US markets continue to lead the 7 Asset Classes

Market Story & Outlook:

Current Story of the market has added some certainty as the Fed insist that the economy is improving and growth remain stable. The buyers have bought into that assumption pushing the indexes back to the previous highs. Interest rates have flattened on the Fed outlook and belief of no rate hikes until late in 2015.¬†Volatility has died down to the 14 level on the VIX and has allowed the upside to prosper short term. For now all is calm and supposedly positive… one day at a time as this unfold into the end of the year.

The Fed still 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 sooner they rip the band-aide off the sooner the healing process will begin.

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 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.

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 financials and technology gaining some upside ground the last week of trading. The rotation in leadership has helped the index push back to previous highs and complete the ‘V’ bottom that has been in play the last month. Earnings remain a driver as well as the Fed.¬†Watch, manage your risk with stops and look for other sectors to join in the push higher.

SP500Scatter

Points of Interest:

  1. Healthcare is driving and biotech is the underlying reason. There is some topping in the sector and worth our attention moving forward to protect the gain in the move.
  2. Energy moved lower on the downside move in crude oil prices. The break below the $80 level is not helping short term as it has injected some uncertainty into the broad markets as a result.
  3. Financials made a renewed move to the upside and are assisting in the current move higher of the broad index.
  4. Technology got help from the semiconductors, but the internet sector has been a drag. Still like the push higher as it has helped the broader index move higher.
  5. Utilities remain a leader as well and with interest rates stable could offer more upside short term.
  6. Consumer staples are moving higher and gaining strength as money rotates to the defensive sector.

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 to higher of late. It is still outpacing the other currencies compared below. Renewed strength this week from the stimulus move in Japan. YCS jumped as a result versus the dollar.

Currency

Points of Interest:

  1. The renewed move higher for the buck has all the other currencies heading lower. Still watch for the dollar to weaken, but the Fed and other central banks want to keep the buck on top for now by their actions.

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, but let them run for now as ti plays out relative to the market environment.
  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 second pivot lower on September 1st and has not looked back since. It is important to note the bottoming attempting to take root the last two weeks failed and the downside resumed. 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. Crude oil has moved front and center as the commodity broke support at the $80 level and has put investors on edge relative to the impact for the stock sector. Look for the commodity to hold the $75 level as support near term. Patience could be rewarded with a upside trade as this bottoms.
  2. Natural Gas has moved up nicely off the lows and is facing some near term resistance. Cold winter expected and that favors the commodity short term.
  3. Gold broke support at $114.50 last week and the downside remains in play helped by the stronger dollar.
  4. Base metals (DBB) are showing some upside progress with copper, steel and aluminum making a upside move.
  5. The water index (FIW) has continued the reversal and shifting trend higher. Resistance $34.

Commodity

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

5) Global Markets: 

The global markets have shifted in conjunction with the US markets at least as far as the EAFE index is concerned. As we can define on the chart the big move in Japan is testing lower following the stimulus surprise last week. This is still a weak asset class and the leadership is not present. It is content to follow the US equity markets for now. Still willing to practice patience as this unfolds.

Points of Interest:

  1. Japan (EWJ) spiked to highs on the stimulus. Now needs to find its way and determine how much of an impact that will have short term.
  2. Emerging markets bounced, but failed to confirm and is testing lower again .
  3. Europe offers the best outlook short term as it is doing better economically short term, but not enough to change the short term outlook.
  4. China flirting with a move higher, but has failed to follow through to this point. Upside trade works if we get some follow through.
  5. Emerging markets continue to struggle as the dollar remains strong. Started to bounce, but faded lower again.

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 October 7th low and started a new upside move. The upside remains in play, but the one concern is interest rates and any hike would have a short term impact. For now positive and continues to move higher.

Points of Interest:

  1. PLD, HCN HCP and SPG have been showing some upside acceleration, but watch how the current FOMC meeting impacts this move going forward.
  2. MLPs bounced back from the sharp selling, but have equal risk to manage as energy commodities struggle for price stability. The sector is heavily influenced by the energy sector and should be watched as that is facing pricing pressure short term.
  3. Mortgage REITs have been moving sideways in light of interest rates and threat of moving higher? Worth watching.

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. Testing currently as emerging markets struggle against the dollar.
  5. PCY Рcurrent dividend yield is 4.8%. Bounced as well off the lows the first of October and upside move in play. Testing the trend 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.