Long Term – Jan. 2019

Once a month, on the Wednesday following the 15th 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 – Third quarter GDP was revised down a bit from 3.5% to +3.4% for the third estimate on Dec. 21.   Through three quarters, the average GDP growth is 3.2%, a nice growth rate.

The Jan. 16 update from the Atlanta Fed on GDPNow for Q4 is +2.8%, which is a good number that would drop growth for the year to 3.1% which is still a good number.

Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit in 2017 to 2.6%.  This GDP number supports the assertion that the bull market continues. 

Year Quarter GDP %
2018 Q3 3.4
2018 Q2 4.2
2018 Q1 2.0
2017 Year 2.6
2017 Q4 2.9
2017 Q3 3.2
2017 Q2 3.1
2017 Q1 1.2
2016 Year 2.0
2016 Q4 2.1
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates –  The Fed raised the Fed Funds Rate .25% to the range of 2.25 – 2.5% on Dec. 19, as expected, but they also indicated they see only two rate hikes in 2019 instead of the three they previously discussed.

Following the 12/19 press conference, the market proceeded to sell off hard.  Various Fed governors came out and softened the language saying they would be “data dependent” and not raise rates if the economy weakened.  Investors had been concerned that if the economy slowed due to the China trade war that the Fed was not indicating that it could cut rates to support the economy.  The Fed also indicated more flexibility on slowing the runoff of their balance sheet (as Fed owned bonds matured, selling them into the private market).  The market took the signs of greater Fed flexibility positively and we have rallied off of the late Dec. stock market low.

I was getting too much data in the table below and I thought readers would ignore it.  I decided to average the data for each quarter that was over a year old.  In that way I can keep a lot of meaningful data, and the reader will not have to wade through too much detail.  At least that is the plan.  Eventually I can average 4 quarters of data and keep some “years summary” data.  Then I can revisit the plan in 10 or 20 years, if I’m still blogging!  🙂

While rates are rising, I do not see a hostile interest rate environment.  For now, rates still support the long term bull market. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Jan 16, 2019 2.4 2.6 2.7 3.1
Dec 19, 2018 2.4 2.6 2.8 3.0
Nov 21, 2018 2.1 2.9 3.1 3.3
Oct 17, 2018 2.1 3.0 3.2 3.3
Sep 19, 2018 1.9 3.0 3.1 3.3
Aug 15, 2018 1.9 2.7 2.9 3.0
Jul 18, 2018 1.9 2.8 2.9 3.0
2018 Q2 1.7 2.8 2.9 3.1
2018 Q1 1.5 2.6 2.8 3.1
2017 Q4 1.2 2.1 2.4 2.8
2017 Q3 1.1 1.8 2.3 2.9
2017 Q2 .9 1.8 2.2 2.8
2017 Q1 .7 2.0 2.5 3.1
2016 Q4 .5 1.8 2.4 3.0

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 18.5, down from 20.3 last month.  I used 4 quarters of earnings with the most recent being Q3 2018.

This metric is neutral due to the recent correction in stock prices, relative to my trimmed 30 year average of 19.

This valuation is based on the Jan. 9th market price, after its recent significant drop.  The market is not overheating in this late stage of the expansion, which is good.  On the other hand, one might reasonably ask why the market did not do better in 2018 with the strong economic performance.  Higher interest rates from the bond market are starting to attract investment that a few years ago would have flowed into stocks.  This has the natural effect of lowering the P/E that investors are willing to pay for riskier stock investments, relative to bonds.  Also, the stock market rose following the Trump election on the PROMISE of what he would do, and the benefits of deregulation and tax reform.  Those effects are fully in the market now, and we are looking at a possible slowing of GDP growth and earnings, and negative effects of the China trade war.

In a bull market with valuation at the long term average level, this indicator is supportive of the bull market.

S&P earnings – The latest earnings estimate from Factset is for 10.6% higher earnings for Q4 than in the prior year (revised down from 13% last month).  These downward forecast earnings revisions are why I prefer to use trailing estimates for the valuation just above, because the trailing estimates DO NOT CHANGE, they are facts.  The forward looking estimates are useful, but you must take them with a grain of salt.  Look around at the world and see what else is going on.  Are the estimates too high?

