There is not a lack of issues or opportunities facing the financial markets this week. As we stated in the Sector Watch update over the weekend, volatility is back along with increased risk. As investors we have to be more focused and disciplined to keep from losing principle. Thus, we start the week with five areas to watch and capitalize on as the week unfolds.
The first is the most obvious as we, along with the rest of the world, watch crude oil prices. The situation in Libya isn’t getting better and the price of crude rose to $106 over the weekend. Saudi Arabia is facing challenges and reinforces its ban on protests. The price of oil isn’t going to get better anytime soon based on the geopolitical unrest. One headline read, “stocks – it’s all about oil”, and for the near term stocks may be held captive to the price of oil. The downside risk to stocks is being built up by the media more than analyst. The consensus remains positive among analyst with the stipulation oil doesn’t sustain higher prices for a extended period of time. Thus, as we start the trading week there are two potential plays, one, crude oil in the form of USO, United States Oil ETF (USO) and two, a trade on the downside of the broad market index with ProShares Short S&P 500 index ETF (SH). Both have been added to the Watch List for the week.
Second, the price of food continues to be a challenge around the world. To some, it is a bigger problem for inflation than oil prices. Shortages are showing up in emerging markets and the outlook is for the situation to get worse before it gets better. The price of agriculture commodities have been spiking higher over the last six months. Looking at a chart of DBA, PowerShares Agriculture ETF the trend remains higher and last week the fund made a break from the five week consolidation at the high. That is a positive sign for the fund and a negative sign for food costs. See the Watch List for post in the agriculture sector.
Third, retail sales data will be released on Friday. The same store sales data last week was positive as the department stores showed solid reports. The consumer has continued to shop following the holidays and that is a positive sign overall. The big question mark is the price of gasoline. The price at the wholesale level spiked above the $3 mark and the price is racing toward the $4 mark at the pump for consumers. It has the impact of a tax as it is immediate, but hopefully temporary. If the price sustains itself at these elevated levels consumer spending will see the effect. For the short term there may be some upside opportunity in retail despite the negative influence of gasoline prices. Watch XRT, SPDR Retail ETF (XRT) this week to break higher. See Watch List for post on the sector.
Fourth, bonds have seen a reprieve from higher interest rates as the fear factor elevated the last two weeks. This is likely a temporary move in bonds and the downside will resume as the threat of inflation and higher interest rates will outweigh the fear of equities moving lower. Gold will be the more likely benefactor long term on the fear trade than bonds if rates start to rise. The ECB may hike rates as soon as April, but Mr. Bernanke and the Federal Reserve are not likely to follow suit until the fall, at the earliest. However, the market can raise rates without the help of the Fed. The long end of the yield curve has moved to 4.6% from 3.6% over the last six months and a move to 5.4% by year end is not out of the question. You can play the downside of the US 30 year Treasury bond with TBF.
Five, the US dollar is sinking and a break below 76.30 on the dollar index is a big negative for the greenback. The next support is 75.80 and then 74.17. The lack of support to the dollar by the Fed or the current administration isn’t going to change anytime soon. The Fed is hell bent on putting more dollars in the system to help keep the economy running. The inflationary impact is being felt around the world and in the US despite the Fed Chairman’s comments. A weaker dollar doesn’t help with the price of oil. In essence we are importing inflation as we use a weaker dollar to buy higher priced oil. If we are long oil (USO) and short the dollar (UDN) maybe we can keep pace with inflationary process currently in place.
This promises to be a challenging week. The volatility has moved higher over the last two weeks and the lack of direction in equities has been obvious. Take what the market gives you and remain disciplined as this all plays out.
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