Investors Must Know How We Got Here And Where We Are Going

April 23, 2014

Policymakers Are Blowing Bubbles Again

Many hard-working Americans are scratching their collective heads about the following questions:

  1. Why have stocks performed in a manner that seems to be out of step with the relatively slow pace of economic expansion?
  2. Why has the economic recovery failed to gain traction, even though the peak of the financial crisis occurred almost six years ago?
  3. Are policymakers inflating bubbles again?
  4. Will the markets revert back to the bust portion of the boom-and-bust cycle we have been in since 1997?

Learning From Nixon’s Wage And Price Controls

If you believe in the free enterprise system and its ability to efficiently allocate productive resources, the blurb below falls in the “I can’t believe they did that” category. From the Cato Institute:

Remember “TARP,” “Too Big to Fail,” “Government Motors,” “pay czar,” the buzzwords of the Bush-Obama era? They reflected a disturbing trend toward presidential interference in economic life. Forty years ago this week, President Richard Nixon showed us just how dangerous unchecked executive power can be to the free-enterprise system. On Aug. 15, 1971, in a nationally televised address, Nixon announced, “I am today ordering a freeze on all prices and wages throughout the United States.” After a 90-day freeze, increases would have to be approved by a “Pay Board” and a “Price Commission,” with an eye toward eventually lifting controls — conveniently, after the 1972 election.

Unfortunately, many political decisions and government acts are designed to help those in power stay in power. To stay in power, you have to get reelected. Notice how Nixon’s actions came prior to the 1972 election.

Choice Made To Focus On The Short-Term

When the S&P 500 was plummeting in the second half of 2008, policymakers had some tough decisions to make:

Option A: Let the financial crisis run its course and allow:

  • Bad debts to be purged from the system via defaults, and
  • Asset prices to find their true bottom based on supply and demand.
  • Option B: Try to stem market and economic declines with a focus on reducing short-term pain rather than what is best for the economy in the long run.

    In 2008, the cries of “we have to do something or we will get killed in the next election” were much louder than the pleas of “let’s not make the same mistakes again”. Policymakers around the globe, including the Fed and U.S. government, decided to intervene in the markets in a manner that had not been seen in quite some time.

    Can You Imagine Where We Would Be Today?

    Assume policymakers decided in 2008 to focus on the long-term and allowed the laws of supply and demand to determine (a) the true value of stocks and real estate, and (b) how to best allocate scarce resources. An argument can be made that under that scenario:

    1. The economic pain and job losses would have been far worse between 2009 and 2010.
    2. However, when stocks and real estate dropped to natural and reasonably priced levels, idle investment capital would have stepped in and started making productive and more sustainable investments in our long-term economic future.
    3. Once weak players and bad debts had been purged from the system, in an admittedly painful process, the economy would have started to grow at much higher and sustainable rates in 2011, 2012, and 2013. In 2014, unemployment would be lower than it is today and GDP gains would be much higher.

    If you are thinking “the laws of supply and demand and the free markets got us into the 2008 financial crisis in the first place”, keep in mind government intervention into the financial and housing markets skewed the free market and allowed asset bubbles to form. The markets were not free between 2002 and 2007 when government subsidies of all kinds were in place.

    Intervention Creates Pricing And Allocation Distortions

    The text below from the International Institute for Sustainable Development (IISD) highlights one of the primary causes of asset bubbles and economic distortions:

    Critics often point to the economic distortions created by subsidies, especially subsidies that are used to promote specific sectors or industries. Generally, such subsidies tend to divert resources from more productive to less productive uses, thus reducing economic efficiency.

    Government Intervention Helped Inflate Housing Bubble

    Between 2002 and 2008 numerous forms of government intervention and subsidies helped distort two industries, housing and financial services. The list below contains a few of the more relevant forms of intervention:

    1. Repeal of the Glass-Steagall Act
    2. Government guarantees of mortgage loans
    3. The Federal Reserve kept interest rates too low for too long.

    Déjà Vu All Over Again?

