The Fred Report - Weekly August 26, 2024

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Summary of Market View 

In Stocks, we discuss the possibility of a sharp pullback into late September/early October and give three ETFs to buy if that occurs. In Bonds, we look at the various duration Treasury ETFs we follow.

In Commodities, we look at three different broad-based Commodity ETFs. These are different, both in holdings and methods of construction. In a sign of changing times, only one has a K-1. In International, we look at the un-hedged ETFs we recommend. Last, in Chart of Interest, we show the quarterly chart of FXY. This suggests our idea that the Yen will stabilize in here, possibly for years.      

Stock Review (Back to top) 

We have looked at the indicators, and it still looks as if we could see a dip from this area, starting later in the week, that will lead to a buying opportunity in late September to early October. In other words, we have no changes to our forecast.

We will look at a couple of ETFs that are trading reasonably well, that we would look to buy if this pullback occurs. The first is SPGP (Invesco®S&P 500 GARP ETF). This has support from 100 (a gap) down to 95. Resistance is the 106-area. The daily stochastic is overbought. The weekly stochastic is slight sell pattern but should recycle if we get this pullback – we would buy that weekly recycle! Our next position would be VBR (Vanguard Small Cap Value ETF). Small Cap still has the best Accumulation and Small Cap Value looks better than all of the other Small Cap ETFs. Support is from 190 to 180 in layers. Resistance is the 200-area. The daily stochastic is overbought, and the weekly is also a sell pattern – we would buy a weekly recycle here as well. Small cap could have a strong rally into yearend. The last ETF we would look at is XLV (SPDR® Select Sector Healthcare ETF) for several reasons that are interesting. The chart reason is that this is a breakout of a long high-level consolidation. We have had a target of 160 by yearend and this is easily doable from here. The other, perhaps more interesting reason is that Healthcare often does poorly in election years, and if we get the pullback I envision, the uncertainty around Healthcare is likely over. This is one of the best long-term Sector charts, and it is not overextended – in fact it is just getting going!

The next two weeks should be interesting for the market. We have advised selling some trading positions and have eliminated two stocks with long-term gains in the Sector Review. For those who have sold trading positions, we have suggested holding onto the cash. If we do see some pullback here, we will redeploy that cash on a good buy signal in September/October. We show charts, below.

Fixed Income Review (Back to top)  

Today, we will look at three Treasury Bond ETFs representing our interest rate indexes: IEI (ishare®Barclays 3 - 7 Year Treasury Bond), IEF (ishare®Barclays 7 - 10 Year Treasury Bond), and TLT (iShare®Barclays 20 Year Treasury Bond). These are all interesting in light of the recent pronouncements by the Federal Reserve. The announcement has affected short-term rates, which the government can somewhat control, but has had less effect on longer rates that are more market sensitive.

IEI has been moving out of the consolidation for a while and is currently challenging resistance in the 120-area. This should hold for a while. Support is now the 115-area. The daily stochastic is in slight sell mode, and the weekly is overbought and not yet a sell pattern. IEF is a similar but weaker chart. It is close to resistance in the 100-area but not yet testing it. Support is the 95-area. The stochastic pattern is the same (but again, weaker) as IEI. TLT is weaker still, with resistance at 100 that is close to being tested. Support is in layers from 95 to 93. The stochastic pattern is similar to the other two, but it IS weaker. The daily is in slight sell mode and the weekly is a new sell recycle.

In various venues we have mentioned that we believed the fundamentals suggested that these ETFs should be stronger than they have been. While these charts are not terrible. How they trade over the next couple of weeks will be interesting, to say the least. Our forecast continues to be a drop in rates into the end of 2024, then potential problems in 2025. We show daily and weekly charts, below.  