This indicator is supportive of the bull market, but if estimated earnings for 2019 are continually marked down, volatility will continue.

Age of primary move, bull or bear market – The bull market is 9.8 years old, which is a long bull market by historical standards.  In and of itself, this is meaningless.  It does provide some perspective that one should keep in mind.

Geo-Political:

Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching, centered in the Yemen conflict (noted Dec. 2017).

In the US, we are approaching the point in the investigation into Russian meddling in the 2016 US presidential election where we will find out whether charges will be filed against the president’s closest advisors.  At that point a constitutional crisis could emerge.  A constitutional crisis is not a given, but if it occurs, I would expect the stock market to retreat for a while. (noted January 2018)

Trade wars are in effect with China and the EU.  I think some of the objectives Trump pursues are valid, but I am not confidant the method being used is the best.  This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products.  Growth is slowing in both Europe and China.  This is already a small negative for the economy, but currently the reports out of China on trade talks with the US are mildly positive.

Global geo-politics is supportive of the bull market, currently.  The trade issues are less supportive of the bull market than a year ago.

Technical:

January has been a good month so far, up about 5%.

Technically the market if flashing a caution sign on a long term basis.  Clearly we have had a significant correction the last 4 months.  However, we have not violated the long term uptrend channel decisively in both magnitude and duration.  The RSI at the top of the chart is at 52 which is neutral.  On a long term basis, if the downturn is a correction and not the start of a primary bear market, we could be near the bottom.  Momentum shown by MACD at the bottom of the chart is still in a downtrend, which is a negative.  The price action is questionable, having violated the bottom of the uptrend channel, but the market has rallied in January and if this does not get worse, it may show the bull market remains intact.

Both the 50-month and 200-month moving averages are rising and the market action remains above both of them, a positive sign on a long term basis.

2019 01 16 long term

The market’s technical indicators support the thesis that the long term bull market remains in force, however that support is the weakest it has been in over six years.

Conclusion:

The stock market remains in a long term bull market technically, and there is nothing in the general economy, in Fed policy, or in the global geo-political realm to overturn that conclusion.  However, the price action of the market has dipped below its long term uptrend lower level and this is a significant danger.  If this persists it would indicate the primary trend of the market has changed.

 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Negative – Noted Jan. 2018)  It 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.  With the Fed no longer buying the US government debt that is currently running at $650 billion per year, and will likely expand to $750 billion per year, who is going to buy that debt, and what interest rate will they demand before committing their capital to that investment?  If that causes interest rates to rise unexpectedly fast and high, that would pose a significant risk to the US economy.

With the ECB ending their QE bond buying by the end of 2018, and probably beginning to raise rates in 2019, this may divert some buyers of US treasury bonds to Euro bonds, and that would put upward pressure on US interest rates (noted June 2018).

The total national debt exceeds $20 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.

Rich Comeau, Rich Investing

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Rally – 2% Up Week

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update will be posted on Wed. the 16th.

Economy:

The ISM non-manufacturing index fell to 57.6 last month from 60.7 in the prior month. The index had hit a 21-year high of 61.6 in September, meaning it fell from a torrid pace to a brisk one.  Initial jobless claims, a rough way to measure layoffs, declined by 17,000 to a seasonally adjusted 216,000.  The consumer price index slipped 0.1% in December to mark the first decline in nine months, driven by the low price of oil.

Overall, the economy remains in good shape, but upsets are occurring in isolated segments, like homebuilding which is slowing due to higher rates.

Geo-Political:

This week’s trade talks with China seemed to go well.

Jan. 9, 2019 –  China’s Foreign Ministry said Wednesday that its trade talks with the United States had concluded, and that results would soon be released.

The length of the negotiations, which extended into an unexpected third day, suggests the serious nature of the discussions, the ministry said.

Asian stocks jumped after the talks were extended for an unscheduled third day, fueling optimism that the world’s largest economies can strike a trade deal to avoid an all-out confrontation that would severely disrupt the global economy.

Ted McKinney, U.S. Under Secretary of Agriculture for Trade and Foreign Agricultural Affairs, addressed the negotiations earlier in the day to reporters at the delegation’s hotel, saying “I think they went just fine.”

