Signals and detection are keys in life to anticipate future events. Traffic lights are a simplified system to help efficiently control the flow of cars on streets going in every direction. The beauty is its simplicity. Red means STOP and green means GO. The yellow light is the tricky one because it tells you to proceed with caution, because the red light comes quickly after. It would be nice if everyone on the road actually used their blinkers to alert others of their intensions, but that seems to be too difficult. It’s always critical to be aware of your surroundings while behind the wheel.
Unfortunately, decision making in life doesn’t always come with the clear green and red lights. We live in a yellow colored world where we generally have to proceed with caution in everything we do. That’s the case in the business world as well as in our personal lives. Various signals are used to anticipate weather changes, crime prevention and even find out where the fish are biting. Pitchers and catchers use them all game. Radar (Radio detection and ranging) was a revolutionary system utilized in World War II. It was key to identify activity both on land and at sea. We humans have an innate internal radar called instinct and judgment. People make decisions all day everyday based on various signals. It can be costly when signals get crossed.
We pay attention to many signals every day when navigating the stock and bond markets. Earnings, the price of oil, the Fed and the value of the Dollar are all key ingredients to global markets, and we pay very close attention to signals which suggest which direction they’re moving. A Strong Dollar tends to drive earnings and oil prices lower. Conversely, a weakening Dollar has the opposite effect. So far, earnings are coming in generally as expected, but company outlooks are more cautious. The Dollar has been on the weak side for much of 2016, which has been a boost to earnings and the price of oil. Stocks have moved higher in response. In fact, not only have the losses been erased for the DOW and S&P in 2016, but the gains have taken stocks back to their all-time highs in a very short period of time.
The overall trend has been undeniably higher, but we still remain in a pretty defined trading range between 1800 and 2100 on the S&P and 16K and 18K on the DOW. The high end of the range is proving to be resistance. It’s been a stellar run from the lows. We are constantly looking for signs for the next moves, both short-term and long-term. In our work, the Dollar has great influence. Oil does too. The Fed has been a driver in both of them. Stocks have moved. We’ve been taking some profits off the rally, banking gains and writing calls to take advantage of the strength. We have more calls in place now than perhaps ever. Leadership has narrowed quite a bit again. The Tech heavy NASDAQ has been underperforming. The key is to anticipate, act and then react. The investment superhighway is full of traffic lights. We are in yellow light mode right now. We are ready for a red light and are confident it will then turn green again. We are still Bullish on 2016, but are proceeding with caution.
Have a nice weekend. We’ll be back, dark and early on Monday.