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The Top Hedge Funds of 2016 Share Their Best Bets for This Year (With New Charts & Examples)

Bloomberg recently did a good cover on what hedge fund managers are looking out for in 2017. The general consensus is clear; the market is uncertain, and world events are causing markets to react in unexpected ways.

“You’re going to have to take way more risk today in order to try to make outsize gains versus a year ago,” -Hanif Mamdani, PH&N Absolute Return Fund

I found the article to be pretty insightful, with a handful of key take-aways. To make it easier for my readers, I’ve broken up the article into easy-to-digest sections, and added some charts and examples to make it clearer. Here we go:

1. Distressed Energy Companies

Hedge funds specializing in purchasing companies that are on the verge of collapse, actually profited from the rise in oil prices last year. Companies that were in the red started to turn profitable, and after purchasing companies at ultra-cheap prices, these assets were starting to bring in significant capital gains for hedge funds. Even though oil has risen significantly, hedge fund managers still see the potential for more gains.

It’s interesting to look at the related ETFs for oil and gas companies. I’ve pulled out 2 charts of U.S Oil & Gas company ETFs (XES and IEO). The gains over the year are impressive.

The charts above summarize the oil and gas sector for the year of 2016.

On the technical side, the Oil & Gas sector is still on an uptrend. It is prudent to remain bullish when the market is still trending up. It’s interesting that XES has broken out of a wedge, and looks to be gathering bullish momentum.

In the longer term, oil & gas companies seem to be picking up momentum.

 


A few weeks ago, I was invited to give a talk at the Singapore Stock Exchange (SGX) on the Offshore & Marine sector, and Keppel Corp was one of our top picks. 

2. “Global Macro Deceleration”

Some hedge fund managers are positioning themselves for the worst. For example, a border tax in the U.S could “cause a global depression and a major equity market decline,” says Carlson Capital’s Black Diamond Thematic Fund. They’re waiting for commodities to “correct meaningfully” (meaning a decline in commodity prices), and looking to scoop up good stocks at the bottom of the market decline.

Traditionally, sector rotation strategists have sworn by investing in stocks like semiconductors, industrials and miners during full-blown bear markets. These stocks are famous for having high volatility and are not for the faint-hearted. A famous example, Caterpillar Inc, is shown below:


Heavy industrials like Caterpillar Inc tend to move cyclically with the economy. Notice the 6 big swing it has had since 2012!

3. Long High-Yield Corporate Bonds Amidst Rising Interest Rates

Some hedge funds are betting on higher-yield corporate bonds rising during this period. High-yield bonds typically have both a short maturity and high coupon rate. With interest rates expected to rise in the coming decade, bond prices are likely to fall and bond holders will actually be worse off (Economics 101!). However, with the shorter maturity, higher-yield corporate bonds become more attractive as they are less exposed to the beating by rising interest rates. Bearing in mind these ideas, it is understandable why these have been attractive to institutional investors in the past year.


I’ve inserted a little-known ETF, “HYG”, a high-yield corporate bond ETF that tracks the prices of high-yield corporate bonds. You can see that the bear trend sharply reversed at the turn of 2016 and has been rising steadily since. The uptrend is still in force, and some hedge fund managers are looking to speculate on a variety of interest-rate products.

What They’re Saying:

In summary, what we notice to be the consensus about the market in 2017 is this:

  • Heightened interest rate, inflation rate, and economic volatility
  • Renewed interest in unconventional investment strategies

That being said, it’s important to keep yourself updated and continually learning about financial markets. In such a unique market climate, it would serve you well to continue reading up and knowing what market participants are paying attention to.

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Research Sources:

bloomberg.com/news/articles/2017-02-28/the-top-hedge-funds-of-2016-share-their-best-bets-for-this-year

The January Barometer: An Accurate Predictor of Stocks for 2017?

There are many speculations about leading indicators in the market, and one of the most popular ones is the January Barometer. In this post, we will explore this phenomenon, and see if it holds up to the test, and whether it will provide any useful insights going forward.

WHAT IS THE JANUARY BAROMETER?

