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Actionable news in QQQ: PowerShares QQQ Trust, Series 1,

Lots Of Volatility No Real Movement

Volatility Kick
  • Just Waiting For The Bond Bears
  • Energy-less Oil
  • Sector & Market Analysis
  • 401k Plan Manager

Last week, I discussed the “Breakout Failure As Resistance Holds” stating: how, despite the carnage in Technology and Discretionary sectors, the overall market was mostly unaffected.

“The markets shot out of the gate on Monday and rose 20-points for the day which confirmed the breakout above previous resistance. Unfortunately, that bout of ‘exuberance’ was short-lived and the rally faded for the rest of week closing back below resistance as shown below.”

Importantly, note the short-term “sell signal” remains intact in the lower part of the chart which suggests pressure is currently to the downside. With only minor support currently in place, a break below 2410 could well suggest a decline to 2380 over the course of the next month.

As noted on Friday, the last couple of weeks have experienced a sharp rise in price volatility. While stocks have vacillated in a very tight 1.5% trading range since the beginning of June, there has been little forward progress to speak of. However, notice that support at 2416 has remained solid as “robots” continue to execute their program of “buying the dips.”

This lack of progress once again has us “stuck” with respect to portfolio positioning. As I noted two week’s ago in this missive:

“During last week’s pullback, we added modestly to our broader-based ‘core’ holdings for the second time over the last couple of months. to participate with the breakout. Stops have been moved up and remain very tight.

While I remain very cautious on the overall market, the trend remains bullishly biased which keeps portfolios allocated on the long side for the time being. However, I will not be surprised by a reversal and failure of the breakout leading to us getting stopped out of positions.”

Unfortunately, we haven’t changed much over the last few weeks with the exception of taking profits and rebalancing technology, health care and international exposure back to market weights last week. (This was noted in the sector recommendations chart in the Sector Analysis section.)

Internals also weakened again after only a mild improvement which also keeps our 'guard' elevated.

Despite the uptick in volatility last week, volatility remains suppressed at historically low levels. As shown in the chart below, the recent “back and forth” action has reduced the overbought condition of the market short-term with stocks testing the bullish uptrend. However, complacency remains elevated which suggests the risk of a break of support could lead to a sharper, and rather sudden, decline.

I continue to suggest a healthy regimen of risk management practices in portfolios by following some rather simple guidelines (the same ones that we followed to harvest profits recently as noted above.)
  1. Tighten up stop-loss levels to current support levels for each position.
  2. Hedge portfolios against major market declines.
  3. Take profits in positions that have been big winners
  4. Sell laggards and losers
  5. Raise cash and rebalance portfolios to target weightings.

For now, we wait and let the markets tell us what it wants to do next.

Beware the “Dog days of summer.”

Just Waiting For Bond Bears To Re-Emerge

3…2…1…During the last week, we finally got a bounce in interest rates from very oversold levels (remember rates are inverse to bond prices so oversold rates = overbought bond prices.) I am patiently awaiting the “bond bears” to come out in force once again declaring the “bond bull market” dead and telling you why you should sell your bonds and buy overvalued stocks.

This has been the case since mid-2013 and all along the way, through numerous missives, I have explained why such an outcome will not be the case. To wit:

“As I have discussed many times in the past, interest rates are a function of three primary factors: economic growth, wage growth, and inflation. The relationship can be clearly seen in the chart below.”

Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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“Okay…maybe not so clearly. Let me clean this up by combining inflation, wages, and economic growth into a single composite for comparison purposes to the level of the 10-year Treasury rate.”
“As you can see, the level of interest rates is directly tied to the strength of economic growth and inflation. Since wage growth is what allows individuals to consume, which makes up roughly 70% of economic growth, the level of demand for borrowing is directly tied to the demand from consumption.

As demand increases, businesses then demand credit for increases in capital expenditures or production. The interest rates of loans are driven by demand from borrowers.

Since ‘borrowing costs’ are directly tied to the underlying economic factors that drive the NEED for credit, interest rates, and therefore bond values, can not be overvalued. Furthermore, since bonds have a finite value at maturity, there is little ability for an overvaluation in the ‘price paid’ for a bond as compared to its future ‘finite value’ at...


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