For Stocks, Economic Perception Is Reality

By: Chris Ciovacco | Fri, Dec 20, 2013
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Friday's Report Helps Investors Feel More Confident

GDP - Here and Now

We have been stating for some time the Federal Reserve was using quantitative easing (QE) as monetary lighter fluid to get the economic fire started again. The Fed desperately wants to cut back on monetary injections and pass the baton to the economy. Right or wrong longer-term, if the market's pricing mechanism (aggregate opinion of all investors) perceives the economy is strong enough to take the baton from the Fed, it is bullish for equities. Perception sets asset prices. Friday's GDP report helped strengthen bullish perception. From USA Today:

Spending by consumers helped drive the U.S. economy to better than expected 4.1% growth between July and September. The growth rate, the highest since Oct.-Dec. 2011, was spurred by consumers spending more over the summer on health care, recreation and other services. Consumers also spent more than expected on nondurable goods, mainly gasoline and energy.


Credit Markets Have Remained Optimistic

We recently outlined the rationale behind reviewing the chart below as a risk monitoring tool for the economy. When market participants calculate bond default probabilities, they include an assessment of the economy. If the odds of a recession are low, then the odds of widespread bond defaults are also low - an environment where higher yield (JNK) is in greater demand than safety/return of principal (TLT). The chart below reflects a greater demand for JNK and is indicative of bullish economic confidence. How did the chart below look in October of 2007, just before the stock market peaked? A 2007 chart can be found here.

JNK:TLT Chart


Have The Bulls Reached An Exhaustion Point?

The brief video below compares the major stock market peaks in 2000 & 2007 to 2013 using a process and proprietary tools developed by Tom DeMark (Market Studies, LLC). DeMark's counts tell us when the probability of trend exhaustion reaches "it is time to pay attention" levels.


Investment Implications - Economic Momentum Building

The best time to invest from a probabilistic perspective is when the fundamentals and technicals align in a bullish manner. The charts stabilized this week, a topic to be covered in this weekend's video, and the economy is trying to grab the baton from the Fed. From USA Today:

The GDP report suggests that the U.S. economy entered the fourth quarter of this year "with more momentum than had previously been thought to be the case," said Richard Moody, chief economist of Regions Financial Corp.' in a note after the Commerce Department released the report Friday. "And we expect that momentum to build further in 2014."

Our market model began adding to our long holdings Thursday based on observable improvement in the market's risk-reward profile. An example of observable improvement is the break of the downward-sloping trendline near point A below, and the higher high made in the Dow Thursday (point B).

$INDU Dow Jones Industrial Average INDX

If Friday's GDP-induced gains can carry into the close, our rules will call for another incremental increase in our allocation to equities. We will head into next week holding U.S. stocks (VTI), financials (XLF), energy (XLE), small caps (IWM), technology (QQQ), and global stocks (VT).

 


 

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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TRUE MONEY SUPPLY

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