“As January goes, so will the market go for the year.” – Wall Street Folklore

The January barometer is a tool used to determine if the year will be bullish on the equity space. If January sees a winning month, the year would be a winning year.

January can be said to be an indicator to whether the year would be bullish or not.

This idea first emerged in the 1972 edition of Yale Hirsch’s Stock Trader’s Almanac. Here’s what was published:

“We doubt that any technique or indicator ever devised has been so remarkably accurate as the January Barometer. The barometer, which indicates that as January goes, so will the market go for the total year, has proven correct in 20 of the last 24 years…. Very few stock market indicators show such an 83.3 percent accuracy for even short spans of time.”

 

 

PREVIOUSLY… INVESTIGATING THE SANTA CLAUS RALLY

A couple of months back, I collected statistics for a simple ‘buy in January, sell in February’ portfolio. How it works is simple: I would purchase the stock index on 1 January, and sell it on 1 February and see the results.

Buy in January, Sell in February Statistics

2011: 4.34%

2012: 1.28%

2013: 4.55%

2014: 5.62%

2015: -0.08% — Total returns for 5 years = +15.71%!!!

Over the last 5 years, it has indeed been a great run for the ‘buy in January, sell in February’ portfolio.

This got me excited, but I decided to look further back in history…

Breaking up the time periods into 5-year chucks, here are the statistics:

5-year “Buy in January, Sell in February” Statistics

2011-2015: +15.71%

2006-2010: -8.7%

2001-2005: +0.88%

1996-2000: -6.38%

The santa claus rally didn’t really exist as claimed by most sensationalists.

This time, we want to look at whether January tells us if the year would be a winning year.

 

JANUARY BULL RUN = WHOLE YEAR BULL RUN?

Quantpedia has a good summary of this, and the strategy is simple: Invest in equity market in each January. Stay invested in equity markets (via ETF, fund or futures) only if January return is positive otherwise switch investments to T-Bills.

To put it more simply, there are two scenarios:

Scenario 1: January positive –> Stay invested in equities

Scenario 2: January negative –> Exit equities

The results are shocking. Quoting from a research paper titled: “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

“We investigated the power of the January market return to predict returns for the next 11 months using 147 years of U.S. stock market returns.

Using 147 years of U.S market data, this was the result:

We found that, on average, the 11-month holding period return following positive Januarys was significantly higher, by a wide margin, (-7.76%) than the 11-month holding period return following negative Januarys.”

This meant that on average, a year with a positive January outperformed a year with negative January by 7.76%. This is a very significant difference.

 

 

Having a drink at the highest pub in Africa! Finally clocked my 51st country – Lesotho! 🇱🇸 #feelinghigh #lesotho #southafrica

A post shared by Spencer Li 🇸🇬 Synapse Trading (@iamrecneps) on

 

5 TRADING STRATEGIES THAT WERE RESEARCHED

In the research paper that I mentioned above (you can read the whole paper by downloading it in the link at the bottom of this article), here are 2 strategies that can be taken knowing that January is a good predictor of the market for the rest of the 11 months:

(1) LONG/T-BILL STRATEGY

Long in Jan, continue being long if Jan is positive, but exit and go long on bonds if Jan is negative.

(2) LONG/SHORT STRATEGY

Long in Jan, continue being long if January is positive, but go short if Jan is negative.

The results for 1857 – 2008 are highlighted below:

Strategy 1 ( completely outperformed strategy 2.
Source: Page 21 of “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

In the research paper, 5 strategies were outlined, but I only cover the 2 that are relevant to our discussion.

It seems that this would be a very profitable strategy:

Firstly, buy stocks in January.

If January is positive, remain long on stocks from February to December.

If January is negative, exit stocks and go long on bonds from February to December.

In addition, the research paper also published returns for the years 1940 – 2008:


Strategy 1 completely outperformed strategy 2, even in the recent 70 years.
Source: Page 23 of “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

 

Christmas tree + Cape Town Flyer + National Geographic photo frame 😄🇿🇦🎄 #Christmas #southafrica #capetown

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WHAT HAPPENED THIS YEAR?

