Ten Ideas Looking Forward

The market remains a mental challenge for investors. We have discussed this all year relative to a lack of clarity. I wrote over the weekend about the wall of worry being nothing more than a function of clarity. Below are ten ideas relative to the markets and what you and I can or should not do as this all unfolds. To keep it simple think of the market like reading a mystery novel. You want to know who did it, but you have to read the story as it unfolds to figure it all out. That is the market currently… a mystery that in reality is waiting for decisions and facts that will set the trend in motion going forward.

The first three are the biggest worries and thus more time spent by the market on them the balance are other opportunities or worries to watch:

  1. The Federal Reserve – I should just stop there… they have been a PITA (pain in the ass) to the market for the last two plus years. The inability to make decisions and adjust as they go along they just keep limping with excuse after excuse not to raise rates. They have now waited to the point of the economy stalling under the weight of the inaction. Hike rates and let everyone respond as they will. In the end it will be better for the economy. If you take the trillions of dollar in retirement accounts and add 1% interest to them the impact to the economy by the consumer (retiree) having more to spend will make an impact. Yes, all those worry warts about the economy stalling as a result… it may, but it will improve over the longer term view. They need to stop being focused short term and look longer term. When the Fed finally acts and removes this “worry” from the investors mind… markets will respond positively over time… immediate reactions will create an opportunity.
  2. The US Dollar – Yes, it is getting stronger again. This should not be a mystery in light of the rest of the world. Before we all get too concerned the downtrend off the March high is still in place. The dollar needs to work it’s way back to the $26.20 level to convince me the upside is ready to resume. The dollar index needs to move above 98.30. Blaming the decline in oil on the dollar of late is not exactly true. Commodities overall and the emerging markets… yes. The downside risk to those are real… but, as the dollar settles into a trading range the upside in those assets will return. Too often we are guilty of the negative short term versus the positives longer term. The strength of the dollar will bring new opportunities in time, but in the meantime… short the yen (YCS), short the euro (EUO) and long the dollar (UUP) seems to be working very well. Where there is complaining there is usually opportunity.
  3. Crude Oil – Yes, prices are declining again and it is not the fault of the dollar. You need to look no further than supply/demand imbalance. All the chatter about the US rig counts being down and production down and, and, and… isn’t stopping OPEC, Russia, Brazil, Iran, Iraq and others from increasing production. They need the money to live and sustain their oil dependent economies. There is always more to it than what is in the news. Focus on the underlying facts and you will find the truth… in time the markets always migrate to the truth after they the chase the lies down to confirm they are lies. Not a fan of either side of this trade currently, but I do think, believe, and know in time the opportunities will unfold… for now look elsewhere.
  4. Interest Rates and Bonds – As stated above the Fed just needs to proceed forward and offer some relief to interest sensitive assets. Treasury bonds (TLT) have been a roller coaster ride this year. The have declined more than 10% on the move in interest rates higher in anticipation of the Fed acting to raise rates. Interestingly enough stocks have not stalled too much and the economy is still racing along at 2% growth just like the last five years. The short side of this trade has worked well and it will work again as the Fed acts. Not a sector to be long… but, like most negative news it will create an opportunity by overshooting the mark. Keeping this on our list to buy after the war is over with the Fed and interest rates… in the meantime I still like the short side of the bonds following this bottom bounce.
  5. Emerging Markets – the downside risk is back with the dollar strength of late. The break below $41.75 is a negative. Take out the 200 DMA another negative.. Break $41 and it could get uglier. Short trade is on for now, but I would be very cautious about this sector bouncing as the worries lift. I am not short, not really interested in getting short… but, I am interested in a bottom reversal as it sets up.
  6. China – Why the jump higher and now indecision about the outlook? All that comes to mind is the title of that old movie… “Sex, Lies and Videotapes”. I know random thought, but the four letter word in the middle is the key… Lies. Someone is lying and I don’t really care who as I will not have the power to change it… I do have the power to avoid the country currently and look at the opportunity to be short should the current trend reversal setup follow through on the downside. Be patient and let it unfold.
  7. Greece and the EU – Stop this madness… the EU (European Union), ECB (European Central Bank) and IMF (International/US Monetary Fund) are acting like the Fed. Can’t keep from picking at the sore. Greece doesn’t have any money, they don’t have a fiscal policy that is worthy of discussion and they keep electing officials that promise handouts instead of hard line solutions. Let them default and let’s get on with this mess. Clean it all up and make it a better place financially. GREK by the way has been a good trading ETF for those willing to ride the risk and news wave.
  8. Banks – The banking sector has been confused by the Fed as much as any investor. The inability of the Fed to act on interest rates is the challenge with this sector. Higher rates would be a plus for the sector and thus we like the regional banks (KRE) the most in the arena. You have to focus long term and trade the imbalances as they happen relative to the Fed and emotions. Taking a three year time horizon and a focused strategy for managing the risk. This is a one of the better opportunities looking forward.
  9. Politics – I don’t want to get into the dysfunctional group in Washington DC, but they are over regulating to the point of stalling the economy and causing price destruction in sectors of the market and sections of the country. Minimum wage increases, mandatory healthcare, higher medicare taxes, social security, and the list goes on… this is putting a squeeze on businesses and it is passing on price inflation that has nothing to do with the cost of goods and it is an inflationary process that the Fed can’t manage. These issues will get worse before they get better. In a capitalist economy regulations will strangle growth… Not saying we don’t need laws, I am just stating that when the government oversteps the laws of capitalism it destroys the effects of capitalism on growth. This is an on going issue that will continue to show up in GDP and inflation.
  10. Volatility Index – The VIX is at 13.5 currently and that is low. Despite all the worries above the investor is complacent. The spikes higher for a couple of days are not volatility it is news driving volatility short term. If all the worries were really weighing on investors the VIX would be at 20 or higher… thus, something else to watch as all this unfolds in the coming weeks, months and years.

The markets are and will continue to be a mental challenge for investors. Don’t overthink and analyze it… let it unfold. Watch for the trends that are sustainable and put your money to work there. If you can’t find anything that meets your criteria… cash is a sector. The key is have a defined strategy, a defined approach for implementing your strategy and the discipline to carry it out. There will be plenty of opportunities as we move on.