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.

S&P 500: This Chart May Hold Key To Stock Rally’s Fate

Fed’s About Face Helped Kick Off Reflation Trade

The Federal Reserve’s rapid reversal on interest rates in the first few weeks of 2016 helped launch the reflation trade. The reflation trade is also known as the weak-dollar trade; both refer to leadership from assets that tend to perform well during periods of rising inflation expectations and/or a weakening U.S. dollar. Reflation is also used to categorize the early stages of economic improvement after a period of weakness or contraction.

Another False Dawn Or Sustainable Leadership?

While there is no question weak-dollar assets have responded to the Fed over the past few months, the jury is still out on the question of sustainability. The chart below shows the performance of materials (XLB) relative to the S&P 500 (SPY). Notice how similar periods of leadership ended in disappointment (red arrows below). The reflation trade has worked its way back to a similar area (orange arrow).

Weak-Dollar Trade And The S&P 500

With valuations stretched and earnings falling into the tepid category, markets have been focusing on theliquidity supplied by central banks. The chart below shows the same XLB vs. SPY ratio, but this time from a zoomed-in perspective. Notice how the performance of the S&P 500 has mirrored the fate of the weak-dollar trade.

We Learn Something Either Way

Have there been reflation/weak-dollar trade head fakes in the recent past? Yes, a March 18, 2015 headline proclaimed “Avoid utilities as reflation trade picks up steam”. The chart below shows the 2015 rally in materials relative to the March 18 reflation headline.

The present day look of the XLB:SPY chart aligns with the “possible inflection point” theme we have been covering in recent weeks.

Fed Statement June 15

While the financial markets remain skeptical of the Fed taking action on rates in June, guidance provided in the statement may assist markets in assessing the odds of the next hike coming in July. If the Fed helped spark the current rally in risk assets, common sense tells us they will play a role in either helping extend the rally or bringing it to an abrupt end. All things being equal, stock bulls prefer to see the XLB:SPY ratio break to the upside. Stock market bears are hoping for another false reflation dawn.

 

SPY, SPX, QQQ, IWM, VIXY, SQQQ