Down Every Day Last Week

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update will be posted on Thursday 4/25.

Economy:

Retail sales for March rose .7%.  Existing home sales for March were 4.2 million units annualized, down from 4.4 million last month.  That looks poor considering we have entered the spring selling season.  High home prices, limited supply and high interest rates make the market tough for those who can’t pay cash.  The leading economic indicators (LEI) for March were -.3% after last month’s +.2% broke the year long trend of negative readings, so its back to negative.

Mixed data this week, call it a push (a push in betting is a tie, nobody wins, nobody loses).

Geo-Political:

The topic of the week was the clash between Israel and Iran.  Iran fired 300 missiles at Israel last weekend which Israel, the US and Jordan shot down, and Israel struck back in a limited way at a military base in Iran.  The stock market priced in a geo-political risk event, and we hope it does not go farther.  We’ll see.

A friend asked me a couple of weeks ago, what was wrong with a particular company whose stock was so high in 2021 and it has come down so low today?  2021 was a “cash infusion cycle” bull market high, when both Trump and Biden had been pumping trillions of dollars into the economy like drunken sailors.  Stock prices had boomed to obscene valuations on a PE basis.  That had to be corrected and it was by the 2022 bear market.  I told my friend, there was nothing wrong with the company.  Stupid investors drove the stock price up far beyond historical measures, and that does not stand forever.  It may take a year or two, but it will be corrected.  We are seeing that correction in the Mag 7 stocks now, although TSLA looks more like a broken stock than a correction.

Technical Analysis:

For the week ending 4/19/2024, the S&P 500 was down about 2.5%, down every day.

We are 5% below the market’s all-time high.  We are in a bull market correction.

Technically (see chart below) the market looks negative near term and positive long term.  RSI at the top of the chart is oversold at 31, so it may be time to think about buying a little.  Momentum shown by MACD at the bottom of the chart is negative and the decline has picked up pace..  The price action is negative.

It is interesting to look at the RSI at the top of the chart.  I have color coded the bullish and corrective areas in green and red.  In a bull market when the market becomes overbought (RSI at or above 70), it can stay overbought for weeks or even months.  In a bull market, when the market becomes oversold (RSI at or below 30), the market seldom stays oversold for long.  You can see that over the last year.  The behavior of the RSI tells you a lot about the complexion of the market.  We are oversold.  Will we rally?  I suspect we will unless a major geo-political event occurs that scares the market.  When we rally, if the rally ends with a high that is below the March peak at 5250, that would be a lower high and we could begin to build a down channel which would indicate the correction has farther to go.

There is a good support zone between the 150 and 200 day moving averages, from 4650 to 4750.  If that is not held, the bottom of the normal range, the two purple lines, would provide support at 4500.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I was assigned on a PLTR Put at $21 so I now own more.  I had sold a Put option at a strike of 21 and the stock closed at 20.50.  If the holder of my Put option did not own any PLTR stock, he could exercise his option to put the shares to me at 21, go on the open market and buy them at 20.50 and force me to buy them at 21, so he made .50 per share gross profit.  The stock is low priced, so he probably bought my option for .25, then he got .50 by selling me the shares, so he doubled his money over a month or two.  If the stock had closed at 21.05 instead, the holder of my Put option would not have exercised, and he would have lost the .25 per share that he paid me for the option, so he would have suffered a 100% loss in that case.  All option contracts cover 100 shares of the stock.  So if the option holder paid .25 per share for the option, he controlled 100 shares of PLTR for $25, which would have been his total loss.  The option game is a little complicated because it involves selecting a strike price where you think you will make money, and a specific expiration date of the contract, so there are a few important moving parts you have to deal with.

I had a few stocks called away, XOM, SCHW, and RTX, all at nice profits.  That is one of the risks of selling covered calls, you may have the stock called away if it goes up in price above the strike price at which you sold the call option.  I will keep an eye on them to see if I can buy them back at a lower price.  Some stocks held up well or went up during this correction.

With stocks on sale, I started to do a little buying, little being the operative word.  I bought a little AMGN, BMY, MSFT UNH and C.  For expensive stocks I started a position with only 10 shares.  They may all continue to fall and I may be able to add more shares at a lower cost if this correction continues.  I don’t simply look at the S&P chart when buying a stock, you also have to look at the chart of the stock itself.  If the market has come down but the stock has not come down as much, it may not be a good time to buy that stock.  I also check the recent news on a stock at Finviz.com, and the latest earnings report.  Fidelity provides for free several good rating service reviews from companies like Zach’s and I look for their overall rating on the company.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

Warm CPI, Warmer Middle East

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

Bad news started Wed. morning when CPI for March came in warm; up .4% for the month and up 3.5% for the last year.  On top of the warm reports in Jan. and Feb. the market now thinks we will only get 2 rate cuts this year, and a few folks think there is a chance we only get 1 or even 0 cuts.  The market didn’t like that. 

Geo-Political:

Last week I reported that it is suspected that Israel bombed an Iranian embassy in Syria, killing two Iranian generals.  That riled the market last week and that tension carried over to this week, especially when Biden passed a warning to Iran that the US would defend Israel.  Oil, bonds and gold jumped up.  Bonds and gold are called the “safety trade”; they usually rise in times of international strife, then fall back down.

From China last Friday:

“April 12, 2024 – Advanced Micro Devices and Intel dipped on Friday after The Wall Street Journal reported China is ordering the country’s largest telecom carriers to cease use of foreign chips.

Chinese officials issued the directive earlier this year for the telecom systems to replace non-Chinese core processors by 2027, the Journal reported.”

The trade war continues.  We may de-couple one trade sanction at a time.

I could write more, but the section below is more important than usual, so read it twice and think about it.  You can always write a comment and share your thoughts.

Technical Analysis:

For the week ending 4/12/2024, the S&P 500 was down about 1.5%, the third down week in a row.

Technically (see chart below) the market looks negative for the near term.  For a couple of months I have pointed out how extended the market was to the upside and the correction has finally arrived.  RSI at the top of the chart is neutral at 46, but falling.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative for the near term.

We are at the first line of support, the 50 day moving average.  We could get a bounce here, but my gut says no.  I think the warm CPI and ME tension will trump the technical, but I have been wrong before.

Where might we go from here?  The AI rally since the Oct. low was so strong it lifted a lot of stocks, but it could not last at that rate.  I think the normal rate of rise is the two purple lines rising to the right and that channel began over a year ago.  We could go back into the purple channel, but I don’t see that happening quickly; the economy is too strong, unemployment is too low, inflation is stubborn, but 3% inflation is not going to tank the economy or the consumer.

The shape of the next rally will be what to watch.  If the rally peaks below March peak, we will have a lower high in the market and if later we saw a lower low, that would begin to trace out a down channel, a significant correction.  If on the next rally we go on and set a new high, the correction would be over in what is called a “V shaped recovery”.  What will it be?  I don’t know; I just keep watching the chart.

Our decision when this correction ends will be what to buy (start thinking about your buy list), and are you buying it for a trade (short term) or a hold (long term).  At the end of a market washout if valuations are low, I would buy for a hold.  If the correction is shallow and valuations remain elevated, I would buy for a trade.  Good dividend stocks are easier to hold long term because if they go down a lot, they pay you to wait until their share price recovers.  A caveat, if the dividend is too high, that can be a sign the company is in trouble.  That’s just me.