    Over the last five years, we have all heard “historic lows” and interest rates used in the same sentence countless times. Low interest rates help subsidize industries, such as housing, that benefit during times of favorable borrowing conditions. Concerns about artificially inflated housing prices have resurfaced again in 2014. From Yahoo:

    “It’s definitely a mixed bag of news,” says Humphries in the video above. “On the one hand you’re happy that home prices are recovering so nicely. On the other hand home values were definitely overvalued in 2006 and the fact that just so shortly after the greatest housing recession of the century we’re already seeing a lot of metros return to their peak levels is a sign for how robust the recovery is…but some markets are definitely in danger of overheating again.”

    Low Rates And QE Have Juiced Stocks Again

    In addition to flooding the system with greenbacks, low interest rates distort financial markets by forcing investors to gravitate toward riskier assets in search of returns. If you want to understand how quantitative easing (QE) alters the investment landscape, viewing this 2010 video will do the trick. Just as low rates helped push stock prices higher between 2002 and 2007, the Fed has been running their bubble-blowing machine almost non-stop over the past five years with an undeniable impact on stock prices.

    Debt Was Never Purged From System

    Government intervention (2008-2014) has allowed excessive debt to remain in the global financial system, which continues to act as a drain on systemic and economic confidence. The lingering debt has negatively impacted the strength of the current expansion. The text from The Guardian below was published on April 9, 2014, meaning debt-related problems are alive and well:

    The eurozone’s creaking banking system poses a serious threat to global financial stability, according to the International Monetary Fund, which warned European leaders to accelerate plans to support weak banks and create a banking union.

    Concerned Capital Has Remained On Sidelines

    If you believe…

  • Asset prices never reached their natural lows in 2008-2009.
  • Asset prices are still being artificiality inflated with QE and low interest rates.
  • Excessive debt still threatens the stability of the global financial system.
  • …then, it is difficult to make long-term investments in real estate, stocks, factories, new employees, etc. Government intervention helped create the three bullet points above. Those same bullet points have contributed to the current and tepid global economic recovery.

    Skewed And Propped Up Markets Carry Higher Risk

    Economic cycles commonly feature booms and busts. A common misconception for new investors is that we have never seen anything like this before. Policymakers and central bankers have been intervening in markets long before most of us were born, and they will still be doing it after we are dead. A bigger and more concerning misconception is “the Fed can always bail out the markets.” If that were true, why did the Fed allow the S&P 500 to drop over 50% in both 2000-2002 and 2007-2009. It is not a question of if the next bust is coming, but when.

    Bubbles Can Last Longer Than Rational People Think

    What happens if asset prices rise for another three years? If that sounds insane, keep in mind many were shocked the housing bubble remained intact as prices continued to rise into 2006. You may counter with “there is no way stocks can rise for three more years given their already stretched valuations.” Using valuations as a market timing mechanism is questionable at best. For example, stock valuations were already stretched in the 1990s and talk of bubbles was common (sound familiar?). As shown in the chart below, with a PE of 90, the NASDAQ gained an additional 134% from January 1, 1999 to the euphoric peak in March 2000. With a stretched PE of 32, the S&P 500 gained an additional 26%.

    Investment Implications: Preparing For Bubbles And Bears

    The objective of this article is to highlight (a) the importance of having a game plan for both bull and bear markets, (b) increased risks caused by artificially inflated asset prices, and (c) lingering concerns about excessive debt. There are many prudent ways to prepare for a bubble that lasts three more years or an imminent “pop”. Regardless of the approach, they all involve studying markets, building a risk-management system, backtesting the system, developing rules, and following the rules 100% of the time. If you are new to these concepts, the articles below provide simple examples of systems and risk-management strategies:

    1. You Need A Plan For Next Inevitable Bear Market
    2. Stock Bubbles: Can Investors Profit While Monitoring Risk?
    3. 2007/2013: You Will Never Look At The Markets The Same Way Again
    4. Tired Of Missing Rallies? 4 Ways To Improve Your Game
    5. Concerned About Being Underinvested? You Should Be

    Markets Still Responding To Fed

    One telltale sign the current bubble-blowing cycle is nearing its inevitable end will be when stocks fail to respond to Fed pep talks. Recent market action says we are not there yet. Technology stocks (QQQ) were on the ropes before Fed Chairwoman Janet Yellen delivered some reassuring words last week. From San Francisco Gate:

    Federal Reserve Chair Janet Yellen said [last] Wednesday that the U.S. job market still needs help from the Fed and that the central bank must remain intent on adjusting its policy to respond to unforeseen challenges. Yellen’s speech Wednesday and her answers to questions afterward served to confirm investors’ view that the new Fed chair is firmly in the camp of “doves”— officials who are more concerned about high unemployment than about the threat of future high inflation.