The STI is up 5.5% for the month of January 2017. Going by the strategy outlined above, if you are a buy-and-hold investor, it would be wise to hold the STI until the end of 2017.

 

On the contrary, for the Dow, we’ve only seen a +0.4% increase in Jan 2017. At the time of writing this (2:00am Singapore Time, 1 Feb), it still makes sense to hold the U.S stock index until the end of 2017 (if you’re a buy-and-hold investor). That being said, it’s wise to employ price action strategies and focus on a precision entry/exit if you are already long.

While the January barometer is good information to know, it’s largely a super long-term strategy (10-20 years) and investors will position themselves well if they have strong price action fundamentals in a generally bullish market.

Going forward, I expect the stock market in both Singapore and U.S to be bullish. This is a probabilistic approach; I would still be making trades based on solid price action strategies, and make portfolio adjustments where necessary.

All the best for 2017, and happy trading! I hope that this article has shed some light for those who hate reading research papers 🙂

 

RESEARCH SOURCES & REFERENCES

investopedia.com/terms/j/januarybarometer.asp
cnbc.com/2014/01/30/uld-totally-ignore-the-january-barometer.html
quantpedia.com/screener/Details/113
papers.ssrn.com/sol3/papers.cfm?abstract_id=1436516
fullertreacymoney.com/content/2010-03-02/Januaryeffrct.pdf
Cover Image: wallpapercave.com

Synapse Weekly Market Highlights (8 Jan 2017) – 1st Week of 2017, How Did it Go?

 

If you’ve been following my blog posts and Instagram account, you would know that I just got back from my trip in South Africa last week. Still a little jet lagged (even though I’ve traveled so many times), and missing the awesome sights and sounds of that beautiful continent.

The Southern-most tip of the continent of Africa! 🇿🇦🌎 #southafrica #capeagulhas #africa

A post shared by Spencer Li 🇸🇬 Synapse Trading (@iamrecneps) on

 

3 OF LAST WEEK’S PREDICTIONS – S&P500 and Forex

Prediction #1: S&P500 – Look to buy on bullish bars near the EMA (Triggered!)

spS&P500 as at 31 Dec 2016.
Source: MetaTrader 4

I mentioned the following last week:

  • Bulls will be hesitant given the uncertainty surrounding the first week of the new year.
  • Bears would try to exert their influence repeatedly, so don’t be alarmed if your long positions get stopped out easily.
  • I would wait for 2-3 bullish signals before being confident of a nice up-move.

On Monday, we saw a gap up from the open + a bullish bar with a substantial body. This was sufficient to enter a long position.

You would have bought once you saw a white bar printed on the EMA. (Monday)
Source: MetaTrader 4

Prediction #2: Short AUDUSD, but wait for pullback to EMA + bearish bars for a  higher probability trade.

The AUDUSD looks bearish and 3 bullish bars have occurred last week.
Source: MetaTrader 4

Last week I said: “Possible price levels to observe at 0.73000, 0.74000, and 0.75000 (all these present good shorting opportunities).”

Even though a short entry is possible given the bearish bar we now see on the AUDUSD, I advise against it because the 3 bullish bars before it present a lot of bullish commitment. Stay away.  

 

Prediction #3: Short on NZDUSD on every opportunity! (but read the cautionary notes below before you trade)

Last week, I said it was a “good time to short on NZDUSD, but caution is advised”. Now, shorting seems like a reasonable thing to do.
Source: MetaTrader 4

This is what I said last week:

  • The year has just started so a sideways market is more probably in the first few days.
  • If you are going short once the market opens on Tuesday, take a small position, use a wide stop, and don’t be afraid to sit through pullbacks and open losses.
  • Add on for every short opportunity you can find (if you are more aggressive).
  • I’ll be more confident if I see 2-3 confirmation bearish bars.

Now, we see a nice bearish bar near the EMA. If you got stopped out intra-day last week, that’s ok. Now, this presents a good opportunity on the daily chart. 

