ECB, Markets & A “Confirmed” Buy Signal

This week’s newsletter is a heterogeneous amalgamation of reflections on recent events, the most important of which was the European Central Bank’s (ECB) push into a negative interest rate policy.

The European Central Bank took extraordinary steps this past week to stave off the threat of deflationary pressures in Europe. This included cutting key interest rates below zero for the first time in a bid to get banks to lend more to credit-starved customers and would make, for a start, up to €400 billion ($545 billion) in cheap loans available to banks later this year. The ECB hopes that the banks will lend more to the private sector in the future.

…..Read more here

The Buy Signal Is In

In January of this year, the markets gave both a “warning” and then a “sell” signal in our portfolio allocation model. This would have normally been a signal to reduce equity exposure to portfolio allocation models. However, we opted not to do so as the markets had “technically” not done anything wrong.

The only reason that we went against our portfolio model signals was due to the Federal Reserve’s ongoing monetary intervention programs. The excess liquidity has continued to act as a support for asset prices in recent months so we opted to remain allocated with a cautious eye towards to financial markets. This has worked out to our advantage so far.

…..Read more here

ALSO INSIDE THIS ISSUE

• Caught In A Liquidity Trap
• Pictures Of An Exuberant Market
• The Buy Signal Is In
• Portfolio Action Recommendations:
• The Cost Of Doing Business In Your 401k Plan

…..read more & view some great charts HERE

For 5 years the correlation between the expansion of the Federal Reserve’s balance sheet and the growth of the S&P 500 has risen dramatically. Since QE3 was unveiled, the correlation is converging on 1 which of course is just happy coincidence and nothing to do with the free and easy flow of liquidity that month after month of Fed largesse has created. The problem is we now know that the hurdles to a Fed un-Taper are very high and so we can extrapolate the end-point for the Fed’s balance sheet and where stocks would trade at that point.The S&P 500’s recent exuberance has priced in the total expansion of the Fed’s balance sheet to the end of the taper, so how much more upside is there?

Coincidence…?

Perhaps not…continue reading HERE

Briefly: In our opinion speculative long positions are still favored (with stop-loss at 1,885, S&P 500 index).

Our intraday outlook is neutral, and our short-term outlook is bullish, following a breakout above consolidation:

Intraday (next 24 hours) outlook: neutral
Short-term (next 1-2 weeks) outlook: bullish
Medium-term (next 1-3 months) outlook: neutral
Long-term outlook (next year): bullish

The U.S. stock market indexes gained 0.1-0.4% on Wednesday, slightly extending their recent uptrend, as investors reacted to some mixed economic data announcements. The S&P 500 index has reached the new all-time high at 1,928.63, moving further away from the level of 1,900. The nearest important support level is at around 1,915, marked by recent local lows, and the next support is at the psychological 1,900. On the other hand, a potential level of resistance is at 1,950. There have been no confirmed trend reversal signals so far. However, a profit-taking correction cannot be excluded here:

Ed: Click Charts for Larger View

Expectations before the opening of today’s session are slightly positive, with index futures up 0.1-0.2% vs. their yesterday’s closing prices. The main European stock market indexes have been mixed between -0.1% and +0.4% so far. Investors will now wait for some economic data releases: Challenger Job Cuts report at 7:30 a.m., ECB Rate Decision at 7:45 a.m., Initial Claims at 8:30 a.m. The S&P 500 futures contract (CFD) trades close to yesterday’s high, along the level of 1,925. The support level remains at around 1,915, marked by recent local lows, as we can see on the 15-minute chart:

The technology Nasdaq 100 futures contract (CFD) is in a similar intraday consolidation, close to its recent high. The support level is at around 3,710-3,720. There have been no confirmed negative signals so far, as the 15-minute chart shows:

Concluding, we remain cautiously optimistic, expecting the continuation of the uptrend, and we continue to maintain our already profitable long position. The stop-loss is at 1,885 (S&P 500 index).

Thank you.

U.S. stocks advanced Wednesday, with the S&P 500 index hitting a record high, as investors weighed a mixed bag of news on the economy.

The Dow Jones Industrial Average advanced 15.19 points, or 0.1%, to 16737.53. The S&P 500 tacked on 3.64 points, or 0.2%, to 1927.88, its 16th all-time high this year.

The Nasdaq Composite Index gained 17.56 points, or 0.4%, to 4251.64.

On Tuesday, the Dow slipped 21 points, or 0.1%, to snap a three-session win streak, and the S&P 500 eased less than 0.1%, failing to close at a record for the first time in four sessions.

Stock benchmarks started Wednesday in the red but drifted higher in midday trading, as investors weighed mixed economic reports.

“Now’s going to be the time when the data is, or isn’t, going to point to an accelerating recovery,” said Hank Herrmann, chief executive of money-management firm Waddell & Reed. But “there’s still some confusing elements.”

Many investors have been holding tight in their current positions or raising cash levels as the S&P 500 trades at all-time highs. Wells Fargo Private Bank, which oversees $170 billion in client cash, recently raised its recommended cash level for its advisers. Mark Litzerman, head of equity research for the bank, said that the bank plans to invest that cash eventually, but it is holding back until it gets a clearer read on the economic outlook.

“One of the big conundrums for investors is, if you take money out of a certain asset class, where do you put it?” he said. “We’re waiting to see how things play out with the economy this summer before we make a move.”

Stock futures had pushed lower before the market’s open after a disappointing report on the labor market. Data compiled by Automatic Data Processing and Moody’s Analytics showed that 179,000 private-sector jobs were added in May, falling short of expectations of a 210,000 increase.

