Portfolio Watch – Week of February 17, 2014

Weekly Market Update by the Economic Trends Research Group


Last week’s stock rally, unlike the prior week’s rally was broad based with small-cap, mid-cap, and large-cap stocks all rallying.

Although the fundamentals of the economy are not sound, stocks continue to feed on the easy money policies of the Federal Reserve.

Janet Yellen, the new chairperson at the Federal Reserve, sounded just like Ben Bernanke in her first comments as chair.  Ms. Yellen made it clear that the accommodative policies would continue under her watch.  Stocks rallied on the news.

The Federal Reserve’s tapering, slowing the rate at which money is printed, is at this point in our view largely symbolic.  Even at the slower pace of money printing, the Fed is still printing better than 20 cents of every dollar the government spends.

That is simply unsustainable.

We are continuing to protect our stock positions with a 10% trailing sell stop to potentially let us participate in more upside for stocks should there be more upside, but also help to protect us from a large stock market decline which is likely in our opinion.

By the end of the current winter economic season, we expect the Dow Gold ratio to decline to at least 2.  If you are a new reader to “Portfolio Watch”, the Dow to Gold ratio is simply the number of ounces of gold it takes to buy the Dow Jones Industrial Average.  The Dow Gold ratio is calculated by dividing the value of the Dow by the price of an ounce of gold.  As you can see from the data box on the first page of this issue, that ratio stands at more than 12 presently.

Chart 1Last week, we stated the chart of the S&P 500 was sending us mixed messages.  Our view that the stock market top was in on the S&P 500 at 1850 still holds; however, should the S&P 500 index exceed the prior high of about 1850, it would signal the stock market rally would probably continue.

There are two blue lines on Chart One.  The first blue line, labeled by the red arrow, illustrates the market’s prior top.  Notice that price level has been tested three prior times and held.

The other blue line on Chart One, labeled by the green arrow, outlines an uptrend that began in late August of last year and has continued to the present.

We still think the probability of the stock market’s rally continuing and breaking through the prior market high is lower than a decline beginning from here.

In addition to the market’s prior high being tested on three prior occasions and failing each time, the other reason we believe the probability favors a renewed decline rather than new highs in the market are trading volume levels.

Notice on Chart Two that as this stock rally has unfolded trading volume has declined.

Typically, declining trading volume means a trend may be close to running out of steam.

Chart 2Gold advanced strongly last week.

Our trend following indicators have gold in a ‘not trend’ are presently with shorter term trend indicators signaling an uptrend while longer term indicators are still signaling downtrend although those indicators could change to uptrend over the next several weeks as gold has rallied more than 11% from its low.

Silver followed gold’s lead last week and rallied as well.  Silver has rallied more than 13% from its recent low.

Longer term, as the economic winter season progresses we are bullish on precious metals and bearish on stocks.

Our long positions in US Government bonds experienced a bit of a loss last week, however our buy signals remain intact.  In a rather strange week for markets, stocks advanced, gold advanced and US Treasuries held value with yields on the 30-year increasing only 2 basis points from the prior week.

Near term, we expect US Government bonds to once again act as safe have for investors should the stock market decline continue in earnest.

The US Dollar declined slightly for the second consecutive week although the US Dollar has remained in a tight trading range for the past three months.  Longer term, as Chart Three illustrates, the US Dollar remains in an uptrend.

The Euro, which has been inversely correlated to the US Dollar, advanced for the second straight week.

The Japanese Yen advanced slightly although we believe recent upside in the Yen is simply a countertrend rally in the context of a broader, longer term decline.

Chart 3Corn prices declined slightly last week, although corn prices are holding above their low of last month.

Base metals, another commodity have closely tracked the price action of corn.

A decline in commodity prices is typical of an economic winter season.

The only exception to the price decline in commodities is the recent price action of oil.

Oil prices have rallied for 5 consecutive weeks and the price of a barrel of oil presently stands at about $100.  We believe the rise in the price of oil is largely due to a colder than normal winter as demand for heating oil has increased as consumers are traveling less.

If you are not yet a subscriber to our monthly economic commentary, you can get a free subscription by visiting www.YourRetirementOutlook.com.  The interview of the week is with Professor Larry Kotlikoff who served on the Council of Economic Advisors under President Reagan.  The interview is now available at www.EverythingFinancialRadio.com.

“The more I practice, the luckier I get.” – Arnold Palmer

Week at a glance

Week Open Week Close
Dow 15794.1 16154.4 +2.28%
S&P 500 1797.02 1838.63 +2.32%
Gold 1268.1 1319 +4.01%
Silver 20.1 21.49 +6.92%
30 Year US Treasury Yield 3.67% 3.69% +0.02%
US Dollar Index 80.69 80.14 -0.68%
Dow Gold Ratio (minimum target 2) 12.25

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