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What Are The Stock Market Leaders Telling Us?

By: Chris Ciovacco | Tuesday, March 4, 2014
Ukraine Territory Outline

Ukraine Fears Ease

Monday and Tuesday have been about the conflict in Ukraine. Monday's news was fear related; Tuesday's news was better. From Bloomberg:

U.S. stocks rose, with the Standard & Poor's 500 Index rebounding to a record from its biggest loss in a month, as comments from Russian President Vladimir Putin signaled the Ukraine crisis won't immediately escalate. "On a very short-term basis, everything you've seen in the market has everything to do with the Ukraine," Kevin Caron, a Florham Park, New Jersey-based market strategist at Stifel Nicolaus & Co., which oversees about $160 billion, said by phone. "But over last 2 weeks, the market has moved higher with the exception of yesterday. The bet has been made that the economy continues to expand and most of the disruption we've seen has been from the weather."


Leadership Speaks To Economic Confidence

As we explained using a 2008 example in this recent video clip, during bear markets or risk-off periods investors tend to gravitate toward defensive assets, such as bonds (AGG), and away from growth-oriented assets, such as stocks (SPY). The observable evidence, as of Tuesday, continues to side with the bullish case for stocks and the economy.

SPY:AGG Chart


Budget Proposal From President

With mid-terms looming in the fall, those facing re-election typically shy away from controversial programs, meaning the term "non-starter" may apply to much of President Obama's budget. From The Wall Street Journal:

President Barack Obama proposed a $3.9 trillion budget package Tuesday peppered with new taxes on upper-income Americans and businesses, plus numerous spending initiatives aimed at bolstering education, research and low-income work programs. Many of the proposals are likely to meet a cool reception on Capitol Hill, where both parties are preparing for November elections that could change the balance of power on Capitol Hill.


Investment Implications - No Core Changes Monday or Tuesday

Based on our market model's read of the evidence, we have increased exposure on the growth side of our portfolios six times since the market's risk-reward profile began to improve on February 7. Monday's sell-off did not inflict any significant damage, and thus we held our long positions in U.S. stocks (SPY) and technology stocks (QQQ). If stock bulls can carry Tuesday's momentum forward, we may cut back on our bond exposure (TLT) later this week.

IVW:SPY Chart

Our short list of investment candidates have an undoubtedly risk-on bias: large-caps (SCHB), technology (XLK), large cap growth (IVW), mid-caps (MDY), small cap growth (IWO), and health care (XLV).


Using Hard Evidence As A Guide

While risk-on periods always battle countertrend rallies, making decisions based on the weight of the evidence will typically keep you aligned with the markets. The market has been giving "the weight of the evidence remains bullish" clues for several weeks. The S&P 500 made a new closing high Tuesday, which means the evidence has been a generous guide. The following articles provide examples of using hard evidence to make allocation decisions:

  1. Stock Rally Near Probabilistic Sweet Spot
  2. Stocks Unquestionably Hesitant, But Is That Bearish?
  3. New Closing High For S&P 500: What Does It Mean?
  4. How Strong Is The Bearish Case For Stocks?

 

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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