But benchmarks pared losses after a report on service-sector activity came in better than expected. The Institute for Supply Management’s nonmanufacturing composite index for May came in at 56.3, above expectations of 55.2.

Despite the raft of data, trading remained relatively light on Wednesday, traders said. “The volume has been awful,” said Michael O’Rourke, chief market strategist at JonesTrading Institutional Services.

Investors are awaiting Thursday’s policy-setting meeting for the European Central Bank, when most economists expect the bank to cut rates, and Friday’s U.S. employment report. Wednesday’s ADP report is seen as a preview of the government’s May employment report Friday, which is expected to show nonfarm-payroll growth of 210,000.

Among other economic data released Wednesday, the trade deficit for April widened 6.9% to $47.2 billion versus expectations of $40.9 billion. First-quarter productivity was revised to show a decline of 3.2% and unit labor costs increased 5.7%, close to expectations.

The yield on the 10-year Treasury note rose to 2.604%, after settling at a three-week high of 2.592% late Tuesday.

Gold futures lost less than 0.1%, to settle at $1,244.00 a troy ounce, after snapping a six-session losing streak on Tuesday. Crude-oil futures slipped less than 0.1% to settle at $102.64 a barrel.

The dollar rose against the euro and the yen.

The Stoxx Europe 600 was little changed, gaining less than 0.1%. Economic data out of the euro zone continued to support expectations that the ECB will introduce new stimulus measures by either cutting interest rates or boosting liquidity through asset purchases. Data firm Markit said its composite purchasing managers index, which measures activity across both the manufacturing and services sectors, fell to 53.5 in May from 54 in April.

Asian markets were mostly lower, with China’s Shanghai Composite falling 0.7% to suffer a fourth-straight decline. Japan’s Nikkei Stock Average bucked the regional trend by tacking on 0.2%. 

New on WSJ: Frontier Markets

Among other economic data released

Is it for real?

That was the question I was asking when the S&P 500 kept flirting with the 1,900 mark. Now, with the index notching up one closing record after another and trading solidly in the 1,920s range, I’m becoming a believer.

Why does it matter? Because now is the time for even long-term investors to add equity market exposure for the summer months. I’m even seeing some cues emerging from the Weiss Ratings model results that point me to certain sectors and industries for gaining fresh exposures. I have highlighted both the healthcare and consumer discretionary sectors as fertile ground for stock pickers to find those with high Weiss Ratings that have become wall flowers at this latest sentiment-driven dance of a rally. I still feel those areas should be explored by serious investors who recognize high quality at a discount.

That’s really the crux of what I do here at Weiss Research. I take the results of a very successful set of combined algorithms, which assess stocks mainly on their companies’ fundamental strengths — like sustainable cash-flow growth, and a well-managed balance sheet — but I also take into account forward-looking cues from the market, in the form of share price performance and volatility. The end result of these algorithmic observations is a ranked list of potential investments, which, if successfully analyzed further, can lead to above-market returns on a consistent basis over time.

               Opportunity may arise in materials, one of the most economically-sensitive sectors, as a result of the summer’s trading.

While the Weiss Ratings capture short-term hreats (such as the negative trend in healthcare ratings versus their market-beating performance over the past month), it still points us to potential winners in this sector that is clearly in the line of fire for politicians in the U.S. this summer and fall because of Obamacare. That said, it appears to me that some of the top service providers — like insurers, but also some of the distribution-centric industries — may suffer most in the near term, so we should probably wait until fall to revisit them.

My picks from my last column on healthcare still stand, even those in the potential trouble spots, for longer-term time horizon investors. However, I am getting warmer on some of the device companies that have taken it on the chin lately. I’m eyeing them for my subscription service as shorter-term potential trades during the next few months. Of course, my focus is on those stocks that have pulled back, but still retain a B- or better Weiss Rating.

On the back of a sentiment-driven stock market rally over the past couple of weeks, I am seeing more and more stocks falling in their Weiss Ratings, in some cases despite upticks in current market prices. So even though I maintain my bullish overall view on stocks, I think it’s time to refocus on disciplined investing in those areas where Weiss Ratings are rising, and take note of the reasons for weakness in our ratings for those that are falling.

That divergence — rising stock prices and falling ratings — has kept me slightly cautious in deploying new capital in general for my subscription service. That’s because despite a stable environment in terms of earnings growth expectations following the first-quarter earnings season, forward-looking expectations remain stubbornly low in relation to the market’s seeming buoyancy. These are not only cues to shorter-horizon traders, but also to longer-horizon investors about what might happen in the very short-term — “noise”-type news flow that can either set up a short-term trading opportunity, or signal a buy or sell order from even the most long term-minded investors.

While the rest of the market (including me) focuses on macro trends that affect the economically sensitive sectors, providing entry points for new names, it’s also important to remember the principles of portfolio management that tell us to have at least some exposure (underweight though it may be) to industries and sectors that do not correlate with those stocks in your main thrust (in our Weiss Ratings Portfolio’s case, that is the resurgence of pro-cyclical areas of the economy).

I have added a defensive name recently, and did so to buttress the Portfolio’s diversity as I position it for the second half of 2014. Opportunity may arise in materials, one of the most economically-sensitive sectors, as a result of the summer’s trading. But I’m after those that pass both the Ratings gauntlet (or soon to do so) and a fundamental scrutiny. Pro-cyclical is how I intend to increasingly position the Portfolio for now.

Best,

Don Lucek

P.S. Watch your inbox today after the market closes for Mike Larson’s afternoon edition of Money and Markets. Mike will give you a market roundup, a top story for the day, and an opportunity to share your thoughts on his blog.