Sunday, January 19, 2014

The Week Ahead: Why More Taper Tantrums Will Be Bullish

Even though the market exhibited schizophrenic behavior last week, it is still up 16% for the year, and MoneyShow's Tom Aspray makes the technical case for why a deeper correction might be just what the doctor ordered.

Stocks were hit by a wave of news last Thursday, ranging from weaker-than-expected earnings and better-than-expected data on jobs and housing, which triggered a sharply lower opening in the stock market. The weekly close below the past five-week lows in several of the key market averages is consistent with a near-term top formation.

This drop was not surprising as the market internals early in the week suggested that the market was ready to catch a "summer cold" if not something worse. There were also warnings from the bond market as some of the largest bond funds completed bear flag formations early in the week. This was a clear sign that rates were again ready to move higher.

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Of course, the trend of higher rates is a global phenomenon as this chart shows the rise of both the United Kingdom's and Germany's bond yields from their spring lows. This has been accompanied by net outflows from the Treasury market of over $40 billion. This is in contrast to the large inflows that had been the normal each year since 2004.

Over the past few months, there have been signs of improvement in the Eurozone stock markets as they had been badly lagging the US for the first half of the year. For example, the German Dax was basically flat from January through the latter part of April while the US market was moving sharply higher

The economic data has now started to confirm the improvement in the Eurozone as last week it was reported that their GDP has risen to 1.2%. This is the first positive-territory reading since late 2011.

The Percentage Change chart shows that while the Spyder Trust (SPY) and US stocks are still outperforming, the Vanguard FTSE Europe ETF (VGK) is now up 9.6% for the year. It was in negative territory as recently as late June. I will be looking for a correction in the euro-focused ETFs in the next month.

chart

The emerging markets are still lagging badly as the Vanguard FTSE Emerging Markets (VWO) is still down 8.6% this year, while the big loser has been the bonds as the iShares Barclays 20+ Year Treasury Bond ETF (TLT) is down over 15%.

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