    Consequently, we continue to maintain a mix of stocks (SPY), bonds (TLT), and cash. The recent observable improvement in the market’s tolerance for risk allowed our market model to call for an increased exposure to stocks along with a reduction in cash. While things have improved for equities over the last five sessions, enough concerns remain, including artificially inflated asset prices, to maintain a flexible stance paired with an open mind.

    Elections Are Always Just Around The Corner

    Will the Fed decide to shut down the bubble-blowing machine? It is not likely for two primary reasons:

    1. Midterm elections are right around the corner with a Presidential election soon thereafter.
    2. No one, including Janet Yellen, wants a crisis to occur on their watch.

    Government Has Helped Skew Tuition Costs

    The impact of subsidies is not limited to housing and stocks. It is easy to find examples in all walks of life. Common economic sense tells us that cheap and accessible mortgages increased the demand for housing and help drive prices higher. The same logic can be applied to the availability of loans for college. From the Cato Institute:

    One result of the federal government’s student financial aid programs is higher tuition costs at our nation’s colleges and universities. Basic economic theory suggests that the increased demand for higher education generated by HEA will have the effect of increasing tuitions. The empirical evidence is consistent with that—federal loans, Pell grants, and other assistance programs result in higher tuition for students at our nation’s colleges and universities.

    The more recent form of intervention has come in the form of “forgiving” a portion of education loans. This program, like many others, has unintended and negative consequences. From The Wall Street Journal:

    The Obama administration has proposed in its latest budget released last month to cap debt eligible for forgiveness at $57,500 per student. There is currently no limit on such debt. The move reflects concerns in the administration not just about the hit to the government, but over the risk that promising huge debt forgiveness could make borrowers and schools less disciplined about costs. Colleges might charge more than they would otherwise, leading students to borrow more. Federal data show tuition and fees are up more than 6% a year on average in the past decade, more than 2 1/2 times inflation.

    Questions You May Have Asked Yourself

    April 22, 2014

    Article Will Be Posted Wednesday Morning Answering:

    1. Why have stocks performed in a manner that seems to be out of step with the relatively slow pace of economic expansion?
    2. Why has the economic recovery failed to gain traction, even though the peak of the financial crisis occurred almost six years ago?
    3. Are policymakers inflating bubbles again?
    4. Will the markets revert back to the bust portion of the boom-and-bust cycle we have been in since 1997?

    Uncertain Fed Plus Uncertain Economy Equals Uncertain Markets

    April 21, 2014

    Stocks, Bonds, and Gold Oh My!

    After 111 calendar days we have established one thing about the 2014 investment landscape; it is quite a bit different than 2013. The “easy” call heading into 2014 was that bonds were going to fall in price and interest rates were going to rise. Unfortunately, there are no easy calls in the world of investing. From Bloomberg:

    The surprising resilience of Treasuries has investors re-calibrating forecasts for higher borrowing costs as lackluster job growth and emerging-market turmoil push yields toward 2014 lows. That’s also made the business of trading bonds, once more predictable for dealers when the Fed was buying trillions of dollars of debt to spur the economy, less profitable as new rules limit the risks they can take with their own money. “You have an uncertain Fed, an uncertain direction of the economy and you’ve got rates moving,” Mark MacQueen, a partner at Sage Advisory Services Ltd., which oversees $10 billion, said by telephone from Austin, Texas. In the past, “calling the direction of the market and what you should be doing in it was a lot easier than it is today, particularly for the dealers.”

    On a relative basis, long-term Treasuries (TLT) shot out of the starting gate in 2014. Since then, there has been no clear leadership from bonds or stocks. Early in trading Tuesday, TLT was besting SPY by 0.53%.

