Daily Gains Letter

Three Ways to Combat a “Recovery” That Even the Fed Says

By for Daily Gains Letter |

Federal ReserveFederal Reserve Chair Janet Yellen confirmed what we’ve been espousing in these pages for the last couple of years—that the so-called recovery feels an awful lot like a recession for most Americans.

Addressing a crowd in Chicago, the head of the Federal Reserve said the U.S. jobs market is still underperforming and will continue to need the help of an artificially low interest rate environment “for some time.”

Investors were, as you can imagine, afraid the Federal Reserve was going to raise short-term rates. A rate hike would elevate borrowing costs and pull the rug out from under stock prices.

But instead, the Federal Reserve said it was committed to keeping interest rates low in an effort to stimulate borrowing, spending, and economic growth. The artificially low interest rate environment is a welcome sign for Wall Street—which essentially ended the first quarter of the year where it began.

By committing to keeping interest rates low, the Federal Reserve is ensuring a steady flow of money into the stock market…which cannot help but raise the already-bloated indices higher. The S&P 500 continues to trade near record-highs, as does the Dow Jones Industrial Average. Even the NASDAQ’s all-time high is, all things considered, within striking distance.

With the current bull market now in its fifth year—all is well in the U.S.A.! That is, if you’re one of the fortunate few to even realize we’re in a bull market. There are far too many weak underlying indicators to suggest we’re on a stable—let alone sustainable—economic footing.

For instance, the U.S. unemployment rate has improved from 10% in 2009 to 6.7% today. On the surface, that sounds really good; but it doesn’t sound quite as great when you consider the drop has more to do with an increase in low-wage-paying part-time jobs and the number of Americans who have given up ever finding a job.

The underemployment rate is still near an eye-watering 13% and the long-term unemployment rate is at 2.3%. What about wages? Stagnant. February housing data? All bad. Car sales are up—but so, too, are auto loans.

During a period when the Federal Reserve’s spending topped $4.0 trillion and the S&P 500 has rebounded almost 130%, virtually nothing has changed. In other words, the Federal Reserve has done nothing to help out Main Street. Wall Street, on the other hand…

What does all of this mean for the average investor? Thanks to the economic disconnect and soaring key stock indices, we’ve said that it’s better to trade the market than the economy. And that still stands. At the same time, there are a number of stocks that appear a little bloated.

Where should investors look? Stocks tend to stay close to their 40-week moving average—and when they go more than 10% higher or lower, they are prone to correct closer to the 40-week moving average (MA).

So, which stocks are trading above their 40-week MA and might be ripe for a short-term correction? The Dow Chemical Company (NYSE/DOW) is trading roughly 20% above its 40-week MA, while Walgreen Co. (NYSE/WAG) and CVS Caremark Corporation (NYSE/CVS) are both approximately 15% above their 40-week MAs.

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