It’s been a good one for us,” he said without elaborating.

https://www.cnbc.com/2019/01/09/us-trade-delegation-wrapping-up-meetings-in-china-hopes-of-deal-build.html

Concluding a trade deal with China would be the best thing that could happen for the stock market, avoiding the disruption that higher tariffs would bring if a deal is not reached.  Both countries are being hurt, so I think a deal will happen.

The second major issue affecting the markets has been the Fed raising interest rates and normalizing its balance sheet, allowing the bonds we bought in the aftermath of the financial crisis to be sold into the private sector.  The Fed had indicated we would have 3 rate hikes in 2019, but backed off to 2 at the December meeting, and since the selloff following those comments, the Fed has made more dovish comments that it will be data dependent and could pause the rate hikes to see what effect all the previous hikes are having.  We clearly see the slowdown in housing.  The Fed has also sounded a more dovish tone regarding the runoff of the balance sheet.  As bonds mature in the Fed portfolio, if they are not bought again by the Fed, and private entities must buy them (corporations, individuals, and foreign buyers), liquidity is decreased and those entities can’t spend those dollars in commerce or the stock market.  There is also a demand by private investors for a higher return which puts pressure on bond yields to rise.

The important point about the Fed actions today is that they MUST BE DONE.  They must be done because the Fed used extraordinary means in the aftermath of the financial crisis.  Now we must take the medicine.  If you ask, well why did the Fed use extraordinary means, the answer is they did not want a re-run of the great depression, which was a real risk in 2009.  I never saw anyone put forward a practical solution other than what was done.  Some said we should have just let the banks fail, and the auto industry fail, and investors would have bought the pieces out of bankruptcy and built stronger companies.  Who has a lot of confidence in that alternative?  Not me.  Maybe it would have worked, but how shocked would Americans have been?  What other industries would have failed as scared Americans pulled in their horns and quit spending?  Nobody has ever given a coherent assessment of how low the bottom of the US economy would have been reached.  No responsible politician or financier has ever addressed that, and for a good reason, it was not practical and it entailed too much risk as nobody knew how much damage to the economy would occur under that scenario.  So, the Fed did what it did in 2009 and for a few years after, and now we MUST slowly undo it.  Don’t blame Jerome Powell (the Fed Chairman), he is doing what logically he must do.

Technical Analysis:

The market continued its recovery, up 2% last week.  The Fed has tried hard in several addresses to sound more dovish on rate hikes and the runoff of the balance sheet, and the stock market likes it.  The trade talks with China progress, and at least no bad news is coming from them.  Those are the two biggest problems we are facing.  On the downside, tariffs still are increasing costs for many American companies, and in earnings season starting this week we need to see what this means to their current profits and forward guidance.

Technically we can see a recovery beginning, but the question is will it have staying power.  Look at Relative Strength Index (RSI) at the top of the chart.  It is at 52 which is neutral in normal mode, but we are in correction mode and 52 can be “overbought” and time for a correction.  In this correction when the RSI has hit the 50 level, it has headed back down.  This made me very cautious toward the end of the week, and for safety reasons I lightened up, I took some of the profits I made the last few weeks since the Dec. bottom.  The market could go higher, but earnings season looms as a wildcard and profits were very strong last year at this time due to the tax cut, so comparisons will be difficult.  The dollar has weakened the last couple of weeks, but from a high level and it will still pose a headwind.  Momentum shown by MACD at the bottom of the chart is in a strong uptrend from the deep oversold bottom in late Dec.  Price action is negative, with the 50-day moving average below the 200-day moving average, and the price is below both of them.  The price will hit resistance at the 50-day moving average at 2625, just 1% up from here.  That is also the level of the little double bottom that had provided support in Nov. and Dec. (see the green horizontal dashed lines, the bottom one).  Old support becomes resistance.  It will be illustrative how the market acts at that resistance level.  If it fails to break above, then we will probably get a retest of the recent low at 2350, which would be a good thing if it is a successful test and remains above 2350.  I’m cautious.

One of these days I should clean up the chart, but I enjoy this one, it is so illustrative of the gyrations the last year, I’m going to keep it a while longer.