    Earnings Push Stocks

    Markets often pause when investors begin to question stock valuations. At some point corporate earnings must justify higher stock prices. Stocks have been in pause mode for most of 2014. Earnings are trying to push the play button once again. From Bloomberg:

    “The few earnings that we’ve had so far have been coming in pretty well,” John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said in a phone interview. “All the fundamentals still line up that stock prices can go higher. Interest rates are still low, the economy’s getting better. All of that is still a good environment for equities.”

    Short-Term Hurdles

    This week’s stock market video covers numerous short-term hurdles that, if crossed, may allow stocks to take back the upper hand relative to bonds. Earnings will most likely determine the outcome.

    After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

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    All That Glitters

    Investor confusion has not been limited to the stock and bond markets. With tensions between Russia and Ukraine escalating early in the year, gold (GLD) appeared to be emerging as a market leader. The last month has not been kind to gold investors, putting them in a similar and still unsettled boat with stock and bond investors.

    Professional money managers have been net-sellers of the yellow metal in recent weeks. From Bloomberg:

    Hedge funds lowered bullish bets on gold for a fourth week, the longest streak this year. The net-long position contracted to the lowest since mid-February as speculators sold bullion on signs of accelerating U.S. economic growth. The investors more than doubled bets on lower prices in the past month while reducing wagers on a rally in six of the past seven weeks. Prices fell 7.6 percent since reaching a six-month high in March after tension in Ukraine eased and U.S. equities rallied to a record.

    Investment Implications - Tying To End Yo-Yo Action

    Monday’s session followed through on the gains posted in stocks last week, which is a good sign since it may be signaling the end of the market’s yo-yo action. We added to the growth side of our portfolios based on the observable improvement in the market’s tolerance for risk. Some of the concerns that were present at Friday’s close were cleared Monday. We still prefer to see the Dow make a new high above 16,576; it closed Monday at 16,448. We continue to hold a mix of stocks (SPY), bonds (TLT), and cash. While the markets would like to see some resolution in Ukraine, that appears to be little more than wishful thinking at this point. From Reuters:

    An agreement reached last week to avert wider conflict in Ukraine was faltering as the new week began, with pro-Moscow separatist gunmen showing no sign of surrendering government buildings they have seized. Washington says it will hold Moscow responsible and impose new economic sanctions if the separatists do not clear out of government buildings they have occupied across swathes of eastern Ukraine over the past two weeks.

    Stocks: Concerns Still In Place?

    April 18, 2014

    After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

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    Fed’s Low-Rate Pledge Keeps Wind At Stock Market’s Back

    April 17, 2014

    Don’t Fight The Fed

    The longer you are involved with the financial markets, the more meaningful the expression don’t fight the Fed becomes. In the simplest terms, if the Fed keeps interest rates near zero, it is next to impossible to make money in conservative investments. As long as the low-rate pledge is in place, investment capital will tend to gravitate toward risk in the search of positive returns. From The Wall Street Journal:

    Federal Reserve Chairwoman Janet Yellen left markets comforted and reassured about continued low interest rates after a speech that emphasized her focus on low inflation and economic slack. Wednesday’s remarks, coming in her third major address in the past month, followed an eventful first policy meeting in March that left some investors worried the central bank under her leadership might be inching toward higher rates sooner than expected. Ms. Yellen studiously sought to keep the central bank’s interest-rate options open in the speech before the Economic Club of New York. “Because the course of the economy is uncertain, monetary policy makers need to carefully watch for signs that it is diverging from the baseline outlook and then respond in a systematic way,” she said.

    Fed Still Thinks Weather Was To Blame

    As noted on April 2, stock market corrections almost invariably are kicked off by economic or geopolitical concerns. The recent bipolar activity in the stock and bond markets was due in part to a soft patch of economic data. Janet Yellen addressed that topic Wednesday. From CNBC:

    “In recent months, some indicators have been notably weak, requiring us to judge whether the data are signaling a material change in the outlook,” Yellen said. “The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather related.”

