Monday’s markets: Investors’ Adventures in Wonderland

Alice and caterpillar.
Alice confronts a caterpillar smoking something funny, a little like today's traders. (Public domain, Sir John Tenniel, image from "Alice's Adventures in Wonderland" by Lewis Carroll)

WASHINGTON, March 23, 2015 – Relatively short, relatively pithy comments today, on a Monday that appears to be experiencing a modified, limited hangout version of irrational exuberance.

As we learned last week, interest rates aren’t going up until they do. The dollar is going up against the euro until it isn’t. Oil prices are going down forever until they go up. And nothing is as it seems.

Recent market action feels like Alice must have felt when she encountered that famous mushroom-sitting, hookah-smoking caterpillar. “Whooo … are … you?” the caterpillar famously asked. The average small trader today would have to answer, “I … don’t … know…”

This market just seems to get curiouser and curiouser. We have gotten to the point of wondering just what Wall Street’s caterpillars are smoking. We’d like some of that stuff ourselves. Maybe it would help us forget just how massively irrational everything has become in the financial world today.

Real estate is tepid. So REITs, having corrected a bit earlier this year, are going back up. Oil, for sure, was going to dive below $40 per barrel for West Texas Intermediate (WTI) within hours, absolutely for sure. Except that between last Thursday and today, WTI has snapped back from the $43 zone to slightly over $47. Interest rates, of course, would be going up to, oh, 6 percent, maybe higher, in June. Now they’re not going anywhere anytime soon. More or less. We think.

All this backing and filling is great for the high-frequency traders (HFTs) who love stocks to whipsaw anywhere from a couple of cents to maybe a buck a day, aided and abetted by hundreds of thousands of phony orders they drop into the system and then cancel, the better to move things their way and sucker punch the little guy.

But what’s really going on here? We think we know, and it’s all like our other metaphor about pick-up sticks. In a messy pile of freshly thrown pick-up sticks, you have to pull each stick out carefully to avoid moving the pile, a trick that eventually become nearly impossible.

Our messy pile of sticks involves symbiotic business, currency and resource action not just in the U.S. but also around the world.

Specifically, the Fed decided to put a hold on the interest rate increases they really, really want to start because the dollar vs. euro move had become incredibly distorted.

With the Europeans finally starting some relatively tepid QE stimulus about four years after they should have launched it, and the U.S. Federal Reserve threatening more and more obviously that they’d likely drop their “patience” in order to increase interest rates soon, the euro-dollar balance shifted with incredible rapidity.

The euro has dropped, in less than a year, from a high point, where it took approximately $1.40 to buy one euro, to a low point last week where, briefly, it took less than $1.05 to make the same swap. That’s a huge move in a fairly short period of time.

Not only did this rapid decline threaten to continue, taking the euro below par ($1) vs. the dollar. The strong dollar had also begun to pressure domestic oil prices lower and lower and lower, due to the fact that the dollar was so strong. Lost on the public, and perhaps the Saudis as well, was the simple fact that an appreciating dollar could purchase more oil at lower dollar-denominated prices, meaning that oil prices could drop further and faster than might be healthy for anyone.

In addition, the rampagingly bullish dollar was starting to actually suck a considerable amount of cash out of the Eurozone precisely when the battered economies over there needed cash to start rebuilding their economies. With the promise of potentially much higher interest rates over here, why should European investors dump their money in a system where they essentially had to pay the banks to hold their money, given effective below-zero interest rates on that continent?

It was all too much too fast. We think it likely that, after a few frantic transatlantic phone calls and soulful conversations between banking officials and troubled oligarchs, the Fed decided to pull back, the better to stabilize both the dollar and oil prices in a somewhat higher range than they were heading. But, of course, nobody told us that. Which is why the Maven is telling you now.

So, a confused Wall Street is mostly up today, at least in terms of American stocks. Healthcare still seems to be in a short corrective mode. Consumer durables and utilities are confused. Retail stocks remain fairly strong, even as the pundits swear no one is buying anything. And even copper, long a bellweather for business optimism (until recently) is finally showing some genuine signs of life, indicating that maybe those building trade and real estate stocks (like REITs) aren’t behaving so irrationally at all.

Where this goes, nobody knows, but this is what’s likely going on under the hood of this market. Until things change again.

Today’s trading tips

We finally hit our stop and exited our lovely hedged European stock ETF, HEDJ, for a 12+ percent profit, the best we’ve had for several weeks during which losses were far easier to book than gains.

We have moved into a small position in the copper ETF (JJC), hopefully to catch what seems to be a long-awaited up-trend over there. We are watching our reduced positions in downstream energy plays Calumet (CLMT) and Kinder Morgan (KMI) recover nicely, at least today, and are also observing that several bond-like ETFs that we hold like PFF (preferred stock holdings) and several individual preferred stocks are starting to sneak back up now that the interest rate increase threat is off the table. At least through May 1, as we were told by Janet Yellen last week.

Since we can trade them without a commission at Schwab, we’re also sneaking back into positions in the equal-weight S&P 500 ETF, symbol RSP, as well as Schwab’s own small-cap stock ETF, SCHA, given that small caps tend to do better than large cap stocks in an environment like this one, where the little guys are not quite as subject to currency wars as those big multi-nationals.

In addition, we’re jumping back in, little by little, to an ETF that follows a broader list of dividend paying “dogs” than the Dogs of the Dow, those Dow stocks that pay the highest dividends. This broader ETF is labeled SDOG, appropriately enough. Similarly, we’re trying a second equal-weight S&P ETF labeled SPLV, one we made money in earlier this year.

We are in far more ETFs than actual stocks right now, given that market groups continue to move en masse, making it harder to beat them with individual stock purchases. That could change, but it hasn’t yet.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17