Market Commentary by James Dondero

Confirmation on the Breakout.

By James Dondero | February 26, 2015

  • Stocks remain strong, with indices such as the Value Line and Russell 2,000 Small Cap Index now confirming last week’s breakout in the S&P and NASDAQ. While volume has been on the light side and all could certainly pull back and test their breakouts, this strength may be bullish longer term.
  • Yields however, continued to battle at important areas of resistance on the charts. 2% to 2¼% on the 10-yr. US T-Note is an area investors have chosen to buy bonds in the past, and doing so again here could take money from stocks, and help the averages noted above test their breakouts.
  • Finally, the overseas markets remain mostly positive as well, with those in Europe, Japan and India the most bullish. This strength has finally spread to China, with the FXI (China Large-Cap 25 ETF) ‘breaking-out’ this week.

 

Risk-On for Equities!

By James Dondero | February 19, 2015

  • The big news this week is that US stocks have ‘broken out’ of their recent trading ranges to the upside. The consumer discretionary and technology sectors continue to lead the way higher, which is good news for the bulls.
  • Overseas markets continued to march higher as well, with the DAX also seeing an all-time high last week. While the tone is not quite as bullish in the emerging markets, they continue to show signs of improvement with China very near a breakout.
  • Finally, also moving higher last week were interest rates, with the yield on the 10-yr US Treasury back through 2%. This is also good news for stock market bulls, as proceeds from bond sales are clearly being used to purchase equities.

 

A Crowded US Dollar and a Possible Slowdown for the DAX.

By James Dondero | February 13, 2015

  • While a big winner the past several months, we continue to believe the US Dollar is a ‘crowded’ trade, and that further consolidation may be ahead for the greenback – as well as for crude oil.
  • Stocks again improved nicely this week, and while they have yet to break decisively out of their recent trading range, it is looking increasingly likely the bulls will win this tug-of-war. We base this on the strength in the technology and consumer discretionary sectors, which appear poised to lead the market higher.
  • Finally, while we continue to believe European sovereign debt purchases by the ECB will be bullish for the markets, we would caution investors that broad market indices such as the German DAX are unlikely to gain at their current pace (up 12%, YTD).

 

A Possible Upside Breakout for US Equities and Midstream MLPs.

By James Dondero | February 5, 2015

  • While we still believe that deflation is likely to be the dominant theme for 2015, the downtrend in crude oil appears to be reaching the point of exhaustion. We believe crude has found its low and is in the process of tracing out a v-shaped bottom. We also believe midstream MLPs may be poised for an upside breakout; learn more in our most recent white paper.
  • Interest rates also bounced this week but still remain within a larger downtrend as they converge toward similar yields in Germany, Japan, and other developed nations. High yield bonds outperformed treasuries on the week, a move which may help boost stocks going forward.
  • Of particular note in the US this week has been the strength in consumer discretionary stocks. This, coupled with similar outperformance in the mid-caps, suggests these sectors may be poised to lead the broader market averages higher.
  • Finally, the overseas markets remain mixed. The DAX continued to move higher as investors get more comfortable and enthusiastic about the intervention by the ECB. Meanwhile, emerging markets remain weak, with India still showing the most promise.

 

A Possible Opportunity in Oil as Yields Search for a Bottom.

By James Dondero | February 2, 2015

  • While we continue to see deflation as the dominant theme for 2015, we also see a short-term countertrend opportunity for crude oil which appears poised for at least a bounce, and potentially a longer term, v-type, bottom.
  • US bond yields continue to trend lower, as they ‘converge’ toward those overseas. Yields on the 30-year US Treasury have now broken their 2008 and 2012 lows, while yields on the 10-year Treasury appear headed for a test of the 1.40% area.
  • Stocks in the US again moved sideways last week, with the broad market averages remaining within their recent trading ranges. Those overseas however have been responding quite positively to the ECB’s decision to purchase sovereign bonds, with the DAX moving to new highs.
  • Finally, the picture within the emerging markets remains mixed, and we believe security selection within countries that have tailwinds remains critical. While we remain quite bullish on India, those with commodity based economies are likely to struggle in a deflationary environment.

 

30-Year Yields Break 2008 Support Levels and the DAX Continues its Upward Trend.

By James Dondero | January 23, 2015

  • While deflation and a strong US Dollar remain longer-term market trends, we continue to believe oil could be near a short term bounce.
  • Yields on the 30-year US Treasury have now broken their 2008 and 2012 lows, as yields in the US continue to converge with those around the globe.
  • US Equities continue to hold support and are finding encouragement from the DAX. This German Index surged 5% last week, and has been a good leading indicator for US markets the past few years. Additionally, we suspect the recent outperformance of small cap stocks over large caps may be coming to an end.
  • The general outlook overseas remains mixed with Russia and Brazil weak, while India and China remain strong.

 

Oil Searches for a Bottom, Utilities Offer a Possible Upside and Overseas Markets Test Key Support.

By James Dondero | January 9, 2015

  • While concerns around deflation continue to dominate market headlines, oil may finally be near a short term bottom, supporting our belief that an oversold bounce in commodities may occur in January.
  • Hard assets continue to look appealing with regard to deflation. Over the next few years, scarcity issues due to expected capacity changes in utility-based organizations like the Electric Reliability Council of Texas (ERCOT) could lead to a potential upside for companies like TXU and NRG.
  • Long term yields continue to stair-step lower and the ratio of high-yield/treasury bonds continues its downtrend. Rates in the US are still relatively favorable in comparison to those in other developed countries, supporting our bullish outlooks for both US bonds and the dollar.
  • Within the US stock market, it remains a mixed picture. While many of the broad market averages remain within their recent trading ranges, the Volatility Index (VIX) is clearly highlighting the increase in daily volatility — an environment which suggests to us that both bulls and bears have an opportunity to capture alpha.
  • Overseas markets continue to be the primary concern for the US. While those in Asia still retain a healthier outlook overall, last week did see significant weakness in countries such as Spain & Greece.

 

The Tape Remains Split, Commodities May Bounce and Overseas Markets Continue to be a Risk.

By James Dondero | January 5, 2015

  • Deflation remains the dominant theme for 2015 with the agricultural sector now joining crude, copper and precious metals in breaking support. That being said, commodities are quite oversold and may well see a short term bounce in January.
  • Long-term yields remain in downtrends and now appear to be breaking the panic lows which were set in October of 2014. The HYG/TLT ratio also resumed its downtrend last week, which suggests a bearish environment for risk assets.
  • The tape remains split in the US, with the bulls still unable to generate an overwhelming number of stocks making new highs. This has led to six occurrences of the Hindenburg Omen over the past several months; a potential cause for concern. The Hindenburg Omen measures simultaneous new highs/lows in a single market, when this occurs there is no consensus on market direction and a higher dispersion of returns between securities. If this persists it will result in a lower correlation between stocks and represents an environment in which good active management should outperform.
  • The overseas markets are nearing key support levels, such as 60 on the EFA. Overseas stocks have been weaker than those in the US, and potential contagion into the US remains the primary risk to domestic markets.

 

The views and opinions expressed are for informational purposes only and are subject to change at any time. This material is not a recommendation, offer or solicitation to buy or sell any securities or engage in any particular investment strategy and should not be considered specific legal, investment or tax advice. There is no guarantee that any of the forecasts will come to pass. Past performance is no guarantee of future results.

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