    Resource Utilization Justifies Low Rates

    The Federal Reserve is charged with a dual mandate, which includes “fostering maximum employment.” While unemployment has come down, so has the labor participation rate. Yellen cited economic slack and idle workers as justification to keep interest rates suppressed. From The New York Times:

    Even as a number of indicators point to better economic times ahead, the chairwoman of the Federal Reserve, Janet L. Yellen, reiterated on Wednesday that she expected interest rates to remain very low until the recovery is on a more secure footing and the American economy is more fully involving available workers and other resources.

    Investment Implications – Lines In The Sand

    We outlined the economic rationale for monitoring the strength of industrial stocks on April 4. Investors would be showing renewed confidence in the wake of Yellen’s remarks if their buying conviction can push the Dow to a new weekly closing high. The zig-zag look of the Dow is indicative of investor confusion. During periods of low conviction and indecisiveness, it can be helpful to draw some lines in the risk-reward sand. For example, one might take a more measured approach redeploying cash as long as the Dow remains below 16,478. If and when a weekly close is printed above 16,478, redeployment confidence could be ratcheted up a notch. The weekly close printed below 16,478 at 16,408.

    We entered the week with a fence-sitting mix of stocks (SPY), bonds (TLT), and cash. Given the still uncertain outlook for the economy and Fed policy, along with still shaky technicals, we made no moves this week. If the Dow pushes to a new high and the S&P 500 can clear 1,870, we will most likely increase our exposure to stocks. Possible buy candidates include dividend stocks (DVY), broad U.S. stock exposure (VTI), industrials (XLI), and energy stocks (XLE).

    Frustrated By Stocks This Week?

    This week was unpleasant for many investors, which prompted the strategy tweet below:

    Weekends are a good time to review investment risk management strategies. On March 29 we noted if an approach or system can manage to avoid the pitfalls below, the odds of successfully navigating though the next crisis should improve:

    1. You think you know what is going to happen next.
    2. Your plan is not flexible enough.
    3. Failing to understand the strengths and weaknesses of technical analysis.
    4. Government and central bank intervention.
    5. Economic turnaround.

    Heading into this week, the markets looked extremely vulnerable to additional downside. During the week, instead of correcting, stocks yo-yoed back up. The five points above applied to the past week of trading. The Fed was a big part of the turnaround in stocks (central bank intervention). We also saw some favorable economic numbers, such as the better than expected Philadelphia Fed Survey released Thursday. The five points above, especially flexibility, will be important next week as well.

    Stock Rally: Will Third Time Be A Charm For Dow?

    April 16, 2014

    Mobile Usage Hurts Google

    The easiest way for investors to become more decisive in the financial markets is for earnings to justify higher stock prices. While after-hours quotes should always be taken with a grain of salt, Google was down 2.48% after releasing some disappointing figures late Wednesday. From Bloomberg:

    Google Inc.’s costs are rising as the search provider finds it harder to keep up with a broad shift to advertising on mobile phones, with sales falling short of estimates. Google’s audience is steadily migrating to smartphones, where the company gets less money for marketing spots than on desktops and tablets.

    Dow Making 3rd Attempt At 16,580

    After pointing out a Dow Theory non-confirmation that was in place on April 4, the S&P 500 dropped over 50 points. Has the Dow posted a new closing high during this week’s rally? Not yet. The inability to print a new high is indicative of investor doubt about earnings, the economy, and central bank policy. Janet Yellen’s remarks helped boost stocks Wednesday, but those moves can be “one day wonders”. We will see if the gains can continue on Thursday.

    IBM Not Helping The New High Cause

    IBM carries the third highest weight (7.7%) of any stock in the Dow Jones Industrial Average. Therefore, the reaction to Wednesday’s earnings will impact the Dow Thursday. The early reaction was not favorable for Big Blue. IBM was down over 4% in the after-hours session on revenue concerns. From MarketWatch:

    Revenue slipped to $22.48 billion, below the $22.91 billion projected by analysts polled by Thomson Reuters. It was the eighth straight quarter IBM has reported weaker revenue from year-earlier levels. Though the computing and tech giant remains a key provider of computer hardware, software and services to big corporations and governments around the world, IBM is struggling to respond to technological advances such as cloud computing, which allows customers to rent computing power and software over the Internet. Slowing demand in emerging markets, especially China, is also posing a challenge for Big Blue.

