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.

Could The Fed Trigger A Deflationary Slide In Stocks?


Policy Change Coming Next Week?

In Tuesday’s Wall Street Journal, a reporter with excellent contacts at the Fed, Jon Hilsenrath, penned the following:

Federal Reserve officials are seriously considering an important shift in tone at their policy meeting next week: dropping an assurance that short-term interest rates will stay near zero for a “considerable time” as they look more confidently toward rate increases around the middle of next year.

Is The Market Really Worried About Inflation?

As noted recently, inflation expectations are what ultimately determine interest rates. It is difficult to believe the market is expecting widespread price increases when crude oil (NYSEARCA:USO) is dropping like a stone. As shown in the chart below, oil has plummeted more than 40% over the past six months.

Bond Market Seems Unconcerned

Fixed-income investors can buy bonds with an inflation-protection component (NYSEARCA:TIP) or they can buy a standard bond (NYSEARCA:IEF). The chart below shows demand for inflation-protected bonds has been much weaker than demand for standard bonds, which does not look like a market concerned about a big spike in consumer prices looking out several years.

Investment Implications – The Weight Of The Evidence

While the Fed looks at many factors when considering a shift in interest rate policy, it is difficult to make the case that longer-term inflation expectations are becoming problematic. In fact, our friends across the pond are concerned about deflationary, rather than inflationary, forces. From Reuters/The Fiscal Times:

French core inflation turned negative in November, with the first drop in the indicator since records started in 1990 pointing to a growing risk of deflation in the euro zone’s second-largest economy.

During Wednesday’s big sell-off, we noted (see tweet) it was possible stocks would find their footing near support. During the early stages of Thursday’s trading day, buyers did step in at a logical level. The S&P 500 (NYSEARCA:SPY) chart below is an updated version of the one tweeted Wednesday. Before stocks can push higher, they must clear a short-term resistance hurdle near 2055.

The Million Dollar Question

The market will be looking to see if the Fed drops the phrase “considerable time” from their upcoming December 17 statement. Changing the language would increase the odds of an interest rate hike coming in the next six months, something that could spook the stock and bond markets.

The Reaction Is More Important Than The Statement

Rather than attempting to anticipate the market’s reaction to next week’s Fed statement, our approach will be to remain patient and wait to see the actions of market participants after the release of the Fed’s December 17 statement. If considerable time is dropped, will the market take the “this is bad news because rates will be moving higher” approach or “this is good news because the economy is gaining positive momentum” approach? Time will tell.

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