@theMarket: Pay Attention to Diverging Markets

It was a turbulent week for U.S. stocks as the strong dollar and worries over possible rising interest rates spooked investors. But not all markets followed our lead. This divergence could be the beginning of a trend that could benefit your portfolio.

Normally, the American stock market is the big dog that wags the tail in international markets. When U.S. averages decline, foreign markets fall with them and vice versa. "De-coupling" occurs when the opposite happens like it did this week.

While U.S. stocks declined, both the Chinese and Japanese stock markets gained. Other Asian markets also did well, especially South Korea, which cut a key interest rate this week. So far in 2015, Japan is a clear winner, gaining 8.4 percent year-to-date, while China has trailed with only a 3.5 percent gain. However, those gains look good compared to the S&P 500 Index, which is flat for the year.

Europe, thanks to the launch of their own quantitative stimulus program, is up 15 percent so far this year but in all these cases appearances can be deceiving. If an American investor had purchased either European or Japanese shares without hedging the currency, those gains would have been much less. In the case of Europe, where the Euro has declined by 13 percent, the U.S. investors' gain is about 2 percent, still better than the U.S., but not by much.

Recently, many equity strategists are coming around to my point of view. As most readers know, I've been bullish on Japan since June, 2011, when the Nikkei was trading around 8,900, compared to over 19,000 today. Readers also know that I have reiterated my positive stand on China, Japan and Europe several times over the last year and with good reason.

The worldwide trend by central banks to lower interest rates and stimulate their slow-growing economies is having a predictable positive effect on many foreign stock markets (as it did in the U.S. over the last five years). In contrast, our own Federal Reserve Bank has wound down our stimulus program and is preparing to raise interest rates now that the country is growing again. That has triggered a rise in the dollar and demand for U.S. Treasury bonds.

All of this sounds good and it is over the long-term, but short-term it causes problems here at home. Most large U.S. companies depend on foreign markets for a healthy share of their profits. The 23 percent rise in the dollar against a basket of currencies since last June has hurt profits considerably. So much so that analysts are predicting that 2015 could be the worst year for corporate profits since 2009 (when earnings fell 5.5 percent).

I am not expecting that sort of shortfall, but first quarter 2015 profits could decline by over 2 percent and the second quarter should be down as well. And adding to the export woes, the decline in oil prices is also having a negative impact on corporations in the energy sector.

Given this wall of worry, is it any wonder that our stock market should be trapped in a trading range? So far this year we have vacillated in a range of -3 percent to 3 percent and I expect that to continue until we have more clarity on all of the above concerns. Does this mean I've turned cautious on the U.S. market?

Not at all; American corporations have coped and even prospered in a strengthening dollar environment in the past. The stock market has also done quite well when interest rates have risen throughout our history, as long as rates do not rise too much. Lower energy prices have also turned out to be a great boon for economies worldwide. All that is required is a little patience while we wait for our economy to adjust to these conditions. And as we wait, a little money in certain foreign markets is not such a bad idea.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Home on the Range

New highs followed by some selling, then a little back and fill, before climbing to yet another new high. That's the environment we are in and it happens to be a great recipe for making money in the stock market.

The last few days are a great example of what I'm talking about. Last Friday, the Nasdaq finally breached the 5,000 level. Now there was nothing magical about that number. It's round and the media decided to use it as some sort of goal post for the technology index. As I predicted in recent columns, the Nasdaq scored that touchdown and then this week, promptly fell back 40-plus points. The other averages sold off in sympathy and here we sit in yet another trading range.

The media needs to manufacture a reason why markets move and sometimes those reasons can be full of contradictions. Friday's non-farm payroll data is a case in point. The employment gains surprised investors. The cold snap in the Northeast had many economists looking for weaker job growth. U.S. payrolls actually came in much higher at 295,000, versus a mean estimate of 235,000 jobs. One data point does not a trend make, but if you look at the three-month average of 288,000 job gains/month, the employment data is clearly rising.

That puts the unemployment rate at 5.5 percent, down from 5.7 percent, even though the month to month rise in wages is still fairly anemic. Nonetheless, those are good numbers and combined with the continued low price of energy, should convince most investors that this economy is doing just fine. Why, therefore, did the stock market sell off?

