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It is too early to get overly
concerned about the intraday weakness we have seen in recent sessions.
However, it is not too early to have contingency plans in place should
outcomes skew toward the bearish end of the spectrum.
Muted Response To Fed
The lack of response from commodities
and precious metals to Wednesday's "we will print as long as necessary
to bring down unemployment" announcement from the Fed is a yellow flag
for investors. It tells us the markets are losing confidence in central
banker's ability to create positive inflation in the face of strong
deflationary forces. Sometime over the next two weeks we would like to see
commodities and precious metals attract interest from buyers concerned about
future inflation.
Important To Have Contingency Plans
In our videos,
we often talk about "drawing lines in the sand" or "clearing
thresholds". If you manage investments with an "IF-THEN" type
of approach, it provides milestones for making decisions. At the early stages
of a correction or bear market, indecision can be very costly.
Given the weak stock market closes on
Monday and Tuesday, we believe it is prudent to identify "leave it
alone" regions and "time to take some defensive action" regions.
While we make allocation decisions based on our market models and the big
picture, understanding simple support and resistance levels is essential to
proper risk management.
S&P 500 Support
The chart below shows possible areas
of support for the S&P 500 based on numerous methods and timeframes
(monthly all the way down to a 5-minute chart). Fibonacci retracement levels,
based on the "down" move from B to C, are shown in blue (1393,
1408, and 1424). The retracement levels for the "up" move from A to
B are highlighted via the three green horizontal lines (1346, 1370, and
1395). An updated version of the chart below can be viewed during the
remainder of the week here.
If-Then Scenarios
If the S&P 500 drops into the
1408 to 1424 region, our bias would be to "leave it alone". If the
big picture deteriorates above 1408, we may consider adding a relatively
small hedge to our portfolios (e.g. a drop accompanied by significant
strength in defensive assets).
Our concerns would increase between
1393 and 1408, but our overall bias would still be an expectation of another
move higher in stocks. If the S&P 500 drops below 1393 and is accompanied
by other big picture bearish indications, we would most likely add a hedge
and/or cut back on our exposure to risk (do some selling).
Market Leaders As Risk Monitors
A simple tenet of markets is when
market leaders are healthy; the market tends to be healthy. Conversely, when
market leaders stop leading, it is time to become more concerned. If the
following ETFs can continue to exhibit strength, it sides with the bullish
camp for global risk assets: Mexico (EWW), Germany (EWG), France (EWQ), Euro Stoxx 50 (FEZ), China (FXI), Emerging Markets (EEM), and
Asia (AAXJ). We will also be keeping an eye on credit spreads in the days
ahead.
If Fed Assets Catch A Bid
The Fed is trying to create positive
inflation, including asset price inflation to encourage economic activity
based on the "wealth effect". If the Fed is
successful, stocks and commodities should continue to perform well. These
ETFs can assist with monitoring the effectiveness of the Fed's printing
extravaganza; silver (SLV), metals and mining (XME), semi-conductors (SMH),
Australia (EWA), Latin America (ILF), Brazil (EWZ), Russia (RSX), and
commodities (DBC).
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