The State of the Markets:
The bulls encountered a bit of a challenge early last week, but by Friday appeared to be none the worse for wear as the rip-snorting bull run of 2018 continued unabated.
However, at least on Tuesday and Wednesday, it appeared that our furry friends in the bear camp had finally found something to get excited about as bond yields began to spike through what some viewed as critical levels. For example, former bond king, Bill Gross declared that a new bear market for bonds was upon us as rates went through his key line in the sand at 2.5% on the U.S. 10-year.
Personally, I think the more important levels for the 10-year yields are at 2.6% from a near-term perspective and 3.0% on a longer-term, weekly chart. However, the key is that rates were spiking on a Bloomberg report that the Chinese were considering paring back, or even halting, their purchases of U.S. treasuries. And by Wednesday morning, the 10-year was trading at 2.595%, which was within a whisker of my personal line in the sand.
In all honesty, I was ready to move into "panic early" mode (as in, "panic early or not at all") on Wednesday morning and was considering some defensive moves in the bond market. But, the more I thought about the situation, the more odd the report became, at least in my mind. My thinking was as follows...
First, China really doesn't have many alternatives when it comes to placing all those U.S. dollars it takes in. A Deutsche Bank report summed up the situation nicely. "The simple fact remains that in the short run, the US fixed income market is the only market with sufficient size and depth to accommodate the bulk of the demand from China."
Next, U.S. bonds continue to provide significantly higher yields than the other big markets such as Germany, UK, and Japan. And that's before you factor in the conversion of dollars into other currencies.
Oh and why would China intentionally "talk down" the prices of its own holdings? Remember, China is the largest foreign holder of U.S. bonds. So making statements that cause your positions to tank makes little sense from an investment standpoint.
And finally, I knew that China had been talking about diversifying their currency holdings for eons.
So, I stepped back from the keyboard and decided to simply watch the action for a bit. And sure enough, the next report out of the world's second biggest economy was that the initial report had been fake news.
As far as the stock market was concerned, nobody seemed to care. The "dip" - if you can really call it that - was bought and investors large and small appeared to go on about their business of putting money to work in stocks.
It didn't hurt that the economic data showed no sign of inflation and that consumers were still on a shopping spree. Or that the earnings from JP Morgan (NYSE: JPM) - a stock I've owned for some time - were pretty darned good. The bottom line is that the bulls remained in stampede mode and the major indices all finished at all-time highs.
From a big-picture perspective (which is what the first report each week is supposed to be all about), the trend is clearly an investor's friend here. However, the move is definitely a bit too enthusiastic for my taste and I worry that if the current run continues much longer, it could end in an ugly fashion. So, while Ms. Market doesn't give a hoot about what I think, I'd prefer to see the bulls slow their roll a bit in the near term.
In summary, I've been saying for some time now that it remains appropriate to side with the bulls here and to enjoy the ride. However, I believe it is also important to recognize that risk is elevated at this time. And for me, this means that the portfolio turbochargers (margin, leverage, and the like) should be in the "off" position and that taking one's foot off the gas to coast for a while might wind up being prudent.
You are what you do, not what you say you'll do. - Carl Jung
Today's Model Review:
LEADERS Model: The LEADERS currently holds positions in the Technology, Industrials, Health Care, and Financial sectors. We will review market leadership this week to determine if any changes are necessary.
CORE Model (Risk Managed Exposure): Today's CORE model's exposure is largely in line with the current target at 90% vs. 85%.
To review, the goal of this model is to stay in tune with the overall risk/reward environment. Therefore, we make adjustments only when there is a meaningful and sustained divergence between the target model reading and our current positions.
TRADING Model: We currently hold trades in the Russell 2000, India Small Caps, Eurozone, a dividend-payer ETF, and the emerging markets.
2018 YTD Performance Update:
DD LEADERS: +5.0%
DD CORE: +4.6%
DD TRADING: +4.4%
S&P 500: +4.2%
|Daily Decision Trading Service
Current Portfolio Summary
|The LEADERS Model|
|% of |
|Technology Select Sector SPDR||XLK||25%||12.1.16||$46.64||Buy|
|Industrial Select Sector SPDR||XLI||25%||8.14.17||$68.58||Hold|
|Health Care Select Sector SPDR||XLV||25%||11.27.17||$81.79||Hold|
|Financial Select Sector SPDR||XLF||25%||12.12.17||$28.19||Buy|
|The CORE EXPOSURE Model|
|% of |
|ProShares UltraPro S&P (3X)||UPRO||30.00%
(Equiv 90% Long)
|The TRADING Model|
|% of |
|iShares Eurozone ETF||EZU||20%||5.11.17||$40.25||Hold|
|First Trust Value Line Dividend Fund||FVD||20%||5.11.17||$28.88||Buy|
|iShares Emerging Markets ETF||EEM||20%||6.112.17||$41.57||Buy|
|VanEck Vectors India Small-Cap Index ETF||SCIF||20%||7.18.17||$58.00||Buy|
|iShares Russell 2000 ETF||IWM||20%||10.19.17||$146.09||Buy|
% of Model Explained
The number shown in this column represents the percentage of the the model this position represents.
Current Rating Explained
This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.
Positions Can Change
Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.
About the Daily Decision Models:
The Daily Decision is designed to be a simple, easy-to-follow e-letter service showcasing 3 different model portfolios. The LEADERS model is the flagship, growth oriented strategy that focuses on "where the action is" in terms of market leadership. The CORE model is a longer-term, risk-managed approach to keeping exposure to market risk in line with prevailing conditions. And as the name implies, the TRADING model is intended to be a tactical, opportunistic trading strategy.
Wishing You All The Best in Your Investing Endeavors!
The Front Range Trading Team
NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.