North China Forty

While the U.S. stock market (SPY) has languished since the Fed’s QE3 announcement back in mid-September, another major market index has surged back to life.  China stocks as measured by the iShares FTSE China 25 Index ETF (FXI) has exploded higher by over +23% in the last few months.


The FXI has arrived at a critical juncture following this recent surge.  The $40 level on the FXI has served as both critical support and resistance for the last half decade.  For it was back in 2007 when the FXI first broke decisively above $40 to reach its all-time highs in October of that year.  The $40 level also represented critical support in 2008 leading up to the outbreak of the financial crisis when it finally broke decisively below.  And the FXI desperately clung to support once again after reclaiming $40 from mid-2009 to mid-2011.  And $40 has represented stiff resistance in the 18 months since.  But as we move toward the end of 2012, the FXI is making its latest run at reclaiming the $40 level.


How the FXI performs as it approaches the $40 in the coming trading days will be particularly important.  For if its able to break out decisively above this critical resistance, the potential for further upside on the FXI is meaningful.  However, a breakdown at this level could result in a swift retracement back to the $32 to $37 range.

Forces beyond the charts suggest that the FXI will eventually find the steam to breakout above $40 in the coming months.  Most significantly, it is expected that the People’s Bank of China will embark on another monetary stimulus program in support of the new government under Xi Jinping as it transitions into power between now and March 2013.  Even if the Chinese economy shows signs of slowing, aggressive policy stimulus have shown the ability to more than overcome these forces to push stocks higher, and any future program will likely be no exception.

Disclosure: I am long China stocks via the FXI

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.



Fed Strikes A Strong Note As Expected

The latest data on the Fed’s balance sheet was released on Thursday afternoon.  And the balance sheet expanded appreciably as was widely expected heading into the week.


Overall, the Fed’s balance sheet increased by $57 billion to $2.919 trillion for the week ended December 12.  This marks a continuation of the oscillating upward trend in the Fed’s balance sheet since the launch of QE3 back in mid September.

As was expected, the primary driver of the increase in the Fed’s balance sheet was the settlement of a major tranche of mortgage-backed securities (MBS) purchases scheduled for December 12.  This alone led to a net $45 billion increase in the Fed’s balance sheet over the past week.

The increase in the Fed’s balance sheet is likely to continue over the next two week, albeit at a more measured pace, as a round of 15-Year Fannie Mae and Freddie Mac MBS purchases are set for settlement on Tuesday and a block of 30-Yeaer Ginnie Mae bonds are slated for next Thursday.


Whether these latest liquidity injections translate into stock market gains remains to be seen.  But even though the initial response has certainly been lackluster, it is worth noting that recently favorable technical support readings remain fully in tact despite today’s pullback.  For example, stocks as measured by the S&P 500 Index (SPY) are holding newly established support at the 50-day moving average.  Moreover, stocks remain in bullish territory according to its Relative Strength Index and momentum continues to move in a positive direction.  Thus, stocks may still show the power to move higher in the coming days despite Thursday’s disappointing price performance.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Stocks: The Next Big Test This Week

Stocks have staged an impressive comeback since bottoming at 1343 on the S&P 500 back on November 16.  Over the past few weeks, stocks have rallied by +5.6% and managed to reclaim the critical support level at the 200-day moving average (red line on chart below) along the way.


As we move into a new trading week, the stock rally faces a particularly important test.  On Friday, stocks as measured by the S&P 500 ended the day at 1418.  This closing level is effectively right on the 50-day moving average (blue line on chart above), which represents stiff resistance since stocks first broke decisively below this technical level back in mid October.  On several different occasions over the past two months, stocks have attempted to break out back above the 50-day M.A. only to retreat back lower.  Thus, a decisive break above above this resistance would be a particularly bullish signal for the continuation of the stock rally over the coming months.

Stocks appear poised to breakout above this critical resistance in the coming week for the following reasons. 

First, the technical setup is strikingly similar to what we saw unfold in the market during the month of June.  After breaching support at the 200-day moving average at the beginning of June, stocks exploded higher over the next several weeks.  And by the time they arrived at the 50-day moving average resistance in late June, stocks had firmly established its Relative Strength Index in bullish territory with a reading above 50 and Momentum readings were just crossing into positive territory after surging off of previous lows.  This is almost the exact same setup we are seeing with stocks today, and the last time around they went on to breakout decisively above 50-day M.A. resistance and rally for the next several months.  Thus, it would not be surprising to see the same outcome going forward.

Second, stocks are set to receive a meaningful tailwind from the U.S. Federal Reserve over the next several trading days.  Although unprecedentedly aggressive policy actions by the Fed since the beginning of the financial crisis have created massive distortions in financial markets that are likely to end badly at some point down the road, they continue to show the propensity to float markets higher in the meantime.  As for its latest balance sheet expanding QE3 stimulus program announced back in September, much of the liquidity associated with the asset purchases tied to the program has yet to arrive in capital markets.  This is due to the fact that the mortgage-backed securities (MBS) associated with the program have settlement dates that only take place on selected days each month.  Moreover, it can take several months before these MBS purchases to settle in select cases.  So while the Fed’s balance sheet has expanded by only $36 billion on net since the beginning of QE3 back in mid September, the Fed is set to settle MBS purchases totaling at least $54 billion next week and at least another $33 billion the following week.  This massive upcoming injection represents a considerable liquidity tailwind to help float stocks higher as we move through December.

