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Weekly Commentary – The Year of Populists

First Brexit, Then Trump, Now it was the Italians who voted resoundingly against the status quo in a referendum and yet another victory for the populists’ movement across the globe. Consequently, “Italy’s main opposition parties called for early elections as soon as Italian Premier Matteo Renzi conceded defeat in Sunday’s key referendum vote, announcing he will resign tomorrow.”

http://www.wsj.com/livecoverage/italy-referendum

The Euro and equity futures gapped down across the board, though damage is contained thus far with ES down a mere 6pts, nonetheless add to the mini pullback that the S&P 500 is experiencing since breaking through the uptrend off Feb lows.

20161205-SPX.png

While the outcome will cause headwinds in the ST particularly for Europeans markets, would it be enough to derail the massive rally in US equities? If there is one thing we learned since 2009, is that every mini crisis out of Europe would turn out to be a fantastic buying opportunity in US stocks. The logic comes in twofold: 1) Uncertainty in Europe means rotation into US assets 2) ECB will contain the crisis with ample liquidity to the market via its QE program.

Hence, we would look to buy dips towards 2170 in the SPX for target of fresh ATHs heading into new year. How about the Nasdaq, which has seen its divergence with rest of broad indices grown as post-Trump gains were entirely erased. In fact, this kind of wide range consolidation with descending RSI in QQQ is not a rare occurrence, and two in 2015 eventually resolved to the downside. We would stay away from QQQ for time being.

20161205-QQQ.png

The Russell 2000 (IWM) also took a dent to its unprecedented rally, -2% week over week, with the RSI finally dropping under overbought conditions. What is the implication after such a massive spike in short period of time? Since 2009, we have had 5 other occurrences during which the RSI spiked beyond the 70 line and dropped back under it. As you can see in the chart, all but one led to a multi-month consolidation which marginally higher highs on declining RSI while the exception in Oct 2012 led to a month long correction. This time around, we expect a multi-month consolidation between 125 – 140, so there will be indeed trading opportunities for both bulls and bears.

20161205-IWM.png

Meanwhile, last Friday we had a rather uneventful NFP number which was slightly below expectations but most likely not enough to derail the 2nd post-crisis rate hike scheduled later this month. As the impact is largely priced in, we continue to be in the camp that US Dollar and interest rates are prime for a pullback. On the back of Italy referendum vote, US Dollar gapped up on Euro weakness, but in the bigger picture we believe the move to be short-lived. Technically, the RSI’s drop below 70 in addition to bearish MACD crossover historically suggests at least a drop to 20DMA, and in a more severe case towards 50DMA.

20161205-USD.png

For Treasuries, we continue to follow the Long Treasuries ETF (TLT) chart as the current chart pattern continues to closely resemble the bottoming pattern in 2015

20161205-TLT.png

Likewise, Gold is due a technical rally after holding strong support at 1170. In addition, the statistical chance of a rally has increased even higher especially after closing under weekly Bollinger Band 4 weeks a row, an oversold phenomenon that has happened just twice in the last 10 year including this time.  The previous occurrence was in August 2015, during which a 7% rebound towards 20WMA ensued.

20161205-GOLD.png

With 2016 drawing to a close, the last major event is the Fed Meeting on December 14. With a rate hike baked in by the market, the question is whether Yellen will sound more hawkish and project more rate hikes ahead, especially considering an inevitable showdown between Trump and Fed. Per Business Insider, “Trump’s massive infrastructure-spending plan could trigger a much faster jump in inflation. It’s not guaranteed, and there are questions about how much of the promised economic growth it would actually spur. But since the election, interest-rates traders have priced in a much steeper trajectory for inflation.”

 

http://www.businessinsider.com/trump-and-the-fed-may-clash-2016-12

 

That is what the market, especially US Dollar and Treasury yields, has been aggressively trying to price in. At the same time, a less than expected hawkish statement from the Fed could cause an unwind of the rally as well. Without a doubt, still plenty of trading opportunities ahead before the year ends.

 

Weekly Market Snapshot

Sector ETFs by Weekly Return %

SYMBOL NAME CLOSE DAILY (%) WTD % MTD %
XLE SPDR Select Sector Fund – Energy Select Sector 74.83  