We are in one of those periods where traders have decided that good news is actually bad news. Stronger job growth, to them, means the Fed is going to raise rates sooner than later. Duh, hasn't the Fed already notified us that they plan to raise short-term rates sometime in mid-year? Whether that happens in June or September is immaterial, but traders insist on trading every data point as if it is meaningful. Don't you fall for it.

The point to focus on is that all of this trading to and fro is simply noise. Understand that we are now in a new trading range on the S&P 500 Index, somewhere between 2,085 and 2,115. And like previous trading ranges, this one represents a higher low and a higher high from the previous range. If you look back through the last 12 months, time and again, you could identify the same type of trading behavior. The moral of this story is that as long as the markets continue to exhibit this kind of behavior we are all in Fat City.

How long before the next move higher? I wish I knew. Sometimes trading ranges are short-lived, a week or two. At other times, they can last for months. After all, stocks go sideways better than 60 percent of the time, so patience is a real virtue when it comes to investing. Historically, March and April are up months in the stock market. Odds are this year will be no different. What you need to understand is that in this kind of stair-step market, you simply hunker down and wait for your rewards.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@The Market: Full Steam Ahead

The major averages made all-time highs again this week, except the Nasdaq. It is just a matter of time before that tech-heavy index joins the party. But what happens after that?

The short answer is that we go higher, maybe not right away, but soon. January, you may recall, was a down month, which was similar to last year. This month saw a recovery followed by higher highs just like last year. If the trend versus last year continues, we should see further gains in March, possibly fueled by more demand from overseas investors.

Given that the United States is the only game in town for bond buyers, if off-shore investors want yield and safety, we should expect to see a continuation of demand for our bonds. That should keep interest rates low and stock prices up. If so, we should expect to see a broadening out of stock market participation, which is usually a bullish indicator.

I've noticed that while the S&P 500 Index, the Dow Industrial and Transport averages, the Russell 2000, the Nasdaq 100 and the Mid-cap  S&P 400 are all above the 2007 highs, one of the largest indexes around has lagged the party. I'm talking about the NYSE Composite Index of 2000 listed stocks, including REITs and ADRs (American Depositary Receipt) of foreign companies. This is a big index and about 25 percent of those stocks represent foreign companies.

It appears to me that the NYSE Composite is getting ready to play catch-up with the other averages. Although I am not sure, one reason this index may be lagging is due to the underperformance of the foreign components of the index. However, thanks to central bank quantitative easing in both Europe and Asia, a number of foreign stock markets are starting to participate in the U.S. rally.

In fact, so far this year some foreign markets, such as Japan and parts of Europe, have outperformed our own stock market. This could continue as the impact of monetary stimulus begins to take hold within their economies. That could set us up here at home for even further stock market gains in a virtuous circle.

Does that mean that it will be smooth sailing from now on? Not likely. Although I am confident that the Nasdaq will break its old Dot.com high of 2000, investors should then expect a bout of profit-taking. If we look at the short-term conditions of the market, I would say that almost all the averages are over bought and are due for a pullback, but that's exactly what we long-term investors want to see.

Two steps forward and one step back is a concept that my longtime readers are familiar with. In bull markets, like most of life, there are good times, followed by a little disappointment, and then more good times. That is the kind of stair-step market that I believe we are enjoying right now. There will be plenty of reasons for why the markets are too high and should be sold — slow growth, lower earnings, fear of higher interest rates, etc. — but these will be sorted out and stocks will climb higher after some profit-taking.

In my mind, the party isn't over until the fat lady sings and nobody I see is even overweight. For those of you who want a bit more beta in your portfolio, you might want to add some overseas investments, but remember risk and reward. You will be betting that despite poorer economic fundamentals, overseas markets will play catchup with our own stock market. If you are wrong, what gains you might make here could be lowered or even erased by losses overseas. As always, it is your choice.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: A Race to the Bottom

Faced with slowing economies and sluggish employment, more and more countries throughout the world are devaluing their currencies, slashing interest rates and stimulating growth wherever they can. That should be a recipe for further global growth in the years to come.

These days wherever you look — China, Canada, Denmark, Sweden — central banks are announcing surprise interest rate cuts on a weekly basis. Last month's announcement by the ECB of their own additional quantitative easing efforts evidently triggered a rush of responses by other banks across the world.  So far this year 26 out of 34 major central banks are establishing or maintaining monetary easing policies.