A friend asked me what that purple line on the chart is, the one up in the air over Oct. – Nov. of last year.  I told him “that’s a mistake”.  When you draw a line, or annotate the chart, it is temporary until the next mouse click on the chart to add an annotation.  Once you click the mouse, the previous line becomes permanent on the chart.  The only way to get rid of it is to delete ALL of the annotations and start over with a clean chart.  I like all of the history on this chart so I have not started over for over two years and I don’t plan to anytime soon, so I’ll (and you) just have to live with that mistake.

Click THIS LINK to open the chart in a separate window.

What am I doing?  This week I sold a big position in KMI that I had accumulated over a couple of years and took a nice profit on a stock that had paid a 6% dividend.  While the market has been down for a few weeks, the energy stocks stayed high so I sold at the current peak.  KMI may go higher, or maybe not, but I locked in a good profit.  With most stocks dropping, and some down hard, I bought back covered calls while capturing 80%+ of the option premium.  I will wait and see when this correction looks over and then sell some Put options when the Put option premiums are high.  Over the last couple of years, I am learning more about the option game and getting a little better.  I have a friend who makes some small trades just to see how the mechanics work and the strategy.  If he loses his $100, he says “hey, that is like the cost of a class and a book; I’m learning”.  I like his attitude on that.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

Concern in the Middle East

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

The ISM manufacturing index for March was 50.3, which is significant because it is the first time in a year that it came in above 50.  Above 50 shows growth, below 50 shows contraction.  The ISM services index for March was 51.4, also good.  Factory orders rose 1.4% in Feb.  US auto sales for March were 15.5 million annualized, that’s OK.  Non-farm payrolls added 303K jobs in March, that’s strong, and the unemployment rate fell to 3.8%.

Overall, it’s a good looking economy.

Geo-Political:

Several Fed governors spoke last week and echoed Chairman Powell’s message that the Fed will not cut rates until they are comfortable they are on the path to hit their inflation target of 2% per year.  The inflation rate does not have to hit 2% for the Fed to cut, it just has to be on the path to 2%.  If the Fed cuts interest rates too soon, inflation could re-ignite and if they wait too long to cut, they could allow the economy to slip into a recession, which nobody wants to see.

The news below broke late Wednesday and played a role in the big selloff on Thursday:

“April 3, 2024 – Iranian leaders renewed their promise to hit back after an airstrike widely blamed on Israel destroyed Iran’s Consulate in Syria, killing 12 people, including two elite Iranian generals. Iran’s President Ebrahim Raisi said Wednesday the attack “will not remain without answer.”

The U.S. is concerned the deadly strike in Damascus could trigger new attacks on American troops by Iranian-backed militias in Iraq and Syria, said Lt. Gen. Alexus Grynkewich, the top U.S. Air Force commander for the Middle East.

Iran and its allies — including the Lebanese militant group Hezbollah and other armed groups in Syria, Iraq and Yemen — have repeatedly traded fire with Israel and the U.S. since the start of Israel’s war in Gaza.

https://apnews.com/article/israel-hamas-war-latest-04-03-2024-0980966d62c623bbff9e02841debee01

I expect that Iran will retaliate, when and where is the question.  If it looks like there is escalation in the Middle East that would take the market down for a while until we find out if things continue to escalate.

Below is from Michelle Caruso-Cabrera, a well connected finance reporter who is respected, regarding feedback from a CEO in the room with Xi Jinping on March 27.  It is in nine posts from “X”, formerly twitter:

“Just got off the phone with one of the American CEOs who went to the China Development Forum (CDF) this week and met with Xi Jinping on Wednesday in China. Speaking on condition of anonymity, he said “Business is still terrible,” and confidence in the economy is very low. 1/9

After spending nearly a week there speaking with the leadership and members of the business community, this CEO said there was no indication the country is is backing away from centralizing the economy. 2/9

He said wealthy Chinese are fearful and selling items that are seen as ostentatious, such as private jets, “because its dangerous to be rich in China.” He added that they are trying to get their money out of the country. 3/9

As for the CDF, there was very little reference to climate change, renewables, or decarbonization. This CEO said there were passing references to the private sector, but the focus always returned to support of the large, state-owned enterprises which dominate the economy. 4/9

The CEO told me the meeting with Xi lasted 1.5 hours; that Xi was asked tough questions by the CEOs and that Xi gave tough answers. He says in that meeting, Xi stressed the following: -that China’s economy hasn’t peaked 5/9

-every economy has difficulties and they have the capacity to address theirs -said repeatedly they know how to fix their economy, that everyone has an idea about how to fix their problems but that they know how to fix their problems 6/9

-they know they have to provide at least 10 million new jobs every year to new graduates –on semiconductors, that its not right for the US to try and constrain China’s economy -that China is not a threat to the United States 7/9

-that the US should not try to hinder China’s growth –Taiwan is a red line and that China doesn’t interfere with other countries’ borders, so other countries shouldn’t try to interfere with theirs -that nuclear war would destroy humanity and we should never go there 8/9

-Thucydides trap is not inevitable and has to be avoided at all costs –the governing system of China is not going to change -They respect other forms of government, they ask respect for theirs. 9/9”

In the US, that would be called a terrible meeting.  The economy in China is floundering, and Xi Jinping wants to see US corporations invest more in China.  Normally one would offer some incentives to the CEO’s to entice them to make more investments.  I did not hear of any enticements at all.  He says China is not a threat to the US, but if he invaded Taiwan and took control of Taiwan Semiconductor, he would have control of much of the US economy since Taiwan Semi makes 60% of the worlds computer chips and 90% of the most powerful chips.  That is a threat to the US economy and countries defend their strategic interests.  Point 9 says it all, they are not going to change anything, but they want the US CEO’s to invest more in China.  That looks like a fail to me.

The bad news for the US stock market is that with the Chinese economy stalling, their people will be buying fewer goods from the US, which will hurt the profitability of US companies that have done a lot of business in China.  The stock market runs on profits, so that can put a damper on some US companies, like Tesla, Starbucks, McDonalds, and Apple.

Technical Analysis:

For the week ending 4/5/2024, the S&P 500 was down about 1%.

Technically (see chart below) the market looks positive, but still extended to the upside.  RSI at the top of the chart is neutral at 55, but it dropped last week.  Momentum shown by MACD at the bottom of the chart is slightly negative, trending lower.  The price action is negative short term and positive longer term. 

Everyone thinks we need a correction, and one percent down does not qualify.  It may be the start of something bigger, or maybe not.  I remain cautious because the rise since November (the green parallel lines at the right of the chart) has been too rapid and does not look sustainable.  The price has dropped out of the narrow steep upward channel, so that could indicate a change in direction if we don’t get back in the channel soon.  But, we are just 1% below a record high so you can’t get too negative.

Click THIS LINK to open the chart in a separate window.

The big banks kick off earnings season next week and it is always interesting to see how they assess the business climate, consumer spending patterns, and loan repayment conditions.  In the monthly Long Term update, Factset projects Q1 earnings to come in +3.4% above last year’s Q1 and that is normal growth of earnings.

What am I doing?  I had a large position in JEPI called away at 57 and I was not sorry to see it go.  I had held it for over 2 years and my cost was 57.  I was under water after the bear market in 2022, and just broke even now.  JEPI paid about 7% dividend on average while I held it, so I beat CD’s and the money market.  But JEPI does go down with the market and I don’t feel that buying in up here at a record high is what I want to do.  I’d rather wait for a big correction, then start building a position back up at lower cost.  JEPI to me is a long term instrument and I may have to wait a long time before it is attractive again.  Sometimes I buy 10 shares to keep in my portfolio just so I don’t forget that I want to add some in six months or a year on a big pullback.  Lightening up on stock positions ahead of a correction is not a bad idea either, but we never know exactly when that will happen.

