By J Clinton Hill, Capital Markets Strategist @ Hillbent.com
Market Condition: September 12, 2016
Today was void of any market moving data to guide investors on the direction of next week’s FOMC announcement. The opportunity was not lost upon Federal Reserve Governor, Lael Brainard, who dovishly emphasized accommodation to mitigate risks of low growth and inflation in Europe and Japan. By doing so, expectations for a September rate hike plunged from 19% to 11% (based upon trading in Fed Funds Futures).
However, after Friday’s unexpected selloff, some sort of rebound was to be expected. Desperate men will cling to hope, even when false. To be sure, the Fed will raise rates. Yet, do not be deceived as it is not in control of the markets and nor should it be. The reversal rally in equities was almost impressive, but technically speaking, the market condition is deteriorating. This should not be misconstrued as the advent of a new bear market, but the correction initiated on Friday could very well extend itself further to the downside.
Asset Class Summary Analysis
Equities: Major US stock indexes, i.e. Dow Jones 30 Industrials (DIA), S&P 500 (SPY) and Russell 2000 (IWM), will still need to clear last Friday’s high and fill their downward gap to give their rebound credibility. Providing leadership and demonstrating that such is possible was the Nasdaq 100 (QQQ), which distinguished itself by almost approaching last Friday’s high and managing to close with a strong relative strength ranking.
Globally, Japan (EWJ), Europe (VGK) and China (FXI), noted to be weaker links in the food chain for G-20 economies, have been top performers lately and successfully testing support and thus far maintaining their bullish trends.
Equity Sectors: Only three out of the ten major sectors are still holding support at their 50-day moving average, but shave off three percent and they too will find themselves in short-term bearish territory. Utilities (XLU), interest-rate sensitive like bonds, have been underperforming all sectors, but especially by Financials (XLF).
Volatility: The VIX (VXX) is once more reflecting complacency, but needs to overcome resistance at its 40-day moving average.
Bonds: Rising yields in treasuries and Bunds are taking a toll on bonds and as they struggle to find support at their 50-day moving averages. The desire for yield is evident in the relatively strong performance of High Yield Bonds (HYG).
Currencies: Shorting the US Dollar (UUP) and buying the Japanese Yen (FXY) remains in play, while the Euro (FXE) continues to churn in neutral. As the saying goes, don’t fight the tape.
Commodities: Gold (GLD) and the US Oil Fund (USO) are also succumbing to pressure of potential rate hikes. GLD, so far, has been the most resilient and gold bugs may yet call the Fed’s bluff or at least force it to show its true hand. At some point the central bank will have to “walk instead of talk”. Don’t abandon the yellow metal.
Real Estate: While technical damage to this group is real and will take time to reverse, the current 4% dividend yields on the DJ Real Estate Index (IYR) and Residential Real Estate Index (REZ) make them attractive buys as the US economy has yet to reach the contraction phase of the business cycle.
No further comments this evening. (Please see our exchange traded fund summary below for a capital markets performance analysis.)
ETF Market Performance: September 12, 2016
|1YR RS||Equities||Close||% Chg||50D-MA||200D-MA||50-v-200|
|89||DJ-30 Industrials (DIA)||183.30||1.32%||-0.46%||4.38%||4.86%|
|88||Emerging Mkts (EEM)||36.96||0.68%||1.57%||10.59%||8.89%|
|65||Europe FTSE (VGK)||49.30||0.90%||2.60%||2.43%||-0.17%|
|87||Latin America 40 (ILF)||28.21||1.80%||0.68%||15.61%||14.84%|
|88||Pacific Ex-Japan (EPP)||41.08||0.69%||-0.12%||6.20%||6.33%|
|82||FTSE China 25 (FXI)||38.28||0.13%||5.45%||13.22%||7.36%|
|3||VIX Short-Term Futures (VXX)||36.28||-6.71%||-11.40%||-47.25%||-40.46%|
|Bonds / Fixed Income|
|69||20+ Yr Treasury (TLT)||135.59||0.05%||-2.81%||3.22%||6.20%|
|74||Aggregate Bond Fund (AGG)||111.82||0.08%||-0.64%||1.11%||1.76%|
|72||Treasury Inflation Protection (TIP)||115.12||0.03%||-0.91%||1.32%||2.25%|
|78||Investop Corp Bond (LQD)||121.83||0.01%||-1.25%||2.70%||4.00%|
|91||High Yield Corp Bond (HYG)||86.07||0.35%||0.17%||4.42%||4.23%|
|29||US Dollar Bullish (UUP)||24.60||-0.16%||-0.73%||-1.36%||-0.64%|
|63||Euro Trust (FXE)||109.38||0.08%||0.68%||0.64%||-0.04%|
|90||Japanese Yen Trust (FXY)||94.88||0.88%||0.74%||7.98%||7.18%|
|71||DB Commodity Index (DBC)||14.65||0.00%||-0.14%||5.40%||5.54%|
|35||US Oil (USO)||10.64||0.47%||0.85%||1.14%||0.29%|
|75||DJ Real Estate (IYR)||80.83||1.21%||-3.05%||4.42%||7.70%|
|77||DJ Home Construction (ITB)||28.07||1.15%||-2.97%||4.47%||7.67%|
|69||Residential Real Estate Index (REZ)||64.97||1.17%||-3.52%||1.22%||4.91%|
|81||Consumer Discretionary (XLY)||79.53||1.40%||-1.79%||1.84%||3.70%|
|75||Consumer Staples (XLP)||53.68||1.88%||-2.15%||2.23%||4.48%|
|92||Technology / Info (VGT)||117.66||1.59%||2.28%||8.90%||6.48%|
Signing off @ Hillbent…
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