Friday, December 27, 2013

Market Update 27 December 2013

The year 2013 will go down in history as one of the most misunderstood, unloved and under-participated market rallies of all time.  With the exception of those investment managers who routinely “index” their portfolios to the S&P 500 index, the vast majority of investment managers will have  under-performed when bench marked against the S&P 500.

It would appear (in hindsight) the combination of unprecedented U.S. Federal Reserve monetary stimulus (Quantitative Easing) combined with a slight improvement in economic conditions in the U.S. has enticed investors to re-enter the stock market with vigor.  The question now is what becomes of the market now that FED has begun to reduce its Q.E.  The “mad monetary science experiment” that the FED has used as its weapon of choice in battling deflation now needs to be wound down.  There is the potential for a very serious market correction if they do not get the “mix” just right.

We ended 2013 with U.S. stocks overbought and overvalued.  In the process, the U.S. markets have dragged most other markets upwards as well.  Inter-market relationships will need to be monitored closely in 2014 to provide evidence of the stresses introduced as Q.E. is systematically removed.

I will  not provide detailed technical analysis in this update but more of a "top-down" view of a number of equity, bond, currency and commodity markets to give you an idea of where we stand.


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World Equities

The majority of equity markets did EXCEPTIONALLY well in 2013.  The standout was again the U.S. markets with lesser performance from Europe and the Far East.  Emerging markets lagged and will continue to get hurt in 2014 if Q.E. is removed at a rapid pace.

As long as price remains above the 200 day simple moving average (shown in red on each chart) it must be assumed the long term trend remains up.  Brazil and China (especially China) remain a problem heading into 2014 but interestingly both Russia and India have held up quite well.  If the "B" and "C" of the BRICs can get going it is possible once Q.E. has passed the hot money may once again return to emerging markets.

Given the amazing performance in 2013 it must be assumed 2014 will not be quite so kind.  I expect increased volatility with greater market corrections than presented themselves in 2013.  I also expect we will have another positive year in equities primarily due to the continued monetary support by central banks worldwide.



Greece

Brazil

France

India

U.S. Nasdaq Composite

Germany

World

U.K.

Spain

Italy

Japan

U.S S&P 500

China

Australia

Canada
Russia




World Bonds

Bonds remain relatively weak as Q.E. is anticipated to be reduced in the U.S.  I was anticipating a turn around in bonds once interest rates stabilize but it appears rates have not found equilibrium yet.  As such, it may be a bit soon to step back into bonds (except short duration and corporate credit).

Emerging market bonds are feeling the pain of Q.E. taper and the hot money leaving emerging markets.  No sign of a bottom yet.

I expect the U.S. 10 year yield to push up to the 3.9-4.0% area defined by the multi-year descending trend line and the previous 2009-2010 yields.  That appears to be the next good area to re-enter U.S. government bonds but there is so much interest rate distortion currently in the markets it is really difficult to assess what constitutes "value" currently.



International Treasury Bonds

Emerging Market Sovereign Debt
U.S. 10 Year Treasure Yield

U.S. 10 Year Treasure Yield

U.S. 30 Year Bond


U.S. 10 Year Bond


Commodities and Metals

A very difficult year for commodities and metals.  Until these start to turn around it must be assumed inflation is negligible and we remain within the grips of deflation.

I believe gold has a shot at sub-$1000 in 2014 but at that level it would be a great place to buy the dips.  


Reuters-CRB Commodity Index

Agriculture ETF

Gold

Silver

Gold and Silver Miners Index


Breadth

Troubling non-confirmation on equity market breadth in the U.S. (less and less stocks are holding up this current rally) leads me to expect a correction to develop soon.  However, it appears any significant dips will/should be bought given it is expected central banks will continue to provide support at least through 2014.




NYSE % of stocks above the 50 day moving average

NYSE % of stocks above the 200 day moving average

NYSE McClellan Oscillator

NYSE Summation Index

S&P 500 Equal weight to Cap weight ratio

Russell 2000 to Dow Jones Industrial Average ratio

Volatility Index

Currencies

The USD held up quite will in 2013 given the Q.E. operations in the U.S in 2013.  It is interesting to note we finished the year right in the middle of the current 72-90 zone it has been stuck within since 2006 and right on the previous support line near 80.85.  Price is below the 200 day moving average so the current trend is down

It is assumed as Q.E. is unwound it should act as a backstop for the USD.  As such, I would expect a higher USD throughout 2014 from current levels with an expectation it will exceed its 2013 top above 84.71 and challenge previous tops at 88.

The currency of choice in 2013 was the British Pound (up 10.3% from its 2013 low) and the losers the Australian/Canadian Dollars.  The Aussie appears to be attempting a bottom near current levels (off 16% from its 2013 high) but the Loonie remains within a well defined down-trending channel well below the 200 day moving average (down 9.3% from its 2012 high).  Not shown today but a very important monthly support area at 93.95 must hold.  A break and the next level is around 85.00.

The Euro held up well in 2013 but on the long term chart the down-trend line remains intact.  I would expect a decline near current levels back to support at 127 followed by 120 should the USD find its footing as a result of Q.E. tapering.


USD Long Term

USD

Australian Dollar

British Pound

Euro Long Term

Euro
Canadian Dollar


In summary, 2013 was an exceptional year assisted by record corporate profits, artificially manipulated interest rates and a slow and tepid economic recovery in the U.S.  As the FED unwinds Q.E. there is a danger moving rapidly could lead to substantial market losses.  Given such, I have to assume the FED will take baby steps and attempt to sooth the market players with each small cut it makes.  This should continue to provide a tailwind to equity investments in 2014.

While the markets are short term overbought and somewhat expensive, there is no indication we have yet hit the top in the current cycle.  I will remain within my current 50% equity/50% USD cash holdings at present and should we finally get a long-awaited correction I plan to add slightly to my equity positions (based upon my personal risk profile this would not exceed 70% allocation).

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