 

UPCOMING MARKET OPPORTUNITIES: SINGAPORE MARKET

As summarized in the picture above, the STI is still in a sideways market and caution is advised against a bull run. I’m aware that other experts might argue that a bull run is in place, but technically and professionally speaking, a bull run only occurs after it has clearly emerged out of the sideways consolidation phase. 

At this point, my stock screener has printed a buy signal, but I’ll only look to enter if it pulls back a little, bounces off the EMA, prints a nice bullish trend bar, and I see the EMA turning upwards. Otherwise, it is still in a sideways situation right now.

Markets tend to move from bear market > sideways market > bull market. I believe this to be the case for the STI. Watch and wait.

 

UPCOMING MARKET OPPORTUNITIES: GOLD

Source: MetaTrader 4

The gold chart is VERY bearish, but the recent bullishness makes me want to stay away. I’ll wait for 2-3 more bearish confirmations before deciding to go short. 

I might also take a bullish trade if I see multiple pullbacks to the EMA, and if gold starts rising gradually without any huge bearish bars.

LASTLY: UPCOMING NEWS


The only thing worth noting this week.
Source: myfxbook.com/forex-economic-calendar 

The second week of January will see no important market-moving news, except Yellen’s speech on 13 Jan, 08:00 hours. Watch out for USD pairs, just in case they get affected, and as usual, reduce your open positions or take some profits before this time.

Happy trading, and all the best in your trading journey!

Cheers!

Synapse Weekly Market Highlights (1 Jan 2017) – Opportunities Aplenty!

1

2016 has been a blast, and a very happy new year to everyone! This week’s analysis will be a little heavier, so keep calm and read on. Let’s just dive straight into the market analysis for this week:

 

RECAP OF LAST WEEK’S PREDICTIONS – HOW DID IT GO?

#1: Bullish breakout on EURCAD (D1 chart)

euraudLast week’s analysis; we predicted EURAUD would climb higher.
Source: MetaTrader 4

This week, we saw the EURAUD climb even higher after a mini pullback that didn’t touch the EMA. Those who took entries intra-day would have seen large profits, while those who took longer-term positions would have in-the-money positions. Congratulations to those who took this trade!

thisweekThis week, the EURAUD climbed higher and close with some profit-taking.
Source: MetaTrader 4

The chart still shows that EURAUD is bullish, and it is still wise to hold on to any long positions, adding on if a gentle pullback to the EMA occurs.

 

#2: Bullish breakout on EURCAD (D1 chart)

lastweekLast week, a bullish call was given for the EURCAD.
Source: MetaTrader 4

Traders were advised to enter only intra-day, which meant profit taking was to also be intra-day. Those that followed this advice did well:

eurcadThis week, the EURCAD climbed higher and closed with heavy profit-taking.
Source: MetaTrader 4

Despite the heavy profit taking on Friday, the intra-day traders would have already taken profits. Those who bought near the EMA would also have seen great profits and have at least had partial profit-taking, securing the profits on the position.

 

#3 Wait for pullback to EMA on USDCHF (D1 chart) and buy on a touch of the EMA (with a good bullish bar!)

usdchfLast week’s analysis for USDCHF.
Source: MetaTrader 4

Those who waited for a USDCHF pullback to the EMA saw it, but the pullback was very violent. Here’s how it looks like since last Friday:

chfThe pullback was very violent, and profit-taking from bears was very substantial.
Source: MetaTrader 4

This week, we expect the USDCHF to remain sideways, as traders consolidate what the huge candle (on last friday) would mean for 2017. Don’t expect to have your trades on USDCHF run quickly in one direction; let it consolidate for 3-5 days before deciding again. This will be on my watchlist, but will not be a top priority. Bulls would be looking to buy near 1.01000, so watch out for the price action at this level. 

UPCOMING MARKET OPPORTUNITIES: KEY STOCK MARKET INDICES

S&P500 – Look to buy on bullish bars near the EMA.

spS&P500 as at 31 Dec 2016.
Source: MetaTrader 4

The S&P has travelled upwards rather violently in 2016. After a mild correction to the 20EMA, it is wise to look to buy on bullish bars near the EMA. Profit targets can be near the all-time high, or even further up (2300 and above). However, note the following:

  • Bulls will be hesitant given the uncertainty surrounding the first week of the new year.
  • Bears would try to exert their influence repeatedly, so don’t be alarmed if your long positions get stopped out easily.
  • I would wait for 2-3 bullish signals before being confident of a nice up-move.

