Conservative. Smart. Investing.
As was mentioned last month in this space, December is usually a good month and for the SPY it was as the index rose 2.82% for the month. For the retirement ETF fund where trades are made based on where the stock closes at month end relative to its long term moving average, however, it was a lousy month.
The S&P 500 composite closed up over 2% higher in July than it did in June. But underneath that statistic are some troubling data.
When looking across all sizes of companies (S&P100, S&P 400, S&P500, S&P 600) there are negative trends in New Highs vs New Lows, Advances v Decliners, and % of stocks above their 21 day moving average. The market typically leads the economy by six months. Economic data is still favoring Expansion versus Contraction, but now only by a score of 5-3 as opposed to 6-2 or better in recent months.
The S&P 500 tracking ETF SPY rose 1.3% in the month of June. Analysis of the FRED economic data show that the economy is still in Phase 2 (late growth cycle), which is good for equities.
The ETF Portfolio technical investing algorithm calls for a July 1 investment in International Bonds (EDV), Emerging Market Bonds (EMB), and long term Treasury bonds (VCLT). This is consistent with increase in the flow of monies into bond funds, which indicates that people are hedging these equity ETF bets. There is too much money chasing too little sources of return, so even low paying bonds are getting play here.
Well, another week, and another trillion dollars or so of spending proposals by the Democrats. Actually, Biden is proposing a total of about 6 trillion dollars in federal spending. In the meantime, the economy is improving on its own but Biden, of course, like every President before him, is taking credit for it. Presidents actually have very little to do with the macro economy, it is the Fed and Congress which has the greatest impact on the economy. As for economic impact of the spending plans, there are already signs of supply pushes on inflation – commodity prices in cooper, gold, oil, etc. are rising. This will eventually lead to increased consumer prices and wage increases (i.e., inflation). The Fed seems to think that they will be able to control it once inflation goes above their target rate of 2% for an “extended period” (whatever that means in Fed speak). I fear that they will not be able to so, and they will be forced to “slam on the brakes” with huge increases in the fed fund rate. So be prepared – I think that the ten year note will be at least 2% by the end of this year, and very much higher by the end of 2022.
Economic Phase: Continues 5-3 in favor of continued Expansion. Specifically indicating Phase 2 (late Expansion). No change from last month end.
Retirement ETF Portfolio: No additional BUY signals. No SELL signals
Economic Phase: 5-3 in favor of continued Expansion. Specifically indicating Phase 2 (late Expansion). No change from last month end.
Retirement ETF Portfolio: BUY signal for XLU (SPDR Utilities). No SELL signals
This strategy is based on a straightforward price vs 200 day moving average, plus a confirmation using FRED economic data.
The model sold three ETFs at month end February:
There were no new BUYs in the period.
FRED data indicates a continued (perhaps even stronger) confirmation of Phase 2: Expansion approaching Peak. Coupled with the weakness in the bond market, and the impending economic stimulus coming from Congress, this confirms that equities should continue to outperform in the next 30 days.
I have added a check on Breadth to the base algorithm. This is looking at the number of stocks reaching new highs versus new lows, the number of stocks advancing versus declining, and the number of stocks above or below their 21dma. It looks at this data across the S&P100 (very large caps), S&P500, S&P400 (midcaps), and S&P600 (small caps). Version 54 performs with a higher RAR and higher Win Percentage than V53.