FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 05 September 2016

Monday Morning Call 05 September

Written by , Clarity Financial

Since we are going into a long holiday weekend, I thought it would be worth reviewing and updating a couple of my recommendations from the end of July.

Interest Rates/Bonds

I discussed previously that interest rates had gotten so oversold (bonds overbought) due to the "Brexit" that a reversal was very possible. As I noted previously, the rotation from bonds to stocks confirmed the push higher in the markets.

That rotation is now complete.


With 10-year rates now back to an overbought condition (bonds now oversold), and pushing the accelerated downtrend line that began with the conclusion of QE3, the most likely movement will be down in conjunction with a "risk-off" move in the markets.

As discussed above, the suppressed levels of volatility, extremely confined trading range and the deterioration of momentum all suggest a short-term correction of the market is most likely.

I have been buying bonds fairly aggressively this past week for this reason.

Furthermore, the Treasury to Eurodollar (TED) Spread has recently peaked as well which has historically signaled short to intermediate term corrective moves. By the way, notice the massive increase in volatility in the TED Spread since the end of QE3.


If I am correct, and the markets do experience a short-term correction, or worse, interest rates will likely retest recent lows. One thing is for sure...

"Rates ain't going significantly higher anytime soon."

Oil & The Dollar

At the beginning of July I wrote:

"As shown in the longer term oil chart below, there is little to suggest a recovery back to old levels is in the offing anytime soon. With oil prices back to extreme overbought conditions, a retracement to $35 or $40/bbl would not be surprising particularly if, and when, the US Dollar strengthens. Remain underweight this sector as valuations for energy stocks have entered into 'moon shot' territory."

That call was quite prescient as shown. Not only did we retrace back to almost $40 once, we are likely in the process of doing it again. With oil prices at extreme overbought levels (green dots on top and bottom), a triggering of a longer term sell-signal will likely see a push back towards the $35/bbl range. Importantly, oil prices broke back below the downtrend line and must hold support at the intermediate-term moving average.


Furthermore, the rise in the dollar is likely to continue, particularly if the Fed raises interest rates in September (higher yields attract inflows) which will continue to suppress both oil prices AND earnings. As noted:

"While Central Banks have gone all in, including the BOJ with additional QE measures to bail out financial markets and banks following the 'Brexit' referendum, it could backfire badly if the US dollar rises from foreign inflows. As shown below, a stronger dollar will provide another headwind to already weak earnings and oil prices in the months ahead which could put a damper on the expected year-end 'hockey stick' recovery currently expected. "


Read the review of Q2-earnings here.

Unlike the stock market which is pushing extreme overbought levels, the dollar is at an extreme oversold condition and has only started a potential move higher. This is something to pay very close attention to in the months ahead.

As noted, with interest rates negative in many areas of the world, the push of capital into the U.S. for a higher return on reserves remains likely for now.

Model Update

S.A.R.M. Sector Analysis & Weighting

As I have been repeatedly stating over the last few weeks, as boring as it has been, there has not been enough of a correction of the current overbought condition to justify increasing equity allocations in portfolios yet. This is despite the fact the model has been adjusted higher to represent the target levels of equity exposure we want to migrate toward.


While actual portfolio equity risk weightings remain below our target of 75% again this week, the odds of a further correction, as noted above, continue to increase. However, the continued consolidation of the market has improved conditions in recent weeks and has reduced the potential for a deeper downside correction at this point.

(Note: This is an equally weighted model example and may differ from discussions of overweighting/underweighting specific sectors or holdings.)


Relative performance of each sector of the model as compared to the S&P 500 is shown below. The table compares each position in the model relative to the benchmark over a 1, 4, 12, 24 and 52-week basis.

Historically speaking, sectors that are leading the markets higher continue to do so in the short-term and vice-versa. The relative improvement or weakness of each sector relative to index over time can show where money is flowing into and out of. Normally, these performance changes signal a change that last several weeks.

