Running Silent

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It’s that time of year where I get a little break. This will be my last Preview for a couple of weeks as I rest my fingers and recharge my batteries. I don’t expect too many fireworks over the next couple of weeks, but we should still remain vigilant.

Running Silent

Just because one is running silent doesn’t mean one is not prepared. Here are my thoughts over the next couple of weeks, what to look for and what to expect. I conclude with some reading, listening, and video suggestions.

Geopolitical Volatility?

While I don’t expect any significant volatility over the next couple of weeks there does remain a couple of geopolitical factors that could inject some volatility.

Courtesy of wikipedia

First is the Ukraine situation, while it has certainly taken a back-seat in the 24 hour news rotation, the situation remains a powder keg. While the political circus will certainly make for some entertaining TV for political wonks, what we need to pay attention to is the energy markets. The Ukraine supplies Europe with natural gas as well as oil. The East part of the Ukraine under Russia control is an actual production area, while the West is where all the pipelines run. While we haven’t heard too much of a peep for situation stirring, don’t be surprised if it makes headlines again at any time. Any volatility out of here would push up energy prices, which could trickle over into the currency market and bring some pressure to equities.

Second is the Iraq situation, which much like the Ukraine situation has been moved to the back-burner of the news cycle. The initial shock has worn off and the Obama Administration hopes it remains on the backburner, because it is a sticky situation and there is no right answer from a political point of view. So far the south of Iraq is still producing and shipping, which is the predominant production area. However, if this gets disturbed, we could see a shock to energy prices again.

Ironically the two big known volatility situations are both related to energy and can certainly bring significant volatility to the currency and equity markets. Remember, just because it is not on the evening news doesn’t mean the problem has been resolved, the unfortunate reality is that we are an instant gratification society and unless something IS happening, it is easy to forget.

Watch Light Sweet Crude, 110 a barrel is the upper resistance. If it breaks out above that, expect pressure on the equity markets.

Domestic Volatility?

The Fed, domestic economy, treasuries and the U.S. dollar are the other parts of the equation. There is no planned volatile event in the next couple of weeks. We will not hear from the Fed until their next FOMC meeting scheduled on July 29th-30th. We also don’t get the initial look at GDP for the 2nd quarter until July 31st (chances are the Fed will get an early look before they make any statements or adjustments to monetary policy). I suspect that the Fed will stay the course and the GDP will be positive, my initial expectations are for a mid 2% range and a final revision will come in in the mid 1% range later in the quarter.

Courtesy of wikipedia

Labor Report

While nothing big seems to be happening until the end of July, there is the June Labor Report later this week. I don’t expect any huge surprises and it is probably running slightly better than expected, with all the temp and part-time work included. U3 will still be in the 6.3% range and job creation in the 200k range.

Even though a couple of Fed Presidents have come out recently with some talk about raising interest rates in early 2015, chalk it up to talk because they are trying to spin a strong economic recovery story. Fact is their actions speak louder than words and so far Yellen has been firm on the ultra-low interest rates for a long-time, even after (if/when) QE ends.

The Yield Curve

The 10-year yield is coming down and I would look at the 2.2% range as the initial support in the yield or resistance in bond prices (depending on how you look at it). Personally, I think we could get back to 2% or even lower as the Fed will likely continue to keep rates low and will want to flatten the yield curve to spur lending (spending). Additionally with the ECB setting negative interest rates for bank lending and taking a more accommodative approach, coupled with a rise in concern about the domestic economy with the recent negative GDP (-2.9%), there will be some flow into bonds beyond just the Fed fixing the rates.

Market Expectation

The market has bounced off of recent lows and seems to have stalled slightly into a consolidation range. For the most part the equity market has ignored Ukraine, Iraq, the negative -2.9% GDP; in fact any bad news has been ignored as all eyes are trained on the Fed’s monetary policy. Will rates stay at zero, will the yield curve flatten, and will the Fed continue to remain accommodative? So far the answer to all those questions is a resounding yes. Since the Fed has made bonds (as per yields and the real-rate of return) negative and very unattractive, the only place to generate any yield or growth has been the equity market.

