What a difference a few days makes…

In our last report, we described ourselves as “carefully” bullish, mostly due to the remaining tailwinds of Fed support spilling over from Q4 2019.

We said there would be dips and dip-buying to come as well, and by the week’s close, those dips had shown up…

But, again, we caveated such bullishness as being “carefully” so, and in this Monday report, we go into much deeper detail as to why.

In short, as markets change, the signals change. It’s now time to be careful and wait for the signal to buy the dips still to come.

Simply put, there’s now a lot happening out there in the world as we turn the page to February, including the now- global coronavirus threat, Brittan’s exit from Europe, slowing consumer spending, negative real yields playing to an increasingly inverted U.S. yield curve, plunging oil prices and well… to much more than these pages can cover this Monday.

We’ll hit the highlights for you, though, in this What’s Happening Now, namely addressing the rising risks, how we monitor them, and what we’re doing about it (i.e. recommending) for YOU.

Let’s discuss.

Stocks and Bonds Trading Places

That’s right. In the most recent market sessions, stocks have taken a bow to bonds as investor fear of risk rises and thus yields and interest rates retrace in a flight to bonds (hence biding up bond prices).

Last Friday was on the rude side.

The S&P 500 Index fell 1.77%, confirming a broader Sell Signal generated on January 24, highlighted in the chart below. That takes the S&P 500 to down 2.12% over the past week, erasing all S&P 500 gains year-to-date.

Now that’s a “dip.”

Measuring from the most recent market highs of January 14, technical downside support (the white lines below) is indicated first where the markets closed on Friday (down 4%); second in a more bearish scenario, falling by 9%; and then down by 16% respectively, failing more Fed intervention or inflows from overseas, which we’ll be tracking.

We were concerned about (and thus expected) such dips.

Why the concern? Because the bond market was telling us so, as it so frequently does. We’ve said, time and time again, look to the bond markets for leading indicators of what’s ahead in stocks.

Below we plotted the iShares 20+ Year U.S. Treasury Bond EFT (NYSEArca: TLT), which signaled a clear Buy Signal for bonds back on January 3, which then broke overhead resistance (the red line) on January 21 and has just kept on trucking upwards as investors swapped out stocks for “safe” government bonds.

And remember: When bond prices go up, as in the chart below, bond yields and hence interest rates fall. (That’s ugly too, but we’ll get to that in a moment.)

Bottom Line: Stocks and bonds are trading places. As stocks fall as fear increases, bonds typically rise in a flight to “quality.” Thank-you, Mr. Bond Market, for tipping us off well before the coronavirus began to unleash its potential furry.

A Walk Around the Park

Let’s take a walk around the park, which will inform and remind on What’s Happening Now, What’s Ahead and what it means for Your Portfolio, themes that consolidate everything we aim share for you in the weeks ahead, which is namely to (1) keep you 24/7 informed on what’s happening now, (2) give you the tools you need to look ahead and (3) provide specific portfolio solutions that change when needed, as they have this last week.

As this Twilight Zone matures, actively-managing cash and actively-managing those residual portfolio allocations are what matters most. That’s why we’ll be rolling out a portfolio service mid-month.

It is, after all, February 2020 now and we know we’ve been promising this for quite some time. We get any impatience, but it WILL be good – reeeally gooood.

Storm Tracker Rises

We’ll start our Uh-Oh this Monday with Storm Tracker, which is now rising this week from 30% to 35% for a host of reasons we’ll describe below.

That means, de facto, you should be increasing your portfolio allocation from 30% cash in recent weeks to 35% cash this week.

For those just joining us, Storm Tracker tallies what’s happening now by tracking almost 100 indicators from GDP, to trend, to leading indicators of recession, to yield curves, Déjà Vu and more.

We’ll contain our dialogue in this CSR to the major points at hand, but peeking ahead, know that we’ll be opening our toolbox soon mid-month so that you too (not just we) can look at these data points (and more) at your own will, revised weekly.

Contributing Factors

Glancing below, it doesn’t take long to see who the culprits are for that 5 percentage-point rise in recession probability – namely, falling GDP, rising adverse trends, rising adverse leading indicators, inverting yield curves, and even déjà vu over last week.

