• Weekly comments for July 10, 2017

    The story of last week was the bounce in the US/Japanese rates differentials, which was supposed to support US assets. I was especially expecting a stronger buying pattern on the QQQ/SPY ETFs, which still look weak.







    The 20DMF only started to display a bounce following the jobs numbers of last Friday.



    However, the continued weakness of the US/German rates differentials tends to indicate that world money should be moving toward the Euro zone.



    Below is a Figure I post at least once a week since it offers a good view of the struggle between growth and income investors.

    When expected growth is strong, small caps usually outperform large caps. However, when rates come down due to lower expected growth, small caps underperform. This seems mechanical, but what these Figure shows is probably expectation for a strong Trump stimulus after the election, followed by a slow down starting in January when it was clear that Trump could not handle the Congress as easily as it wanted.

    The ups and downs between small and large caps ratio could be due to volatility issues in these two instruments. When reforms seem stuck in political issues, both instruments fall, but small caps fall far quicker. The opposite is true when a political solution emerges.



    If we only look at the US rates, higher rates pull money out of US Treasuries, but also out of defensive sectors such as utilities, REITs, gold, commodities etc.







    This money rotating out of defensive sectors should be moving somewhere. We can see that some is moving back into the Mammoth sector, but it is not that impressive.



    If there is a general uncertainty regarding high valuations, then this money should stay out of the markets and we should see a surge in Excess Reserves. Unfortunately, the last update on Excess Reserves was posted on June 22. As updates are posted every two weeks, we should have seen a new update last Thursday. Normally, we should have a drawdown of excess Reserves, which is positive for equities.



    Conclusions:

    The hard part is always the conclusions: where are we going from here? How can we make money in the current market environment?

    As I have written it for weeks now, I believe that most Trump hopes have been priced into today's market. However liquidity is still available and hence is supporting high valuations. In this context, there is a higher probability of spikes down moves instead of spikes up moves. Furthermore, in the current context of higher rates, the small caps which display close to zero profit will find it harder to raise money. Hence, I believe that buying small caps puts on IWM/SPY ratio up-spikes and selling then on down spikes is a good way to make money.

    Another way for making money in the current market is riding down the retail chain disaster trend. Let me explain:

    When I was looking for the consequence of higher rates on the US economy, I came to the XHB Money Flow (Housing market). We can see that the MF (blue line) has been negative since March, indicating a real money outflow. This money flow is calculated on each component of XHB. My first conclusion was that higher rates are bad for housing stocks (specifically home builders.)



    However, this is hardly the case as we can see below. So where is the negative XHB Money Flow coming from?



    The building products and home furnishing sectors however show a very negative pîcture. Hence, I concluded that people stopped refurbishing homes.





    But then, looking into each stock in these two sectors, I found out that the most negative where WSM/BBBY/RH and HD/SHW/LOW. These are mostly retail chains.

    I also related these negative Money Flow pattern to what occurs to the car parts sector.



    Knowing that Amazon worldwide has started wiping out the car parts retail chains by direct delivery to end users, I concluded that this move was also taking place in basically all the big items retail sectors.

    http://www.dailymail.co.uk/sciencete...ly-owners.html

    If Amazon cuts the intermediaries and lower prices by 20%, this means that many low level jobs must be lost in the process. How do we relate this to a healthy US jobs market? Are there more fruit pickers and bartenders than before? More efficiency in the retail industry is very deflationary, especially in an economy that is 70% consumers oriented.

    Why don't we see that into stock prices?
    Comments 1 Comment
    1. RalphR's Avatar
      This explains XHB vs ITB