 

Bearish on the Hang Seng Index. Short near the EMA with bearish confirmation bars.

hsBears have exerted their influence, and will continue to exert influence unless the bulls suddenly show up for no reason at all.
Source: MetaTrader 4

Bears will be happy to short near the EMA and at any prior resistance. If the Hang Seng index climbs up beyond the EMA, it is unlikely to break above 22300 (near the trendline drawn above). I’ll look to short it in the upcoming days/weeks, if a nice opportunity arises.

 

Watch the ASX closely for a buying opportunity.

asxThe ASX has broken new highs and bulls will continue to buy on every opportunity.
Source: MetaTrader 4

The ASX has had a whirlwind of a 2016, and bulls are pleased that it has broken new highs. I would be looking to enter on pullbacks to the EMA, preferably near the breakout support level of roughly 5550, and ride up for a nice bull trend trade.

UPCOMING MARKET OPPORTUNITIES: FOREX TRADING SPACE

Short AUDUSD, but wait for pullback to EMA + bearish bars for a  higher probability trade.

audusdThe AUDUSD looks bearish and should be unable to hold support at 0.71400.
Source: MetaTrader 4

AUDUSD has seen multiple trendlines broken. The bullish move in early 2016 was broken significantly, and the sideways market that took 6 months to develop also saw its end, causing me to believe the market is transitioning into a bear market. Bears will look to short at every opportunity, which means smart traders will go short, preferably near the EMA, and until bearish signal bars appear. Possible price levels to observe at 0.73000, 0.74000, and 0.75000 (all these present good shorting opportunities). 

 

Sideways on GBPUSD; look for opportunities in both directions.

audusd
The GBPUSD looks sideways and must be traded like how a sideways market should.
Source: MetaTrader 4

GBPUSD has seen a humongous correction (almost 20%) in the past 6 months, and should still trade like a sideways market for some time before traders decide where it should finally end up. Buying low and selling high, though simple as it sounds, is the suitable strategy for such a market context.

 

Short on NZDUSD on every opportunity! (but read the cautionary notes below before you trade)

nzdusd
Good time to short on NZDUSD, but caution is advised.
Source: MetaTrader 4

Classic head and shoulders on NZDUSD, strong bearish bars in recent times, and a breakout from the prior support. A bearish bar near the EMA gives good reason to go short, but I’ll be hesitant and do the following:

  • The year has just started so a sideways market is more probably in the first few days.
  • If you are going short once the market opens on Tuesday, take a small position, use a wide stop, and don’t be afraid to sit through pullbacks and open losses.
  • Add on for every short opportunity you can find (if you are more aggressive).
  • I’ll be more confident if I see 2-3 confirmation bearish bars.

 

LASTLY: UPCOMING NEWS upcomingSome of the upcoming unemployment figures, and the NFP announcement on Friday.
Source: myfxbook.com/forex-economic-calendar 

The first week of 2017 will see 4 unemployment rate announcements. No shocker expected here, because the main market-moving news will be the NFP announcement on 6 January, Friday. Intra-day traders can keep their eyes peeled for the hours surrounding the NFP, which happens at 21:30 hours (Singapore time).

This week is a week with a number of great opportunities. Happy trading, and wishing everyone a great start to the new year!

Cheers!

Will Higher Interest Rates Eventually Lead to a Stock Market Crash?

asJanet Yellen’s actions come into the spotlight once again.
Source: slate.com

 

After a slew of unprecedented events (Trump, Brexit), what has been troubling the world financial markets in recent days? As the FOMC announcement approaches, market participants have all eyes fixed on the almost-certain rate-hike that is coming up on Thursday. You probably have started to see Yellen’s photograph in news articles across all major financial newspapers.

