Category: Countries & Regions

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Rising interest rates: Good or bad for stocks?

We are now at the September quarter-end, normally a volatile time for stocks. Expect selling pressure to increase over the next few weeks as investment managers sell off poor-performing stocks. Increased cash balances then enable them to take advantage of new opportunities as they present themselves. If the fundamental under-pinning of the market is sound, the market is likely to undergo a minor dip before resuming its advance. If not, and there are serious flaws, the sell-off could turn into a rout — as in 1987 and 2007.

At present the market appears sound, with none of our market indicators flagging elevated risk, and the bull market is likely to continue.

Bears cite the potential for an increase in US interest rates as a major threat to the US economy. The track record for the last 15 years suggests otherwise. The graph below compares percentage change in 10-year Treasury yields to the Wilshire 5000 Total Market Index (divided by 20 for purposes of comparison). The two tend to rise and fall in sync, with a 20% to 40% rise in the index accompanying a 1% increase in yields.

10-year Treasury yields v. Wilshire 5000 Total Market Index

The Fed tends to be conservative about raising interest rates (“doves” outnumber “hawks”) and is unlikely to raise rates until there is solid evidence of a recovery. So a rise in interest rates is more likely to be followed by a surge in stocks than a fall.

US stocks

The S&P 500 found significant support at 1965, the lower border of the broadening wedge. Monday’s long tail flags (short-term) buying pressure. Follow-through above 1990 would suggest a rally to test the upper border. Breach of 1965, however would indicate another correction. Decline of 21-day Twiggs Money Flow below zero would confirm, while recovery above its September high would suggest that buyers are back in control.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) is rising, but the low level continues to suggest a bull market.

VIX Index

Dow Jones Industrial Average found support at 16950 on the weekly chart. Long tails again flag buying pressure. Recovery above 17150 would suggest another advance, while follow-through above 17350 would confirm. Breach of support at 16950 is unlikely, but would warn of a correction. 13-Week Twiggs Money Flow reflects some hesitancy, but the long-term picture is bullish.

Dow Jones Industrial Average

* Target calculation: 16500 + ( 16500 – 15500 ) = 17500

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Ukrainian Soldiers Provide More Evidence of Russian Military Participation in Eastern Ukraine

Matthew Aid reports that captured Ukrainian soldiers offer new evidence of direct Russian military involvement in eastern Ukraine:

Stepping out of a bus on at dusk on Sunday during a prisoner exchange, Alexei Koshelenko said he was captured during heavy fighting on Aug. 24-25 near the town of Ilovaysk, east of the separatist stronghold of Donetsk…..

“We were hit by multiple rocket launcher Grads and after that the troops just swept us away. We were completed defeated within 20 minutes. Many of us were killed, others are missing,” Koshelenko told reporters.”They were Russians,” he said, standing among unshaven and exhausted-looking soldiers being counted before the swap was completed. Referring to a city 300 km 200 miles northeast of Moscow, he said: “They said they were an airborne assault battalion from Kostroma.”

Read more at 2 Ukrainian Soldiers Provide More Evidence of Russian Military Participation in Fighting in the Eastern Ukraine – Matthew Aid.

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The Scottish Question Has Not Been Answered

Peter Geoghegan writes on the impact of further devolution in Scotland:

At present, England has no devolved legislature similar to Scotland’s. Instead, all laws for England are made at Westminster. Consequently, non-English MPs often vote on issues that only affect England. Any change to this policy would likely be fiercely resisted, particularly by Labour which has a large contingent of Scottish and Welsh MPs.

Labour, ironically, could be the biggest loser in Scotland’s referendum. It has traditionally been the party of central Scotland — of the post-industrial towns and villages that ring Glasgow and Edinburgh and hold much of the country’s 5 million people. In Glasgow, there was long been a saying that you could shave a monkey and get it elected on the Labour ticket. But in the referendum, almost 40 percent of Labour voters chose independence….

Read more at The Scottish Question Has Not Been Answered.

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America’s Never-Ending War | Project Syndicate

Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research writes:

It is time for the US to recognize that since it launched its war on terror, the scourge has only spread. The Afghanistan-Pakistan belt has remained “ground zero” for transnational terrorism, and once-stable countries like Libya, Iraq, and Syria have emerged as new hubs.

….Making matters worse, Obama plans to use the same tactics to fight the Islamic State that led to its emergence: authorizing the CIA, aided by some of the region’s oil sheikhdoms, to train and arm thousands of Syrian rebels. It is not difficult to see the risks inherent in flooding the Syrian killing fields with even more and better-armed fighters.

