Market Update

Allrighty,

So last night Torina texted me about the recent run-up in stocks. Yep, the machine that is the stock market seems to add 40 points to the Dow each day. The consensus on the street is both bulls and bears want the stock market to correct back down to earth, therefore it probably won't happen. Everyone's also waiting for this unknown external event that gives the market a reason to sell off for a bit, but the riots in Egypt were nothing but a head fake.

My theory: You're starting to see inflation across the globe, especially in emerging economies, mainly driven by the rise in food prices (that plus high unemployment in the middle east). We've seen emerging markets slowly, but surely correct over the past couple of months and they've fallen like a row of dominos. First it was the faster growing emerging economies such as Thailand, Indonesia, India, and Turkey. Then you saw Brazil and China roll over. Now you're seeing weakness in Hong Kong, Singapore, Malaysia, S. Korea, and Russia. It's nothing but a healthy correction, and you're already seeing increased buying back into the first tier that fell, but non-the-less, where does that leave the developed markets? Are we the next domino to take a breather?

So what's the catalyst for a healthy correction? Inflation is the central theme in the emerging economies and it may provide a glimpse into the future for the US, although less extreme. Our CPI came out at a seasonally adjusted 0.4% rise. But, the food index rose 0.7%, it's largest increase since 2008, and energy and fuel rose 2.1%. So prices are starting to creep higher. When QE2 began, the order of ops was: commodities will rise, then after 6 months, stores would begin to pass on their costs to consumers...we're starting to see that.

So since the market is forward reflecting (about 6 months), you would have expected to see energy and risk stocks that rise in bull commodity markets lead, and stocks whose costs are tied to food production and energy underperform. This obviously happened. Now, you haven't seen weakness in energy names yet, but just this past week many of the food names and consumer staples are starting to break out. Check out the charts for K, and DF. This is a bit worrisome to me, since these are defensive names who generally outperform in defensive markets. What this may be telling us is that the US will be the last domino to correct, and the 2nd half of the year may be contributed to a more defensive approach of weighing the consequences of QE2, along with the rise in longer-dated interest rates.

Suggestions: Look to scale back positions in energy and risk names that have had huge runs, and reposition into stocks that have been beaten down ( food/consumer staples). The gold and silver trades are officially back on (Torina mentioned SLV in a previous post and it looks to be headed to the atmosphere again).

Stocks I like for this play: DF, MO, NKE, PBR, SLW, MCD

Back up the truck on Gold

I know it's been a while, but it's been spent working, living, drinking, playing, etc'ing.

I've learned a lot already in 2011. Now that Sequent Asset Management's hedge fund is up and running ($100,000 minimum investment in case anyone needs another way to diversify their portfolio), I've been able to begin to see patterns emerge between the model, my personal trading habits, and the market. When volatility is low and the model wants to come out to play for the week and invest, the market seems to drift higher. When the model shuts itself off for the week and doesn't invest, my account and the market chops around or drops, and increases in volatility. In conclusion, the model doesn't like volatility and is a great predictor of it. Similarly, I and my portfolio don't like volatility and will most likely lower my risk or take profits when the model stays out of the market.

The model is back in this week after sitting out for 2 weeks in a row. The market has rallied on Monday and is staying above water today. We should see decent UE numbers on Friday and the US economy continues to show good numbers and is the place to be in 2011, especially now that emerging markets are showing weakness. I scooped up a bunch of positions the last 2 weeks in the midst of volatility and am now waiting for a continued drift up.

Gold looks to have corrected and it's time to back up the truck and start buying. (This is why I wrote in today)

Adam

Lots of Opportunities

Lately I've felt like a kid in a candy store (easy trades in a bull market).

The US economy is the place to be and you're seeing it in both the market prices and the data points. Today's ADP payroll numbers came out as a whopping surprise to the upside, and although the ADP number isn't usually looked to as a great economic indicator, you can't ignore the huge number that was posted. Expect a similar increase in employment figures due out at the end of the week, Friday, and the UE number to ratchet down a tenth or so.

What I love most about our economy right now, is the confidence it's displaying. Money is flowing out of conservative assets and into new avenues of growth and risk. Interest rates are rising as money comes out of bonds and into equities (Long TBT). Gold is DIEING and I love it! GLD just broke the 50day moving average today, and expect about a 5-10% move to the downside until it finds support around 1240 on the 200 day moving average. Now I'm not saying the gold trade is over, but I am saying it's not the place to be anymore. As money flows into equities and other risk assets, why stay in a position that is exhausted on the buy-side (minus central banks adding to their positions in the future), and doesn't pay a yield to be in. Also, the fundamentals for being in gold (inflation/deflation, safe haven, etc.) are dwindling. Find the next emerging investment instead.

Note: Small corrections should be expected, especially after the huge run we've seen in December and now January. So be careful with your buy-ins, let the market come to you, and buy on dips for 2011.

GGB is breaking out nicely after a couple weeks of indecisiveness. Long HK, MU, PBR, TBT, TUR, UAL in trading account. Some have been working. Some may not work.

Eyeing metals and ag names when they finish pulling back due to profit taking.

Trade on my friends,

AF