Research & Investment | Will the Fed hike rates?

By Colin Twiggs
September 17th, 2015 4:30 p.m. AEST (2:30 a.m. EDT)

Advice herein is provided for the general information of readers and does not have regard to any particular person’s investment objectives, financial situation or needs. Accordingly, no reader should act on the basis of any information contained herein without first having consulted a suitably qualified financial advisor.

Performance at 31st August 2015

The S&P 500 Prime Momentum strategy returned +15.92%* for the 12 months ended 31st August 2015, outperforming the S&P 500 Total Return Index by 15.44%.

We reduced exposure to equities on 21st August 2015 (current cash holding is 60.5% of portfolio value) and will maintain this position until macroeconomic and volatility filters indicate risk is no longer elevated.

The ASX 200 Prime Momentum strategy returned -13.51%* for the 12 months ended 31st August 2015. Underperformance is primarily attributable to sharp falls in Sirtex (SRX) and Resmed (RMD) after disappointing clinical trials. Concentrated portfolios are always more volatile because of high exposures to individual stocks, but they also tend to perform better in the long-term — which is why we recommend a minimum investment horizon of 5 years.

We reduced exposure to equities on 21st August 2015 (current cash holding is 59.4% of portfolio value) and will maintain this position until macroeconomic and volatility filters indicate risk is no longer elevated.

* Results are unaudited and subject to revision.

North America

The market eagerly awaits the decision of the Fed Open Market Committee (FOMC) on whether to lift the target interest rate (FFR) from its 0.00 – 0.25 percent range maintained since the dark days of 2008.

Core CPI

Core CPI remains subdued at 1.83 percent for the 12 months to August — close to its 2 percent target — so there is no urgency to increase rates despite a strengthening job market.

The act of revising the target rate is largely symbolic. There is no doubt that the economy can withstand an increase in the Fed Funds Rate to 0.5%. But commencement of a tightening cycle may scare an already jittery market. There is a fairly equal split amongst economists as to whether the Fed should proceed with the rate rise or not. My guess is that the Fed will opt for a bet each way, with a wider target range (say 0.00 to 0.50 percent) or a reduced increment (say 0.10 to 0.30 percent). The effective FFR is currently sitting at 0.14 percent and I am sure the Fed’s plan is to continue with a gradual increase over time and no sudden movements.

Effective Fed Funds Rate

The S&P 500 is testing resistance at 2000 after a higher trough and rising 21-day Twiggs Money Flow indicate buying pressure. Recovery above 2000 would signal a relieving rally, while respect of resistance would suggest another test of support at 1900.

S&P 500 Index

* Target calculation: 1900 – ( 2000 – 1900 ) = 1800

The CBOE Volatility Index (VIX) indicates market risk is declining.

S&P 500 VIX

NYSE short sales are also declining.

NYSE Short Sales

Dow Jones Industrial Average closed above resistance at 16700. Follow-through after the FOMC decision would confirm a relieving rally. Reversal below 16600 would warn of another test of 16000. Failure of support at 16000 is unlikely, but would signal a primary down-trend. Recovery of 21-day Twiggs Money Flow above zero indicates medium-term buying pressure.

Dow Jones Industrial Average

Canada’s TSX 60 recovered above 800, indicating solid support between 790 and 800. Recovery above 820 and the descending channel would signal that the correction has ended. Rising 13-week Twiggs Momentum would strengthen the signal, while recovery above zero would confirm.

TSX 60 Index

* Target calculation: 800 – ( 900 – 800 ) = 700

Europe

Germany’s DAX found support at 10000. Recovery above 10500 would suggest a relieving rally, but only follow-through above the descending trendline and resistance at 11000 would confirm. Respect of the zero line by 13-week Twiggs Money Flow is a bullish sign; completion of a trough above zero would confirm long-term buying pressure.

DAX

The Footsie similarly found support at 6000. Recovery above 6300 would indicate a relieving rally. Penetration of the descending trendline would confirm.

FTSE 100

Asia

The Shanghai Composite Index continues to test (enforced) support at 3000. Recovery above 3500 is unlikely, but would indicate that the crisis has passed.

Dow Jones Shanghai Index

Hong Kong’s Hang Seng Index found support at 21000 and is likely to test the former primary support level at 23000. 13-Week Twiggs Money Flow below zero indicates long-term selling pressure, but recovery above zero would suggest a false signal. Breakout above 23000 and the descending trendline is unlikely, but would signal that the down-trend is over.

Hang Seng Index

Japan’s Nikkei 225 found support at 17500. Recovery above 19000 would signal a rally to test resistance at 21000. The gradual decline on 13-week Twiggs Money Flow suggests medium-term selling pressure rather than a primary (long-term) shift.

Nikkei 225 Index

* Target calculation: 19000 + ( 19000 – 17500 ) = 20500

India’s Sensex is headed for a test of the new resistance level at 26500. The primary trend is downward. Respect of the zero line by 13-week Twiggs Money Flow indicates medium-term buying pressure. Recovery above 26500 is unlikely, but would warn of abear trap. Respect of resistance remains more likely and would suggest another decline.

SENSEX

* Target calculation: 25000 – ( 26500 – 25000 ) = 23500

Australia

The ASX 200 continues to test primary support at 5000. 21-Day Twiggs Money Flow oscillating around zero indicates uncertainty. Breach of 5000 would confirm a primary down-trend. Recovery above 5300 is less likely, but would indicate a bear rally.

ASX 200

* Target calculation: 5000 – ( 5400 – 5000 ) = 4600

Just a word of caution. Relieving rallies can (and often do) fail. Probability of a continued primary up-trend will only improve once support levels have been tested. Early movers always face greater uncertainty. Which is why our long-term portfolios continue to hold high levels of cash.

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