0.22

0.29%

2.90% 0.54%
KRE SPDR KBW Regional Banking ETF 53.03  

-0.43

-0.81%

1.40% 1.18%
XLF SPDR Select Sector Fund – Financial 22.65  

-0.25

-1.10%

1.07% 0.62%
XLB Materials Select Sector SPDR 49.98  

0.02

0.04%

0.85% 0.08%
DIA Dow Jones Industrial Average ETF 191.74  

-0.16

-0.08%

0.23% 0.18%
XLI SPDR Select Sector Fund – Industrial 62.81  

-0.01

-0.02%

0.16% 0.64%
IYR iShares Dow Jones U.S. Real Estate Index Fund 74.45  

0.78

1.05%

-0.63% -0.53%
XLU SPDR Select Sector Fund – Utilities 46.8  

0.42

0.90%

-0.76% 0.11%
SPY SPDR S&P 500 219.68  

0.11

0.05%

-0.83% -0.32%
XLG Rydex Russell Top 50 ETF 153.02  

-0.2

-0.13%

-1.09% -0.63%
XLP SPDR Select Sector Fund – Consumer Staples 50.57  

0.32

0.63%

-1.27% -0.02%
XLV SPDR Select Sector Fund – Health Care 68.41  

0.16

0.23%

-1.54% -0.49%
PFF iShares S&P US Preferred Stock Fund 37.02  

-0.04

-0.11%

-1.73% -1.23%
XLY SPDR Select Sector Fund – Consumer Discretionary 81.44  

-0.45

-0.55%

-1.86% -0.50%
XRT SPDR S&P Retail ETF 45.61  

0.1

0.22%

-2.21% -0.22%
IWM iShares Russell 2000 130.9  

-0.07

-0.05%

-2.36% -0.54%
QQQ PowerShares QQQ Trust 115.67  

0.2

0.17%

-2.64% -1.57%
XLK SPDR Select Sector Fund – Technology 46.69  

0.17

0.36%

-2.73% -1.71%
SMH HOLDRS Merrill Lynch Semiconductor 68.77  

1.09

1.60%

-4.10% -3.22%
IBB iShares Nasdaq Biotechnology 270.46  

0.97

0.36%

-4.92% -1.32%
           

Commodity & Bond ETFs

SYMBOL NAME CLOSE DAILY  (%) WTD % MTD %
USO United States Oil Fund 11.48  

0.15

1.32%

11.13% 5.03%
GDX Market Vectors TR Gold Miners 21.37  

0.71

3.38%

3.69% 2.59%
SLV iShares Silver Trust 15.83  

0.17

1.08%

1.28% 1.09%
AGG iShares Barclays Aggregate Bond Fund 108.02  

0.34

0.32%

-0.14% -0.20%
LQD iBoxx $ Investment Grade Corporate Bond Fund 116.4  

0.53

0.46%

-0.16% -0.38%
HYG iShares iBoxx $ HY Corp Bond Fund 85.38  

0.51

0.60%

-0.41% -0.32%
GLD SPDR Gold Trust 112.14  

0.6

0.54%

-0.42% 0.35%
TLT iShares Barclays 20 Year Treasury Bond Fund 119.6  

0.87

0.73%

-1.01% -0.53%
DBA PowerShares DB Agriculture Fund 19.68  

-0.04

-0.20%

-3.05% -1.30%

Country ETFs

SYMBOL NAME CLOSE DAILY (%) WTD % MTD %
EWI iShares MSCI Italy Index Fund 22.13  

0.15

0.68%

3.95% 1.75%
EWS iShares MSCI Singapore Index Fund 21.43  

0.15

0.70%

2.68% 1.81%
EWC iShares MSCI Canada Index Fund 26.23  

0.12

0.46%

1.35% 0.85%
DXJ WisdomTree Japan Total Dividend Fund 48.77  

0.16

0.33%

1.29% -0.87%
FXI iShares FTSE/Xinhua China 25 Index Fund 37.31  

-0.28

-0.75%

0.59% -0.74%
EWY iShares MSCI South Korea Index Fund 53.29  

-0.17

-0.32%

0.49% 0.06%
EWJ iShares MSCI Japan Index Fund 49.62  

0.15

0.30%

0.26% -0.54%
EWU iShares MSCI United Kingdom Index Fund 30.35  

0.25

0.83%

0.20% 0.96%
EWQ iShares MSCI France Index Fund 23.39  

-0.07

-0.30%

0.09% -0.26%
EWO iShares MSCI Austria Index Fund 16.09  

-0.06

-0.37%

0.06% 0.03%
EWP iShares MSCI Spain Index Fund 25.18  

-0.07

-0.28%

0% 0.04%
EWM iShares MSCI Malaysia Index Fund 29.39  

0.09

0.31%

-0.17% 0.34%
EEM iShares MSCI Emerging Index Fund 35.12  

0.04

0.11%

-0.37% -1.07%
EWX SPDR S&P Emerging Markets Small Cap ETF 40.69  

0.1

0.25%

-0.44% -1.17%
EWT iShares MSCI Taiwan Index Fund 30.5  

0.09

0.30%

-0.65% -0.78%
EWL iShares MSCI Switzerland Index Fund 28.31  

0.13

0.46%

-0.67% -0.14%
EWA iShares MSCI Australia Index Fund 20.69  

0.03

0.15%

-0.67% 1.22%
EWD iShares MSCI Sweden Index Fund 27.44  

0.02

0.07%

-0.80% -0.18%
EWG iShares MSCI Germany Index Fund 24.74  

0.06

0.24%

-0.92% -0.36%
EWH iShares MSCI Hong Kong Index Fund 20.74  

-0.24

-1.15%

-1.19% -2.03%
EWK iShares MSCI Belgium Index Fund 16.97  

0

0%

-1.45% -0.93%
EWW iShares MSCI Mexico Index Fund 43.22  

-0.05

-0.12%

-1.95% -2.04%
EWN iShares MSCI Netherlands Index Fund 23.17  

-0.12

-0.52%

-2.24% -1.53%
EWZ iShares MSCI Brazil Index Fund 31.68  

0.2

0.63%

-4.17% -5.40%

 

Week Ahead – Events and Economic Data

12/5 Monday

Time Event / Data
08:30 FOMC Member Dudley Speaks
10:00 ISM Non-Manufacturing

 

12/7 Wednesday

Time Event / Data
10:00 JOLTs Job Openings
10:30 Crude Oil Inventories

 

12/8 Thursday

Time Event / Data
08:30 Initial Jobless Claims

 

12/9 Friday

Time Event / Data
10:00 Michigan Consumer Sentiment

 

 

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