2019 01 12

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

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

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, or send me an email, my address is on the “About” page at the top of the blog.

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 so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.

Rich Comeau, Rich Investing

Volatility

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

Initial jobless claims, a rough way to measure layoffs, climbed by 10,000 to a seasonally adjusted 231,000 in the seven days ended Dec. 29.  The Institute for Supply Management said its manufacturing index fell to 54.1% last month from 59.3%. The last time the index has fallen more steeply was in October 2008, at the height of a U.S. financial crisis.  Sales of new vehicles in the U.S. rose slightly in 2018, defying predictions and highlighting a strong economy.  Automakers reported an increase of 0.3% over a year ago to 17.27 million vehicles.  The U.S. gained a whopping 312,000 new jobs in December to bring total employment gains in 2018 to a three-year high of 2.64 million (this is a surprising strong number, it could be revised down next month, let’s watch).  If it is not revised down, the Fed decision to hike the Funds rate would appear justified, at least somewhat.  Unemployment ticked up to 3.9%.

Geo-Political:

This week, we’ll just talk about China and Apple.  Apple on Wed. after the market close, pre-announced a significant revenue miss, down from a forecast $91 billion, to $84 billion for Q4.  That’s huge.  CEO Tim Cook said it was 100% iPhone sales in China that caused the miss.  I don’t think that is exactly right, so let’s discuss.

The miss by Apple is 7%.  The strong dollar caused 2% of the miss, according to Cook, just on the exchange rate.  There are currently no tariffs on iPhones by China, so that is not directly the problem.  However, there are reports of managers suggesting to their employees that during the trade war they should buy Huawei phones.  Around the country, others may have reached that conclusion on their own.  Some of Apple’s problems belong to Apple.  They have been very aggressive raising prices, and many have wondered when they would hit the tipping point of being too expensive.  They may have hit it.  The Huawei phone has caught up close to Apple, and it costs about half.  This has nothing to do with China, but Apple has not introduced a new compelling product in a long time.  The watch has been underwhelming in its market penetration, although it continues to gain feature and new sales.

The US trade delegation is meeting with the Chinese on Monday and Tuesday to see what they are doing and whether they are trying to meet US demands.  It is not clear what if anything China will ask of the US.  Both economies are hurting, so there should be some impetus for both sides to make a deal by March and put out some positive spin when this meeting ends.  But, stranger things have happened.  The president cannot like the tenor of the US stock market.

Technical Analysis:

The market was slammed down on Thur. by the Apple earnings miss, then it rallied strongly on Friday after Fed Chairman Powell indicated greater flexibility on raising rates this year.

Earning season gets into high gear on the 15th when JP Morgan and Wells Fargo report.  Today the financials rallied with the rest of the market, is good news coming from the banks?

Technically, things are up in the air.  RSI at the top of the chart is about neutral at 48, but considering the red line horizontal channel it has been in, it could also be considered overbought during this correction.  MACD has just turned up, a good sign for the short term.  Maybe the worst is over?  Price wise we have rallied off a deeply oversold bottom in late Dec., but nothing is proven.  The little rally off oversold was to be expected.  I made a little peanut money.

2019 01 04

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

What did I do this week?  Not much.  I bought CD’s and Treasuries with some 30-day money that matured (I was waiting for the Fed’s hike on 12/19 to capture that extra ¼ point).

I don’t plan to do anything big until after JPM reports on the 15th.  If they say business is good, and the rest of the market picks up on that, I’ll probably keep buying in slowly.

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

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, or send me an email, my address is on the “About” page at the top of the blog.

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 so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.

Rich Comeau, Rich Investing

Santa Rally

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

Initial jobless claims, a rough way to measure layoffs, slipped to 216,000 in the seven days ended Dec. 22, from a revised 217,000.  Two government economic reports were not released due to the partial government shutdown.  No surprises this week.

Geo-Political:

China appears to be blinking in the trade war with the US.  Resolution to these tough issues should not be expected quickly.

“Dec. 28, 2018 – China appears to be giving ground on U.S. demands to clean up its act on trade and foreign investment ahead of a new round of trade talks between the two sides next month.