Yet, you can only ignore the economic reality and geopolitical volatility for so long. We all pump gas into our cars, pay our energy bills and oil has railed to 105. I think we could see it retreat to the 100-102 range, but it is not coming down to 90 or 80 anytime soon. The long-term and bigger picture is oil on the rise, with or without the volatility of Iraq and Ukraine, as global consumption continues to rise and production continues to push close to maximum extraction rates. Again, watch that 110 resistance point in the Light Sweet Crude!

Tech Sector Circus

Courtesy of wikipedia

The tech sector has also been interesting and a conundrum. There are actually three stories in the tech sector, which make up the components of the NDX index. First you have a lot of the big heavy weights that are turning into commodities and value propositions; they are not producing any new vertical revenue markets and are now in a phase of market competition of existing market share. These companies should be valued not just on growth, but also yield. Second group of companies have reinvented themselves to expand into Cloud and Big Data computing, they have added new market share and are seeing some real growth. The last group is the over-hyped and significantly over-valued IPO sector. Looking at some of the P/E ratios, they are at nose bleed levels and would have to see years of 100% growth to even justify their value. A few are coming back down to earth, but for each one that falls and new one rockets higher. It’s like a bubble happening in these few stocks, but rather than all of them inflating, it’s like many little bubbles and some of the pop and others keep inflating. This has created a rather highly volatile tech sector and means that investors have to be selective.

Some Reading/Listening/Video Suggestions:

While I am gone let me offer a few reading and video selections.

Blogs/ Articles:

Courtesy of shadowstats

Shadow Stats Public Comment on Inflation Measurement (C-CPI) – this is an excellent article on the government’s inflation tool.

Market Preview – The Government’s Modest Proposal – an essay I wrote in 2008 about government data. Responses to my Essay.

Economist – Northern Lights (interesting article about how the Scandinavian countries we routinely point as proof of how socialism can be successful are realizing the folly of their ways and are starting to embrace capitalism.)

This Week in Barrons (a weekly review of the market along with a detailed report on long/short positions)


Keynes vs. Hayek (Music Video debating the two economic ideologies)

I can’t believe we made it – (great video to remind us of a different time).


New Deal in Old Rome – by Haskell (this is an excellent book explaining the economic impact of Rome and how we continue to repeat the same economic mistakes). Free in PDF or epub

The Law - by Bastiat (a timeless essay from 1850 about the state and the law)

This should keep you busy until I get back.

Support & Resistance

INDU 16,800
The range will most likely be in the 16,700 level with 17,000 on the high-end over the next couple of weeks. If the Labor Report disappoints or we get some geo-political volatility I would look at the 16,600 level as the first support area.

NDX 3800
As I reported earlier this index is a mix bag, with over weights, value companies, and some high-flying P/E ratios. Expect high volatility and this index is not indicative of the general market.

SPX 1950
The range will most likely be in the 1930 – 1990 range. Bad news will drive the index to a support area of 1920. As long as the VIX is in the 11-13 range I suspect we will consolidate with a slight up move trend in the market. The Labor Report could bring more volatility. Also read my report on Skew/Slope/Curvature.

RUT 1170
The broad range is 1160 to 1210. If we break down below 1160 look towards 1130 for broader support. For now it seems like 1160 would be the low with a trend upward towards 1200+.

Be back soon!

The only expected event that can drive this market higher or lower will be the Labor Report this week. Most of the on-air talk will be about the economy and expectations for the 2nd quarter GDP. Most have written off the 1st quarter as an anomaly and that marketing spin has worked for the most part, the market hasn’t reacted at all.

Yet hidden volatility is constantly building and I suspect we will see it unload into the market in the 3rd or 4th quarter this year.

It’s worth giving up a little premium to hedge your long positions.

I will see you back here in a couple of weeks. Until then I will be running silent, yet paying close attention.

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3 Responses to “Running Silent”

  1. McRocket says:

    Thanks for all your great updates…enjoy your break.

  2. JB says:

    Hey douchebag- I am noting that you are SHORTING C right here. Who shorts at the bottom? LOL. BTW, they did not FAIL the stress test. The crony Fed used them as an example. They have better cap ratios than any of the big banks. Do your homework. I will be back to check your success with SHORTING at 47….HAHA

    • McRocket says:

      Hey JB, your opinions are welcome…your juvenile name calling is not (at least to me).