Traditional economics theory teaches us that when interest rates rise, they are deflationary; businesses find it harder to borrow and affects interest-sensitive investment, while home owners find it harder to pay their mortgages. It all seems reasonable on the surface, but what actually goes on behind it?

In an economic climate such as ours today, traditional predictions have fallen very flat. There are Fed officials and scholars (not lay-people) who still insist that QE has no impact on the real economy whatsoever. The average wage-labourer probably doesn’t feel much when interest rates change, nor will he care even if rates drop or rise significantly.

However, as traders, our portfolios are at stake and it will bode us well to study this properly. Several macroeconomic indicators have to be understood and analysed to understand what is likely to happen. I’ve broken it down into 4 components for easy reading. Let’s get going:
 

INDICATOR #1: Falling GDP?

The body of scholastic material addressing the link between interest rates and GDP is rather depressing. Stephen D. Williamson summarizes this rather aptly:

“There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed—inflation and real economic activity”-Stephen D. Williamson, St. Louis Fed Vice President

When the cost of borrowing rises, economic activity slows. That has been what the Fed was trying to do when it goes ahead and raises interest rates. They were used as a deflationary tool to keep the economy from expanding too rapidly. What have we seen? I came across this table while researching on this topic:

bank

What we see is that the average rate hike cycle takes 22 months, while a recession normally happens 41 months later. However, it has been 87 months since the last rate hike, eclipsing even the 85 months lag time since the 1994-1995 rate hike.
These are definitely unusual circumstances. While the economy has been chugging along for 7 years despite near-zero interest rates, I don’t see how a rate hike would dramatically change this, especially in the short-term (1-2 years from now). While the economy has been a big topic on Trump’s agenda during the election, the reality is that the economy is still reeling from the damage caused in 2008, and it could take far more than more investments to bring the world back to economic health.

 

INDICATOR #2: Lower Stock Prices?

The US stock market has been breaking new highs and with every new high, another analysts comes out and purports that ‘this is the top’.

 

econDire predictions by an economist.
Source: CNBC

However, before we all go into doom and gloom, let us remember that the bear markets of the last 50 years have had different causes, to be fair, there had to be some sort of trigger. It could be a political issue, such as the 1973-74 oil crisis, and the 1990 bear market caused by Iraq’s invasion of Kuwait. Furthermore, the Fed could be behind a market crash; in 1982, after raising interest rates relentlessly, the U.S market saw some severe bear moves in that period of time.

Sometimes bear markets happen because of bubbles; such as when the 2001 dot-com bubble and 911 terrorist attacks came about. In 2008, we saw a market crash as a result of a tanking housing market spurred by widespread institutional dishonesty.

Let us not be quick to jump to conclusions about a market crash coming. I’ll be watching the S&P and other indices closely over the next few months.

Interestingly, some quip that the “three steps and a stumble” rule would become a reality. It last happened in 2004, but we didn’t see a stock market crash until 4 years later.

“The ‘three steps and a stumble’ rule states that after three consecutive rate hikes (three steps), the stock market would begin to fall rapidly (stumble).”

I don’t quite buy into this idea. Over the past 30 years, there were only nine occasions where we saw 3 rate hikes in a row. Thrice in the 1970s, four times in the 1980s, and twice in the 1990s, and on average, only the 1970s saw a significant decline (approximately 10%) of the stock market in the next year or so.

chartChart of DJIA price changes after 3 rate hikes
Source: MarketWatch.com

More interestingly, the S&P500 looks like it’s ‘toppish’; the bull run seems rather unsustainable, but something seems to be sustaining this euphoria. On a technical basis, it has simply broken out of an expanding wedge on the daily chart.

sp
The S&P500 has broken out of an expanding wedge pattern. It looks rather unsustainable, but it is happening before our eyes.
Source: MetaTrader 4

We’ll have to watch closely how the S&P behaves near the resistance before deciding if it would continue the rally (which is very possible!).

 

INDICATOR #3: Volatile Bond Prices?