In a draft law on foreign investment released earlier this week, Beijing proposed greater intellectual property protection for overseas firms operating in China and to refrain from interfering in the operation of foreign businesses. The law, published by the top legislature, could help address long-standing U.S. concerns that China is systematically stealing American companies’ technological know-how.

The move came amid continued signs that China’s economy is losing steam. On Thursday, the government reported that industrial output grew in November at the slowest pace in a decade, in good part because of the trade war with the United States and a drop in domestic auto production.

“The economy is slowing down for sure,” said Larry Hu, head of Greater China Economics at Macquarie Group. “It has already slowed over the past four quarters, and will slow for another four quarters.””

https://www.latimes.com/world/asia/la-fg-china-us-trade-20181228-story.html

If the US gets substantive concessions from China it will be a coup for the administration.  The next question will be what is the worth of the concessions made, and what did it cost us to achieve them?

Meanwhile, the Eurozone is slowing:

“December 14, 2018 – Leading data suggests that the Euro area’s economy ended the year on a weak note. The Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, fell from November’s 52.7 to 51.3 in December—the worst result since November 2014. Despite the fall, the composite PMI lies above the 50-threshold, signaling expanding business activity in the Eurozone.

Both the manufacturing and services sectors PMIs fell in December, leading to the decrease. New business inflows stuttered in December and employment growth fell to a two-year low. Weak demand was seen both at home and abroad with new export orders recording the sharpest drop seen on record and protests in France disrupting business activity in the Eurozone’s second-largest economy. On the price front, output price inflation eased but remained elevated due to firm commodities prices.

Regarding the two largest Eurozone economies, Germany’s composite output index fell to an over four-year low. Similarly, France’s plunged to a 30-month low hit by the ‘yellow vests’ protests.

FocusEconomics Consensus Forecast panelists expect the Eurozone economy to expand 1.7% in 2019, which is unchanged from last month’s forecast. For 2020, panelists expect the economy to grow 1.6%.”

https://www.focus-economics.com/countries/eurozone/news/pmi/pmi-falls-to-over-four-year-low-in-december

Technical Analysis:

The market ended the week up 3% after wild swings.  Monday was down 600 points, then Wed. was up 1,000 points and held the gains toward the end of the week.

Right now, the S&P 500 is down 6% for the year to date.  That would make it the first down year for the stock market in 10 years.  What the heck is going on?  Trump blames the Fed for raising rates, but with a Fed Funds rate of 2.5%, I don’t buy that argument.  The farmers and those who manufacture products out of steel blame Trump and the tariffs he’s imposed on imports for hitting their profits.  The general public is concerned about the trade wars and dysfunction in the administration.  Jeff Gundlach warned recently about the size of the US deficit and the runoff of the Fed balance sheet sucking liquidity out of the system, while at the same time the ECB has stopped supplying liquidity in Europe by ending their QE program.  Some have posited that the problem is not that the Fed is raising rates, but that they waited too long to raise rates and allowed the stock market to rise to levels not warranted by business activity.  Now we are correcting for the abnormal levels the stock market reached under emergency fiscal measures, even though the emergency was over at least 5 years ago.

Technically, the chart remains problematic, but it is improved over last week.  RSI at the top of the chart has improved from deeply oversold to low neutral at 40.  Momentum appears to be improving with MACD at the bottom of the chart trying to turn up from a very low level, which will be a short term positive if it continues.  The price action has given us a positive bounce off deeply oversold levels.

2018 12 28

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

What did I do this week?  I bought a little starting on Wed., SPY, Royal Dutch Shell for the dividend and an eventual bounce back in oil price, and some Visa.  But I don’t think this week told us much as all the big investment dogs were out of town on vacation.  The real story will be told in the week following Jan. 1.  If the market continues to rise, I will continue to buy in during the weeks ahead.

In the recent Jeff Gundlach interview I posted, he said he thought we had entered a bear market.  In my last monthly update, I said that to me, we are still in a long term bull market.  What gives, why the difference.  I admit, Mr. Gundlach has better training and more experience in the markets, plus access to better data than I do.  He should have more credibility, and that is why I posted his interview.  But, at one point in the interview, even he equivocates on whether it is a bear market.

