current view of the markets - cfa institute fred report... · (charts as of 01/20/15) by fred ......

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Current View of the Markets(charts as of 01/20/15)

By Fred Meissner, CMTwww.theFREDreport.com

© 2015 The FRED Report • www.theFREDreport.com • 404-875-FRED

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Overall Macro Views for 2015

• ThisshouldbeayearofvolaQlityandshort‐termtrendsforallmarkets.Traders,notinvestors,couldprosper.

• StocksareatriskforthebiggestcorrecQonsince2011.Thisshouldoccurinthefirsthalfof2015.Shouldthisoccurthesecondhalfcouldbestrong:targetrangeonSPYis223–229.229ispredicatedonQ1orQ2beingnegaQve.StocksareespeciallyatriskforhighervolaQlity.

• Bondspricesshouldhithighsinthefirstpartof2015.Traderssellbondsat134,ourobjecQvefortheyearonTLT.AlternaQvestotreasuriesshouldfarebe\erthanTLTin2015.WatchDSUM,PCY,andBKLN.

• GoldshouldhaveastrongfirsthalfandGLDcouldtest139.

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© 2015 The FRED Report • www.theFREDreport.com • 404-875-FRED

Overall Macro Views for 2015

• Oilshouldbo\omnolaterthanMarch2015.Wewouldexpecttheselowstoberetestednomorethan10weeksakerthelowestmonthlyclose.

• DBCshouldbo\ominthefirsthalfof2015.WatchDBAandthesokcommodiQes–theymaydobe\erthanconsensusexpectaQons.

• Currencymarkets:Astrongerdollarispossibleinthefirstpartof2015butitisextendedandshouldhaveaweakersecondhalf.TheYenshouldoutperformtheEuro.WearelongtheSwissFrancinourmodelsmovinginto2015.

• EmergingmarketscouldoutperformdevelopedEurope,especiallyifLaQnAmericastartstoimprove.WatchEWZ,ARGT,andILFtodetectimprovementinLaQnAmerica.SwitzerlandremainsourfavoriteEuropeanmarket.

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Chart: SPY – S&P 500 SPDR

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Chart: MDY – S&P Mid-Cap 400 SPDR

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Chart: IJR – S&P 600 Small-Cap Index

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Chart: NYA – NYSE Composite Index

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Chart: SPY – SPDR S&P 500

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Chart: PDP – PowerShares Technical Leaders

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Chart: SPLV – PowerShares SP 500 Low Vol

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The FRED Report PortfoliosThebiggesthurdlewehavehadinourcapacityas“PoroolioStrategist”atvariousfirms,isthatmostfirmporoolioswerenottacQcalenoughduetofirmpolicy,sotheseporoolioswillbeabitmoretacScalthanmostofferingsasweareunrestricted.Akeypointisthatmostoftheseporooliosandmodelswillbe“ObjecSvesBased”.BythiswemeanthateachporooliowillhaveanobjecQve,andmeeQngthatobjecQveismoreimportanttousthanstraightmarketoutperformance.

LargeCapandSmallCapSectorsObjecSve:Maintainafullyinvestedstanceinstocks,buttousesectorweighQngsto:(1)capturemoreupside,and(2)miQgatedownsideriskthantheSPYIndexETF(forLargeCap)andIJRIndexETF(SmallCap).

TimingModels(DomesQc,DevelopedInternaQonal,andEmergingInternaQonal):TheFREDTimingModelsaredesignedtousesomeoftheQmingtechniquesweusetoforecastmarketsintheFREDReport,withvaryingdegreesofrisk,duetotheconstrucQonandmoreacQvemanagementoftheETFsinthestrategies.

BucketList:The“BucketList”poroolioisdesignedtotaketheoverallsecQonsofTheFREDReportweeklyreportandlistsomeideasadvisorscanusebycategory.Wewillhave5categories:Stocks,FixedIncome,CommodiQes,InternaQonal,andChartofInterestorAreasofInterest.Wewillhaveamaximumof25unitsinthisporoolio,allocaQng5unitstoeachcategory.

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10/13/15Update:• TIMINGMODELCHANGESANDCOMMENTARYWewillmovetheboththeDomesScHighBetaandHighRelaSveStrengthmodelsbacktoDefensivefromNeutralbybuyingoneSPLVineachmodelandsellingoneSPHBandPDPrespecQvely.Thereisenoughrisktosuggestthisiscorrect,andwecanrevisitlater.WewanttoseeindicatorsimproveTherearenochangesintheInternaQonalTimingModels.