The other big move was that I sold MS for a nice profit, which was a large position.  I started buying it 2 years ago and bought on pullbacks several more times.  The average length of time I held was about 1 year.  I made 8% capital gain, 4% on dividends, and 4% selling covered calls and put options, for a total return of 16% in a year.  It’s not NVDA type return, but the bottom is not likely to fall out of MS and hurt you real bad.  On the chart, MS is near its 52 week high.  They say buy low and sell high.  If I see this in the mid 80’s per share, I will start building a new position.  MS will report earnings in a couple of weeks and the stock could jump up some more (or not), but I’m satisfied with the trade I made.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

US CEO’s Go to China

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update was posted on Thursday and follows this post on the website, just scroll down.

Economy:

New home sales for Feb. were 662K annualized, the same as last month.  Durable goods orders for Feb. were +1.4%.  The Case Schiller home price index (20 cities) was +6.6% Y-o-Y in Jan., way too high.  I have not mentioned initial jobless claims in months because they have been so steady around 210K per month, which is normal.  I don’t plan to report them until they exceed 250K on the weekly report.  The final revision for Q4 GDP was +3.4%, nice growth.  The U. of Michigan consumer sentiment survey for March was 79.4, up nicely from last month.  The PCE report for Feb. advanced .3%, while Y-o-Y PCE was up 2.5%, which is moving close to the Fed target.

Some analysts on CNBC suggest that while the Fed says the inflation target is 2%, the last Fed forecast did not show inflation down to 2% until 2025.  The suggestion was that the Fed does not want to force a recession in order to get inflation down, and they would be comfortable with inflation at the current level and bank on it coming down over time.  It’s not the gospel, it’s just an opinion.

Geo-Political:

One of the more important events last week was the US CEO’s meeting with China’s President Xi Jinping.

“March 28, 2024 – BEIJING — Chinese President Xi Jinping told U.S. executives on Wednesday that bilateral relations can improve, and pledged that Beijing would keep working to improve the business environment.

“Over the past couple of years, the China-U.S. relationship experienced some setbacks and serious challenges, from which lessons should be learned,” an official English-language readout of Xi’s remarks said. “The relationship cannot go back to the old days, but it can embrace a brighter future.”

“China and the United States should help rather than hinder each other’s development, both in traditional areas such as trade and agriculture, and in emerging areas such as climate change and artificial intelligence,” the readout said.”

https://www.cnbc.com/2024/03/28/chinas-xi-tells-us-ceos-that-bilateral-relations-can-have-a-brighter-future.html

That sounds good, but I’ll believe it when I see real change happen.  China’s economy is in trouble, but they want to give the impression that it is strong.  China’s housing sector is overbuilt and companies are going broke because they cannot carry their debt.  China’s militarism has antagonized the US, and we have become much more cautious on trade with China, going back to Trump’s imposition of trade tariffs on Chinese steel in 2018, and more tariffs after that.  Covid and the large shutdowns of Chinese cities showed the vulnerability of the US to supply chain concentration in China, and with a nudge from the government, most US companies are adding supply capacity in nations other than China, such as India and Vietnam.  All of this hurts China.  President Xi has also rolled back the free market economy in China and punished some of their most successful companies such as Alibaba and its CEO Jack Ma.  There are many red flags to US CEO’s and it is doubtful that words alone will convince them to invest in China the way that they did from 1990 to 2015.  That is just my opinion.

Technical Analysis:

For the week ending 3/29/2024, the S&P 500 was up .2%.

Technically (see chart below) the market looks positive and extended.  RSI at the top of the chart is high-neutral at 69.  Momentum shown by MACD at the bottom of the chart is neutral.  The price action is positive and rising, probably too rapidly.  There is nothing new to say about the chart.

Click THIS LINK to open the chart in a separate window.

The market is trading near all-time highs and rising at a rate that is not sustainable in the long run.  Selling a high PE stock up here is not a bad idea.  Staying out of the market while it is on a longterm rise is painful to watch.  One option is to buy a high quality stock that has recently been beaten up.  Another option is to buy an index ETF and put a trailing stop loss under the position to prevent you from taking a big loss.  The nice thing about an index ETF is that if one stock takes a big drop, the drop gets diluted by the other stocks in the index so you don’t lose that much due to a single-stock problem.  The most popular index ETF is SPY, the proxy for the S&P 500.

What am I doing?  I did a little buying last week and I bought RSP.  SPY is the market cap weighted S&P 500 and now it is dominated by 5 really large market cap stocks, MSFT, AAPL, META, GOOG, NVDA.  Those stocks are fairly extended on a PE basis and account for about 20% of the value of SPY.  RSP is the “equal weight” S&P 500, so each stock in the index is owned at a 1/500^th weight, so the large cap tech stocks are much less influential on the price of the ETF, whether going up or down in price.  That is important if you think the market is high and there is a little more downside risk in the high flyers.  I am buying smallish pieces of RSP and I put a trailing stop loss under each piece, down 5%.

I sold my JEPI, which is a nice income generator from JP Morgan.  I bought it in 2021 when the market was up and I have been under water for two years, but it was yielding 7% so it was OK.  I got even so I sold it at this record high level.  If we get a significant correction over the next year or two, I will buy it back at a hopefully more attractive level.  The lesson here, and you can get a sense of this by looking at a 2 year chart, is don’t buy at the top, you will go much better if you wait for a good price closer to the observed lows.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

Long Term – March 2024

Once a month, on the fourth Thursday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The third estimate of 2023 Q4 GDP is +3.4%, following Q3’s +4.9%. 

That is a warm read, well above the long term 2.0% trend.  By itself, it would not prompt the Fed to hike the Funds rate, but it would push out the estimated time for the first easing.

The current Atlanta Fed GDPNow estimate for Q1 GDP is +2.1%.

This is bullish for the stock market.

Year	Quarter	GDP %
2023	Q4	3.4
2023	Q3	4.9
2023	Q2	2.1
2023	Q1	2.0
2022	Year	1.0
2021	Year	5.5
2020 – Covid	Year	0.1
2019	Year	2.3
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – At the March meeting, the Fed left the Fed Funds rate unchanged at 5.5%.

After being balanced in the Fall meetings, the Fed indicated that future hikes are likely over.  Powell said they will be cautious about timing the first rate cut.  The bond market pushed out its timing of the first rate cut to June, with 3 cuts in 2024.  The CPI and PCE monthly data has ticked up slightly the last two months and if it does not head back down, the Fed might have to cut its outlook for rate cuts down to two for 2024.

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  The Fed continues to reduce its balance sheet by $90 billion per month, but they indicated they are thinking about slowing the pace of QT, my guess is they would cut it in half to $45 billion per month. 

Local and regional banks have tightened lending standards making it harder for small and medium businesses to get loans to expand.  That will slow the economy down somewhat.

The latest CPI was +2.9% versus a year ago.  The commodity complex is moving up in price, not good for inflation.  Oil, gold, copper, and agricultural products are all rising in price.  That could defer the Fed’s first rate cut.