The classic causes of bear markets are absent, no recession in sight, interest rates are not at hostile levels, there is no major geo-political event (the China trade war is a heartburn, but not a major event).  But could it be different this time?  Could it be that our $20 trillion government debt, growing at roughly a trillion dollars a year in good economic times and a rising interest rate environment, suck so much liquidity out of the system that the system grinds to a halt?  We could try to just print more money, but at what time will the world stop wanting to buy our bonds because the value of the dollar is going down?  We have just never been in this condition before, so it is hard to predict exactly what will happen going forward.  But this is the meat of Mr. Gundlach’s argument as to why we are in a bear market, because it is different this time, and our debt level will drag us down.  I am waiting to actually see signs of that in the stock market, while Mr. Gundlach is looking at debt and deficit conditions and feels confident enough in his ability to see the future effects of these conditions and is calling the shot right now, bear market.  My crystal ball is not that good.  Why do I have any readers of my blog?  I have no conflict of interest, as I am not trying to sell you anything.  I am free to say what I think.  I try to provide enough essential information to be meaningful, and yet keep thing short enough and not to wonky that you can make it through each week.  Jeff Gundlach, not so much.

My advice is “stay vigilant”.  A “set it and forget it” investing strategy at this time is inappropriate in my opinion, no matter what your financial adviser says, especially while he or she is compensated the most by keeping you in those high-fee stock mutual funds.  Bonds and CD’s finally have some sort of yield and if you don’t have any in your portfolio, assess your stock / bond mix.  I continue to like individual bonds from the Treasury (the safest) and CD’s which are safe if you are within the FDIC insured limit per institution (but CD’s are not all that liquid, particularly brokered CD’s from the brokerage houses).  I have some of each, CD’s and Treasuries.  I can capture a bit higher yield on CD’s and keep better liquidity with the slightly lower yielding Treasury.  I am generally staying under 2 years in duration while the Fed is raising the Funds rate and is expected to continue.

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

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, or send me an email, my address is on the “About” page at the top of the blog.

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 so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.

Rich Comeau, Rich Investing

7% Down Week on the S&P 500

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update was posted Wednesday and follows this post, so if you follow them just keep scrolling down to it.

Economy:

Existing-home sales ran at a seasonally adjusted annual 5.32 million pace in November, which was 1.9% higher than in October, but 7.0% lower than a year ago.  Initial jobless claims rose by 8,000 to 214,000 in the seven days ended Dec. 15.  GDP grew at an annual 3.4% pace in the third quarter instead of 3.5%, according to the government’s third estimate.  Durable goods orders in November rose a weak 0.8% in November, following a sharp 4.3% decline in the prior month.  Consumer spending rose 0.4% in November, and spending in October was revised up to 0.8% from the prior estimate of 0.4%.  The University of Michigan’s consumer-sentiment gauge registered a final December reading of 98.3 vs. a preliminary reading of 97.5.  The Leading Economic Index® (LEI) increased 0.2 percent in November to 111.8, following a 0.3 percent decline in October, and a 0.6 percent increase in September.  The GDPNow model estimate for real GDP growth in the fourth quarter is 2.7 percent on December 21.

The economy is softening.  We see it in housing and durable goods orders.  The Leading Economic Index is weak, with an actual decline in October (three months of decline forecasts a recession in the next six months, not there yet).  GDP, after the sugar high of the tax cuts, is coming back down to a normal range, if the GDPNow estimate for Q4 is close to reality (I find them reasonably close late in the quarter).  The consumer does not see a problem coming, with consumer spending strong, as well as consumer sentiment.  That is normal as the typical consumer does not watch the economy closely.  Employment is strong, which it typically is a TRAILING indicator that does not head down until the economy has been weak for quite a while.  I see caution flags in the economy.

Geo-Political:

There is a lot to read in this section this week, but it is VITALLY important and I hope you will be diligent and read all the way through!

Fed Chairman Jay Powell held his press conference announcing that the Fed hiked the Fed Funds rate by a quarter of a percent to 2.5%.  He also stated the Fed will probably only raise the rate twice in 2019 vs. the previously stated three times.  The Fed expects to continue reducing their balance sheet by allowing $50 billion per month of maturing bonds to be sold into the private markets, and Mr. Powell did not indicate that the Fed was flexible on that pace.

