Risk/Reward Vol. 327
THIS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Recently, both major indices have been in the red. The S&P 500 closed down on Friday, its ninth day in a row. It has not had nine consecutive losing days in 36 years. Moreover, both indices dropped through major resistance barriers on Wednesday: the Dow Jones Industrial Average closed below 18,000 and the S&P 500 closed below 2100. That said, the losses remain in a tight range with DJIA down only 1.5% and the S&P down only 3% over the past month. Consistent with the premise of last week's edition, both remain positive year to date. The consensus reason for the negativity is the uncertainty associated with the election. Mr. Market abhors uncertainty. Trump is a wild card as is a Democratic sweep of the presidency and both houses of Congress. Neither result is likely, but the possibility of either occurring has Mr. Market flummoxed. If the status quo prevails (Democrat president, Republican Congress) look for the markets to quickly reflate, less so if the Democrats gain control of the Senate. If either wild card scenario occurs look for a significant downdraft in the markets. It is no mystery why so many are heavily in cash.
While the indices remain reasonably flat, interest rate sensitive securities are undergoing a major re-pricing in advance of the Federal Reserve's anticipated rate increase come December. And make no mistake, a rate increase is coming. The press release following the conclusion of the Fed's meeting on Wednesday indicated that if just "some further evidence of continued progress" toward re-inflation occurs, a rate increase is likely. Many market mavens interpreted the use of "some" to many "any", and the requisite evidence likely appeared with Friday's employment report. The annualized wage rate increase came in at 2.8%, more inflationary than expected. Absent an international "black swan" or a wild card election result, a rate increase in December is a lock. In anticipation of that increase, bond funds are experiencing record withdrawals. Bond--like stocks such as telecoms, REIT's, preferred stocks, etc. are at low levels not seen since February. With the futures market still assigning only a 72% likelihood of a December increase, I believe that room remains for these sectors (my favorites) to go lower. In any event, I see no reason to buy in advance of the actual rate increase announcement which should come December 14th.
Oil prices and concomitantly oil stocks remain a hot mess. Mixed messages are coming from Iran and Saudi Arabia in advance of the much anticipated OPEC meeting scheduled this month. Are the talks, aimed at limiting production, on course or have they been derailed? Adding to the madness was news on Thursday that US oil inventories grew by 14.4million barrels during the week ending October 28th, their largest build ever. Oil prices now are in the mid $40's/bbl. well below where they were two weeks ago. Where is oil going? Who knows? All I know is that I am waiting until OPEC meets before buying despite some very tempting prices and yields available with my old standby's BP, RDS and a host of domestic pipeline companies.
Recently, I was asked why Risk/Reward is so heavily weighted to interest rates and oil. The answer is that I am a one trick pony (interest rates) with a fixation on horse of a different color (oil). (Sorry for mixing equine metaphors.) I have come to believe that one can construct a non-diverse portfolio correlated to a market singularity; the yield on the 10Year US Treasury Bond, with movement by that singularity providing clarity as when to buy, hold or sell. This approach requires daily vigilance, adherence to rules (e.g 8% loss limit) and fearing not buying and/or selling some or all of one's portfolio in short order. My approach is explained in more detail in Vol. 221 www.riskrewardblog.blogspot.com . This approach has made me a trader/market timer, but has reduced my anxiety in these uncertain times. That said, if ever again I see the 10Year paying 5%, I will buy all that I can and gladly abandon my approach.
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