Three Reasons To Put Stocks On Shorter Leash

By: Chris Ciovacco | Thu, Dec 12, 2013
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Waning Bullish Conviction

3 Taper Trends
  1. Stronger economy
  2. Taper odds increasing
  3. Bullish trends are more vulnerable


Retail Data Exceeded Expectations

The Federal Reserve has been looking for noticeable improvement in the economy to allow them to begin paring back their latest quantitative easing campaign. Thursday, economic bulls went 2-for-3. From Bloomberg:

Data today showed retail sales rose more than forecast in November as Americans bought cars and took advantage of discounts going into the holiday-shopping season. A separate report indicated applications for unemployment benefits jumped last week from an almost three-month low. The Bloomberg Consumer Comfort Index advanced for a third straight week as Americans grew more optimistic about the economy.


Better News Brings Taper Concerns

Strong Retail sales

While we noted Wednesday the Fed's discussion of excess reserves tells us they continue to be concerned about economic growth, it is the market's perception of tapering that drives asset prices. From Bloomberg:

"The economic news has been generally pretty good and the Fed has supposedly has been waiting for better economic news," John Carey, a fund manager at Pioneer Investment Management who oversees about $200 billion, said in a telephone interview. "There was an expectation a few weeks ago that the Fed might wait until February or March. But now with good economic news, it's starting to seep into the market that the Fed could start tapering earlier than that."


18% Believe Taper Comes Next Week

If stronger economic data pulls taper expectations forward, a logical question is how far forward. A recent Reuters poll provides some insight:

According to a Reuters poll released on Wednesday, 32 economists expected the Fed to begin to taper in March, while 22 said it would scale back in January. Only 12 economists expected a tapering announcement next week when Fed policy-makers hold their last meeting of the year.


Waning Tolerance For Risk

When bullish economic conviction is stronger than bearish economic conviction, the stock market rises. The daily chart of the S&P 500 below shows a clear shift toward bullish conviction occurred on October 10. Notice how the blue moving average remained above the red moving average after October 10, which signaled ongoing bullish demand from investors. As of Thursday's close, the observable evidence shifted into a "it is prudent to pay attention here" mode. The blue line dropping below the red line is far from a fool-proof signal, which is why our market model uses numerous inputs. However, the observable shift in the chart is a good example of deterioration that has occurred in the market's profile.

$SPX S&P 500 Large Cap Index INDX


Investment Implications - Bulls Have To Prove It

Investors who adjusted their mix between equities and bonds after the October 2007 stock market peak were glad they did. The concept of using market profiles as an asset allocation guide is described in this video clip. No one rings a bell at a major bull market peak, which means it is logical to allocate in a manner that is in line with the current market profile. Market profiles speak to the aggregate tolerance for risk. When a profile deteriorates, it tells us the market's tolerance for risk is waning. Another example of an observable shift that has recently occurred is the series of lower highs and lower lows on the chart of the NYSE Composite Index below.

$NYA NYSE Composite Index - Not a Good Look for a Bull

In the last two sessions, our market model called for two incremental reductions in our allocation to foreign stocks (VEU). If the market can "prove it to us" by reversing some of the emerging bearish signals, we are happy to redeploy the cash from this week's sales. If deterioration continues, we will continue to reduce risk at a prudent rate based on the observable shift in the aggregate tolerance for risk. We are still long, holding numerous ETFs, including stakes in the broad U.S. market (VTI), technology (QQQ), energy (XLE), and small caps (IJR).

 


 

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.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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