The markets reacted negatively to all the news, expecting the current hike, but hoping for more flexibility in 2019 on both rates and the runoff of the balance sheet.

What we are looking at is the other end of the horse that the Fed created in 2009 – 2015, dropping rates to zero and Quantitative Easing (buying bonds).  Some people decry the Fed saying they made a mistake, but they are Monday Morning Quarterbacks, yelling from the cheap seats.  What was their plan?  What pain would it have inflicted, and when?  Frankly I did not hear any good plan at the time.  They should just shut up and sit down.

The Fed had the control, they had a plan, and they executed the plan.  It was reasonable, given the disaster we were in.  You need a banking system, and the one we had needed to be saved.  What the Fed did was save the banking system, and defer the pain for a few years until the economy was stronger and could sustain the pain, and spread it out over a period of years instead of sustaining it all at once in 2008 – 2009.  Eventually the pain must be endured.  There was NO scenario in which the pain was eliminated, none at all.  Now, we have to have some heartburn as the Fed normalizes interest rates and has the private markets absorb the debt the government generated to bail out the economy through deficit spending.  What is happening now is exactly what should have been expected, and in my opinion, it is better than watching the banking system implode in 2008 and watching the great depression all over again, because that is just about what would have happened.

For all the weak whiners today, where were you in 2008 and what was your other plan?  Some folks without a clue just like to complain, and when you are never asked to actually act and do the best for the system, when you were never actually on the field of battle, it is easy to sit in the stands and complain.  A pox on them!

This is the other side of taking extreme action to save the system when it was in a disastrous position.  In “normalization” we will see the long term results of what we did to save the system.  There is going to be heartburn, but it will be spread out over time.

So, what should you do about it?  Watch the market, see what its primary direction is, and behave appropriately.  More on that in the next section.

There was a great interview on Wednesday with Jeffery Gundlach, CEO at Doubleline and a very successful investor.  He is bearish and some of his comments are below:

SCOTT WAPNER: That’s right. We’re still volatile in the market. Today is another representation of that. We’re still about 50 points above on the S&P of the February lows.

JEFFREY GUNDLACH: Yes.

SCOTT WAPNER: Do you think we’re going to go below that?

JEFFREY GUNDLACH: Well in the fullness of time, I think absolutely we’ll go below that. I’m pretty sure this is a bear market. People like this definition of 20% down as a bear market, but that’s obviously very arbitrary. I’ve been around over 35 years in the business and have seen a number of bear markets. It’s more about how you lead into it, how it develops and how the sentiment changes, and I think we’ve had pretty much all  of the variables that  characterize a bear market I remember going — usually  something happens that really  doesn’t make any sense at all  and I’m kind of amazed how it  goes on longer than it should  like back in the dotcom days when companies were being IPO’d  and had no sales let alone revenues that’s hard to be and they would actually explode to  the upside on the IPO. That’s kind of crazy and then we had the subprime lending with pick a pay loans back in ’05 and ’06 and that was kind of crazy and that went on longer than it should have. This time like we talked about a year ago it was crypto, bitcoin which was truly a mania, we talked a year ago it just went up. Maybe in the end it’s a good thing or the block chain technology is a good thing. The way it was being treated and believed in was a mania and then it crashed about a week after we met a year ago and it was at 17,500 when we were speaking right in this spot and of course now it’s down below 3,500 so an  85% decline. And one after another you start to see various sectors of the global financial markets give it up. The global stock market peaked January 26th. And so did the New York Stock Exchange composite, January 26 but the Dow Jones Industrials, the Nasdaq, the S&P 500. All of  these things, one by one,  started to roll over and come  the summertime or later in the summertime you were down to the FAANGs and then you were down to two stocks it was amazon and apple and then amazon gave it up. And then finally when they decided they weren’t going to tell you how many phones they sold anymore apple gave it up.

SCOTT WAPNER: That was the last straw.

JEFFREY GUNDLACH: That was kind of the last straw.

<snip>

SCOTT WAPNER: Is it a long lasting bear market or it can be short term as some have suggested on our air and then this secular bull market will resume?

