Chris Ciovacco

About the Author Chris Ciovacco

Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. The thoroughly researched and backtested CCM Market Model answers these important questions: (1) How much should we allocate to risk assets?, (2) How much should we allocate to conservative assets?, (3) What are the most attractive risk assets?, and (4) What are the most attractive conservative assets? Chris is an expert in identifying the best ETFs from a wide variety of asset classes, including stocks, bonds, commodities, and precious metals. The CCM Market Model compares over 130 different ETFs to identify the most attractive risk-reward opportunities. Chris graduated summa cum laude from The Georgia Institute of Technology with a co-operative degree in Industrial and Systems Engineering. Prior to founding Ciovacco Capital Management in 1999, Mr. Ciovacco worked as a Financial Advisor for Morgan Stanley in Atlanta for five years earning a strong reputation for his independent research and high integrity. While at Georgia Tech, he gained valuable experience working as a co-op for IBM (1985-1990). During his time with Morgan Stanley, Chris received extensive training which included extended stays in NYC at the World Trade Center. His areas of expertise include technical analysis and market model development. CCM’s popular weekly technical analysis videos on YouTube have been viewed over 700,000 times. Chris’ years of experience and research led to the creation of the thoroughly backtested CCM Market Model, which serves as the foundation for the management of separate accounts for individuals and businesses.

Market Scenarios: Winners And Losers

Durables Miss In Big Way

The slow growth/low inflation story gained additional traction Tuesday when durable goods orders came in well below expectations. From The Wall Street Journal:

U.S. businesses broadly cut capital spending in the final months of 2014, raising red flags about the economy’s ability to sustain momentum amid troubles around the globe. Orders for durable goods-products like cars and kitchen appliances designed to last at least three years-fell 3.4% in December from a month earlier, the Commerce Department said Tuesday. Orders have fallen four of the past five months.

Bonds Win In Two Of Three Scenarios

From an investment perspective, there are three major scenarios likely facing investors. Scenario one is an ongoing period of slow growth and low inflation, which can be favorable for both stocks and bonds. Scenario two, slower growth, has gained some momentum with the recent trends in earnings and economic data. Scenario three involves a stronger economy and a shift toward higher inflation. You can see a larger and economically-broader version of the flow diagram below via this link.

The least likely outcome in the short run appears to be scenario three (stronger economy). Given the stock market has not broken down in a meaningful way yet, it seems reasonable to assign the highest probability to scenario one, which is more of the same (slow growth and low inflation). The broader market’s failure to make a new high over the last seven months tells us scenario two (slower growth/recession) is creeping higher on the probability ladder. The video below puts some additional fundamental and historical context around the three scenarios.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

 

Strong Dollar Hits Earnings

The fundamental backdrop includes increasing fear of deflation, which has helped increase demand for the world’s reserve currency, the U.S. dollar (NYSEARCA:UUP). A strong dollar has some negative consequences for U.S. corporations. From Bloomberg:

The dollar’s surge is reducing earnings at American companies from Procter & Gamble Co. (NYSE:PG) to Pfizer Inc. (NYSE:PFE) and DuPont Co. that make a large portion of their revenue abroad. P&G, the world’s biggest consumer-products maker, today reported profit that missed analysts’ estimates in the quarter ended Dec. 31 after what Chief Executive Officer A.G. Lafley called “unprecedented” foreign-exchange rate fluctuations reduced sales by 5 percentage points. DuPont and drugmakers Pfizer and Bristol-Myers Squibb Co. (NYSE:BMY) all posted annual forecasts that trailed predictions, in part because of the dollar.

Investment Implications – The Weight Of The Evidence

In two of the three scenarios described above, bonds can perform well. Consequently, we have been slowly been ratcheting up our fixed income (NYSEARCA:TLT) exposure in recent weeks. Until the broad stock market breaks down, we can afford to remain patient with our equity-based ETFs (NYSEARCA:SPY).

Wednesday brings the latest from our friends on the Federal Reserve’s Open Market Committee. If we are willing to pay attention with a flexible and open mind, the market will guide us in the coming days and weeks.