August 2016 – Adaptiv

Pay Attention To This Interest Rate Instead

August 26, 2016April 13, 2022

While everyone is listening to the noise of the Federal Reserve, we’re focusing on reality. Janet Yellen can wax intellectual about theories. We’ll continue to focus on the hard data, such as the 10-Year US Treasury Yield, an interest rate market participants should really care about.

Since establishing an all-time-low in early July, the 10-Year Treasury Yield has found continuous support. So much so, that this important metric created a consolidation triangle near the lows established back in early 2015 and again in early 2016. You can see this important consolidation in the chart below.

With the 10-Year Yield breaking out, this could have some potentially positive consequences for equities. When we discuss bond yields, the supply and demand battle is fought on the bond price side of the product. As the 10-Year Treasury Bond price increases, its yield decreases. The opposite is also true. So the 10-Year Yield breakout highlighted above is a direct reflection of 10-Year Treasuries being sold. For many institutional investors, the 10-Year Treasury Bond is used as a safe haven. When the big money leaves a safe haven, what do you think it’s buying? You got it: Equities.

Nothing is guaranteed, but if the 10-Year Yield can sustain this breakout, it should provide a tailwind to Equities as an asset class.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Equity

U.S. Equity Rally More Than Just Noise

August 18, 2016April 13, 2022

For over 500 days, the broad U.S. Equity market moved sideways in a 15% range (fun fact: this was one of the tightest ranges since the inception of the S&P 500) with the most recent market low taking place in early February. More specifically, the lowest point of this 500 day period was on February 11, 2016. Was there any significance to this date? Other than being my very good friend’s birthday, we found another significant development on that date. Here it is:

“I wouldn’t take them [negative rates] off the table, but we would have work to do to make sure they would be workable.” ~ Janet Yellen | Feb 11, 2016

So on February 11, 2016, with U.S. Equities on the verge of a major breakdown, Janet Yellen decided to open her mouth and wish my friend, “Happy Birthday!” Not exactly true, but what a gift this experimental financial insight was to the broad market. Proven by buyers showing up en masse to buy U.S. Stocks since that date, the market has not looked back, gaining almost 20% in 6 months. Impressive.

As you know, we’re fans of avoiding noise and studying the facts, with price being the most important fact. That 2/11/16 low was significant. We know that by looking at price, not listening to Federal Reserve Chairs. We don’t need to guess what Janet’s words mean when we have the benefit of watching market participants (which is what we are, after all) put their money to work in the market. By watching price, we are watching the economic law of supply and demand. More supply than demand, price goes down. More demand than supply, price goes up. It’s simple. It’s fact.

Another such fact was the Industrial Sector making a higher low on February 11, signaling that the Industrial Sector could lead the market higher. And it did, outperforming the S&P 500 and leading both to new all-time-highs.

This was/is an important development as U.S. Equities perform best when the Industrial Sector leads. Don’t believe us? Check out the facts below.

By using ratio analysis, dividing Industrials (XLI) by the S&P 500 (SPY), and comparing it against the S&P 500 itself, it becomes very clear that when Industrials outperform the S&P 500, U.S. Stocks perform best.

In conclusion, as long as Industrials continue to outperform the S&P 500 while both sustain these recent all-time-highs, it means great things for the overall U.S. Stock market and your portfolio. Those long this market want to see Industrials lead the way. If Industrials cannot lead, then another correction below recent highs is likely. As always, we’ll ignore the noise and pay attention to the only thing that pays: PRICE.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.

Month: August 2016

Pay Attention To This Interest Rate Instead

U.S. Equity Rally More Than Just Noise