Fed policy is restrictive for the economy, and bearish for the stock market.  But we are probably at the peak of interest rates, we have been on pause, and the next move appears to be down.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Mar 2024	5.5	4.2	4.2	4.4
Feb 2024	5.5	4.3	4.3	4.4
Jan 2024	5.5	4.0	4.1	4.4
2023 Q4	5.5	4.4	4.4	4.5
2023 Q3	5.5	4.4	4.3	4.4
2023 Q2	5.1	3.8	3.6	3.9
2023 Q1	4.7	3.8	3.6	3.8
2022 Year	2.8	3.1	3.1	3.2
2021 Year	0.2	0.8	1.4	2.0
2020 Year	0.4	0.6	0.9	1.6 – Covid
2019 Year	2.2	1.9	2.2	2.6
2018 Year	1.8	2.8	2.9	3.1 – Tax Cut
2017 Year	1.0	1.9	2.3	2.9

Valuation:

S&P 500 earnings – Factset shows that as of March 21, for Q1 of 2024, the estimated year-over-year earnings increase for the S&P 500 is +3.4%. 

The forward PE for the S&P is 20.9 (up from 20.4 last month) compared to the ten year average of 17.7, but remember, the forward PE is just a guess. 

The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $240, unchanged from last month.

I have been thinking about how Factset keeps changing the earnings estimates through the year.  This is a number the pros look at, but most of us amateurs do not.  The question is, if earnings estimates keep coming down, do stock prices eventually come down?  They should, or the PE ratio will continue to climb, making stocks expensive on a PE basis.  I’m not going to keep much history, only about 12 months of data.  The number that Factset should have the most confidence in is the current quarter, Q1, and it has almost been cut in half from Dec.  Tracking this should be fun, at least I think so.  Old Rich attempts a new trick.

MONTH	Q1 Estimate	Q2 Estimate	Q3 Estimate	Q4 Estimate	CY Estimate
Mar	3.4%	9.3%	8.4%	17.4%	10.9%
Feb	3.9%	9.0%	8.0%	17.6%	10.9%
Jan	5.4%	10.0%	8.2%	22.1%	12.0%
Dec	6.2%	8.5%	10.7%	18.1%	11.5%

S&P 500 Earnings Estimates, by Month, current year

Telling the future is hard.  Why do I even bother to report future estimates of earnings?  Earnings (profits) drive the stock market.  I look to the pro’s for their estimates, then I take them with a grain of salt.  Even if the estimates turn out to be wrong, that is the data that the stock market is trading on today.  It’s the best we have, and it may be wrong by a little, or sometimes a lot.

The outlook for earnings is bullish at +3.4% for Q1.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 27.2, up a bit from 26.8 last month.  I used 4 quarters of earnings with the most recent being Q4 2023.  The S&P rallied upward since Nov. 2023, faster than earnings growth, so the valuation rose. 

This metric is significantly overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.  On the downside, I will go with 14-18 being moderately undervalued and 9-13 being significantly undervalued.  As a last resort, I will go with 4-8 as being egregiously undervalued, and hope we never see that because all investors will be in pain at that point.

This indicator is bearish.

Age of primary move, bull or bear market – This bull market is 18 months old, started in Oct. 2022.  The age is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political: (One addition this month – Presidential Election)

Presidential Election: (added March 2024) – On Nov. 5^th we will elect a new president.  Joe Biden and Donald Trump are the two primary candidates, and Robert Kennedy Jr. is the main third party candidate.  Kennedy cannot win, but he may prevent one of the other two from winning.  It depends who he takes more votes away from, and right now we don’t know.  Based on forward looking policies, and who the projected winner is, the stock market will start to favor better positioned companies, based on the assumed victorious candidate’s policy priorities.  It’s too early to tell, but keep your eyes peeled.

Liquidity:  Central banks globally raised rates to fight inflation, but most are pausing their interest rates.  Inflation appears to be coming under control, but it is not where the central banks want it.  They appear to be on pause to see if the hikes already in place will slow inflation to the target without additional hikes.

US / China:  It appears that the US and China are engaged in a tug of war to see who is the world’s economic leader.  China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas.  China developed the ability to produce advanced electronics with the aid of the US, but the primary market for those items is the US and Europe.  The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated.  Another major factor is global alliances.  The US has strong alliances with NATO, Canada, Japan, and S. Korea, while China has a strong relationship with Russia.

The economy in China is slowing more than their government would like.  Trade tension with the US contributes to the distress since US corporations are expanding outside of China, notably in Vietnam and India.  The Chinese govt. has been hostile to free market activity by their own corporations such as Alibaba and Ten Cent.  Their real estate sector was over leveraged and is in trouble.

Ukraine:  Thewar in Ukraine drags on.  Ukraine is having more success on the battlefield than most expected, with the help of western weapons.  Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult.  Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals.  Ukraine was a large exporter of wheat and other foods and that export is hindered by the war.  It appears that after the initial shock in the commodity markets when Russia invaded, prices have stabilized and the world is dealing with new sources and trading patterns.

Middle East Conflict:  Hamas launched a violent attack on Israel on Oct. 7, 2023 using missiles and ground forces and Israel has responded with bombings inside Gaza.  It’s a mess, but impact to the US economy is not noticeable.  The Houthi rebels in Yemen are firing missiles at shipping in the Red Sea, causing many ships to go around Africa to Europe instead of using the shorter Suez Canal.  That will increase wait times and raise transportation costs.

US National Debt:  (added Sept. 2023)  The US national debt is very large at over $34 trillion and it is growing too rapidly.  I have been concerned about it since early in this century.  If there is too much new debt and investors don’t want to buy the bonds that the US issues to fund the deficit, they may have to keep the interest rates high, particularly longer term interest rates, high enough to attract bond investors.  Companies will then have to pay higher rates to fund long term projects and that will cut into their profits.  Consumers facing high interest rates will slow purchases.  It is not a good situation for the economy.

Geo-politics is currently bearish, mainly due to the war in Ukraine and global central banks restrictive policy.

Technical:

Technically the chart below is bullish near term (months), and still positive longer term (year).

RSI at the top of the chart is positive and overbought at 70 and rising.  Momentum shown by MACD at the bottom of the chart is positive and rising.  The price action is positive near term and positive longer term.  

The price action is above the top of the long term up-channel, which will limit the upside probability from here.

This close to the top of the up-channel, there is the risk of a correction.  We can also go higher, above the top of the channel, like we did in 2021, but that was driven by excessive stimulus from the Covid cash infusion cycle from the govt.  I don’t see that type of stimulus now, in fact the Fed interest rates are restrictive.  What seems to be giving the market this boost is the computing evolution called Artificial Intelligence (AI).

S&P 500, Ten Year Chart

This is bullish in the short run, and remains bullish longer term.

Conclusion:

1. GDP growth is bullish with Q4 GDP rising by 3.3%. 
2. The Fed has short term rates at 5.5%.  That is restrictive and bearish. 
3. S&P earnings for Q1 are estimated to be +3.4% above Q1 2023 which is bullish. 
4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 27.2, which is significantly overvalued and bearish.
5. The geo-political factors are bearish.  
6. Technically the chart looks bullish short term, and bullish longer term.

By that way of looking at it, the market is neutral, with three factors bearish, and three bullish.

Long Term Issues to Keep in Mind:

National Debt: 

(January 2024) – The national debt is over $34 trillion.

(Late 2020) – The total national debt exceeds $26 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

(Updated March 2020) – Covid 19 begins.  Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

Rich Comeau, Rich Investing

The Fed Stands Pat

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update will be posted Thursday the 28^th.

Economy:

The Leading Economic Indicators (LEI) for Feb. rose .1%, the first rise in over a year!  It’s good news, but its such a small increase that it may not mean much.  Existing home sales for Feb. were 4.4 million annualized, up from 4.0 million in Jan.  Let’s see what happens as spring rolls along; I don’t think you can tell much about housing during winter.

The economy continues to look ok.

