One thing that will likely to occur in 2014 is rising interest rates. Although the recent rally in the bond market might indicate the contrary, but the fundamentals are in place to ensure rising rate will become a reality in 2014. Some people might interpret rising rates will be bad for the US economy, but for what the economy has gone through in the last 5 years, rising rate is a good thing. Instead of having an environment for the corporations to financial engineering their earnings performance using low cost money for stock repurchase, they will have to do it the old fashion way; earn it. For a business to increase its earnings, it needs to expand. As business expands, employment will grow and that will generate demands for housing, auto and other durable goods. This is what capitalistic economy is all about, self fueling and opportunistic. Not one that rely on QE to artificially inflate wealth.
As the economy starts to expand, demands will increase, and that will result in rising prices for goods. When fears of rapid rising prices start to set in, price of gold and other hard assets will start to rise to hedge against inflation. And as inflation accelerates, Central Banks will attempt once again to manage the economy by tighter the money supply by increasing interest rates. For now, the Central Banks are still wearing blinder, so the rate increase to head off inflation is not in the card yet, and neither is rapid rising rate of inflation (based on government calculated CPI). The true inflation rate will not be apparent until the politicians in DC have addressed the fiscal spending issue and stop manipulating the calculation of the CPI. If the CPI is calculated to truly reflect the actual inflation, all the social security beneficiaries will receive more than a measly 1.5% increase for 2014.
As we all know, the market is a leading indicator. But sometime those that claim to know it all speak as the market is a lagging indicator. Looking at the price chart for gold ETF, GLD, the price action appears to have shown it found a near term support near the 114.50. It is currently testing the 122.50 price level. One should not be surprise to see GLD to end 2014 at much higher level as the economy expansion starts to kick in.
(click on the chart to get an enlarge view)
Similarly for the silver ETF, SLV, it too found support near the 18.20 level and it could be building up momentum to break out of the upper bound of the trading range near the price of 19.70.
Conversely for the 20+ years bond ETF, TLT, its recent rally has stalled at 109.34 and could be pulling back toward the 102 level. The cause of the recent rally in bonds is probably due to safe haven for some of the emerging countries’ financial problems than the renew concerns on weakening of the US economy.
On a lighter note, couple high flying stocks finally came back to earth a little bit after they reported their earnings. One of them is AMZN, it appears the notion of earnings growth become an important element to drive stock price higher, not simply trust me on investing in the future for future growth.
Then there is TWTR, all those high hope for rapid grow dissipated as it reported only 9 millions new subscribers were added for the last quarter.
Casino stocks have been hot until recently when China showing signs it is slowing and the market was afraid people going to Macau to gamble might be dwindling. Well, not so by the operation results reported recently by LVS & WYNN. Looking at MGM price chart, it appears it could be getting ready to breakout from its recent pull back consolidation zone and head back up to recent high.
Finally, a wifi service supplier for the airline, GOGO, could be in the final stage of completing the recent pull back if it can get back above 22.
Last week the market has bounced off from its recent sell off. It could be a start of another uptrend within a multi-years uptrend started in March 2009 or it could be a dead cat bounce. Do not get complacent just because the market has corrected itself recently. No one knows when this market will top out until after it has happened. Therefore, continue to trade defensively, when it doubt, close it out and move to the sideline. It is best to be out of the market wishing you are in than in the market wishing you are out if the market turns out to be just doing a dead cat bounce.
