe the hope of stimulus from the Fed is keeping the investor engaged in the markets, but the better data this week from the economy has added to the positive sentiment towards stocks. Thus, the comment above about the elevated risk levels on forward expectations.

The ECB is in the same boat with promises to defend the euro and the EU. The renewed headwinds and legalities of issuing bonds is in play. Thus far investors have been willing to give the ECB time to put together a plan of action, but you have to wander how long this will go without some action. In fact, some believe the bond purchases will not take place at all. The issue is uncertainty of when and what the ECB will do or not do.

China is attempting to put stimulus in place to kick start growth. However, there are questions relative to the yuan’s current weakness, and if that will prevent further stimulus from the Chinese Central Bank? India is attemptiong to put stimulus into play as well as Brazil. The stimulus mania is growing globally, but precious little has been done other than talk. The proof is in the pudding, as the saying goes. All we can really do is watch, evaluate and manage the risk of the rumors, actions and speculation in each situation.

The economy trumps speculation. In other words, what the economic picture is currently along with future projections for growth will outweigh most speculation. The economy is holding steady and improving in some areas. The data for July has been sufficient enough to keep the Fed in check. Based on the current economic reports as well as the earning reports meeting or exceeding expectations in most announcements, the Fed may not take any action in September. More importantly if the outlook improves enough investors will be willing to take on the additional risk discussed above. Positive economic data and improving equity markets will not be a motivation for the Fed to act in September.

Some sectors of interest today:

Mining stocks are responding to the bounce off recent lows and commodity prices rising. XME, GDX, GDXJ and SIL have all moved into position to break from the three month consolidation. This is currently a trade (0-13 weeks) set up as the data is more speculative than sustainable fundamentally. See the Research Tables for more on each of these opportunities.

Crude oil has moved off the June lows and Thursday broke above a key resistance area at $94 per barrel. It faces plenty of resistance at the 200 day moving average and the $97.60 mark going forward. The easy money has been made in oil for now, and the upside may face some challenges. That said, it is likely to hold these levels without much downside. The elevated prices bring a different risk/reward looking forward. There are other opportunities around the sector worthy of tracking. Oil services stocks are moving higher in response, and worth digging into short term.

The stimulus rumor in Brazil are moving the stocks. We added several positions in the ETFs over the last week. The upside is based on the outcome of the stimulus over time, but worthy of the risk currently.  BRF, Market Vectors Brazil Small Cap ETF broke above resistance at the $37.60 level on Thursday with room to move towards the 200 day moving average.

Treasury bonds have been selling off as interest rates have move higher over the last week. Currently this is one of the most speculated events in the market. Every analyst at one time or another has believed these bonds to be overbought and in bubble type conditions. Looking at the chart of TLT, iShares 20+ Year Treasury Bond ETF you can see the acceleration to the downside as the short interest in the fund rises. Since the high on July 25th the drop has been 8.4% in the fund. The 200 day moving average is just below and it could provide some near term support. Watch to see how this progresses.

As always there are plenty of opportunities in the market, the goal is to find the ones that fit your risk profile. Be focused this is still a dangerous market environment. Don’t let the short term optimism lull you to complacency.