2008-Like Plunge In Stocks Not Likely

By: Chris Ciovacco | Mon, Dec 2, 2013
Print Email

Labor Market Keeps Presses Rolling

The table below puts some context around the impact of the Fed's bond buying program. It tells us several billion dollars of freshly printed money will be pumped into the global financial system this week. The Fed's actions greatly reduce the odds of an imminent plunge in stock prices.

Tentative Operation Schedules


Dual Mandate Speaks To Employment

The Fed has said for some time it wants to see substantial improvement in the labor market before ending this round of quantitative easing, meaning an aggressive tapering schedule is not likely to be announced in the coming weeks. From Bloomberg:

"The weakness in jobs is continuing fodder for the Fed to fulfill its most recent and steadfast comments about the support of the economy," Holland, who oversees more than $4 billion in New York, said in a Nov. 26 phone interview. "Until the labor market gets better, the two parts of dual mandate have to be served," he said. "I'm still pretty set in my position and prepared to see the market go higher."


Why A 2008-Like Plunge In Stocks Is Not Likely

This week's stock market outlook video compares 2013 to vulnerable periods in 2000 and 2008. As shown in the video, bullish economic conviction relative to bearish economic conviction is much stronger today than it was in 2000 or 2008.


Manufacturing Picks Up

If the Fed hopes to taper their bond purchases without disrupting the bull market in stocks, the economy must show signs of improvement. Monday investors were greeted with some encouraging news. From Bloomberg:

Manufacturing unexpectedly accelerated in November at the fastest pace in more than two years, pointing to a pickup in business spending that will help propel the U.S. economy in early 2014. The Institute for Supply Management's index increased to 57.3, the highest since April 2011, from 56.4 a month earlier, the Tempe, Arizona-based group's report showed today. Readings above 50 indicate growth. The median forecast in a Bloomberg survey of economists was 55.1. Orders, production and employment strengthened.


Bears Have Work To Do

Rapid declines in stock prices occur when bearish economic conviction greatly exceeds bullish economic conviction. When doubt starts to creep into the equation, it shows up on a chart in the form of a lower high. Lower highs often foreshadow corrective activity in equities (see A and B in the chart below). In recent weeks, stocks have been making a series of higher highs, which tells us investors remain confident about future economic and market outcomes.

$SPX S&P 500 Large cap Index INDX


Technology vs. Brick & Mortar

Traditional Black Friday sales were down from last year, but retailers are still filling orders on Cyber Monday. From Reuters:

Black Friday vs Cyber Monday

ComScore Inc, an analytics firm, said U.S. online sales rose 17.3 percent on Thanksgiving and Black Friday, outpacing sales growth at brick-and-mortar stores. ComScore has forecast a 16 percent jump in online sales for the season, helped by greater use of mobile devices. The most visited e-commerce sites in order were those of Amazon.com Inc, eBay Inc, Walmart, Best Buy Co Inc and Target Corp, comScore said. Retailers are also being aggressive online as they look to benefit from Cyber Monday, which falls on December 2 this year. Cyber Monday is the biggest sales day of the year for e-commerce.

Tablets and smart phones make it even easier to shop online. Investors see the ever-growing role technology plays in our lives, which can be seen in the NASDAQ 100 ETF's (QQQ) recent leadership. All things being equal, strength in technology stocks aligns with a "risk-on" market profile.

QQQ:$SPX - QQQ has been outperforming hte S&P 500


Defensive Bonds Not Waving 2008-Like Flags

When investors are nervous about the economy, earnings, and Fed policy, they prefer to be in defensive-oriented bonds rather than growth-oriented stocks. In a November 27 article we compared the demand for Treasuries (TLT) to demand for stocks. A fair counter argument is "the demand for Treasuries has been skewed by the Fed". We can address that issue by looking at the entire bond market, rather than Treasuries in isolation. The chart below shows the demand for bonds (AGG) relative to stocks (SPY). When the ratio rises, bonds are attracting more interest than stocks. Notice how the ratio bottomed in early July 2007, or three months before stocks peaked.

AGG:$SPX - Economic fear was easy to spot in 2008

The same stock/bond ratio is shown below as of December 2, 2013. The sharp contrast between 2008 and 2013 tells us a 2008-like plunge in equities does not appear to be a high probability outcome.

AGG:$SPX


Investment Implications - Staying Long Until Something Changes

Our market model began redeploying cash as stocks firmed on October 9 and 10. Since the October 9 intraday low, the S&P 500 has gained 163 points. Our game plan remains unchanged; as long as the market's pricing mechanism continues to send bullish signals, we will continue to hold a broad stake in U.S. stocks (SPY), financials (XLF), energy (XLE), small caps (IWM), and global stocks (VT). We will remain highly flexible, looking for observable evidence of a shift toward risk aversion.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2014 Chris Ciovacco

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/