A Discounted View

Over the past year, investors have been lulled into a complacent state by the exceptional returns in the market accompanied by low volatility in price action. However, as of Tuesday the S&P 500 (SPX) experienced its largest recent one-day drop of -1.09%. Daily Perspective On the daily chart today’s drop in SPX is clearly defined as it deviates from the uptrend that has formed since the beginning of 2018. While we navigate through earnings season, the gap-down in SPX represents a meaningful difference in sentiment among market participants relative to the rest of January. As constituents of SPX continue reporting earnings, expectations are being repriced into the index. In the meantime, there are some noticeable developments on the daily chart . For example, the gap lower was so pronounced that the daily Relative Strength Index (RSI) finally closed below its overbought level which SPX had maintained throughout all of January 2018. At the very least this sign...

Over the past few months money has rotated into the Consumer Discretionary sector (XLY) Exchange Traded Fund (ETF) at a faster rate than other sectors. In fact, since November of 2017 this sector rotation created a steep ascent in the price of XLY that garnered investors a gain of roughly +18%. While several of XLY’s largest constituents have experienced similar or greater gains over the same time period, certain holdings have lagged. For example, Expedia (EXPE) is displaying some  significant damage to its trend from a daily perspective. Short-term Chart After EXPE announced that it missed its earnings estimates at the end of October 2017, EXPE proceeded to gap lower by about -16% overnight. The  market immediately repriced the value of EXPE and since then the price has been attempting to find some footing. An uptrend during the former half of 2017 brought EXPE to just below 160 in late July. Over the following three months price pulled back and began f...

Since the Global Financial Crisis the US Federal Reserve has acted on an unprecedented scale in its monetary policy. Central bank run programs like Quantitative Easing and Operation Twist were utilized to artificially stimulate the US economy after the Great Recession. The objective for monetary actions, like Fed-open market purchases of bonds, was to drive interest rates lower as well as increase the amount of money available in the economy. While well-intentioned in its design, the latter may have consequences that are beginning to take effect in the value of the US Dollar (USD). That is, creating an excess of a currency in an economic system will eventually lead to inflation and in extreme cases hyperinflation and currency devaluation. Presently, we are experiencing an increase in rates of inflation throughout the US which has signaled the Fed to begin a cycle of raising interest rates . Accordingly, increasing interest rates is intended to help quell the rate of inflat...

Interest rates play an integral role in the functioning of economies and markets. From a Keynesian monetary school of thought, the  increase or decrease in rates will either slow or drive economic activity, respectively. For example, when interest rates are low it is easier to fund pr ojects and expansionary plans with cheap credit. Conversely, as interest rates rise it will become less attractive to issue new debt at a higher rate to take on the same type of projects. Accordingly, assessing the current state of the interest rate market by looking at the US 10 Year Treasury Bond Yield Index (TNX) we can begin to see if changes in Fed policy from a dovish to hawkish stance are being reflected in the marketplace. Long-Term Perspective Looking at the monthly chart of TNX there are a few bullish developments . First, while TNX formed a lower low in 2016 after the its previous low in 2012 its Moving Average Convergence Divergence (MACD) formed a higher low at t...

On Thursday this past week Japan’s Tokyo based Nikkei Stock Index (NIKK)  broke out to new highs after repeated tests of resistance at 23,000 since November 2017. Since last fall, the buyers began to step in and bid up NIKK and its constituents more aggressively until it finally coiled between 22,750 and 23,000 before its breakout. The price action since November 2017 was clearly  constructive in setting up for a bullish breakout as each time price was sold lower the bids came in more quickly as the consolidation evolved. In addition to the strong price action NIKK printed an overbought reading on its daily Relative Strength Index (RSI). During an uptrend it is positive to see an overbought reading in RSI as this confirms the move in price. In other words, the expansion in price to new highs is being confirmed by RSI reaching the high of its range as well. RSI measures internal price strength and is a reliable tool for evaluating the validity of price behavi...