The US may have some of the world’s top think tanks and most highly educated minds. But it consistently ignores the lessons of its past blunders – and so repeats them. US-led policies toward the Islamic world have prevented a clash between civilizations only by fueling a clash within a civilization that has fundamentally weakened regional and international security.

An endless war waged on America’s terms against the enemies that it helped to create is unlikely to secure either steady international support or lasting results…..The risk that imperial hubris accelerates, rather than stems, Islamist terror is all too real – yet again.

Read more at America’s Never-Ending War by Brahma Chellaney – Project Syndicate.

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Australian investors

Australian stocks have taken a bit of a beating over the last few weeks, including a few of the momentum stocks in our portfolio. Risk of a bear market remains low, but a falling Aussie Dollar has prompted international investors to scale back exposure to Australian equities.

AUDUSD

This tends to become self-reinforcing as falling stock prices then prompt further sell-offs. And repatriation causes further weakness in the Aussie Dollar. The down-trend is likely to continue if support at $0.8650/$0.8700 is breached.

Investors who split their portfolio between the S&P 500 and the ASX 200 have been cushioned from the fall, with their US portfolio showing strong appreciation in Australian Dollar terms.

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Market turbulence

A Coincident Economic Activity Index above 0.2 indicates the US recovery is on track. Produced by the Philadelphia Fed, the index includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries. Bellwether stock Fedex also suggests rising economic activity.

Coincident Economic Activity Index

But contraction of the ECB balance sheet by € 1 Trillion over the last two years has pitched Europe back into recession.

Weakness in Europe and Asia has the capacity to retard performance of US stocks despite the domestic recovery.

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Trouble in the East

Expect a continued arm wrestle between Russia and the West over influence in the Ukraine. Russians obviously view their shrinking sphere of influence as a threat to future security. But Vladimir Putin’s actions in Georgia, Moldova, Crimea and the Ukraine — straight from the KGB playbook — are the biggest threat to their security.

A war-weary US and pacifist Europe may be slow to react, but their capacity when provoked to subdue any threat from the East, through their combined economic might, is immense. One should not be fooled by Putin’s macho posturing. He is playing a very weak hand.

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S&P 500 broadening wedge

  • We are at the September quarter-end and can expect stock weakness to continue into October
  • The Dollar is rising
  • Gold and crude oil are falling
  • European stocks are bearish
  • Asian stocks are bearish despite China showing strength
  • US stocks reflect a bull market

Dow Jones Europe Index is testing primary support at 320. Breach would signal a down-trend. Follow-through below 315 would confirm. Penetration of the rising trendline and 13-week Twiggs Momentum peak below zero both strengthen the bear signal.

Dow Jones Europe Index

* Target calculation: 320 – ( 340 – 320 ) = 300

Dow Jones Asia Index broke primary support at 3200 despite bullishness on the Hang Seng and Shanghai Composite. Expect a test of support at 3000 (at the rising trendline). Reversal of 13-week Twiggs Momentum below zero would further strengthen the bear signal. Follow-through below 3000 would confirm a primary down-trend.

Dow Jones Asia Index

* Target calculation: 3100 + ( 3100 – 2800 ) = 3400

Shanghai Composite Index, however, continues to test resistance at 2350. Breakout would confirm a primary up-trend. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure.

Shanghai Composite Index

Bear in mind that Dow Asia and Dow Europe are priced in USD and reflect strength in the US Dollar as well as weakness in local markets — though the two are closely connected.

The S&P 500 is consolidating around the 2000 level in a broadening wedge formation. Do not be surprised if the index rallies early next week, to test medium-term resistance at 2020. Fund managers are normally willing to support the market at quarter-end and lock in quarterly performance bonuses. But this is likely to be followed by weakness in October as they sell off non-performing stocks and increase cash holdings until new opportunities present themselves. Breakout below the broadening wedge — and penetration of both support at 1950 and the (secondary) rising trendline — would warn of a correction. A large volume spike from triple-witching hour on September 19th, however, has exaggerated weakness on Twiggs Money Flow. Breakout above 2020 would signal a fresh advance.

S&P 500

* Target calculation: 2000 + ( 2000 – 1900 ) = 2100

CBOE Volatility Index (VIX) remains in the low range (below 20) typical of a bull market.

S&P 500 VIX

The ASX 200 is testing support at 5300/5350. Penetration of the rising trendline warns of a correction to 5000. Declining 13-week Twiggs Money Flow, below zero, after a long-term bearish divergence, also signals weakness. Breach of 5300 would confirm a test of 5000. Recovery above 5550 is unlikely, but would suggest another test of 5650.

ASX 200

* Target calculation: 5650 + ( 5650 – 5350 ) = 5950

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