The good, the bad, and the Fed

This past week showed the inevitability of a market correction or "adjustment" that many analysts, including myself, have been anticipating.

Many of the markets we follow have demonstrated their sensitivity to economic and geopolitical information. The economic data was better than expected with the Friday jobs report showing 209,000 jobs added in July, and the Institute of Supply Management rising more than expected.

Unfortunately the positive data gives rise to expectations that the Fed may re-assess it’s policy on rates and any idea of rate increases does not bode well for the markets. The improved GDP also added "fuel to the fire" and prompted dollar strength during the week. Higher interest rates or the anticipation of higher rates adds to dollar attraction. On Friday however, yields dipped as bonds closed higher and the dollar gave back some ground. We are vigilant in our analysis of available data and news and the ongoing geopolitical events need careful monitoring.

The Ukraine situation, additional sanctions on Russia, the Israeli/Hamas conflict and now the ebola scare all have a tendency to prompt investor concerns. We will notify our clients of any change in opinion on the markets we follow. Now for some actual information.  

Interest Rates: The September 30 year Treasury bond closed Friday at 138 04/32nds, up 23/32nds as money made the transition from equity market risk to the relative safety of the U.S. Treasury market. The "normalcy" of investors moving to treasuries when equity markets decline and moving from treasuries back to equities on positive earnings returned this week.

Heretofore the markets moved in tandem as both declined. The "fixed coupon" treasuries move adverse to yields and signal change in investor psychology. We continue to view treasuries as in a range and would suggest adjustments in spread positions when either side moves towards the strike price. For an explanation of our spread programs you can email me directly.

Stock Indices: The Dow Jones Industrial average closed at 16,493.37, down 69.93 points and for the week lost 2.8%, the biggest weekly decline since January. The S&P 500 closed at 1,925.15, down 5.52 points and for the week lost 2.7%, its biggest weekly decline since June of 2012. The Tech heavy Nasdaq closed at 4,352.64, down 17.13 points and lost 2.2% for the week. We could be witnessing the long awaited correction after the five year rally in equities and that could translate to 15-20% when all is done. We sent out a warning during the week to holders of large equity positions to implement risk hedging strategies immediately. Hopefully our readers also took heed in our warning of what we saw as an imminent selloff.

My concern is the obvious comparison to 1987 where the equity markets sold off on Thursday, Oct. 15, then again on Friday, Oct. 16, and then the "collapse" on "black" Monday of 22%. At the time of this writing there is no indication of "history repeating" but further declines could be expected as the "irrational exuberance" we have seen since the 2008 selloff may be in order. Once again I implore holders of large equity positions to implement hedging strategies.

Currencies: The U.S. Dollar Index closed at 81.42 on Friday, down 10.3 points after trading as high as 81.615 early in the session. The selling was attributed to profittaking after the runup in prices during the week. The jobs gains of 209,000 reported on Friday was less than analyst expectations of 235,000 jobs so that gave rise to the pre weekend profittaking. Other currencies benefited from the dollar weakness on Friday with the Euro "recovering" 33 points to close at $1.3425. The Swiss Franc gained 31 points to $1.1038, the Japanese yen 27 points to 0.09751, and the Australian dollar 20 points to 92.85c. Losers included the British pound 60 points to $1.6816, and the Canadian dollar 17 points to 91.47c. We have favored the dollar for some time and continue to feel relative to its trading partners, that the U.S. economy is faring better. With concerns over the Argentine default and ongoing Eurozone problems we prefer holding dollar positions. For the week the dollar gained 1%.

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