Geo-Political:

Jerome Powell left the Fed Funds rate unchanged at the March 20^th Fed meeting.  Based on the slightly higher inflation data the last 2 months, I and others thought he would sound slightly hawkish on interest rates, but he was slightly dovish.  He said he thought we were at the peak of interest rates, although if inflation did re-accelerate the Fed could hike rates.  He re-iterated the Fed is still thinking about 3 rate cuts this year, but if inflation shows no sign of abating, we could wind up with only 2 cuts.  Very importantly, Powell said the Fed was not too far away from slowing the rate of Quantitative Tightening, or not replacing bonds on their balance sheet as they mature.  They have been allowing $90 billion per month to mature and be absorbed by the private bond market, which has the effect of taking cash out of circulation in the economy.  Less supply of bonds in the marketplace should lead to higher bond prices, which means longer term interest rates could come down.  Opposing that situation would be the govt. need to borrow, and if that need accelerated and offset the Fed’s slower rate of QT, then longer term rates would not come down.  In terms of impact on the annual deficit, when these intermediate term bonds mature, they are 1 – 2% notes that have to be refinanced at 4%, so the interest on the debt grows significantly even if we were not continuing to add to the deficit, which we are.  I think this is another mistake, running up all this debt, that was helped by the decade long zero-interest-rate-policy, which was a mistake in itself.  Janet Yellen should have been hiking rates, at least to 1 or 2 percent.

Technical Analysis:

For the week ending 3/22/2024, the S&P 500 was up about 1.5%.

Technically (see chart below) the market looks positive and extended.  RSI at the top of the chart is overbought at 69.  Momentum shown by MACD at the bottom of the chart is neutral with a slight negative bias over the last 7 weeks.  The price action is strongly positive in the rapidly rising green channel.

We’ll get a correction, just nobody knows when.

Click THIS LINK to open the chart in a separate window.

Lululemon stock took a beating last week.  They reported OK earnings for Q4, but cautioned on Q1.  They sell high priced athletic and leisure wear, and they have been around for a while.  When you get a bunch of stores in all the major markets, your build-out is nearly complete.  That means your rate of growth will slow.  That is when the sky high PE ratio is no longer justified and the stock price usually declines for a while. 

You can see the same thing happening at TSLA.  It’s not that they are built out, but the rate of adoption is slowing.  The segment of people that feel strongly enough that burning fossil fuels is the primary driver of climate change and is willing to spend extra money and give up a few features to help with the solution is not that large, mainly those who are better off financially.  For many people, the EV is simply too expensive for the job that it does.  We need a breakthrough in battery technology to make this work.  One company working on a new battery is Panasonic and they are making strides, see the link below.

https://news.panasonic.com/global/stories/993

Price earnings ratios are a function of earnings, growth rate, and what people believe the prospects for a company’s growth are, in other words “the hype” around a company.  Some companies have no earnings, but if their growth rate suggests they will achieve profitability soon, and that their long term prospects for growth are believable, they can carry a high PE.  The best example of this is the story of Amazon, which started out as an online book seller that took down many brick and mortar bookstores.  They grew rapidly, but did not show a profit for over a decade.  Amazon kept plowing their profit back into the business, entering new lines of business that also grew rapidly and vanquished competitors.  Today they sell a lot more than books.  They became a platform where small retailers can achieve a global reach by going on the Amazon platform, Amazon Web Services (AWS).  When they eventually showed a profit, they had become a behemoth and the stock was one of the most successful ones in the 21^st century.  But, even Amazon’s growth rate is slowing.

What am I doing?  I was looking for a few things to sell since the market is so high.  I sold the small piece of AMAT that I bought recently, for a profit.  I had protected it with a “trailing stop loss %” order, so I cancelled that, then sold the stock.  With the market so high, I am trying to keep a trailing stop under positions.  I also sold AVGO and MSFT, taking profits I made over the last few weeks.  I sold some covered calls on stocks I want to hold, since many of my options expired on 3/15.  Before selling the next option, with the market up high, I had to ask, should I sell the next option, or sell the stock and try to buy it back in a correction?  In a few cases, I am trying to sell ¼ of my position and keeping the rest.  If the stock corrects, I would buy the ¼ back at a lower price.  You don’t have to be out of the market, but it has more risk now after its run-up since Oct.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

A Soft Patch

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

The CPI was up .4% in Feb. and 3.2% over the last 12 months.  The monthly CPI for Jan. was also up .4%, which is a 4.8% annualized rate, hotter than the Fed wants to see.  The PPI rose .6% in Feb., hotter than recent numbers.  Some analysts that projected a June rate cut by the Fed think that may get pushed out to July.  If part of the recent run-up in stocks was predicated on a May or June cut, stocks could come under pressure.

Retail sales were up .6% in Feb., a good read. 

Geo-Political:

The Fed meets 3/19-20, so we’ll hear their latest thinking on the Fed Funds rate on the 20^th.  I expect that in light of the recent warm data on inflation, Powell will not sound dovish.  That could upset the market.

I listened to an interview a few weeks ago with the CEO of Stellantis, Carlos Tavares.  Stellantis was formed by the merger of Fiat (Italy) and Peugeot (France).  Fiat acquired Chrysler, Jeep, Ram after the GFC so they are part of Stellantis now.  Mr. Tavares said that over the next 20 years, he expects we will consolidate from 20 major auto brands down to 5, and Stellantis plans to be one of them.  That may happen, or he could be wrong, but some consolidation makes sense to me.  We’ve already seen a number of nameplates retired in the US, such as Plymouth, Saturn, Oldsmobile, and Pontiac.  If we do go down to 5 major players, and Stellantis is one of them, who would the other 4 be?  Toyota will survive, they operate worldwide.  The survivors will have to have scale to distribute their fixed costs over many units.  China has such a large population base and inexpensive labor, so they will have a champion survive, maybe BYD.  GM would be the likely US champion, but they have cut operations outside of the US and I wonder if they can survive without international success.  The S. Koreans have a champion in Hyundai, which also owns Kia.  Perhaps we would see Germany with a champion formed by Volkswagen, Mercedes Benz, and BMW.  So we have Stellantis (self proclaimed), Toyota, BYD, GM, Hyundai, and Germany led by Volkwagen.  Will it play out that way?  I don’t know, I thought it was fun to speculate. 

Let’s take a quick look at the German economy.  I looked at the Euro zone recently, but Germany is the engine of the Euro zone, and it does not look very good.

“March 6, 2024 – Forecast for the German Economy

The leading indicators currently available do not point to an economic turnaround at the start of 2024: a deteriorating order situation in all economic sectors, low order backlogs, high sickness rates, ongoing strikes.

All in all, economic output is likely to continue its decline in the current quarter and fall by 0.1 percent compared to the previous quarter. A noticeable overall economic recovery is not expected until the second half of the year. Overall, price-adjusted gross domestic product will increase by only 0.2 percent this year compared to the previous year. Next year, economic output will then increase by 1.5 percent. The growth forecast for the current year has thus been significantly lowered by 0.7 percentage points compared to the ifo Economic Forecast Winter 2023 and raised slightly by 0.2 percentage points for 2025. Contrary to expectations, the German economy is in recession in the winter half-year 2023/24. In particular, a recovery in industrial activity will not set in until later.

Economic weakness will slow down employment growth and initially cause unemployment to rise further. The unemployment rate will average 5.9 percent this year, 0.2 percentage points higher than in 2023. The rate is not expected to fall back to 5.6 percent until 2025.

