To understand where there is potential for market gains over a 6 – 12 month time frame, it helps to consider the situation that we are in. Looking at the macro scenarios can give us insight on where to drill down for opportunity and understand risks.
Six months ago, the markets were concerned with the potential for rising interest rates and the stifling effect they might have on the global economy. It was one of the two main reasons for the correction that the market suffered in to the end of 2018. However, US Federal Reserve Chairman Jerome Powell rescued the market by keeping rates, and expectations for future rate increases, low. That started the recovery in the US Bond market, bringing interest rates down.
Below is the chart of the 20 Year US Treasury Bond ETF, TLT. This chart shows an inverse relationship with interest rates since rising bond prices mean lower interest rates. So, if the chart below is going up, rates are coming down.
Notice the break through resistance at $123 and the rising bottoms on the chart (as shown by the green line that I have drawn. This means bond prices are likely to continue higher until they hit resistance at $128 on the TLT, meaning interest rates are likely to stay low.
Low interest rates are good for the consumer eager to buy more stuff, including large purchases like homes and automobiles but also in consumer products as financing costs on these larger purchases drops, freeing up discretionary spending.
It is interesting that lower yields for US bonds has still allowed for the strong performance of the US Dollar, which has been in an upward trend since early in 2018, as they can often be inversely correlated. However, an upward trend is what the $US is in and it should be counted on to continue if the upward trend line that I have drawn in green on the chart below remains intact. I expect more upside near term, although we should anticipate some resistance for the $US when it gets back to the highs set late in 2016.
A strong US Dollar has some positive effects for the US based consumer whose purchasing power is improved on imports. In addition, it is cheaper to travel overseas.
Another important chart to consider is that for Oil which has been moving higher since its bottom in December 2018. Recently, it has shown some signs that a pull back is imminent as it recently failed to hold its highs. It is now threatening to break its very steep upward trend line, which if it happens, would likely lead to a topping out for Oil prices and perhaps even a pull back.
Finally, we have the US economy which continues to show improvement. Last week’s employment numbers exceeded expectations by a wide margin and unemployment continues to sit at low levels in the US.
So, we have several reasons to think that the current situation will benefit the US consumer and his or her desire to buy more stuff and go more places:
- Lower borrowing costs
- Increased purchasing power of foreign goods and services
- Lower fuel costs
- Increased consumer confidence
There is a wildcard, or perhaps a Trump card, that has to be considered for the near term direction of the markets. US – China trade was the second primary reason for the market correction in 2018 and the failure to arrive at a new trade deal will likely cause a sharp drop in stocks. Those that will be affected the most are those that have climbed the most. So, from a risk mitigation standpoint, I would avoid a heavy concentration of stocks that are already well in to their upward trends.
Some trading ideas based on these themes:
XRT (S&P Retail Spider ETF) – the group has broken the downward trend line and is building a base between $44 and $46. Buy signal on a break out through $46 on the weekly chart.
EXPE (Expedia) – buy signal if it breaks out of the pennant pattern on the chart below, moving up through $131 with increased volume.
AN (Autonation) – has recently provided a buy signal with the break of the downward trend line, look for a confirming signal on a break up through $43.
Tyler Bollhorn is the founder of StockScores and www.stockscores.com