Trend Can Be Your Friend or Foe

Trend direction is a key component of our Storm Tracker, which last week so well described and now confirms the flight away from equities into bonds, as equities and commodities fell in a flight to perceived quality.

Our proprietary ‘spider chart’ below is not that hard to read-and is worth a careful look.

Using this Sector Trend Tool: Good is a 10; implosion is a zero. It’s that simple and it’s all plotted below in daily, weekly and monthly time frames, giving us (and you) a trustworthy peek ahead.

Take equities. You can plainly see how trends have been weakening, from monthly to weekly to daily (last week). How would you like to have Sector Trend at your fingertips each and every week? Again, it’s all coming mid-month.

Trust us, you’ll like it. See how stocks and commodities are contracting while bonds are expanding? These are things you need to know.

U.S. Treasury Yield Curve Continues to Invert

In addition, the oh-so-important U.S. Treasury yield curve is looking nasty again this week, compared to a quarter ago, highlighted below.

Again, a picture conveys 1,000 words.

The current yield curve (in yellow) continues to invert and that’s not a good thing, for the Fed just spent a bunch of money on the repo and Treasury markets to bail out the last inversion.

So, now what? More steroids? Of course, if the Fed slides back in, our signals will change, but for now, we must listen to what the markets are telling us.

For now…see how low (and dangerously compressed) those interest rates are? All along the curve? Subtract inflation (real inflation not the fake inflation put out by the Fed), and the curve goes negative, joining the likes of Japan and Europe.

Critical Clues: Sector Rotation in Overcrowded and Uncertain Terrain

Our Sector Watch is updated weekly and will be perpetually available to you soon when we launch our Portfolio Builder service. Such Equity Sector Rotation and Sector Performance is key for looking ahead and investing ahead of the curve.

For now, here’s what our Sector Rotation tools are telling us. Simply put: It’s messy out there.

Quad 2 (upper right), our Leading Quadrant, is simply overcrowded. In fact, the entire rotational chart is so tightly crowded towards the center of the matrix that it spells one thing: a high degree of market uncertainty.

This kind of bunching rarely happens.

But here’s the good news. When sectors ultimately and individually propel themselves (explode) out from a tight pack like this, the trajectories can be meaningful…and profitable.

So, we’ll keep our eye out for you for sector investment opportunity in sectors that might pass through the Lagging Sector onto the Improving Sector. These will be Signals that matter. For now, we wait for a clear signal before we pull a trigger.

What All This Means for Your Portfolio

Storm Tracker’s risk percentages are ticking up; Equity Sectors are all crunched up, uncertain which way to turn-up or down; Trends are not looking too rosy on the equity side; and the yield curve is inverting again.

What to do?

Simple. Follow our rules. Raise your cash allocation to 35% and for that Remainder Allocation, begin to get defensive as we have across utilities, fixed income and gold…and consider moving to the short side in the equity markets, as we have this week, for a portion of your portfolio.

By example, the Utilities Select Sector SPDR ETF (NYSEArca: XLU), well capitalized at $12 billion, is up 7.9% over the past month. iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) would work on the fixed income side, at $19 billion in market cap and up 6.8% in the last month.

We spoke about gold last week…think about a pull-back in price and an allocation to the SPDR Gold Shares ETF (NYSEArca: GLD), $46b market cap; and for stocks, if you want to get short as we have, Proshares offers an ample supply of inverse ETF’s that short (bet against) the S&P 500, the Nasdaq and the Russell 2000, at varying points of leverage.

Or just hang out until mid-February and we’ll build this portfolio for you, using our own Portfolio Builder that provides precise percentage recommendations, building upon our macro outlook, Storm Tracker and a myriad of other key variables/indicators.

Again, we do apologize for the wait on all of this, but trust us, it will be worth it.

Until later this week, stay well and stay safe.

Matt & Tom


4 responses to “Risk Ticks Up: “Carefully Bullish” to Bearish for Now”

  1. How do you explain the failure of gold to play a leading role, along with bonds, in providing protection against a likely decline in stocks and a dangerous monetary situation?

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