The State of the Markets:
And we're back... After months of little to no volatility, the bears got back into the game yesterday, putting on a pretty decent show on the first day of the week's trade.
Stocks started the day higher - no, make that, a lot higher - on the back of strong earnings from the likes of Citi (NYSE: C) and renewed enthusiasm for the economic picture. Before you could find a second cup of coffee, the venerable DJIA was up another 283 points and the floor traders had donned their Dow 26,000 hats. (And for the record, do we really need new hats for every 1,000 Dow points?)
All the major indices were following suit and it felt as if the melt-up was shifting into another gear. "Party on, Wayne" appeared to be the most appropriate phrase of the day as the S&P 500 broke through a big, round number of its own at 2,800.
But then it happened. While the Dow Jones Industrial Average help up fairly well, the rest of the indices started to decline in earnest. And after a modest period of waffling during the lunch hour, the S&P sank into the sunset into the close, finishing down nearly 10 points - and 31 points (1.1%) off the high. The NASDAQ fared worse and the small- and mid-cap indices wound up falling 0.75% and 1.28% respectively on the day.
The technicians - especially those dressed in their bear costumes - clamored about the session being a "key reversal" day, which, historically has meant there will be more selling ahead.
So what gives? Why did stocks go from bright green to red? Why the sudden change of heart?
In short, because this is what happens to markets that get ahead of themselves. Markets that move too far, too fast. Markets that are overvalued. And markets where everyone agrees the only way forward is higher.
As is usually the case, something crawls out of the woodwork to cause the fastest of the fast-money masters of the universe to question their thesis. Something that causes traders to do a double-take and utter the words, "Wait, what?"
In this case, that something is actually a couple things. First, there is the fact that the U.S. Government is facing the possibility of a shutdown at the end of this holiday-shortened week. And while most believe a deal will be made at the 11th, 12th, or 13th hour, the rhetoric out of D.C. is giving some investors pause.
Lest we forget, many a rally over the years has been ended by the childish gamesmanship that gets played out within the beltway.
But the real story of the day had to do with the decline in the dollar. Or, more accurately, the spike in the euro.
Cutting to the chase, the talk going around is that the Europeans will need to start putting the brakes on their QE game at some point soon. And the key is that "sometime" might be sooner than the market currently expects.
So, cue the euro rally, the dollar selling, and the fears that the central bankers will make a policy error, accidentally killing the economic recovery in the process.
Will this come true? Or is this even a realistic fear? To be honest, I'm not sure. But it definitely was enough to spark some fast selling in a market that was overdue for something to crawl out of the woodwork.
When you're arguing with a fool, it is best to make sure he isn't doing the same. -Unknown
Wishing you green screens and all the best for a great day,
Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none.
Note that positions may change at any time.
Today's Model Review:
LEADERS Model: We made adjustments to our LEADERS model yesterday. First, we took profits in our financials holding by selling XLF. We then began the process of adding a 5th position to the portfolio by reducing the current holdings in tech, industrials, and health care to 20% each. We then added a 20% position in the materials sector (XLB). This leaves 20% of the portfolio in cash. Our plan is to redeploy this cash into the next market pullback. And yes, feel free to insert an eye-roll here. However, the current rally is getting a bit too exuberant for our taste and we have decided to create some dry powder here. Mbr>
The LEADERS currently holds 20% positions in the Technology, Industrials, Health Care, and Materials sectors.
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: +4.9%
DD CORE: +4.1%
DD TRADING: +3.2%
S&P 500: +3.8%
|Daily Decision Trading Service
Current Portfolio Summary
|The LEADERS Model|
|% of |
|Technology Select Sector SPDR||XLK||20%||12.1.16||$46.64||Buy|
|Industrial Select Sector SPDR||XLI||20%||8.14.17||$68.58||Buy|
|Health Care Select Sector SPDR||XLV||20%||11.27.17||$81.79||Hold|
|Materials Select Sector SPDR||XLB||20%||1.16.18||$63.02||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||Buy|
|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||Hold|
|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.