Pullback or Something More?






Hello ,

This market is getting ugly and we all know it.

The reason for this latest breakdown in stocks was yesterday’s FOMC Minutes, which reduced the chance of a September rate hike, and in doing so revealed an unconfident Fed and compounded growing global growth worries that started in China, but are now spreading to Europe and the US. 

The 5+ year bull market is now at a critical tipping point, and whether this market holds or breaks will depend on the Fed. 

Understanding the Fed and its effect on stocks is now more than critically important to client portfolios, because if the Fed does not hike in September, then this market will likely break in a big way. 

So, you need to understand the Fed to protect client portfolios. 

We understand the Fed because we spend hours monitoring and analyzing:

  • Comments by Fed Governors
  • Research Papers from the Fed
  • Key Economic data the Fed uses to make policy decision
  • Key bond market signals that tell us what the market thinks of the Fed and,
  • FOMC Meetings and Official Releases like the FOMC Minutes

We take that analysis and provide our paying subscribers with plain English takeaways they can use to 1) protect client portfolios and 2) seize opportunities.  

We are less than a month from the most important Fed meeting since the crisis of 2008/2009, and what the Fed does will likely be the deciding factor for whether stocks rally for the remainder of the year, or sell off (potentially violently).

We are committed to making sure that our paid subscribers have the timely, accurate Fed analysis they need to:

  1. Alter broad asset allocations if the selloff worsens.
  2. Identify and buy hedges to protect portfolios
  3. Know when it’s safe to expand risk tolerance

Yesterday we knew within a few minutes that the “Dovish” minutes meant trouble for US stocks, and we explained that to subscribers in today’s Sevens Report, and again provided two ETFs that we believe are great “pure play” hedges for a further decline in the stock market. 

We’ve included an excerpt from today’s edition of The Sevens Report that explains why the Fed is causing this market sell off, and what needs to happen for it to stop.
 

Bottom Line: A Note to the Fed (Post FOMC Minutes)

Yesterday, the FOMC Minutes were taken as incrementally “dovish” thanks mainly to a lack of enthusiasm for a rate hike, and consistent mentions of China risks and too-low inflation. The Fed pilots didn’t remove a chance of a September rate hike, but they did legitimately reduce them, which isn’t a good thing for markets, as we’re seeing this morning.

That “dovish” message, which seemingly contradicts much of the other things we’ve been hearing from the Fed “pilots,” contributed to greater volatility in the markets late yesterday afternoon.

Now, I’m all for transparency, and generally speaking, more information is a good thing, although there are exceptions.

Being in an airplane is one of those exceptions where transparency isn’t always a good thing. We don’t need to know every detail of the flight or every warning light that goes off. We just need to know that the pilots are confident we’re all going to get to our destination in one piece.

With that in mind, right now I feel like I’m in the back of a plane, and on the in-flight entertainment system I can hear the flight attendant talking to the pilots in the cockpit.

Flight Attendant (Market): “Is it safe to land yet?” (i.e. raise rates)

Pilots (Fed): “We don’t know. It depends on the weather.” (i.e. the economy)

Flight Attendant (Market): “Well, what’s the weather like?

Pilots (Market): “It’s not bad right now and basically the same as it’s been, but it could get worse.

Flight Attendant (Market): “Well, ok, what are we going to do? The passengers (investors) are getting nervous and restless and want to know what’s going. We’ve been descending for a really long time and we should have landed hours ago.

Pilots (Fed): “We don’t know what we’re going to do yet, it depends on the weather.

The Flight Attendant closes the door confused.

Then, the pilots turn on the PA system and all the passengers can now hear them argue about the weather:

Pilot 1 (Kocherlakota and the Doves): “We can’t land in this weather, it’ll be a disaster. We’ll never make it.

Pilot 2 (Lacker, Bullard and the Hawks): “Yes we can, we can easily make it, now’s the time.”

And then they proceed to argue over the weather conditions and flight statistics over the PA for all to hear.

If I were on that plane, I wouldn’t be particularly confident about the outcome—and that’s the same way I’m starting to feel about the”Fed pilots.”

I am using this silly example to illustrate a point that exuding confidence is an important part of leadership. That’s a point that was best communicated to me by General “Stormin” Norman Schwarzkopf when I heard him speak while I was a student at Vanderbilt. I’ll never forget what he said during that speech: “When placed in command, take charge.”

Someone should tell the Fed that, or perhaps in a bit more direct way:

“Even if you don’t know what you’re doing, pretend!”

The Fed pilots have put us in purgatory/limbo, and that is beginning to weigh on all markets, as volatility is spiking in currencies, bonds, stocks, commodities, etc. The markets need to know the Fed pilots have a plan, and that they are in charge—and the longer that eludes us the worse this volatility will get.

Over the next few weeks our paying subscribers trust us to:

  1. Analyze the economic data and Fed speak and monitor risks to the market.
  2. Provide hedges and allocation ideas that can protect against broad risks to client portfolios and also seize opportunities, should things improve. 

Make sure you have timely, independent, accurate Fed analysis during this critical period.  Dated, jargon filled analysis that doesn’t provide a key takeaway won’t cut it during the next few weeks.

If all we do is help you and your clients successfully navigate this upcoming Fed decision and subsequent market reaction, then it will be well worth the $195 quarterly subscription cost to know you have a dedicated analyst on your team to help you navigate this volatile market “tipping point.”
 
Click here to subscribe now for just $65/month ($195 total)
 

Leading Indicators Breaking Down, Hedges Breaking Out
 
It does not take a certified CMT to realize this market is trading very poorly. 

To that point, the two key leading indicators we have been following for weeks both hit new multi-year lows this morning.  And, that implies that this broad market decline isn’t over.

First, our key bond market indicator that has accurately predicted the last 4 market pullbacks and market bottoms just hit a new multi-year low.

Second, our key China/Commodity/Global Growth linked ETF, which is a leading indicator for China and sentiment towards the global economy, also just hit a new, all-time low.
 

 
Third, the two hedges we identified for our paying subscribers over three weeks ago just rallied to new multi-year and multi-month highs, respectively.
 

The S&P 500 is still within the 2050-2130 trading range for now, but we are going to stay focused on those leading indicators and hedges as the potential for a breakdown from that range is rising. 

Click this link to start your quarterly subscription today and learn the leading indicators we’re watching for this broad market as well as the “pure play” hedges that are protecting portfolios.
 

We Find the Leading Indicators
 
1. In January 2014, when the S&P declined 7% in three weeks, we correctly identified that emerging market currencies were the “reason” for the drop, and identified the Turkish Lira as the key indicator to follow.  When it bottomed, stocks bottomed, and our subscribers knew it.

2. Last April, when the S&P 500 declined 4% in two weeks, we alerted our subscribers that the “momentum” sectors of internet stocks and bio-techs were responsible for the drop, and specifically identified QNET and NBR as two leading indicators to watch.  When they bottomed, stocks bottomed, and our subscribers knew it.

3. During the September/October declines, our subscribers knew junk bonds (and the ETF JNK) were the leading indicator for the market.  When JNK bottomed, so did the market.

4. Recently, as early as November we told our subscribers that oil, XLE and the Dollar Index were the leading indicators of markets, and until the first two stopped declining and the latter stopped rising, stocks would be under pressure.

Our ability to identify key leading indicators has had a direct benefit to our subscribers, and I know that because they’ve told me.  One subscriber (an FA at a bulge bracket firm) wrote to us saying: 

“Thanks for your continued insight; it has saved my clients over $2M USD this year…Keep up the great work,” 

We watch all asset classes to generate clues and insight into the near term direction for stocks, and while we are happy stocks are grinding relentless higher, our job is to remain vigilant to the next decline. 

To experience your own success and 1) Make More Money, 2) Save One Hour a Day, and 3) Have More Confidence and Build Stronger Relationships with your clients, subscribe to The 7:00’s Report right now.

If you want to make your business more successful, you have to possess unshakeable confidence in your knowledge, and helping you acquire that knowledge is what The 7:00’s Report is all about. So, give yourself the gift of confidence in 2015. Begin your subscription to The 7:00’s Report right now by simply clicking the button below:
 

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65 dollars.  To sign up for an annual subscription, simply click here.
 

Best,
Tom

Tom Essaye,
Editor of The 7:00’s Report

 


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