This Isn't Life In The Fast Lane; It's Life In The Oncoming Traffic
Terry Pratchett
What’s Holding Up The Market?
Last week through examination of the Russell 2000s and the rest of my Economic Modern Family (KRE, IBB, XRT, SMH, IYT), I tried hard to make light of what now looks far more serious-the in-fighting or the increasingly dramatic dichotomy between the Indices (supported byBiotechnology and Semiconductor Mergers and Acquisitions) and pretty much everything else.
The Interest Rate Quandary
I searched back to October 2014 when the Fed announced it was ending its two year stimulus program or Quantitative Easing. At that point, the Fed was taking the chance that the economy would continue to grow. It has not.
Furthermore, the indecision on the Federal Reserve’s part to commit one way or another on raising interest rates reflects another quandary-what to do with the enormous number of bonds they bought during the QE program. To date, the Fed has to find a way to sell over $3Trillion worth of bonds.
Last week, the TLT’s or 20+ Year Treasury Bonds rallied. In the face of talk about a possible rate hike, it now appears that the TLTs are suggesting instead, that more stimulus is equally possible.
If the Fed goes back to injecting money, the rationale will have to be because of the floundering economic reports of late and the technical breakdowns in Real Estate,Transportation, Retail and Homebuilding.
What About Commodities?
I have had a nagging sense that with so much confusion, this is the year to look at commodities. Many are at multi-year lows. Deflation fears have to fold into the mix. Goldand Silver are near 2010 lows. Soft commodities such as sugar, coffee and corn are at their multi-year lows as well.
A decrease in real interest rates lowers the cost of carrying inventories, hence rising commodity prices. However, in the natural cycle of commodities, when interest rates rise, producers will cut output if prices are historically low. This leads to shortages.
Both roads--lower interest rates if the Fed injects and rising interest rates if the Fed follows the path of least resistance to sell the bonds they are holding--eventually lead to the same result. At some point-and timing is key-commodities will bottom and yield the next best long term investment opportunities.
So where does that leave the Economic Modern Family right now? Fighting in the minivan while sitting in serious gridlock.
S&P 500 (SPY) Once this failed to clear 212.50 or the fast moving average, the fate for last Friday’s decline was sealed. Now, 209.85 is the 50 DMA and back over 212.50 so much better Subscribers: Negative Pivots in all
Russell 2000 (IWM) Back to unconfirmed warning phase. Now, has to clear 125 or will see yet another test of 122.
Dow (DIA) After 2 Inside days it tried but ultimately held the 50 DMA. 180 nearest support ten 178.75. Upside, 182 key
Nasdaq (QQQ) Double top possible at 111.08-16 and support to hold now at 108
XLF (Financials) 24.40 support with 24.90 the point to clear
KRE (Regional Banks) And back to sheep, trading ranges and Economic Modern Family
SMH (Semiconductors) The land of M&A! New highs
IYT (Transportation) New 60+ day low and a breakdown on the weekly charts
IBB (Biotechnology) Parallel Universe to IYT
XRT (Retail) Granny Retail feeling the strain of her divided family
IYR (Real Estate) Another weakening sector
ITB (US Home Construction) And yet another
GLD (Gold Trust) Over 115 better if holds 114
USO (US Oil Fund) Touched the 50 DMA last Thursday then rallied well on Friday. Over 20.50 to start the week compelling
XOP (Oil and Gas Exploration) Broke the giant bear flag even with closing green on Friday
TAN (Guggenheim Solar Energy) I like the support it is holding but Hanergy Co concerns remain
TLT (iShares 20+ Year Treasuries) Retreated from 124 the 200 DMA and now 120.95 support
