Making Money Alert: A Technical Look at the State of Stocks

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

For the past couple of weeks, the 2013 bull stampede has slowed considerably. Indeed, ever since the Fed introduced the term “tapering” into the trading milieu (a reference to the potential for reducing its current bond-buying scheme) the market has seen the return of sellers. We’ve also seen the return of volatility, and that’s caused a lot of investors to worry about what’s next for stocks.

Given the recent pullback in equities, both here at home and in many segments pegged to international markets, I thought it would be helpful to take a look at the technical state of stocks. Doing so will give us a better sense of the risks here, as well as the potential opportunities for getting in on stocks at a discount.

Let’s start with a look at the broad-based measure of the domestic market, the S&P 500 Index. Here we’ll use the SPDR S&P 500 (SPY), an exchange-traded fund, or ETF, pegged to the index.

The chart above of SPY shows the recent pullback (approximately 3%) from its recent high. The selling in domestic stocks has sent SPY down to a level just above its 50-day moving average of $161.19. The fund now trades only 0.66% above the 50-day moving average — a level which I suspect will be broken soon, given the weakness we’ve seen in most other global markets, and given the general bias toward trimming positions.

As for global stocks, we see that the breakdown below the 50-day average already has occurred in the Vanguard Total World Stock ETF (VT). The current value of $52.64 is 1.44% below the short-term trend line. I suspect we could see this market continue to sell off down to the $51 range, where there does seem to be some significant technical support. However, if that $51 range fails to hold, then the next stop is the $50.17 level, or the current 200-day moving average. A breakdown below this level would surely mean a cascade of selling to follow.

Now, when it comes to the emerging markets of the world, and particularly China, it is here that we see the real decline firmly in place. The chart below of the iShares MSCI Emerging Markets (EEM) is truly frightening, particularly if you’re still holding stocks and/or funds in the sector.

EEM currently trades way below its 50- and 200-day moving averages. In just the past month, its shares have plunged nearly 9%. The selling in EEM pushed its price down to the levels the segment traded at in September 2012. The situation clearly represents a market “reboot” that I’ve been predicting to subscribers of my Successful Investing advisory service for some time.

Finally, there also is a reboot taking place in stocks pegged to the world’s second-largest economy, China. That reboot can be seen by the chart of the iShares FTSE China 25 Index (FXI), a fund pegged to the biggest companies traded on the Shanghai Exchange.

While we have seen a slowdown in certain metrics that tell us how healthy the Chinese economy is, those metrics certainly aren’t telling us there’s a recession in China. Moreover, the selling in FXI that’s sent this fund back to the levels it traded at in October 2012 certainly appears to me to be a clear signal that the reboot in China is firmly in place.

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For patient investors who have been waiting to see the market come back down to more rational levels, I think we could be observing the start of a reboot in domestic stocks (SPY) and global stocks (VT). And though we may not see as big a pullback in these funds as we have EEM or FXI, the prevailing trend does appear to me to be dominated by sellers.

This selling could be setting us up for a great buying opportunity after the selling dust settles. When that does happen, it will be time to jump in and get your money in the fight.

How to Deal with Rising Bond Yields

Bond yields are up, and they’re up big.

Fear about the Fed pulling back on the easy-money reins has caused a sell-off in long-term Treasury bonds. The result is a significant spike in bond yields. The chart below of the 10-Year Treasury note yield ($TNX) tells us just how far yields have spiked in the past month. The spike in bond yields is starting to filter into mortgage rates. During the past couple of weeks, we’ve seen rates spike some 50 basis points.

So, how do you deal with the rising-rate environment in your portfolio, particularly if you have a lot of bond exposure?

The first thing to do is to know what kind of exposure you have to rising rates. If you have a lot of long-term Treasury bond exposure, you need to know that, as these are the bonds at greatest interest-rate risk. Then, if you own the riskiest bonds, i.e. if you own junk bonds or other high-yield bonds, then you also need to make sure you know that you may need to act to reduce your exposure.

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The first step in being able to weather any storm is to be prepared, and that means you must know where you are vulnerable. Now is the time to make sure you know what you own when it comes to bonds, so get out those statements and do your due diligence — if you want to survive the latest spike in yields.

On Government and Sand

“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”

–Milton Friedman

As one of the clearest thinking, and most articulate, spokesmen for rational economic policy, Milton Friedman really knew how to state things so everyone could understand. He also did this with a great sense of humor, as evidenced by the quote here on the folly of government involvement in the economy.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

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