Questions to Ponder

The great thing about weekends is having time to relax and ponder life. As I was scanning and reading analyst reports looking at what others see and believe about the market, it hit me that there are more opinions about the market than there are publicly traded stocks. It was not the number of opinions as much as the difference of opinions on the very same topics. As we start a new week of trading I thought it would be worth putting some of the current issues on the table and determining if there are any opportunities in how they unfold or develop.

“Tapering”… The new word created by Wall Street for the Fed cutting the $85 billion in stimulus it is “investing” in bonds to “stimulate” future growth. The question, ‘is the economy strong enough to handle the cuts from the Fed?’ This topic could be debated forever and there is not a simple answer. The proof will be in the outcome, but that doesn’t help us now. What happens to interest rates? Do they move higher, or have we experienced the worst of the move higher in Treasury bond yields? Is there more downside for bonds as yields continue to rise? The long and short of it is to track the yield on both the ten and thirty year bonds and follow the trend. If yields continue to rise TBF, ProShares Short 20+ Year Treasury ETF is the opportunity. If however, yields stabilize TLT, iShares 20+ Year Treasury Bond ETF or IEF, iShares 7-10 Year Treasury Bond ETF may offer an opportunity as the higher yield becomes attractive as a part of our portfolio.

Commodities are done… for now? The commodity sector has not been a friendly place to be invested over the last two years, at least according to the chart of DBC, PowerShares DB Commodity Index Tracking ETF. The downtrend in the sector remains very much intact and the outlook isn’t much better. The one exception of late has been crude oil (OIL). After trading sideways in a range for nearly six months this year, oil has made a move back near the 2012 highs of $110 per barrel. Is it sustainable? Is the demand issue the primary driver? Supply? What is pushing oil back to near term highs? That is where the speculation comes into play, and depending on which analyst comments you read or subscribe to, will determine what you believe about demand looking forward. For now, demand, according to the data, isn’t rising. However, the speculation that things are improving around the world, and Europe being the most recent to add to the speculation that  things are improving. If it is true, then demand will rise and supplies will have to ramp up to meet the demand. I don’t want to be the investor who believes things are improving when the numbers/data fail to validate the speculation. Thus, oil is trading higher on speculation and hope. Technically that doesn’t matter if you are a technician in the trade. However, fundamentally nothing adds up currently. Thus, choose which side you believe and invest accordingly. The opportunity in the sector may be more in the drillers and/or servicing companies more than the price of crude. Watch XOP, OIH and IEZ going forward.

China? The difference of opinions on the outlook for this country are amazing. The longer term trend remains down, but since the low in June GXC, SPDR China ETF has bounced more than 12%. Even with the bounce the trend is down longer term. Thus, we could say the bounce is from an oversold state and the uptrend is not going to return anytime soon. The challenge has been slower economic growth and a lack of clarity going forward. There are questions as to whether the economic data is be inflated by the Chinese government or if things are improving enough to put money to work in the country? The trend is your friend and on a micro term basis (less than three months) the upside is in play. If you are looking at trading the country ETF you have had several buy signals for the trading opportunity. If you are looking longer term the first order of business would be to break the downtrend in play off the January high, then show an improvement in confidence relative to investing in the country. For now the opportunity is in trading China. Investing in China longer term still has some work to do to convince investors the worst is over.

US Markets are overbought? This issue will be debated for eternity. I am not interested in attempting to define what overbought is, means or when it will change. What I am interested in is two things, first, fundamentally what is happening with the companies which make up the indexes. For the sake of space and time let me make just a few comments. Currently 442 companies in the S&P 500 index have reported earnings. Of which 72% have beat on the bottom line and 53% on the top line (revenue). Breaking the earnings down what we are seeing is cost cutting and stock buy-backs helping the bottom line. The top line beat is partially a result of price cutting to sell more. The concern with that is margin compression. We saw plenty of that in the Q2 earnings. Thus, looking forward there are fundamental challenges facing companies. How much more can they contain costs? Fund share buy-backs to improve profits? How long can they cut prices to increase sales and remain profitable? All good questions, but the key will be to watch how the data unfolds moving forward. Second, The trend of the indexes currently and looking forward. Currently the trend is up and sideways. The sideways move over the last three to four weeks is a concern that needs to be watched short term. If the trend breaks make the necessary adjustments to your portfolio. But, let the trend determine the outcome short term. Looking forward… the projections call for an improving economy over the second half of the year. July didn’t disappoint, but we need to see gradual improvement each month moving forward. The tappering from the Fed will be the wild card as discussed above. For now the trend is in play on the upside and we will honor the trend until which time it breaks and we head for the exits. US markets still offer upside opportunities as the leaders test the current move.

Yes, there are plenty of questions to ponder when it comes to investing our money. The key is to put every investment in perspective relative to the time horizon, current market risk and risk we are willing to accept in our portfolio. Take it one day at a time focused on your goals and objectives and make your decisions based on your perspective and risk tolerance.