9/6/2015 Out of the Fed's Hands

Sector Model	XLE	-0.41%
Full Model	Date	Return	Days
PWR	3/9/2015	-16.38%	180
CBI	4/2/2015	-9.85%	156
MTZ	4/9/2015	-14.29%	149
DRQ	5/15/2015	-13.15%	113
RES	5/19/2015	-26.93%	109
INT	7/7/2015	-21.01%	60
BT	8/11/2015	-11.02%	25
TM	8/12/2015	-9.70%	24
JCOM	8/28/2015	-3.31%	8
MMP	9/4/2015	-1.37%	1
(Since 5/31/2011)
S&P	Annualized	8.71%
Sector Model	Annualized	17.73%
Full Model	Annualized	12.12%
S&P	Total	42.82%
Sector Model	Total	100.62%
Full Model	Total	62.91%
Sector Model	Advantage	9.01%
Full Model	Advantage	3.41%
	Previous	2015
S&P	53.06%	-6.69%
Sector Model	142.84%	-17.39%
Full Model	101.13%	-19.00%

The market continues to progress through a bearish sector rotation:

 There isn’t much to be done other than to ride it out.  The sector model’s XLE position is as volatile as any sector position I’ve held.

The role of China is not a simple matter of directly related markets. Our relationship with them is not meaningful as a trade partner, since only 1% of our GDP is exported to China.  The entire country could disappear with no direct effect on our exports.

Instead, China influences our market because they need to sell our bonds, which threatens interest rates here. Schiff calls this Quantitative Tightening, “QE’s evil twin.”

Demographically this reversal of monetary easing is premature, as I’ve noted.

If Schiff is correct, this is out of the Fed’s hands.  If they don’t enact another round of easing, the foreign selling of American treasuries will have a tightening effect on its own.

And all this would overcome what I have written earlier about the market not being over-valued when divided by M1.  A contraction of M1 would require a proportional contraction of the S&P, just as QE led to the expansion of the S&P.

Just when you think you have the Fed figured out, reality takes its place…

Tim