There are signs that the market has already adjusted to an interest rate hike. Check out what happened to the 30-yr Treasury Bonds over the past year or so:

30yr

The 30-yr Treasury Bonds have fallen 15% since its last high in July 2016.
Source: MetaTrader 4

The rude correction has shocked many bulls out of the market, and it seems we have entered bearish territory in the bond market. My opinion is that the rate hike has definitely contributed to this, but it seems that the rate hike is a mere response to the macroeconomic conditions of the world. On the technical side, we see a head and shoulders pattern that has broken down (as a result of election fever), and the downtrend has continued somewhat.

yieldsShort-term yields have risen almost as much as long-term yields.
Source: Bloomberg

If you’ve studied finance in university you would immediately recognize that the yield curve has flattened. Check out the table above; 3-month rates have risen as much as 30-year rates! This means 3-month yields have risen more than 100%, while 30-year yields rose about 10% or so. This is a typical response when the Fed tightens monetary policy.  A famous interpretation of the yield curve states that when yield curves get inverted (when short-term bonds yield more than long-term bonds), that’s when the stock market crashes like nobody’s business.

We are still very far off from an inverted yield curve, so a market crash is still some distance away. My guess is that the bond market, as a measure of fear, will be in a state of confusion as there are valid reasons for economic strength as well as economic panic. Volatility in yields is likely to be the norm in the year ahead.

INDICATOR #4: Commodity Prices

Although some pundits claim to be able to predict how interest rates will move commodities, I beg to differ. Oil, for example, is very much output driven (think OPEC), and recently we’ve been having output cuts among producers. As you can see in the image below, when I checked the newsmap yesterday, ‘Oil Surges as More Producers Join Output Cuts’ was the most-read news of the day.


A casual glance at the NewsMap reveals a heightened focus on oil production.
Source: Newsmap.jp

Generally speaking, if you look at the relationship between oil and real interest rates, we see very little correlation even over the very-long-term.

irIt’s hard to come to conclusions about how interest rates have affected commodity prices globally.
Source: cobank.com

More recently, we’ve seen commodity prices tank over the past 5 years despite interest rates remaining almost constant. I just did a simple google search on the price of DBC (the global commodity price ETF) and this is what happened in the past 5 years.

commm
A quick glance shows that commodity prices have fallen for 5 years.
Source: Google finance

To make an investment decision on commodities solely on interest rates isn’t wise. On a technical basis, commodities look like a good buy and I’ll be watching them closely to spot trading opportunities.

UP NEXT: THURSDAY’S RATE DECISION

If you aren’t already riding the bull market in stocks, it doesn’t make sense to enter now. Heroic bulls would want to enter now with a small profit target, and the world will be watching closely how the new year starts. Moreover, you won’t want to have too much exposure during the final FOMC meeting of 2016. Volatility on all other asset classes are expected, and I’ll be trading currencies, perhaps more regularly on an intra-day basis if I can’t find any good longer-term trends to ride on. All eyes will be on Thursday’s Rate Decision and the price action in the aftermath will be worth watching.

RESEARCH SOURCES & REFERENCES

http://www.cnbc.com/2015/09/15/when-the-fed-raises-rates-heres-what-happens.html
http://www.cnbc.com/2015/08/18/st-louis-fed-official-no-evidence-qe-boosted-economy.html
https://www.thestreet.com/story/13279476/1/what-happens-when-the-fed-hikes-interest-rates.html
http://www.slate.com/content/dam/slate/blogs/moneybox/2015/11/23/janet_yellen_responds_to_ralph_nader_s_sexist_letter/495620136-federal-reserve-chair-janet-yellen-testifies-before-the.jpg.CROP.promo-xlarge2.jpg
http://www.cnbc.com/2015/08/24/8-things-you-need-to-know-about-bear-markets.html
http://www.cnbc.com/2016/12/10/economist-harry-dent-says-dow-could-plunge-17000-points.html
http://www.marketwatch.com/story/edson-goulds-three-steps-and-a-tumble-rule
https://www.thebalance.com/inverted-yield-curve-3305856
http://www.cobank.com/Newsroom-Financials/~/media/Files/Searchable%20PDF%20Files/Newsroom%20Financials/Outlook/Outlook%202012/Outlook_10122.pdf