Market Wrap: May 13, 2011

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GBR Market Wrap, May 13, 2011

In this Week’s Issue

Weekly Snapshot
• U.S. consumer sentiment index rose to 72.4, a three-month high (Bloomberg)
• U.S. consumer prices increased 0.4% in April on a seasonally adjusted basis (BLS)
• Eurozone GDP grew 0.8% in Q1 2011 from the prior period and 2.5% year-on-year (WSJ)
• China raises reserve requirement for its biggest banks to a record 21% (Reuters)
• U.S. Producer Price Index for rose 0.8% in April, seasonally adjusted (BLS)
• U.S. retail sales were $389.4Bn, up 0.5% from March and up 7.6% from April 2010 (ESA)
• China’s inflation eased to 5.3% in April from a 32-month high in March of 5.4% (Reuters)
• China’s food prices up 11.5%, the sixth straight month of double-digit increases (WSJ)
• U.S. March 2011 international trade deficit grew 6.0%, to $48.2 billion (ESA)
• Standard & Poor’s downgraded Greece’s credit rating by another two notches (Economist)
• China’s trade surplus in April was $11.4B with exports up 29.9% Y/Y (CNBC)
• Apple has overtaken Google as the world’s most valuable brand (Bloomberg)

Market Barometers

Stock Market 5-13-11

FX and Commodities 5-13-11

Weekly Chart(s)
In the wake of the financial crisis, the Fed’s stated goal towards market stability was higher asset prices. They succeeded in achieving that goal in a number of areas: equities and commodities were propped up substantially but consumer, as well as producer, prices have been showing signs of heating up now too. In fact, the recent increases in consumer and producer price indices were perhaps a little too fast for comfort. There are those who suggest that the Fed actually missed the target, particularly when we consider that one of the biggest objectives was the stabilization of the housing market. Whether housing was a justifiable target may be questionable but as far as effectiveness is concerned, there are no signs of a U-turn in housing prices just yet.

With QE2 coming to an end in June, some punters have started to prepare for a scenario of higher rates. Some of the more prominent Bond funds have even begun shorting Treasuries. Yet, the yield on the 10-year Treasury Note remained stubbornly low. What is it then? Is inflation passé or are the markets already pricing in another round of quantitative easing?

While pondering on this question and examining this week’s CPI numbers a little closer, I came across some wonderful charts (courtesy of dshort.com) breaking down the consumer price index and adding a little twist to the mix. For those who are not too familiar with the CPI as an official measure of inflation, here’s a neat primer discussing some of the controversial aspects of the CPI.

Please consider the following charts with an easy-to-grasp overview of the CPI components. For the average consumer, the CPI number is relatively meaningless.  However, what we all feel are price increases at the pump or when pay our monthly bills. As you may have guessed, some of these components are not adequately reflected in terms of the cost-of-living increases for an average consumer. To get a better sense of what CPI means to you, examine the price increases for healthcare, energy, and education. Don’t we all wish we had similar wage increases?

CPI Component Breakdown

CPI categories since 2000

CPI categories plus energy since 2000

CPI categories plus college tuition

Sell In May?
“Sell in May, then go away – come back on Saint Leger’s Day ( second Saturday in September)” goes one of the many rules of thumb of traditional stock investors. As with many rules in the investment world, they work until they don’t. Had you followed the rule last year, it would have saved you a bit of nerves during the summer months.  However, if applied in 2009, you could have missed out on one of the best bull runs ever. I’d like to invite readers to go back in time to see how often that simple rule could have made you money – or not.

Now that we’re in the middle of May, is this a good time to stay on the sidelines until September? The market is up about 100% since the darkest days in March of ‘09 and for some of its players, this is a signal to take some profits. But rather than exiting the market right away, why not apply some of the basic trading tools we mentioned in the past few weeks instead. If you were concerned about downside market risk, use a combination of Jeff Macke’s purple crayons and Barry Ritholtz’s lines in the sand to define some exit points. These lines don’t need to be rigid and they don’t necessarily have to be determined by technical factors alone. You can simply set some given target prices at which you feel a downside insurance needs to kick in. These exit points are primarily driven by your investment objectives as well as your risk appetite.

Below are two possible support lines for the S&P 500. You can set your stop orders right below these exit points and successively move the up higher along the lines (a.k.a. trailing stop orders) to protect your downside risk. If the market goes higher, no harm done and you can take advantage of the stronger up-trend. In case the Sell in May rule were to apply, you could use it once the market corrects below these suggested (purple) lines in the sand, just as an example.

S & P Index

Another alternative would be to use 50-day or 200-day moving averages as guidelines for exit points. Whichever method you prefer, it boils down to the most important trading rule: Cut your losses short and let your profits rise.

Recommended Video: Its The Tax Code, Stupid
Here’s a bit of a different perspective from the Dos Hombres Nesto & Mackey. Enjoy!

Good luck and good investing!


Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also publishes the popular investment blog www.fxinvestmentstrategies.com along with a weekly news-letter.

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.

Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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