    Investment Implications

    Janet Yellen’s stock-friendly comments helped spark a strong day in stocks Wednesday. Given the schizophrenic nature of the shifts between risk-on and risk-off in recent weeks, we prefer to see if stock gains can hold into the holiday weekend before considering any adjustments. You would think with stocks gaining ground Monday, Tuesday, and Wednesday, bonds would be getting killed. The long-term Treasury ETF (TLT) is up 0.49% this week, which indicates some ongoing economic skepticism. Both our stock (SPY) and bond positions are in the black for the week. We will see how the stock market handles the disappointing reports from Google and IBM.

    Trading Range or Stock Correction Remain Most Plausible Scenarios

    April 15, 2014
    1. The mixed-bag economy and mixed-bag market continue to call for defensive contingency plans.
    2. Given what we know today, a rapid and sustainable push to new highs in stocks appears to be the least likely scenario, behind consolidation/correction.
    3. Earnings have been decent so far, but Wall Street makes sure the expectation bar is set at a comfortable level.
    4. An allocation of stocks, bonds, and cash allows for needed flexibility and migration paths until a more dominant theme can emerge.

    Playing The Low Estimate Game

    Isn’t amazing how the majority of companies meet or beat earnings expectations quarter after quarter? Wall Street has always done a nice job of managing investor expectations. From Bloomberg:

    “It’s quite likely that U.S. earnings will beat expectations because analysts have set the bar quite low,” James Butterfill, who helps oversee about $50 billion as head of global equity strategy at Coutts & Co., said by phone from London. “There probably won’t be any particular pressure on margins this quarter, so earnings momentum will continue to rise. I do expect the harsh winter to have impacted the most energy-intensive companies.”

    Inflation Aligns With Ongoing Fed Taper

    The good news Tuesday came on the earnings front, with Coca-Cola (KO) and Johnson & Johnson (JNJ) eliciting a bullish response. The bad news was related to inflation. From Reuters:

    U.S. consumer prices rose in March, but inflation pressures remained generally benign, which should give the Federal Reserve ample scope to keep interest rates low. The Labor Department said on Tuesday its Consumer Price Index increased 0.2 percent last month as a rise in food and shelter costs offset a decline in gasoline prices. Economists polled by Reuters had expected a 0.1 percent rise.

    Central bankers tend to print money until inflation forces them to slow down the presses. Today’s inflation data aligns with an ongoing Fed taper.

    Ukrainian Military Action?

    The unrest continues between Russia and Ukraine. It is possible the markets will have to digest some form of military action, which checks a glass half empty box. From The Wall Street Journal:

    A Ukrainian military operation to wrest control of cities in the east from pro-Russian militants has begun, Ukraine’s acting president said Tuesday, as Russia’s foreign minister warned use of force could derail international talks on the crisis. Oleksandr Turchynov said that a phased “antiterrorist” operation began in the early morning hours in the northern Donetsk region, where the majority of the cities commandeered by pro-Russian forces are located. But there were no immediate reports of specific action and it was not clear how big the effort was.

    Investment Implications: Mixed Bag = Mixed Allocation

    From a fundamental perspective, there are many positives (earnings Tuesday) and many negatives (Fed taper). From a technical perspective, the longer-term trends remain bullish, but the intermediate-term trends shifted to a “risk-off” stance last week. Our nearly equal weights to cash, stocks (SPY), and bonds (TLT) remain appropriate for the current mixed investment climate.

    Resistance Test Would Come At 1,850

    Another example of a mixed picture is the chart of the S&P 500 below. The good news is the index has gained back 25 of the 49 points lost last week (early in Tuesday’s session). The bad news is various forms of prior support (green arrows below) and prior resistance (red arrows) seem to be congregating near 1,850ish. A reversal below 1,850 could bring a return to last week’s risk-off environment. A decisive break above 1,850 could open the door to a retest of the recent highs (near 1,900).

    We have shown frustrating and indecisive charts in recent articles. We could produce additional examples from numerous corners of the market, including the chart of the small cap ETF (IWM) below. If investors had strong convictions about a brighter economic future, we would expect small caps to be performing well, rather than treading water for six months.