This has had the effect of lowering the exchange rate of their currencies, which will, over time, allow their exports to grow and thus their economies. In a sense, this amounts to a price war, where those who can sell their goods at the lowest price (exchange rate) benefit the most. In times past, this kind of action would elicit howls of protests from organizations such as the G-20 group of nations. However, this time around, in their last meeting two weeks ago, the membership actually condoned this global trend.

"But isn't all this money printing inflationary?" one client asked.

Actually, under different circumstances it would be, but right now, most nations, including our own, have the opposite problem. The central bankers are worried about deflation today as economies stumble toward recession and the price of commodities and other products decline further.

Clearly, there is a lot of uncertainty in the world. Investors are skeptical that all this stimulus will have the desired effect. Yet, look at what happened in this country. Despite a gaggle of naysayers, after four years of QE stimulus, our economy is growing at a 2.8-3.0 percent clip and unemployment is gaining. If it worked here, it will work overseas, in my opinion.

Notice what is happening to the stock market, despite this wall of worry. The averages are making new highs. NASDAQ reached its highest closing level since the dot-com boom and bust of 15 years ago. Only this time, these gains are backed up by solid earnings and a strong future outlook.

The participation within the market is broadening as well, which is always a sign of strength. The market's advance is becoming less dependent on megacap stocks (last year's favorites) and leadership is becoming more democratic. Usually, this indicates the likelihood of longevity, or market staying power.

In a stock market like this, one actually hopes for pullbacks. What you want to see is a gain followed by a pullback that makes a higher low, and then a higher high. There are plenty of triggers in the world for these kind of movements — Greece, ISIS, oil prices, the Ukraine. Don't let any potential sell-off spook you. Stay the course.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: The Labor Market Is on Fire

Non-farm payroll employment increased by 257,000 jobs in January and the gains for the preceding two months were revised upward as well. Even better news was hourly wages that jumped 0.5 percent in January to $24.75 after declining in December. That's the biggest gain in six years and bodes well for the economy overall.

Wall Street has been debating just how fast or slow the U.S. economy is growing for months now. The faster the growth, the more likely the Fed will raise interest rates. Why is this so important?

One school of thought says interest rate hikes are "bad" for the stock market. In times past, when rates rose the stock market has sold off, sometimes a lot, other times not so much. Since June is supposedly the target date for a rate hike, and markets usually discount such events by six months or more, we are in ground zero -- if you believe in this scenario.

Weighing in on the other side of this argument are those who believe the Fed won't raise rates for a variety of reasons. Number one, the U.S. economy is not as strong as many think it is (thus the debate over every data point). Even if growth in America does grow a bit more, it won't be enough to pull the rest of the world out of the doldrums. As proof, they point to the decline in oil prices.

In slow or potential recessionary economic climates, the demand for oil dries up as fewer goods and services are demanded. Most often the decline in the price of oil almost always heralds a slowing of the economy, not only here, but worldwide. In that kind of environment, the Fed would be crazy to hike rates. Some say they should actually restart the QE program before it is too late. No wonder the markets are as volatile as they are given these diametrically opposing views.

Which view is accurate, or are they both wrong? Clearly, the energy issue may have much more to do with the explosion of new energy sources brought on by breakthroughs in technology over the last decade. Weakening energy demand may not be the case at all. It may simply be that this new supply has overwhelmed demand in the short term and price declines are the adjustment vehicle to once again bring the oil market into equilibrium.

There is no question economic growth is slowing around the world, however, various governments are doing their utmost to stimulate their economies as the U.S. has done over the past several years. Their efforts should bear fruit if we use our own QE programs as a guide.

One might wonder that the fear of the unknown, of change, may be at the bottom of these issues. We have been in a low to non-existent interest rate environment for so long in this country that even a small uptick in rates makes us uncomfortable. All you need to do is look back in history prior to the financial crisis to understand that rising interest rates in a growing economy has actually been a good thing for stocks.

In any case, the markets this week have actually turned positive for the year. The oil price was the trigger for three straight days of one percent or more in gains. Unfortunately that means that oil is still the tail that is wagging this dog. I have no idea whether we actually have seen the "bottom" in oil prices, but if we have then we can expect markets to continue higher from here.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.