Last week was the transitional week, which closed the books on 2013 and got 2014 off to a roaring start. Our one trade idea gained 6.5%, making last week the fourth most profitable week in GMC’s history. What a way to kick off the New Year!
GMC’s full year retrn for 2013 closed the year at 25.6%.
As for 2014, we are off to a great start, up 4.9% in the first two days of trading.
In this week’s commentary, I’m going to discuss what I’m looking at for each of the Focus Markets and how I plan to trade them accordingly. I want to give you the right mindset of how to approach these markets in the coming weeks.
U.S. Equities – SPY
U.S. equities have been on a tear since the Crisis and specifically, the March 2009 lows. SPY has returned 172% since March 2009 and finished 2013 with a blistering 32.3% return.
Needless tosay, heading into the New Year, I remain cautious of chasing this market higher and equally cautious of trying to SHORT this market too early.
The fundamental data for the U.S. has been accelerating overall. The labor market has shown signs of stabilization and continued improvement. Economic growth accelerated nicely year over year in the third quarter, reporting a 4.1% GDP versus 0.4% a year earlier.
The questions entering 2014 are: How will the taper effect stock market returns? How will a continued rise or a sustained elevation in interest rates impact the U.S. housing market? If the housing market slows down dramatically, how will that impact the labor market? If the labor market starts to deteriorate, will the Fed “un-taper” and step up its asset purchases?
The answer to these questions will be revealed as 2014 unfolds.
From a technical perspective, SPY would need to pullback approximately 12% before I would even evaluate if a LONG trade idea was appropriate. As for initiating a SHORT idea in SPY, I learned the hard way about shorting markets in an attempt to call a top. Look at a chart of Netflix (NFLX) in the fourth quarter of 2010. You’ll see what I mean.
I’m going to maintain my NEUTRAL rating on SPY until the appropriate risk-reward is available. I believe there are much better opportunities in other Focus Markets right now.
Chinese Equities – FXI
Chinese Eqities are at an interesting juncture as of Friday’s close. FXI has declined almost 10% in the last month and economic data has been slowing just a bit over that time frame. But will the data continue to deteriorate? Or is a mild slowdown in China already priced in?
For this week, I’m moving to a LONG bias in FXI and suggesting a trade a Friday’s close or lower, risking approximately 1.3%. We will know this week or next, if FXI can hold the ABYSS line or if further weakness is to be expected by FXI closing below that line.
In order to understand where FXI is headed over the intermediate term, it will be important to monitor not just the data out of China and price movements in FXI but also data and price in other emerging markets. Most of these markets have been declining since October.
In addition, the Fed’s tapering should be a net negative for capital flows into emerging markets, unless growth in these markets can pick up significantly this year.
Depending on how the market responds and how capital flows early in the year, I could very easily and quickly switch to a SHORT bias on FXI.
Fixed Income – LQD and TLT
Elevated interest rates are here to stay and it’s assumed that the Fed will continue to taper throughout this year. If that is the case, the environment is going to become less conducive to all types of fixed income.
The decline that began in July 2012 for TLT and the decline that began in May 2013 for LQD will continue. That said, interest rates have moved up 7% in the last two weeks of 2013 and a pullback should be expected.
When that pullback occurs and these markets rally as a result, that will be the time to initiate SHORT trade ideas. These markets could provide some of the better trading opportunities in the year ahead.
Currencies – UUP and FXE
Last year was not a good year for me trading the currency markets. As such, I’m going to be slightly more cautious in my approach this year. That said, I’m initiating a SHORT bias for UUP and a LONG bias in FXE for the coming week.
The U.S. Dollar (UUP) has been weaker than I expected based on the slight shift in U.S. monetary policy. But it’s weakness has been mainly against the Euro. U.S. Dollar has shown great strength against emerging market currencies in recent weeks.
So, it’s been a mixed bag and the short term direction for UUP is unclear. So, I’m going to lean on the technicals to help us trade this market. The ALPINE line of 21.86 is a thick ceiling for UUP to push through. If it closes above this line, especially if volume accelerates, that will be a true sign of further strength and I’ll need to reevaluate my SHORT bias. However, if it is unable to push through, this could be a great entry point for a SHORT idea.
FXE has been strong recently, in large part on the back of further acceleration in economic data. The big question heading into 2014 is: will the data in the Eurozone continue to improve? Again, I will lean on the technicals to help me evaluate the short-term direction of FXE.
Commodities – OIL and GLD
Oil started this year off with the biggest daily decline since 2012. I’ve had a SHORT bias on OIL since October 28 and I’m going to stick with that bias. OIL could easily fall another 5-10% down to the ABYSS line before it finds solid footing. So, I’m sticking with the SHORT bias for the upcoming week and maintaining our one open trade idea.
Gold had an abysmal year in 2013, crashing 27% during the year. I am a believer in mean reversion when markets travel too far in one direction unabated. So, I would expect a rally from GLD, which began last week with a 1.85% rally.
In addition, sentiment is currently very bearish on GLD in terms of the number of bullish futures contracts. A crash in 2013 coupled with an overly bearish sentiment should lead to a decent counter rally.
However, as I have been saying from the beginning, trading GLD is a derivative of trading interest rates. Historically, GLD has a difficult time rallying in periods where interest rates are rising or elevated. Interest rates are elevated and could see 3.5% this year on ten-year Treasuries.
As long as that is the case, trade GLD with a SHORT bias but pick and choose your entry spots carefully. Wait for the mean reversion rally, which should accompany a pullback in interest rates, as your entry point into GLD.
2014 will offer a number of opportunities to us and we are already off to a great start.
Here's to the start of a prosperous New Year.