Cogitate and Stick to the Game Plan

If you are unfamiliar with the meaning of the word in the title, or the word itself, you’re certainly not alone. 

According to Google, the use of the word “cogitate” in publications peaked in the early 1860’s and has been in a downtrend ever since.  Over 150 years is one hell of a bear market! 

In the investment game, you buy when there's blood in the streets.  My Dad was one of the savviest people I ever met, so it’s not surprising that he was a buyer of “cogitate” ever since I can remember, bear market be damned.

Cogitate is a verb that means to ponder intently.  When was the last time you cogitated?  I’m talking about the kind of thought that is only possible when your spouse and children are running errands, you turn off the entertainment and really think, intently.

I was reminded last week how important it is to routinely cogitate on your priorities and ensure that how you spend your time reflects those priorities. I started publishing The Whaley Report because I wanted to empower investors to earn superior returns in less than 30 minutes each week.

I wanted to give you more time to be a parent, a significant other, and a best friend.  Time to focus on your career, your hobbies, or anything else you deemed important.

And I wanted to give good information without asking you to sacrifice your investment returns.

I set out to accomplish this by using an effective process for monitoring global financial markets that are becoming more interconnected with each passing day. In hindsight, it was quite a lofty goal and maybe even a little bit arrogant.

While the “time” part of my goal is very much subjective, the “performance” part is quantifiable and verifiable. The performance of the trade ideas in this report so far this year, have outperformed 97% of all mutual funds tracked by Morningstar and 89% of all non-leveraged exchange-traded funds tracked by ETFDatabse.com. 

This top-tier performance has been possible, in large part, because of the process I use for filtering out the noise of the markets. And if the last month has shown us anything, it's that the noise in the financial markets is increasing at an exponential rate.

Fed Still Optimistic

The Fed did as expected and delivered a hike, with a hawkish commentary. There were a couple of important points to note. First, there were no dissenters to the rate hike whereas it was speculated that there could be as many as 3 leading up to the meeting.

The other important aspect of the commentary is that the Fed’s economic assessment was little changed and Yellen made a point of stating how strong she believed the economy. So now that the first rate hike in 10 years is behind us, how do we trade markets as we head into 2016?

The greatest trading edge you can develop to consistently outperform is the ability to determine what is happening now. Half of the market participants are driving while looking in the rear view mirror, focused on what has already happened.

The other half spends their days trying to forecast whats going to happen in the future. If the statistical reliability of weather forecasts falls apart after just 8 days, how in the world can you expect to forecast whats going to happen months from now in an ecosystem as complex as the global economy?

Develop a process that allows you to better understand the current environment and you will be far ahead of your fellow investor. Let’s run quickly through a couple of our Focus Markets for an update on my biases and how you should approach each market from a trading perspective.

Focus Markets In, Well, Focus

US equities, SPY, remains a NEUTRAL.

SPY has moved sideways for 2 months and the market reaction to the rate hike was muted, at best. In terms of growth, the US is currently the tallest of the pigmies but that growth is far from justifying the current levels of SPY.

We know that price doesn’t always follow fundamentals. Most of the world’s money is LONG-only and mandated to be close to fully invested no matter the economic or market conditions. With this fact in mind, it wouldn’t be surprising to see capital start to flow into the US equity markets. I’m content to take a wait and see attitude.

Chinese equities, FXI, are a SHORT.

China reported the best monthly Big 3 Data in quite some time. The Big 3 are: industrial production, retail sales and fixed asset investment.

Both industrial production and retail sales accelerated higher and are sitting at 6 and 12 month highs respectively. Fixed investment is holding steady at 10% annual growth. But one month of data does not make a trend and China’s 3 year downtrend in key economic data points remains solidly intact.

The price action of FXI confirms this slowdown as it remains below its 2008 uptrend line, which was broken on December 8. It also remains below its 2 month downtrend line since peaking in late October. The PBOC’s ability and desire to ease further could cause a rally in FXI but for now, remain SHORT or avoid all together.

 

US investment grade corporate, LQD, are a SHORT.

Unlike the start of the last tightening cycle in 2004, this time the corporate bond market is already severely stressed. Just look at a chart of any area of the high yield market, spreads have been blowing out for months now. These spreads are only going to get worse as most people are blaming the energy sector.

But even when you exclude this sector of the US, spreads are widening across other sectors as well. The only way to trade corporate and high yield bonds is from the SHORT side or to avoid them all together.

 

Despite the Fed’s rate hike, I’ve been saying for a while that long-dated US Treasuries, TLT, will perform well over the foreseeable future. Similar to US equities, TLT has traded sideways since late October. There are only 2 things to keep an eye on when trading TLT. First, watch the trend in global growth.

As long as it remains down, there will be buyers for US Treasuries. Second, watch the $123 level on TLT. If TLT trades above that level, it’s a clear LONG. Below that level it’s a mere NEUTRAL. I would not SHORT TLT until and unless the global growth begins to recover and the Fed sticks to its planned hikes in 2016.

 

Now that the Fed has officially hiked for the first time and has signaled four more hikes next year, everyone is calling for the death of the USD. It's true that in the tightening cycles of 1994, 1999 and 2004, that the USD eventually declined. However, there are two things to keep in mind.

First, the USD declined came only after it rallied for the first 3-6 months of the tightening cycle.

Second, those tightening regimes didn’t take place after a long stretch at 0% interest rates and in a global environment where everyone else is actively easing. Until further notice trade the UUP from the LONG side, as long as its able to hold the $25.00 level.

 

One final thought, as I mentioned in the beginning, the “time” aspect of what I hope to deliver to you each week is subjective. Whatever amount of time you believe this report saved you this week, take the advice of my Dad, and use some of that time to cogitate.