ForecastStocks:
The European debt contagion remains front and center. Greece and France are holding elections this weekend, and everyone is on “pins and needles” as to the outcomes. Spain and Italy bond yields are high and they are rising...a bearish circumstance. China remains on a growth deceleration curve, with growing concerns of a very hard landing — some estimates see only 7.0%. Also, lest us not forget that US economic data is softening...surprising many. Collectively, we find all of this rather troubling as good news headlines are few and far between, which has led to increased selling pressure on rallies.
Strategy: The S&P 500 remains above long-term support at the 160- wma at 1190; which delineates bull/bear markets. However, the 200-dma support zone at 1266-to-1278 turned prices higher into overhead resistance at 1340-to-1350...we’ll expect this countertrend rally to fail sooner rather than later.
European markets are again modestly higher as today’s Greece’s pro-austerity groups are about to clinch a coalition deal. While this is good news; the news over Greece is starting to wane quite a bit – and in the future we shall see Greece default on her debts, for they are just too onerous. There is no growth package the world can send Greece to help her out of her misery; it shall only prolong the inevitable.
Outside of Greece, the news is rather horrendous; Spain’s auctioned off 12-month bills at 5.07%; and 18-month notes at 5.11%. This is a dangerous zone to be sure for Spain, and it is only going to get worse. One only need look at the lead chart on page 1 this morning and see that Spain’s General Index has broken down out of a longer-term “head and shoulders” pattern and has made a feeble attempt to rally in recent days with the rest of the world’s capital markets. It failed yesterday in bearish key reversal fashion, and we’ll now look for lower lows to develop in the days, weeks and months ahead. Greece showed a similar pattern, and we were laughed at when we said Greece would lose over 50% of her value from that point forward…now many believe we have lost our collective mind by saying that Spain will lose 50% from her current levels. We fear for what the world shall look like if this were to occur. Also, we should note that the German ZEW index of investor sentiment fell at its fastest rate since October 1998.
Yet, European equities are higher…for our central bank saviors are waiting in the wings…or are they?
Trading Strategy: The market is coming to focus upon today’s and tomorrow’s FOMC meeting and the statement thereafter. There are some such as SocGen who believes the Fed will provide $750 billion in stimulus: $600 billion in QE-3 and $150 billion in “Operation Twist II.” There are others that believe Operation Twist I will simply be extended into Operation Twist II. We stand with the latter, for there isn’t ample evidence currently available for the Fed to become more aggressive as the current fire isn’t that large. When the S&P is roughly -6% off its highs, and when the 10-year note is at 1.59%...those metrics don’t’ suggest a move by the Fed. Markets are working; and liquidity is ample. They will simply seek to move out on the duration curve by selling short-term securities and buying long-term securities…with this being more of a technical move than a simulative move. That’s our central banking call for today.
We are short the Russell 2000 Small Caps via TWM; and we see no reason to change our stance at this point. It is a starter position, and currently has a negative beta of -0.39. We expect to add another 10% to our position with the breakdown of certain hurdle rates such as the 1305 level in the S&P 500; and then the 1265 level to add a final position. We don’t want our beta to get any higher than - 1.0…which would mean an aggressive short position equal to 100% of the Russell.
But having said this, we may soon choose to add a long precious metals or mining positions as the case may be. The miners are finally showing outperformance characteristics, but we are looking for gold to breakout above the $1662 level before doing so. And,when we do get long these stocks – we’ll stick with the more well-known and high volume Barrick’s (ABX) and Newmont Mining’s (NEM) of the world, with perhaps a small ETF position in the junior gold miners (GDXJ) to add just a bit more alpha to the position. For now, we are content on the sidelines.