The inflation rate will continue to fall from an average of 5.9 percent last year to 2.3 percent this year and 1.6% percent next year. Gas and electricity prices in particular will become cheaper for consumers. The energy component is therefore likely to bring down inflation in the forecast period.”

https://www.ifo.de/en/facts/2024-03-06/ifo-economic-forecast-spring-2024-german-economy-paralyzed

Germany is a nation that has paid high wages to their workers.  They sold their goods at high prices, based on high quality.  As other nations that paid lower wages have improved their product quality, it puts pressure on Germany, and on the US.

Technical Analysis:

For the week ending 3/15/2024, the S&P 500 was down a bit, but basically flat for the week.

Technically (see chart below) the market looks positive, but extended.  RSI at the top of the chart is neutral at 48 and falling.  Momentum shown by MACD at the bottom of the chart is neutral, but ever so slightly coming down.  The price action is positive, but it is beginning to live in the lower half of the narrow up-channel it has been in this year.

The up-channel shown by the two green lines on the right of the chart is too steep to be sustainable for long, so I’ve been expecting a correction.  It looks like we’re in a weak patch, but nothing big has happened to the broad market.  The highest flyer, NVDA has corrected a bit, down 10%, and a few other high flyers have been hit.  We are in the dead period in the quarter where there are almost no earnings reports to boost the market for the next 4 weeks.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I had option contracts that expired on 3/15, so I reviewed each one.  Most I let expire and kept the premium.  I was assigned on NXPI so the stock was called at a nice profit.  I bought some SNOW at 160.  I bought PANW on its recent pullback and it rallied, so I sold it to lock in the profit in case the market corrects.  I’ve been holding KMI so long it is a long term capital gain.  The call option that I sold on KMI expired last Friday, and if it hits 18 again, I might sell it.  I would plan to buy it back later if it goes down.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

The Market Continues to Melt Up

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

Factory orders for Jan. were -3.6%, poor.  The ISM services sector for Feb. was 52.6, good.  Non-farm payrolls added 275K jobs, that’s warm.  (The Jan. non-farm payrolls was very large, over 350K jobs, and that was revised down in this month’s report to about 250K, which makes sense).  The unemployment rate rose from 3.7% to 3.9%.

I see some of the tech companies laying off workers in product lines where growth has slowed, and it’s taking a little longer to find your next job now than it did a year ago.

You can see the layoffs at: https://techcrunch.com/2024/03/06/tech-layoffs-2023-list/#january2024layoffs

Overall, I’d say the economy is fair.  GDP is strong, corporate profits are good, employment is generally good, with a few pockets of weakness.  One analyst on CNBC said “this is what a soft landing looks like”.  A soft landing is an economy that slows, but does not fall into a recession.

Geo-Political:

Conundrum – an intricate and difficult problem; Example: He is faced with the conundrum of trying to find a job without having experience.

Governments face difficult conundrums frequently, because they have to balance so many interests, such as:

• Strategic interests
• Good relations with neighboring countries and the rest of the world
• Taking care of its citizens, food, shelter, general well-being and health

Most people believe that climate change is driven by human activity, and I believe that.  The US has about 5% of the world’s population and consumes 20 -25% of the world’s oil.  We have to play a major part is reducing greenhouse gas emissions.  We have converted much of our electricity production from coal to natural gas, which results in a 60% reduction in CO2 emissions for each plant that is converted.  That is good.

China is a large nation with about 1.3 billion people, about four times the population of the US.  China generates most of its electricity by burning coal, and they continue to build coal powered generating plants.  Why?  Do they not think climate change is a problem?  I don’t think so; they can see droughts and floods in their country.  Do they just not care?  I don’t think that is the issue, I think they do care and they are looking at nuclear energy as their long term solution.  That is going to take time, maybe a couple of decades. 

So, why is China moving so slowly?  Geography has the most to do with it, China ended up with small supplies of oil and natural gas.  They do have the fourth largest reserves of coal in the world, after the US, Russia, and Australia.  They could convert to natural gas and import it from the Middle East, or from the US.  The conundrum for China is that if they convert to natural gas, they lose control of their source of electric power.  Their strategic interests are in conflict with the general welfare of their citizens and the rest of the world.  In priority, you take care of your strategic interests first, so they build coal fired plants now.

China is building conventional nuclear reactors also, but they have another problem.  They have a huge land mass and they need generation deep inside their country, away from the ocean.  Current nuclear plants require large amounts of water to keep them cool, which is why Japan built the Fukushima plant on the ocean.  China does not have sufficiently large water sources on their deep interior to cool the number or reactors they would need to build.  Even if they use solar and wind, you need a constant power source when the wind is not blowing and the sun is not shining.

https://www.reuters.com/world/china/china-starts-up-worlds-first-fourth-generation-nuclear-reactor-2023-12-06

China is experimenting with an alternative metal, thorium, to power future nuclear reactors, and using molten salt to keep the reactor cool, which would help them deep inside their country.  It could take twenty years to commercialize the technology.  Here is a good article on the thorium project, it’s not too long.

https://www.iaea.org/newscenter/news/thoriums-long-term-potential-in-nuclear-energy-new-iaea-analysis

You might think I am writing too much about China, or that the article is about climate change, or about an interesting new technology.  All of those are true to an extent, but I am really trying to make a point about how nations make decisions.  In the case of China, doing the right thing for its people and for climate change would be to convert to the use of natural gas to generate electricity.  On the other hand, if you want to invade Taiwan eventually, and you know the US would oppose that, would you base your energy future on imported nat gas from the US?  Of course not.  You could import nat gas from the Middle East, but the US could bomb that pipeline and shut your nation down.  China wants to be in control of their energy future, and that means using their own resources to power their country.  If you want to be at least a regional military player, that is a necessity.  They are willing to suffer the damage of air pollution and climate change to maintain that independence.  That’s how I see it.

Technical Analysis:

For the week ending 3/8/2024, the S&P 500 was down .1%, or nearly flat.

Technically (see chart below) the market looks good, and over extended.  RSI at the top of the chart is neutral at 61, moving sideways.  Momentum shown by MACD at the bottom of the chart is neutral, moving sideways.  The price action is positive, but rising at an unsustainable rate.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I’m not chasing the high flyers here.  I would buy a quality company that has been beaten down, and I did buy UNH.  They announced a government investigation into UNH but even if they find wrong doing, they may pay a fine and agree to some internal controls, but eventually they will get back on track.  The market is so high that I bought back a few Put options I sold a month or two ago, booking most of the possible profit.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

• Is it a bull market or a bear market?
• Why does healthcare cost so much?
• Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

Minor Bad News Can Mean a Huge Drop in Stock Price

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update was posted Thursday and follows this one on the website.

Economy:

New home sales for January were 661K, in line with last years winter level.  Durable goods orders for January were -6.1%, but excluding the lack of orders at Boeing it was only -.3%.  The Case Schiller home price index of 20 cities for Dec. was up 6.1%, way too high.  The second estimate of Q4 GDP was +3.2%, a good reading.  The core PCE Y-o-Y was +2.8%, down from 2.9% last month, and the trend remains downward.  The ISM manufacturing index for Feb. was 47.8, down from 49.1 (anything below 50 shows contraction), which is poor.  Auto sales for Feb. were 15.8 million annualized, up from the light 15.0 million in Jan.  The U. of Michigan consumer sentiment index for Feb. was 76.9, down a bit from 79 last month, but still near a 3 year high.

Overall I’d say the economy is steady state.  With Q4 GDP at +3.2%, that’s the dominant number.  I don’t like the continuing inflation in home prices, which only makes them less affordable for first time buyers.