    Indecisive markets are frustrating animals. If we remain patient and disciplined, the market will tip its hand. For now, a mix of stocks, bonds, and cash offers an appropriate balance between risk and reward. We questioned the sustainability of the bullish advance in stocks on April 4 with the S&P trading at 1,865. We remain concerned with the S&P trading at 1,827.

    Stock Bounce Does Little To Alleviate Concerns

    April 14, 2014
    1. The stock bulls got a nice fundamental trifecta Monday with good news on the economic, central bank, and geopolitical fronts.
    2. However, the rally attempt thus far has done little to alter the market’s intermediate-term risk-reward profile.

    Retail Sales: Better Than Expected

    After the stock market sells off significantly, any form of good fundamental news can create a fairly significant “oversold” bounce. The stock market bulls got what they wanted Monday in the form of retail sales. From Reuters:

    U.S. retail sales recorded their largest gain in 1-1/2 years in March in a decisive sign the economy is bouncing back from its weather-induced slumber. Monday’s upbeat report was the latest to indicate growth was set to accelerate in the second quarter after an unusually cold and snowy winter hobbled activity early in the year.

    The good news did little to alter the “economic concerns are increasing” look of the weekly chart below. Consumer discretionary stocks (XLY) still looked ugly on a relative basis as of 2:00 p.m. EDT Monday.

    ECB: Good News and Bad News

    Risk takers prefer easy money policies from central banks since the added liquidity has to land somewhere. The good news from the European Central Bank (ECB) Monday was they signaled a willingness to expand their stimulative measures. From Reuters:

    The dollar rose against the euro on Monday after European Central Bank President Mario Draghi signaled the bank would ease monetary policy further, while strong U.S. retail sales data also boosted the dollar against the yen. Draghi said in Washington on Saturday that “a further strengthening of the exchange rate would require further stimulus”. Bank of France chief Christian Noyer hammered home the message saying: “The stronger the euro is, the more accommodative policy is needed.” “The ECB is taking the value of the euro more seriously in their approach to monetary policy,” said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Ltd in New York. The statements marked the ECB’s strongest signal yet that it would act to head off further gains in the euro.

    Given the Fed’s easy money policies have been a big driver of stocks in recent years, it is fair to say that all things being equal stock market bulls feel more secure when the U.S. greenback is weakening. The bad news Monday was comments about ECB policy helped push up the U.S. dollar.

    The Big Picture

    Since investors have much longer time frames than traders, looking at risk from a weekly perspective makes more sense. This week’s stock market outlook video provides numerous forms of observable evidence that point to a deteriorating outlook for equity investors.

    After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

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    Ukraine: A More Peaceful Path?

    There is no question the Russia-Ukraine standoff has weighed on the minds of investors in recent weeks. The bulls can make an argument that tensions eased a bit Monday. From The Wall Street Journal:

    A day after threatening a full-scale military operation to drive pro-Russian militants out of a string of eastern Ukrainian cities, the country’s acting president offered an apparent olive branch Monday, saying he wasn’t opposed to a countrywide referendum on possibly granting regions greater autonomy. The move appears to signal increasing desperation from Kiev, highlighting it has few options for a real response as opponents take over further territory.

    Investment Implications – Show Me

    Is it possible stocks have found a bottom? Yes, but one day does not make a new trend. Last week we noted the concerning lack of progress in stocks, which is a symptom of increasing economic concerns. The “vulnerability box” was not altered in a meaningful way during Monday’s rally in equities.

    We entered the week with an allocation of cash, stocks (SPY), and bonds (TLT); a mix that aligns well with an indecisive and hesitant market. As noted on March 21, discipline is the key to ending up in the right place once a period of consolidation is complete. Last week, the scales tipped toward risk-off. Depending on how the market reacts to the incoming data, including Tuesday’s report on consumer prices, we will ratchet up or ratchet down our risk exposure over the coming weeks.

    Stock Market Correction Odds Increasing

    April 11, 2014

    This Week: (1) CCM Market Model, (2) DeMark counts on the S&P 500. DeMark charts and indicators are proprietary tools from Market Studies, LLC.

    After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

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    Video Is Being Processed

    April 11, 2014

    Should be available here sometime around 7:30 p.m. EDT on Friday.