I update each Saturday with my view of the stock market for the next few weeks. The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market. You can always scroll down a few weeks and find the latest “Long Term” update.
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The monthly Long Term update for Feb. was posted on Wed. and is just below this post.
An uptick in supply and lower prices failed to boost existing home sales in January, which unexpectedly fell 3.2 percent versus the marginally downward revised December level to an annualized rate of 5.380 million, well below the consensus estimate of 5.650 million and the lowest rate for January since 1999. Year-on-year, home resales were down 4.8 percent, the largest decline since August 2014. The median selling price fell by a sharp 2.4 percent to $240,500 for a year-on-year increase of 5.8 percent.
Initial jobless claims continue to post very favorable readings that remain near historical lows, at 222,000 in the February 17 week down 7,000 from the previous week. The index of leading economic indicators points to robust economic growth ahead, accelerating in January to rise 1.0 percent following a 0.6 percent gain in December.
The Federal Reserve’s assets totaled $4.412 trillion in the February 21 week, down $ 23.2 billion in the week and down $ 48 billion from the beginning of balance sheet unwinding in October 2017.
I have been concerned that when interest rates rise, home sales would be the first thing impacted and it would be negative. The January numbers are poor, but it could be weather related. Let’s watch. Nothing interesting happened at the Jan. 31 Fed meeting, per the release of the meeting minutes. We see the Fed winding down its balance sheet, letting some bonds that mature be sold by the Treasury into the private marketplace. We also see longer dated bond prices fall and the interest rate tic up on them, which has spooked the stock market. Bonds have fallen into a bear market and I won’t buy any of them until yields offer a decent value for my money. We’re not close yet.
Let’s take a look at Europe, after focusing on the US for a few weeks:
“Jan. 25, 2018 – The euro surged Thursday afternoon to a new three-year high as doubts grew over the future of the European Central Bank’s (ECB) stimulus program.
The currency hit the $1.25 level against the U.S. dollar around 2:00 p.m. London time and was on track for its biggest weekly rise since May of last year. Traders noted that, despite comments from ECB President Mario Draghi on Thursday afternoon, they remain convinced that easy monetary policy in the region is coming to an end.
“Draghi failed to surprise the market,” Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC over the phone. “The economic data is too strong,” she said, adding that investors are therefore convinced that the central bank will have to tighten its policy, despite giving the opposite message on Thursday.
After a routine rate decision for the euro zone’s central bank, Draghi spoke at a press conference Thursday, telling reporters that the recent volatility in the exchange rate is a “source of uncertainty.” He added that it would therefore require monitoring.
However, he used the same wording back in September — a repetition that markets perceived as a lack of concern over the strength of the euro and thus an indication that the ECB will end up tightening its policy. Draghi nonetheless reiterated that the bank will keep its stimulus for as long as needed and stated that there are “very few chances” that it will change interest rates this year.
The euro has been on an upward trend against other currencies, including the U.S. dollar, for the past few weeks as the region’s economy keeps improving and political risks dissipate. However, a stronger euro could hurt European exports and affect inflation in the euro zone — which the central bank has tried to support in the last few years — potentially prompting a change in its policy.”
Europe is a big part of the “coordinated global recovery”, which generally is good for stock markets worldwide. Recently we showed how the value of the dollar has tanked, and the recovery in Europe is part of the reason, as the dollar is always valued RELATIVE to another currency. One of the things I particularly dislike about Mario Draghi is his lying, where it is obvious to everyone the recovery is on track in Europe and interest rates there need to rise, but Draghi insists it is not true so perhaps he can keep the value of the Euro low to make European exports cheaper internationally. In his defense, most central bankers around the world do the same thing, including the US.
Bottom line, economic conditions in Europe are improving, they will probably end QE in September, and in 2019 we will probably see them begin to normalize their interest rates. That will be interesting, since Europeans have been big buyers of US Treasury bonds since their rates were even lower than ours, but they will probably return to buying Euro debt. As the US deficit expands due to the tax cuts and spending increases, and the European buyers exit the market, interest rates could spike higher and imperil the US recovery. Debt is always a dangerous thing if taken too far.
This was a sideways week as the market took time out to assess what happened this month and where to head next. The recent rebound high is at 2750 and the market has been bouncing around just under it. Friday was a big up day and stopped just short of 2750.
Technically, the market indicators are neutral. RSI at the top is neutral at 53, and MACD has just begun to turn up from a low level, a small positive.
Which way next? I really don’t know. I exited the market when it first hit 2750, except for a few stocks that were still rising like Micron (MU).
We are in a correction in a bull market, and will be until we set a new high above 2875. That spells risk, so I sold out. If the market fails to break through resistance at 2750, there will be more downside action and probably a test of the recent low at 2550. If it successfully breaks through 2750 it can go up and test the old high at 2875, but if that fails there will probably be more downside correction.
If we begin to move up through resistance, I will start to buy back in slowly using SPY, buying a little each day the market moves up. In that way I get to participate in the upswing, while limiting my loss if the market heads down. If the market moves down from here, I may pick up a little SDS (short the S&P) and see if I can make some money while the market goes down. Right now, we just don’t know which way the market will move next, it’s at an inflection point.
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Rich Comeau, Rich Investing