Geo-Political:

Let’s take a look at China’s economy today; it is not doing very well.

“Feb. 2, 2024 – China’s economy is set to see growth slow to 4.6% in 2024, dragged down by the country’s subdued exports and a weak real estate sector, the International Monetary Fund said Friday.

The world’s second-largest economy, which grew around 5% last year, may only grow 3.5% in 2028, according to the IMF’s projections. 

China’s weakening economy, as well as heightened competition from homegrown firms, is already taking a toll on U.S. firms. Apple (AAPL) shares fell Friday, dragged by a slump in China sales, despite announcing higher-than-forecast quarterly results late Thursday.

The country, dubbed the world’s factory, is not just a key market but also the biggest source of imports for many large firms, including retail giant Walmart (WMT).

In a separate report, the IMF cast doubt on a recovery in the country’s embattled housing market, which makes up as much as 20% of the country’s economic activity. Investment in homes may decline as much as 60% in China over the next decade, the fund said, as the population declines.

“Sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future,” the IMF said.

A government crackdown on high debt levels and the slump in home sales has triggered the downfall of many real estate companies, including what was once one of the biggest, China Evergrande Group. Earlier this week, a Hong Kong court ordered the embattled property developer to liquidate after more than a year of talks between the company and creditors failed to deliver a debt restructuring plan.”

https://www.investopedia.com/china-s-2024-growth-to-slow-to-4-6-dragged-by-weak-exports-property-slump-says-imf-8557851

First, it is important to know what is going on inside our largest trading partner.  Second, are there valuable lessons to be learned from what we see?  Of course there are lessons to be learned.

The first lesson to be learned is how bad deflation is for an economy.  Deflation is when prices go down over time.  What made the Great Depression in the 1930’s so bad was deflation and recession at the same time.  As the recession hits, workers lose their jobs and they don’t have money to spend.  As they see prices fall, if they have money, they will not buy things because they see that if they wait, they can buy it cheaper in the future.  When the buyers stop buying, more workers get laid off and the cycle spirals downward until an absolute bottom is reached.  There is always some absolute bottom; we are not going to lay off all of the police, or school teachers, or doctors and nurses.  At the bottom, the required workers will hold the line and stop the down spiral, but the economy is in a hell of a mess.

We have seen that we can control inflation.  We can raise interest rates as high as we need to in order to slow consumer spending.  Paul Voker was the Fed chairman in the late 70’s and early 80’s and that is what he did to kill inflation.  You can stop people from spending.  The opposite is not true.  In deflation, you cannot drop interest rates low enough to make people go out and spend, if they think the price will be lower next month.  Following the Great Financial Crisis (GFC) of 2008, the Fed dropped interest rates to zero and left them near zero for a decade and the recovery was very slow.  Ben Bernanke was determined to not let deflation take hold.  In Europe and Japan, they made interest rates negative for years, hoping that people would spend their savings rather than see it eroded by the negative rate, and that did not work.  The nations with negative interest rates recovered slower than the US which never implemented the negative rate.  The message to US economists over many decades has been “do not let deflation take hold because there is nothing the central bank can do to end it”.  The central bank controls monetary policy, how much money is in circulation and how much will we charge you to borrow our money.  The congress control fiscal policy, how does the government allocate the money that is printed by the US Treasury.  The way out of the Great Depression was to print money and spend it on government programs to create jobs, like the Civilian Conservation Corp (CCC).  We still enjoy some of the hiking trails cut in the national parks by CCC workers in the 1930’s, so it was “make work”, but it has had a lasting positive impact on tourism in the US.  There is a way out of deflation, but it takes TIME and well directed spending.

China is seeing deflation.  How well will they handle it?  How will it impact American companies with substantial business operations in China?  It will be negative for those companies, like Tesla, and McDonalds in addition to Apple.

The second major observation is the negative implication of rising militarism, in this case, in China.  As long as China was not a military threat to the US in the Asia Pacific region, we were happy to see them grow.  As we have seen more of their country’s treasure allocated to the military and their threats to Taiwan, they have forced the US to respond and try to blunt further progress by China.  In the modern world you don’t have to invade, you respond economically.  The US has done that by starting a trade war in 2018 by raising tariffs on Chinese imports to the US.  China responded by raising tariffs on imports from the US.  We both suffer, but China is suffering more.  Look whose economy is suffering deflation, and whose economy is steady.  The US is denying exports of certain high technology to China, such as our most powerful computer chips, which can be used for military purposes.  The conflict is primarily economic at this point.  While there are pockets of suffering in both nations, it appears China is suffering the worst of it.  When China cut off imports of US grains, the US passed a farm bill and gave money to those farmers who missed their sales.  Then the US sought alternate markets for our grain and we have come out OK.

Xi Jinping has been the Chinese president for a decade and I am not impressed by what I see.

The Chinese stock market is suffering.  One stock I am interested in is BYD, their auto maker.  They are going after export markets now that the domestic economy has slowed and they are selling at a significantly lower price point than their competitors.  In Chile, an entry level BYD car sells for $18,000 while the comparable Toyota Corolla is at $23,000.  I don’t know if the Chinese govt. is subsidizing the price of the BYD car and dumping them on the world market.  Chile does not care since they do not have an auto manufacturer.  The US will place tariffs on Chinese auto imports to keep them from bankrupting our remaining 3 auto makers.

Beyond auto exporters in China, I am not interested in investing there.  I think their government is making too many mistakes.

Technical Analysis:

For the week ending 3/01/2024, the S&P 500 was up 1%.

Technically (see chart below) the market looks positive, but extended.  RSI at the top of the chart is overbought at 70.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  The price action is positive, but rising at a rate that won’t be sustained in the long run.  I think a correction could start at any time, but nobody knows when.

One of the more interesting stories of the week was the great fall of Snowflake stock (SNOW).  They are a rapidly growing data analysis company and the stock has been surging more on future expectations and speculation than on actual performance.  They reported in-line earnings but guidance was light.  The stock fell by nearly a quarter of its over-inflated value, from 235 down to 185 in one day.  That is the danger in these trendy stocks; if they disappoint just a little they will get killed overnight.  I did buy a little SNOW on the pullback.

If the whole market corrects, SNOW will fall ever further.  That is why I only bought a little.  I want to have some dry powder in case the whole market corrects.  As we saw in the monthly Long Term report, the valuation of the market on a PE basis is significantly overvalued, which invites a correction, but the correction could be weeks or months away.  We just don’t know.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I’ve done some short term trading with small amounts of money.  I don’t want to get heavily invested in an overbought market that appears to be rising at a rate that is not sustainable long term.  I am looking at what to sell and when to sell it into strength.  They say buy low and sell high, and things are high.  We’re in a ripping bull market so it certainly can go higher, but that comes with an increasing risk of a correction.  We could also see a small clearing correction of 3-5% and then see the rise resume.  In a bull market, when things get overbought, then they can get more overbought.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

Is it a bull market or a bear market?

Why does healthcare cost so much?

Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.  Investing involves risk, including the risk of loss.

Rich Comeau, Rich Investing

Long Term – February 2024

Once a month, on the fourth Thursday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The second estimate of 2023 Q4 GDP is +3.2%, following Q3’s +4.9%. 

That is a warm read, well above the long term 2.0% trend.  By itself, it would not prompt the Fed to hike the Funds rate, but it would push out the estimated time for the first easing.

This is bullish for the stock market.

Year	Quarter	GDP %
2023	Q4	3.2
2023	Q3	4.9
2023	Q2	2.1
2023	Q1	2.0
2022	Year	1.0
2021	Year	5.5
2020 – Covid	Year	0.1
2019	Year	2.3
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – At the January meeting, the Fed left the Fed Funds rate unchanged at 5.5%.

