Weekend Strategy Review February 26, 2017

Posted by OMS  at February 26th, 2017

After being down for most of the day on Friday, the Dow clawed back to finish up 11 points at 20,822.  It was up 198 points for the week.  The NASDAQ finished up 10 points on Friday but was only up 6.7 points for the week.  The Russell 2K was down 0.09 cents on Friday and down 5.3 points for the week. The difference between the rise in large and small cap stocks is noteworthy.  It’s what starts to happen when the overall market is approaching a major top. 

I’m not saying the top is in yet, especially for the large cap issues.  I’m only saying that we could be getting close.  I still feel that the larger cap indexes need to correct a bit in a relatively shallow Wave 4 before making a final run to a top, probably in mid-March.  I’m not that confident about the Russell 2K.  The pattern on the RUT is not as strong as the other indexes.  It could have topped on 21 February at the 1,410 level.  

But that’s not what I want to talk about this weekend.  I want to use this weekend to review a few things that I talked about in December 2015, when I did a webinar on the relationship between the Dollar, Bonds, Gold and the Euro.   In that webinar, I showed students how I use the Dean’s List to tell me what’s going on in the world and how to profit from it.

This past week, after I wrote about the brewing crisis in Greece, I received several emails from students asking for my thoughts on the Euro, Bonds, and several matters related to events in Europe.  So, I thought I would use this weekend to show students how I use the Dean’s List to tell me what’s happening with respect to these issues, so they don’t have to listen to a bunch of talking heads on TV, whom are often wrong.

Also, I believe it’s the timing is right.  One of the things that quietly happened late in the week was that TLT and TMF replaced TBT on the Dean’s List.  Hmmm?  What does this mean, and why does this matter now?  Hmmm?

Let’s step back and think about this for a moment. 

First, TLT, TMF, and TBT are my ‘Sticks in the Sand’ for Bonds.  When TLT and TMF, the two positive Bond ETFs, start to appear on the Dean’s List, it tells me that Bonds are getting stronger, and interest rates are moving LOWER.  That’s right…LOWER.  It means that some investors have started to look for their ‘safe haven’ and are already moving money out of equities and into Bonds.  This is a lot different from what you are hearing from most TV commentators.  Most of them have been saying that interest rates are going to rise.  The Dean is saying the exact opposite.  When he puts TLT and TMF on his List, he’s saying Bonds are getting stronger and interest rates are falling. 

The money moving into U.S. Bonds could be coming from Europe, as investors concerned by what’s happening in Greece could be starting to sell European Bonds. Or, it could be coming from the equity markets.

Last week, when I talked about Greece, I reminded students about how in 2011, we saw scared money in Europe move out of ‘Junk Issues’ denominated in the Euro and into U.S. Treasuries.  Back then, even though Moody’s dropped U.S Bonds to a AA credit rating from AAA, the rating still looked great to European investors when their Bonds dropped to below Junk Status.  It caused money to pour into U.S Treasuries.  In August 2011, when the downgrades were happening, TLT rose from 98 to 122 in 2 months!

A similar move could be about to happen again, only this time a Bond rally could be goosed by both a financial crisis in Europe AND a declining U.S. stock market. Remember, even though the 30 stocks in the Dow are still rising, some money is already starting to move out of the Russell 2K small cap index. The 2000 stocks that comprise the Russell are probably a lot more representative of what’s happening in small businesses America.

When TLT and TMF appear on the Dean’s List, it tells me a few other things too.  That’s because of the relationship between Bonds, currencies, and gold that I mentioned earlier. 

Here’s the relationship:  When Bonds get stronger, it means that Bond yields (interest rates) are falling.  Lower interest rates mean that investors get less money for their Dollar denominated Bonds, which causes the Dollar to fall.  The Dollar is like any other commodity.  People buy Dollars when it looks attractive relative to other currencies.  When I say ‘attractive’, I’m talking about interest rates.  When interest rates are relatively high, as they are now compared to Europe, money flows into the Dollar making it stronger.  If interest rates start to decline, which is what the appearance of TLT and TMF on the List is telling me, it means that the Dollar is getting weaker causing gold to rise.  The Dollar and gold have an inverse relationship.  That’s why I always want to see UDN, the inverse ETF for the Dollar on the Dean’s List when I’m looking to buy gold. 

Same for the Euro.  If the Dollar is going to decline, I always look for EUO, the inverse Euro ETF to fall off the Dean’s List. The Dollar and the Euro also have an inverse relationship. BTW, this weekend I’m adding FXE, the positive ETF for the Euro, to the data base for the Dean’s List.  This way, if the Dollar begins to fall, students should expect to see FXE replace both UUP and EUO on the Dean’s List.  I don’t usually trade any of the European currency ETFs or ETNs, but I do like to know when the Euro is getting stronger.  A stronger Euro will likely mean a falling Dollar, a rise in U.S Bond and gold prices, and a decline in U.S equities.

Right now, if you look at what the Dean is saying, you’ll see he’s giving mixed signals.  The Dean currently has TLT and TMF on the List near the bottom, but UUP (the positive Dollar ETF) is also on the List at the bottom. The key here is that BOTH ETFs are near the bottom. TLT and TMF are just starting to move on the List, UUP is near the bottom and should be ready to fall off.  If Bonds continue to rally from their TLB patterns (it’s a nice pattern), UUP should drop off and be replaced by UDN.  Again, as Bonds get stronger, interest rates decline causing the Dollar to decline.  

As the Dollar declines, gold should rally.  UUP and EUO should fall off the List, and be replaced by UDN and FXE.  When the latter happens, you should expect to see a lot of gold and mining stocks near the top of the List.

Same for equities.  Right now, all four of the major index ETFs are on the Dean’s List.  If money starts to move into Bonds, it will likely cause equities to fall.  We should start to see the major positive index ETFs (DIA, QQQ, SPY and IWM) drop off the List and be replaced by the inverse ETFs for the indexes.

It’s all related.

This is why the appearance of TLT and TMF on the Dean’s List is a very important development this weekend.  The Dean is suggesting that several markets (Bonds, equities, gold and currencies) could see significant changes in the weeks ahead.

Have a great weekend.

That’s what I’m doing,

h

BTW, there was another small change in the A-D oscillator on Friday.  So, we need to be on the lookout for another Big Move early next week.

Market Signals for

02-27-2017

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