• BUCKETLISTCHANGESANDCOMMENTARYIntheStockBucket,wehavenochanges,butstaytuned–ifthemarketgetsworsewewillmakesomechanges.IntheAreasofInterestbucket,weremoveEWIandaddIDLV.WealsoremoveUUPandaddFXF.TheSwissFrancisnearlong‐termsupportandusuallydoeswellduringEuroturmoil.IntheBondBucket,Nochanges.IntheInternaSonalBucketwesellEWGandbuyEWL,reversingadecisionatthebeginningoftheyear.IntheCommodiSesBucket,weremoveoneDBCandaddoneUSOtoplaytheseasonaloiltrade.

The FRED Report PortfoliosLargeCapSectorPorbolio:

LargeCapSectorsObjecSve:Maintainafullyinvestedstanceinstocks,buttousesectorweighQngsto:(1)capturemoreupside,and(2)miQgatedownsideriskthantheSPYIndexETF.

LargeCapSectorsweighSngmethodology:weusetwounitsasanequalweight,threeasanoverweight,andoneasanunderweight.

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SmallCapSectorPorbolio:

SmallCapSectorsObjecSve:Maintainafullyinvestedstanceinstocks,buttousesectorweighQngsto:(1)capturemoreupside,and(2)miQgatedownsiderisk,thantheIJRIndexETF.

SmallCapSectorsweighSngmethodology:Wewillusetwounitsasanequalweight,threeasanoverweight,andoneasanunderweight.

The FRED Report PortfoliosTimingModelPorbolios

TimingandWeighSngMethodology:WeofferdomesQcandinternaQonalQmingmodelsforadvisorstochoosewithvariousdegreesofriskproducedbytheETFinstrumentsused(AggressiveandLessAggressive).Weusea4,3,2,1,0unitmethodologyforweighQngandconsidertheporooliotobeneutralwithtwo“highbeta”unitsandtwo“lowvolaQlity”unitspairedtogether.Abullish/aggressivestancewouldbethreehighbetaunitsispairedwithonelowvolaQlityunitandafullbullishstancewouldbefourunitsinahighbetainstrument.AdefensivestancewouldbeonehighbetaunitandthreelowvolaQlityunit.AfullbearishstancewouldbefourlowvolaQlityunits.

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Fixed Income Section

FixedIncomeisthemostchallengingareaofthemarkets,andourbiggestconcernintheyearsahead.TLThasralliedtotargetsof134atthebeginningofJanuaryasforecast,fromourOctober2013buysignal,butthismayendin2015.If(when?)ratesstarttorise,otherfixedincomeareasmaystarttooutperform.WeshowTLTandsomecandidatesthatcouldoutperformbondsifratesstarttorise.

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Chart: TLT – iShares Barclays 20+ Year T - Bond

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Chart: CWB – SPDR Convertible Income Bond ETF

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Chart: BWX – SPDR International Treasury Bond

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Chart: PCY – PowerShares Emerging Markets Sovereign Debt

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Chart: DSUM – PowerShares Chinese Yuan Bond Portfolio

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Chart: BKLN – PowerShares Senior Loan Portfolio

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The Commodity Theme and Inflation

AttheFREDReport,webelievedthatinflaQonwillwin,andcommodiQesshouldbeagreatlong‐terminvestment.Therecentdeclineinoilmayprovethiswrong.DeflaQonisaconcern.Webegin2015withbuysignalsingoldbutthismaybecurrencyrelated.Weexpectatradablebo\ominoilinthefirsthalfbutanylowshouldberetested.Oil’slong‐termoscillatorsareasoversoldas1986and2008.

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The Commodity Theme and Inflation - DBC

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The Commodity Theme and Inflation - GLD

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PowerShares DB Oil Fund (DBO)

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PowerShares DB Base Metals Fund (DBB)

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International Review

• ThereconQnuestobeconcernsaboutEuropeanproblems,andthesemayworsen.

• SwitzerlandremainsthestrongestEuropeanmarketlongterm,butrecentcurrencymovescouldchangethis.

• EmergingMarketshavemorepotenQalthanconsensusexpectaQonsandweremainbullish.