After being balanced in the Fall meetings, the Fed indicated that future hikes are likely over.  Powell said they will be cautious about timing the first rate cut.  The bond market pushed out its timing of the first rate cut to June, with 3 cuts in 2024. 

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  The Fed continues to reduce its balance sheet by $90 billion per month and they have not indicated that they will end QT anytime soon.  This provides a constant supply of bonds in the marketplace and the market may have to offer higher interest rates to entice people to buy those bonds.  Are we seeing that in action right now, with rates backing up?  The treasury also sends a constant stream of bonds to the marketplace to finance our obscene deficit.

Local and regional banks have tightened lending standards making it harder for small and medium businesses to get loans to expand.  That will slow the economy down somewhat.

The latest CPI was +3.1% versus a year ago.  The 30 year fixed mortgage has ticked back up to 7.4% as the whole interest rate complex moved up a little, since the Fed indicated a slower pace of rate cuts this year.

Fed policy is restrictive for the economy, and bearish for the stock market.  But we are probably at the peak of interest rates, we have been on pause, and the next move appears to be down.  That will eventually be good.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Feb 2024	5.5	4.3	4.3	4.4
Jan 2024	5.5	4.0	4.1	4.4
2023 Q4	5.5	4.4	4.4	4.5
2023 Q3	5.5	4.4	4.3	4.4
2023 Q2	5.1	3.8	3.6	3.9
2023 Q1	4.7	3.8	3.6	3.8
2022 Year	2.8	3.1	3.1	3.2
2021 Year	0.2	0.8	1.4	2.0
2020 Year	0.4	0.6	0.9	1.6 – Covid
2019 Year	2.2	1.9	2.2	2.6
2018 Year	1.8	2.8	2.9	3.1 – Tax Cut
2017 Year	1.0	1.9	2.3	2.9

Valuation:

S&P 500 earnings – Factset shows that as of Feb. 16, for Q4 of 2023, the blended (79% actual, 21% estimated) year-over-year earnings increase for the S&P 500 is +3.2%.  It appears we have exited the “earnings recession” of 2023.

The forward PE for the S&P is 20.4 (up from 19.5 last month) compared to the ten year average of 17.7, but remember, the forward PE is just a guess. 

The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $240, unchanged from last month.

The Factset earnings estimate for 2024 Q1 is +3.9% (down from +5.4% a month ago) and their estimate for calendar year (CY) 2024 is +11% (down from 12% last month).  Earnings estimates in 2024 will have an easy comparison of year over year since the 2023 numbers were negative in Q1 and Q2 of 2023.

I made a point to contrast what future earnings estimates from Factset are compared to last month, and there is quite a big difference.  Telling the future is hard.  Why do I even bother to report future estimates of earnings?  Earnings (profits) drive the stock market.  I look to the pro’s for their estimates, then I take them with a grain of salt.  Even if the estimates turn out to be wrong, that is the data that the stock market is trading on today.  It’s the best we have, and it may be wrong by a little, or sometimes a lot.

The outlook for earnings is bullish at +3.2% for Q4.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 26.8, up a bit from 25.7 last month.  I used 4 quarters of earnings with the most recent being Q4 2023.  The S&P rallied upward since Nov. 2023, faster than earnings growth, so the valuation rose. 

This metric is significantly overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.  On the downside, I will go with 14-18 being moderately undervalued and 9-13 being significantly undervalued.  As a last resort, I will go with 4-8 as being egregiously undervalued, and hope we never see that because all investors will be in pain at that point.

This indicator is bearish.

Age of primary move, bull or bear market – This bull market is 17 months old, started in Oct. 2022.  The age is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political: (No change this month)

Liquidity:  Central banks globally raised rates to fight inflation, but most are pausing their interest rates.  Inflation appears to be coming under control, but it is not where the central banks want it.  They appear to be on pause to see if the hikes already in place will slow inflation to the target without additional hikes.

US / China:  It appears that the US and China are engaged in a tug of war to see who is the world’s economic leader.  China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas.  China developed the ability to produce advanced electronics with the aid of the US, but the primary market for those items is the US and Europe.  The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated.  Another major factor is global alliances.  The US has strong alliances with NATO, Canada, Japan, and S. Korea, while China has a strong relationship with Russia.

The economy in China is slowing more than their government would like.  Trade tension with the US contributes to the distress since US corporations are expanding outside of China, notably in Vietnam and India.  The Chinese govt. has been hostile to free market activity by their own corporations such as Alibaba and Ten Cent.  Their real estate sector was over leveraged and is in trouble.

Ukraine:  Thewar in Ukraine drags on.  Ukraine is having more success on the battlefield than most expected, with the help of western weapons.  Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult.  Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals.  Ukraine was a large exporter of wheat and other foods and that export is hindered by the war.  It appears that after the initial shock in the commodity markets when Russia invaded, prices have stabilized and the world is dealing with new sources and trading patterns.

Middle East Conflict:  Hamas launched a violent attack on Israel on Oct. 7, 2023 using missiles and ground forces and Israel has responded with bombings inside Gaza.  It’s a mess, but impact to the US economy is not noticeable.  The Houthi rebels in Yemen are firing missiles at shipping in the Red Sea, causing many ships to go around Africa to Europe instead of using the shorter Suez Canal.  That will increase wait times and raise transportation costs.

US National Debt:  (added Sept. 2023)  The US national debt is very large at over $34 trillion and it is growing too rapidly.  I have been concerned about it since early in this century.  If there is too much new debt and investors don’t want to buy the bonds that the US issues to fund the deficit, they may have to keep the interest rates high, particularly longer term interest rates, high enough to attract bond investors.  Companies will then have to pay higher rates to fund long term projects and that will cut into their profits.  Consumers facing high interest rates will slow purchases.  It is not a good situation for the economy.

Geo-politics is currently bearish, mainly due to the war in Ukraine and global central banks restrictive policy.

Technical:

Technically the chart below is bullish near term (months), and still positive longer term (year).

RSI at the top of the chart is positive at 67 and rising.  Momentum shown by MACD at the bottom of the chart is positive and rising.  The price action is positive near term and positive longer term.  

The price action is near the top of the long term up-channel, which will limit the upside probability from here.  Resistance comes in when we hit the top of the channel (we don’t have to go that high) around the 5,000 level.

This close to the top of the up-channel, there is the risk of a correction.  We can also go higher, above the top of the channel, like we did in 2021, but that was driven by excessive stimulus from the Covid cash infusion cycle from the govt.  I don’t see that type of stimulus now, in fact the Fed interest rates are restrictive.

Ten Year Chart of the S&P 500

This is bullish in the short run, and remains bullish longer term.

Conclusion:

1. GDP growth is bullish with Q4 GDP rising by 3.3%. 
2. The Fed has short term rates at 5.5%.  That is restrictive and bearish. 
3. S&P earnings for Q4 are +3.2% above Q4 2022 which is bullish. 
4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 26.8, which is significantly overvalued and bearish.
5. The geo-political factors are bearish.  
6. Technically the chart looks bullish short term, and bullish longer term.

By that way of looking at it, the market is neutral, with three factors bearish, and three bullish.

Long Term Issues to Keep in Mind:

National Debt: 

(January 2024) – The national debt is over $34 trillion.

(Late 2020) – The total national debt exceeds $26 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

(Updated March 2020) – Covid 19 begins.  Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

Rich Comeau, Rich Investing