Financial Professionals

Market Insights

A A A

Five Charts to Watch

08/19/2013

Since the release of my third quarter playbook “State of Confusion” in early July, it seemed as though the Fed-driven market confusion that began in late May had given way to clarity in the early stages of the third quarter. However, with the month of August more than half over, investors are now grappling with renewed confusion over the following mix of conditions:

  1. Late summer doldrums and extremely light trading volumes and liquidity
  2. A modest S&P 500® Index (SPX) correction
  3. Rising 10-year U.S. Treasury yields toward 3%
  4. Surprising uncertainty surrounding the next Federal Reserve chairman  

Most surprising to me is the uncertainty surrounding the next Federal Reserve chairman. My expectation was that current Vice Chair Janet Yellen would easily replace Chairman Bernanke. However, several media outlets have been reporting President Obama may tap former economic advisor Lawrence Summers instead.  Mr. Summers is certainly a less favorable choice for continued risk asset appreciation.

A contentious debate awaits Washington D.C. in the fall regarding raising the federal debt level. Is the president using Larry Summers as a bargaining chip? Possibly, but whether or not that’s the case, Wall Street is currently not amused by it.

Over the next few weeks there will be relatively little economic or earnings news to guide investors. The prevailing 2013 bull trend for the SPX still remains intact, and while Wall Street waits for September, it would be helpful to keep a watchful eye on the following five charts.

S&P 500 Index (SPX)

  • SPX, currently at 1655.83, is below its 50-day moving average of 1657.40
  • 100-day moving average of 1631.37 is the next support level
  • The series of three higher lows remains intact, supporting the 2013 prevailing bull trend:
    • February 26 low: 1485.01
    • April 18 low: 1536.03
    • June 24 low: 1560.33

8-19 Terranova 1.1
Source: Bloomberg

Japanese Yen

  • The yen continues to correct from its May 22, 2013 low of 103.74
  • Its 50-day moving average is now below the 100-day moving average, a signal that requires investor attention
  • The series of three lower highs does remain intact, supporting the prevailing 2013 yen bear trend:
    • February 25 high: 90.88
    • April 2 high: 92.57
    • June 13 high: 93.79
    • Yen weakness remains one of my major tailwind themes for global risk assets

8-19 Terranova 1.2
Source: Bloomberg

XLF (Financial SPDR ETF)

  • Financials is one of the best-performing SPX sectors year to date, up 22.18%
  • Strength in the XLF is fueled by fundamental tailwinds from an expedited return to normalized earnings, the domestic housing recovery, and a favorable yield curve.
  • Remaining above the 100-day moving average of $19.51 on a closing basis will be critical to keep the prevailing bull trend intact.

8-19 Terranova 1.3
Source: Bloomberg

Russell 2000® Index (RTY)

  • The Russell 2000 Index (RTY) has appreciated an index-leading 20.60% year to date
  • The RTY is yet to break below its 50-day moving average
  • RTY outperformance is driven by its domestic revenue generation exposure and overall 2013 U.S. economic standout leadership
  • Continued RTY outperformance highlights the expectation for accelerating U.S. economic growth over the coming quarters

8-19 Terranova 1.4
Source: Bloomberg

U.S. 10-Year Treasury

  • The U.S. 10-Year Treasury is positioned to challenge the psychological 3% level
  • Resistance exists between 3.10% and 3.22%, a critical “swing area” from early 2011 that initiated a year-long yield decline toward the all-time low of 1.379% hit on July 27, 2012

8-19 Terranova 1.5
Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.