For these reasons, stocks appear poised to pass this latest test in the coming weeks and continue their move higher into the New Year.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.



Conducting Bernanke’s Symphony No. 3 In F Major

The Fed’s QE3 stimulus program has taken on a clearly distinct rhythm.  Thus far, the liquidity injections into the financial system thus far have come on a selected few strong notes that have occurred roughly every four weeks.  And following this 4/4 meter of the Fed’s newest monetary policy symphony, the next major injection is set to burst into the market starting next week.

Since the launch of QE3 back in mid September, the Fed’s balance sheet has been trending higher.  But it has been doing so with much vibrato.


This variation in the movement of the Fed’s balance sheet can be explained by composition of the assets being purchased as part of the program.  QE3, at least to this point, is exclusively focused on the purchase of mortgage-backed securities (MBS) at a rate of $40 billion per month.  And although the Fed commenced the purchase of MBS immediately following their September 13 policy announcement, the settlement of these purchases are often delayed by several weeks to a few months.  For example, while the Fed committed to purchase a block of MBS securities totalling $950 million on September 14, which was the first day that QE3 was put into action, this trade is not scheduled to settle until next week.  Thus, it will have taken a full three months for the MBS securities to be exchanged for cash in this instance.


Overall, these settlements occur on a few specific dates each month, which helps explain the rhythmic pattern of the Fed’s balance sheet expansion thus far.  The last major MBS settlement block occurred on November 14 for 30-Year Term Fannie Mae and Freddie Mac securities and was followed by two smaller MBS settlement blocks on November 19 for 15-Year Term Fannie Mae and Freddie Mac securities and November 20 for 30-Year Term Ginnie Mae securities.  This helps explain the big liquidity burst during the week at the front of the latest meter followed by a second smaller increase the following week.

Looking ahead, the next major rush of Fed liquidity from MBS purchases is set to arrive starting next week.  The three major settlement dates for December are December 12 for 30-Year MBS, December 18 for 15-Year MBS and December 20 for 30-Year GNMA.  The asset totals for these upcoming settlements are already confirmed to be at least $44.25 billion, $12.65 billion and $13.95 billion, respectively, and could reasonably come in around $54 billion, $16 billion and $17 billion, respectively, if not more once the final operational results are revealed by the Federal Reserve Bank of New York on December 13.  This suggests that the amplitude of the MBS purchases at the beginning of each 4/4 meter is only set to increase with each passing month, as the preliminary estimates for December totaling $87 billion are more than 50% higher than November’s totals.


What implications if any does this have for stocks?  If recent history is any guide, it may have an increasingly notable impact.  When the Fed’s first QE3 injection found its way into markets in mid October, the stock market as measured by the S&P 500 (SPY) increased by +3%.  And when the second larger round of liquidity flowed into the system in mid November, stocks advanced a more pronounced +6% and managed to break back above critical resistance at the 200-day moving average in the process.

So what might we expected from stocks with the next wave of liquidity set to arrive next week?  Clearly, these forces will be placing meaningful upward pressure on stock prices.  Thus, an even more robust advance is possible over the coming weeks, but such an outcome will depend on the various other macroeconomic, political and market forces also at work in the markets along the way.  Most significantly, events surrounding the fiscal cliff including reaching a compromise solution could easily send stocks on wild and unpredictable swings at any moment in time.  But all else held equal, these monetary stimulus induced forces are likely to provide a steady tailwind for stocks as we move through the next two weeks.

The Fed’s latest symphony is likely to remain in its current 4/4 meter as the first movement plays out through the end of the year.  But as we move into 2013, do not be surprised if the second movement of the Fed’s score takes on a notably quicker tempo.  For once outright U.S. Treasury purchases are added to the composition as expected, the Fed may be striking a particularly strong note with liquidity injections each and every week.  And while this has the potential to help send stocks euphorically floating higher over the coming months, the key of the Fed’ symphony in F Major hints at what may befall the U.S. economy and its markets once the music of Bernanke’s latest opus finally comes to an end over the next 12 to 18 months.  And this final end game outcome will be particularly worth listening to once it finally arrives.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Stocks: The Danger Lurking After A Fiscal Cliff Deal Is Reached

It has been widely presumed that stocks will breathe a big sigh of relief and surge higher once a compromise is reached on the U.S. fiscal cliff and the overhang of uncertainty is removed from the markets.  But in the distorted post financial crisis environment, political risk has proven to be most unpredictable.  A look back on some of the most prominent political episodes impacting financial markets over the last few years shows exactly how.

