World Bank Gives Traders A Reason To Cut Back

By: Chris Ciovacco | Wed, Jun 11, 2014
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After 88 Points, Some "Give Back" Is Normal

Given the S&P 500 pushed 88 points higher between May 15 and June 10, traders were looking for a catalyst to lighten up a bit. Wednesday morning the World Bank described growth as "disappointing". From the World Bank Global Economic Prospects report:

Developing countries are headed for a third consecutive year of disappointing growth below 5 percent, as first quarter weakness in 2014 has delayed an expected pick-up in economic activity, says the World Bank's latest Global Economic Prospects report, issued on June 10, 2014... The global economy is expected to pick up speed as the year progresses and is projected to expand by 2.8 percent this year, strengthening to 3.4 and 3.5 percent in 2015 and 2016, respectively. High-income economies will contribute about half of global growth in 2015 and 2016, compared with less than 40 percent in 2013.


One Day Does Not Make A Trend

On June 8, we provided some evidence of resurfacing bullish conviction. As shown in the chart below, Wednesday's weakness did little to disrupt the improving look of the S&P 500's weekly chart.

$SPX Chart


Fed Has No Plans To Reduce Bond Holdings

Feds balance sheet won't shrink

The Federal Reserve has printed billions of electronic dollars in recent years. The fresh greenbacks were used to buy bonds, and thus inject new cash into the financial system. Logic tells us that if Fed demand for bonds has helped suppress interest rates, any attempt to enter the market as sellers could result in a big spike in interest rates. From Bloomberg:

Federal Reserve officials, concerned that selling bonds from their $4.3 trillion portfolio could crush the U.S. recovery, are preparing to keep their balance sheet close to record levels for years...Officials worry that such sales would spark an abrupt increase in long-term interest rates, making it more expensive for consumers to buy goods on credit and companies to invest, according to James Bullard, president of the Federal Reserve Bank of St. Louis.


Spring Of Indecisiveness Hard On Hedge Funds

The combination of tepid growth and Fed tapering made for a somewhat trendless environment in the spring. The markets, for the most part, have been in "no clear leaders" mode for some time, which has made the job for hedge funds more difficult. From The Wall Street Journal:

Even now, many of these so-called stock pickers are still struggling. Hedge funds earlier this year suffered back-to-back monthly declines in March and April for the first time in two years, according to researcher HFR Inc. These funds hadn't turned in two consecutive losing months since April and May of 2012, HFR said.


Investment Implications - Volatility To Ignore

Volatility is the enemy of investors. To tame the volatility beast, we need to discern between "volatility to ignore" and "volatility to respect". Thus far, the "give back" in stocks falls into the ignore category. For example, Wednesday's session did little to alter the equity-favorable look of the stock/bond ratio below.

$SPX:AGG S&P 500 iShares Barclays Bon INDX/NYSE

The tweet below tells us the market has a bit more breathing room than in had this spring, which enables us to give our positions a little more rope from a volatility perspective.

Ciovacco Tweet

Consequently, we have made no changes to our allocations this week. We continue to hold stocks (SPY), leading sectors (XLK), and bonds (TLT). As long as any weakness remains in the volatility to ignore category, we will hold our stakes while keeping an eye on the market's ever-evolving tolerance for risk.

 


 

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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