• Asianmarketsarestrong,andJapanshouldimprovein2015aslongasFXYisbelow105.Chinaisaconcern.

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iShares MSCI Switzerland Index (EWL)

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iShares MSCI Germany Index (EWG)

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iShares MSCI Italy Index (EWI)

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Powershares International Dividend Achievers (PID)

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iShares FTSE Xinhau China 25 (FXI)

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SPDR S&P China ETF (GXC)

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PowerShares Golden Dragon (PGJ)

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iShares MSCI Japan Index Fund (EWJ)

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iShares MSCI Emerging Markets Index (EEM)

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PowerShares DWA Emerging Markets (PIE)

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PowerShares S&P Emerging Markets Low Vol (EELV)

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Technical Indicators

ReaderswillnotethatweusethesameindicatorsonallofthechartsinthispresentaQon.WeappenddefiniQonsoftheseindicatorsandareavailableviaemail(fred@thefredreport.com)toanswerquesQonsaboutthismethodology.

© 2015 The FRED Report • www.theFREDreport.com • 404-875-FRED39

Technicals DefinedMovingAverages:

MovingaveragesareoneofthebuildingblocksofTechnicalAnalysis,andtherearealmostasmanywaystousethisindicatorastherearetechnicians.AttheFREDreportweteachanduseadualmovingaveragecrossoversystemtodeterminetrend.Ourfavoritesarethe5periodand20periodmovingaverages.Weconsiderthetrendtobeupifthe5isabovethe20,anddownifbelowit.

StochasScs:TheStochasQcOscillatorisoneofthecommonlyusedmomentumoscillatorsandisstandardoncharQngprograms.Therearetwolinesonthechartbelow,%Kand%D.%Kisthefasterofthetwolines,andrepresentsamathemaQcalformulathatmeasureswherethecurrentcloseisinrela0ontothetradingrangeofthelast“X”periodsof0me.Weusea14periodlook‐back,soinplainEnglish%Ksayswherethecurrentcloseisinthetradingrangeofthelast14days,expressedasa%.

AttheFREDreportweuseitsomewhatdifferentlythaniscommonlytaught.Thestandardwaytousetheindicatoristoregisterabuysignalwhenitmovesbelow,andthenabove,20(thelowest20%ofclosingpricesinthelast14days).Asellsignaliswhentheindicatormovesabove,andthenbelow80(thehighest80%ofclosesoverthelast14days).

Theotherline,%D,isa3periodmovingaverageof%K.WehavefoundthattheStochasQcissensiQve,soweadvocatetakingsignalsonlyinthedirecQonofthetrend.WhenlookingatthestandardFREDreportchart,thiswouldmeantakingbuysignalswhenthe5isabovethe20,andsellsignalswhenthe5isbelowthe20,butusingadifferenttechniquetoexitposiQons.ThereasonforthisistheStochasQcisquitesensiQve,andcangiveearlyindicaQons,especiallyinnewtrends.Italsocanget“stuck”inthedirecQonoftrends,whichconnotesstrengthandnotweakness.Another,preferredinterpretaQon,istousetheindicatortomeasurerisk.Anexample:buyinanuptrend,notwhenthestochasQcisat90%butratherwaitunQlitfallsbelow50%,Thisway,evenifastock,commodity,orETFdoesnotgiveoneofthe“classic”signals,youcansQllusetheindicatortoassessrisk,andlegintoposiQons.

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© 2015 The FRED Report • www.theFREDreport.com • 404-875-FRED

ThispresentaSonwasmadepossiblebyTheFREDReport.FormoreinformaSon,visitusonlineat

www.thefredreport.com

TheFREDReport(www.theFREDreport.com)wasstartedtoprovideFinancialAdvisorsandinvestorsaccesstounbiasedmarketresearch.ThePresidentofTheFredReport,FredMeissner,CMThasbeenpracQcingTechnicalMarketAnalysissince1983andhasworkedintheresearchdepartmentsofMerrillLynchandRobinson–Humphrey/SmithBarney.InaddiQonhehasservedthepublicasaporooliomanagerandfinancialadvisor.Weknowtheproblemsinvestorsfaceandhavedevotedourcareertohelpingfindthebestpossibleinvestmentsinallenvironments.Interestedreaderscanalsoseehisworkeveryweekatwww.thestreet.com.