The first and perhaps most memorable act of political theater in the post financial crisis era came not long after the initial outbreak.  On September 19, 2008, a mere five days after Lehman Brothers had declared bankruptcy, news emerged that fiscal policy makers in Washington were actively working to craft a bailout program for the U.S. financial system.   Stocks were initially ebullent on the news, soaring +8.5% higher on the S&P 500 (SPY) in two trading days on the news to levels that were higher than before the Lehman bankrupcty announcement.  Over the next two weeks, stocks held their ground valiantly.  Although they crated by nearly -9% on September 29, 2008 when the initial bailout legislation failed to pass in the House of Representatives, they quickly recovered much of this lost ground the very next trading day on the notion that Congress would move quickly to successfully pass a bill as soon as possible.  And by October 3, 2008 when the Emergency Economic Stabilization Act of 2008 was signed into law and the Troubled Asset Relief Program (TARP) was ready to be enacted, stocks were still solidly holding their ground at down just -4% since the collapse of Lehman.

It was only after TARP was approved by Congress and this political uncertainty was removed that the stock market plunged lower.  Over the next five trading days after the law was signed, stocks fell by -27%.  By late November 2008 they were down as much as -35%.


The second came a few months later.  In a widely anticipated speech that was supposed to outline exactly how the U.S. government was going to carry out their new bank rescue plan, U.S. Treasury Secretary Timothy Geithner took to the podium in Washington with answers that only served to confuse investment markets and the financial community even more.

It was only after Treasury Secretary Geithner revealed his plan that stocks plunged violently.  Over the next three weeks, stock would lose over -23% of their value.


The third political event in the 2010 Mid-Term Elections was by far the most subdued from a market reaction standpoint.  It was widely expected that Republicans would make strong gains in both the Senate and House of Representatives on Election Day.  And on November 2, 2010, the GOP captured 63 seats in the House to reclaim the majority and also tacked on 6 seats in the Senate.  And although stocks initially advanced by +3% in the first few days after the election, this could widely be attributed to the Fed’s official announcement of QE2 the day after the election on November 3.

But even with the election uncertainty removed and the heavy tailwind of a massive new balance sheet expanding stimulus program from the U.S. Federal Reserve, stocks still managed to trend lower through the remainder of November 2010 after the elections.


The fourth act of political drama for financial markets played out during the summer of 2011 with the debt ceiling debate.  Both sides wrangled for months during the spring and early summer months, yet the stock market teased with achieving new post crisis highs.  And even when the announcement came that an agreement had been reached, the stock market was still trading well within its trading range and not far from recent highs.

It was only after a debt ceiling deal had been struck that the stock market turned sharply lower.  By the middle of the next week, stocks had fallen by -16% and appeared set to fall further if not for the Fed stepping in with bold suggestions of more monetary stimulus coming soon.


The most recent political uncertainty was resolved just recently on November 6 with the Presidential election.  Up until early October, it was widely assumed based on polling data that President Obama would retain the office.  But following a decisive win by Governor Romney in the first presidential debate, the outcome of the election became more uncertain.  And by Election Day, the race was considered a dead heat in many polls.  All along the way, stocks continued to hover within just 2% of post crisis highs.

It was only after the election results were revealed and President Obama had won re-election that stocks moved lower.  Over the next eight trading days, stocks lost -6% of their value.


All of this leads us to the sixth act of post crisis political uncertainty overhanging markets in the current U.S. fiscal cliff debate.  Although the outcome remains uncertain on a variety of levels, stocks as shown in the chart above have stirred back to life in rallying by +5% off of their recent lows and stand within striking distance of post crisis highs.

Thus, history suggests that it would not be at all surprising to see stocks head lower, not higher, following an agreement on the fiscal cliff.  Of course, it could play out differently this time once a deal has been reached.  More specifically, one key advantage stocks have this time around is the fact that the Fed is already in stimulus mode having launched QE3 back in September and is likely to double down on balance sheet expansion with the announcement of U.S. Treasury purchases in mid December.  This is an enormous tailwind for stocks.  But even with this edge, the idea that stocks will rally following a compromise deal on the U.S. fiscal cliff is far from a foregone conclusion.  To the contrary, it would not be surprising to see stock markets move lower in the days following an agreement, particularly if the deal appears unfavorable to the financial markets and the business sector.

A final thought before closing.  If stocks have shown the propensity to move sharply lower once political risk has been removed, does this suggest that stocks might actually rally if we were to maintain this political risk and simply go over the U.S. fiscal cliff?  By going over the cliff, at least companies would finally have clarity in regards to the fiscal policy environment under which they are operating.  Moreover, any fiscal deals that would follow in 2013 would then represent an improvement instead of the detriment to the rates under which they would be operating.  While I continue to assign a low probability to actually going over the U.S. fiscal cliff as well as a high probability that stocks would move to the downside if we did, such a counterintuitive outcome is at least worth closer inspection as we watch the drama unfold and wait for a final deal to be reached in the next few weeks.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.