Commodity Review  (Back to top) 

Today we will look at some of the broad-based commodity ETFs. We always talk about our favorite – DBC – but there are some others that we look at from time to time. We also look at FTGC (First Trust Global Tactical Commodity Strategy Fund), and GSG (iShares® S&P GSCI Commodity Index Trust ETF). We will look at the charts and discuss what makes these different. First, though, we comment on PDBC. This is created from the same index as DBC but issues a 1099 instead of a K-1. We study DBC because the lack of dramatic profit distributions makes the chart cleaner. You can trade PDBC based on our analysis of DBC. We note that DBC has outperformed the Pimco Commodity Index over the last few years. PDBC is the most liquid of these, with the highest average daily volume. Now, let’s look at these.

DBC has been building a base that looks like a high-level consolidation, since the middle of 2022. On the monthly chart this looks like a high-level consolidation. Support is from 22 to 20, and resistance is 23.50 to 25. The daily stochastic is overbought, as is the monthly. The weekly is in sell mode and coming down. So, a sharp advance here would likely be met by some decline into yearend. One short-term concern with DBC is the index has a high weighting in petroleum products – the top three are oil related, the fourth is gold. FTGC is the same basic chart, but the holdings are a bit different. The top four are gold, copper, oil, and coffee. However, this fund is tactical and not based on an index. Because of this, the fee is higher, at 1.02% vs. .59% on PDBC. FTGC has support from 23.50 to 20 and resistance is from 25 to 27.50. The stochastic pattern is a bit weaker than DBC, with the daily stochastic in buy mode and showing slowing momentum, and the weekly is a new buy recycle. The monthly is in sell mode. How do we interpret this? Well, the weekly buy recycle on FTGC suggests the commodities have room to advance, but DBC has higher relative strength. GSG follows an index that is much more neutral to energy than PDBC, with long dated futures contracts. Frankly, the weighting scheme is obscure, with the fact sheet suggesting each holding is weighted by “reference to world production statistics”. The chart is a consolidation like the other two, but a bit weaker. Support is the 20-area, and resistance is 22 to 25 in layers. The daily stochastic is in sell mode, and the weekly in buy mode. This issues a K-1. To conclude, we show three ETFs, with different weighting schemes and varied performance. They are ranked in our order of preference. We would not use GSG under most circumstances. We show charts, below.

International Review  (Back to top) 

Today we will look at Japan’s un-hedged ETFs, as we believe they should outperform the dollar-hedged units over the next few years. We believe this for two reasons. The first is that we have seen DXJ perform a bit better relative to EWJ, than the trading in the dollar would suggest. The second is that technically the Yen looks to be starting a basing pattern that could last for several years. See the quarterly chart of FXY in “Chart of Interest” for a discussion of this.

There are two of these that we use: EWJ and SCJ. EWJ is the big cap unit we are recommending instead of DXJ. This has started to trade well. Intermediate support is from 65 to 60, and resistance is in the 70 to 72-area, now being fully tested. Because this is so strong, it is natural that stochastics will be also. The weekly stochastic is a bit indecisive but still a positive pattern. Obviously, the daily is quite overbought. SCJ has been our favorite Japanese speculation. We say “speculation” because it is Japanese small caps, and it does substantially less volume than EWJ (8 million vs. 80 thousand). SCJ has resistance in the 80-area that is close to being fully tested. The daily stochastic is overbought, and the weekly is still in buy mode and not overbought. Short-term support is now 75, with intermediate support around 64 to 60.

DXJ should still hold up well in here, and we would not sell positions, at least until they go long-term. We are suggesting new money should go into the un-hedged units. Several advisors have already been using a combination of DXJ and SCJ for two reasons. These are to gain speculative “bang for the buck”, as well as a way to diversify the currency risk/reward. Japan is the only developed market to enter a secular bull market in many years, and all of these have room to run. We show charts of EWJ and SCJ, below. 

Weekly Chart of Interest  (Back to top) 

We show a quarterly chart of FXY. You can see that this is the second big decline since 2011. The interesting thing about these two declines is that they are both approximately 41% from high to low. After the first decline, there was a period of consolidation that lasted around six years. Our thesis is another of these consolidations is beginning, and if this is the case the un-hedged Japanese ETFs mentioned elsewhere in this report should start to outperform.

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