As noted above, the recent spike in interest rates has now reached the top of the long-term downtrend and suggests that staples, utilities, and bonds will continue to improve in performance over the next couple of weeks. Such improvement will most likely coincide with an ongoing market consolidation or correction.


Notice in the next to last column to the right, the majority of sectors and indices are pushing extreme levels of deviation from their long-term moving average. Such deviations can not, and do not, last long historically. A resolution of those deviations has been occurring with the recent consolidation of the market which providing the necessary risk/reward rebalancing to increase model allocations in the future.

The two charts below graphically show the relationship of each position's performance relative to the S&P 500 Index. If we are trying to "beat the index" over time, we want to overweight sectors/asset classes that are either improving in performance or outperforming the index, and underweight or exclude everything else.


Sectors Currently Outperforming by >1%

  • Financials (Improved last week)

Sectors Currently Performing In Line <>1%

  • Industrials (weakening)

  • Materials

  • Energy (weakening)

  • Staples (improving)

  • Technology (weakening)

  • Utilities (improving)

  • Discretionary (improving)

Sectors Currently Under Performing By >1%

  • Healthcare (improving)


Index/Other Asset Classes Out Performing S&P 500 By >1%

  • REIT's (improving)

  • Emerging Markets (weakening)

Index/Other Asset Classes Performing In-Line With S&P 500 <>1%

  • Mid-Caps

  • Equal-Weight S&P 500 (weakening)

  • Small-Caps (weakening)

  • International Bonds (weakening)

  • High-Yield Bonds (weakening)

  • Dividend Stocks (improving)

  • International Stocks (weakening)

  • Domestic Bonds

Index/Other Asset Classes Under Performing S&P 500 By >1%

  • None

The risk-adjusted equally weighted model has been increased to 75%. However, as stated above, further consolidation in the markets is needed before making any changes.


Such an increase will change model allocations to:

  • 20% Cash

  • 35% Bonds

  • 45% in Equities.

As always, this is just a guide, not a recommendation. It is completely OKAY if your current allocation to cash is different based on your personal risk tolerance, time frames, and goals.

For longer-term investors, we still need to see improvement in the fundamental and economic backdrop to support the resumption of a long-term bullish trend. Currently, there is no evidence of that occurring.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Investing


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
A Short Note on a Connection Between Marginalist Economics and Folk Medicine
Run A High Pressure Economy? Janet Yellen Does Not Understand the Problem
News Blog
Advance Estimate 3Q2016 GDP Quarter-over-Quarter Growth at 2.9 Percent.
Rail Week Ending 22 October 2016 Better Than The Previous Week
What Happens After The Islamic State Loses Mosul
Infographic Of The Day: The History Of Women's Ice Hockey In Canada
Early Headlines: Asia Stocks Mixed, Huge Antarctic Marine Park, Can Trump Get To 270?, US Workers Gaining, UK Inflation, France GDP, India Savings Lag And More
Why Amazon Gives So Many Perks To Prime Members
Where Workplace Trust Is Strongest
How A Lack Of Sleep Affects Your Brain - And Personality
How Accurate Are Final US Election Polls
What We Read Today 27 October 2016
A Pony And His Beloved Teddy Bear Reunite After Being Apart For 3 Years
October 2016 Kansas City Fed Manufacturing Remains In Expansion
September 2016 Median Household Income Not Statistically Different Than The Previous Month
Investing Blog
Technical Thoughts: Looking For The Rebounds
Gold That Pays Dividends
Opinion Blog
Global Debt Investors: The Silence Of The Lambs
A Hard Brexit And Reduced Migration Won't Benefit UK Workers
Precious Metals Blog
Inflation Surging As Platinum Signals Stock Market Decline
Live Markets
28Oct2016 Pre-Market Commentary: US GDP Rises To 2.9 Percent, Gold Falls Sharply, Markets Expected To Initially Open Fractionally Higher
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved