Fan Appreciation Day (TLT, XLF, SPX)

Where would a king be without his vassals?

Where would a shepherd be without his flock?

A prison guard without criminals?

Answer –

Why, they’d be nowhere. They’d be nothing! Nobody!

And so, too, with us scribblers. With no readers, we’d be whipped about like a batch of scrambled eggs, salted, eaten and as quickly forgotten.

burps

So we want to take a moment to formally thank the several hundred thousand of you who open our weekly rantings and give also a warm and hearty hug to those who take the time occasionally to pen a few words and send them our way.

In particular, we want to thank our good reader Frank, who late last week took the time to send us his thoughts on a number of timely and important issues. And we’re also going to invest a moment now in looking at a couple of them more closely.

The Future of Investing

Frank, we’re going to splice and sift here, so please inform us if we’ve in any way misrepresented what you wrote. We’ll do our darndest to stay true to what we believe you intended.

And we’ll start like this.

Frank wrote –

I expect SPY and GLD to both head higher, correlate later this year. You can also toss in all commodities, energy, and volatility. I think just about everything will rally as the year goes on. The fear will be that it will be too good to be true.

We believe our dear friend, Frank, is right on the money. There will certainly come a time when a great many asset classes will turn north together in one massive swell of liquidity-induced buying, but whether that happens after July 4th (as Frank suggests), or later in 2014, or at some point beyond that, is beyond our ability to determine. Timing these things, as we often say, is like trying to hit a moving target. There are many variables that help us determine when tops and bottoms are in, but most often we don’t recognize them until all of them line up and indicate that, indeed, we’re there.

cowgirl

The main thing, however, is Frank’s call that everything will rise together at some point.

With perhaps an exception or two.

We’ve been claiming, for instance, that the bull market in bonds is over, and that investment strategies that incorporate long bond purchases will be a losing proposition over the medium- to long-term.

Time will tell if that’s correct. For the last five months bonds have rallied and we appear to have offered a faulty analysis. But retracements occur all the time, and for time being we’re sticking with our bond bear call.

Here is a chart of the iShares 20+ Year Treasury Bond ETF (NYSE:TLT), a good proxy for movements at the long end of the curve:

tlt

As you can see, we’ve had a five-month retracement after a year and a half decline from the top (in red).

But both the 137-week moving average (in blue) and the daily MAs (green insert) show signs that we’ve hit a wall. In the latter instance, a few days trade above the long term daily moving average (in yellow) have since been rebuffed, and price is once again trending below that important marker.

We note also that the weekly RSI and MACD indicators are starting to turn bearish. It may be too early to fully rely on these at present, but for now they certainly don’t build our hope.

Frankly Speaking

So the Treasury market may not be so lucky when the time comes to pile on board the bullish gravy train, but we thank Frank for his thoughts and turn now to comment on one more issue he raised.

Frank wrote –

If you want a real stock market BULL rally, then you need the banks and financials to LEAD!!! There’s hardly any leadership coming from that sector.

Frank’s right. The financials should lead in a bull market.

Have a look here. It’s a chart of the Select Sector SPDR Financial ETF (NYSE:XLF) pasted-up against the S&P 500 from the beginning of the bull back in March 2009.

xlfsp500

And, indeed, we’re in a bull market. As Frank stated, you need Financials to lead to have a real bull market.

Now we don’t want to act smart here, because it’s likely Frank was referring to recent relative performance, and, indeed, on a shorter time horizon the financials have not kept pace. Where the broad indexes have been setting new highs this week, XLF is still a percent or two below her best levels.

But not to worry. With a little patience we’ll get there.

The Truth about Financial Stocks

Frank only hints at an idea that’s worthy of spelling out more fully here. And that is – that when the financials are making money hand over fist and their stocks are rising commensurately, we’ll know that the top is near. Financials not only lead in a bull market, they also fly headlong and tantrum-like into the gassy ether when the end is near. We’ll be watching the performance of the financials very carefully to gauge the bull market’s last days.

But we’re not there yet.

In the meantime, CALLs on the hyperbullish FAS ETF offer wonderful leverage on the financials.

Many happy returns,

Matt McAbby
Senior Analyst
Normandy Research

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