JEFFREY GUNDLACH: I don’t think so. I think it’s a bear market.  I think we’ve had the first leg down and the second leg down is usually more painful than the first leg down if this is indeed a bear market. Maybe in the short term we’re getting flushed out. I think it’s lasted a long time. It has a lot to do with the fact i believe we’re in a situation that maybe unprecedented was too strong but it is highly unusual that we are increasing the budget deficit so spectacularly so late in the cycle while the fed is hiking interest rates. I know you’ve teased the segment by talking about the suicide mission I’ve been talking about for months.  The fed almost seems to be on a suicide mission. What i mean by that the deficit in the United States is extraordinarily high from where we are in the economic cycle and given what the debt level accumulated is already.  In the first two months of fiscal ’19 it was just announced last week there’s a funny thing that happened in November where the payments for December ended up being pushed to November because December 1st was on a Saturday if you take that out it’s $44 billion that’s a big number. So if you wake that out and say that’s December and not November. Still, the first two months of fiscal ’19, the budget deficit is going up at an annualized rate of $1.62 trillion. And that’s the official budget deficit. The actual budget deficit is larger than what the report — for example, for fiscal ’18, which ends September 30th, the deficit was around $800 billion. But the national debt went up by $1.3 trillion almost now. Why? What’s the difference there? There are items that are off budget. So the budget deficit really for fiscal ’18 was $1.3 nearly trillion that’s 6% of GDP and we’re supposedly having a good economy and we’re supposedly having jobs growth and all this other great stuff. In actuality we increase the deficit by 6% of GDP since government deficit change is a significant fraction – a significant variable in the GDP equation it seems to me there’s no real economic growth that’s happening away from the deficit. So what worries me is that as we move into a weaker economy,  which will happen at some points and certainly the economy looks  weaker now than it did entering  2018, that the deficit will  continue to expand at a rate which could be prohibitive for the usual decline in interest  rates helping to stimulate the economy. That’s what I think is the real big variable investors need to focus on. And while this is happening with the deficit exploding, the fed is raising interest rates which means the interest expense is going to be increasing year by year as these zero interest rates that we had for a number of years start to roll off and the bonds have to be refloated once they mature, the next five years we have something like $7 trillion of treasuries that are maturing the average coupon on those treasuries is almost as low as 2%, slightly higher, 2.1%. When they roll over, they’re going to be at a higher interest rate because the fed has been on the suicide mission of raising interest rates so the interest expense on that $7 trillion of treasuries is going to be — maybe the rate will be at 3% like it is now or maybe 4% and you might even see we have an expense that goes up $100, $140 billion. So kind of the … of our government is coming back to haunt us ultimately. In financial markets, these things go on so much longer than they should Ross Perot ran for president running infomercials about we were doomed on the deficit and there was a book written in  1992, that same year, that was somewhat sponsored by the  Peterson Foundation called bankruptcy 1994. And the idea behind the book was we have this compounding curve and this debt problem that is going to come back and really cause us problems. Well, he was early.  He was early by at least 26 years. But he’s right, you can’t keep going on with the debt finance scheme, and I’m worried when the next recession  comes we could be looking at, well heck, we’re supposedly in a good economy and the next two  months we’re running $1.6  trillion what if we go into a recession what’s the deficit going to be $3 trillion? And does that mean interest rates don’t go down during the next recession, which is an idea I’ve been noodling around for a long time maybe they go higher with I’ve had a call the next two years that come 2021 the ten-year treasury will be at 6%. I get a lot of pushback a lot of debt deflation is out there in the twitter-sphere absolutely wrong the economy can’t handle higher interest rates.  Interest rates might have a life of their own.  It might not matter what the market can handle or can’t handle.

The full interview is at: https://www.valuewalk.com/2018/12/doubleline-capital-ceo-jeffrey-gundlach-cnbc/

That sounds similar to the concern I expressed in my Oct. 7th, 2017 “Geo-Political” section, where I was worried about a future SPIKE in interest rates.  Check out that section in the archive.

If this comes to pass, it will be on Trump and the republicans who have chosen to cut taxes and raise spending on defense, doubling the deficit of the final Obama year.

Technical Analysis:

The market was down about 7% in a brutal week.  The markets did not think the Fed was dovish enough, there is not enough progress in trade talks with China, the Mueller investigation continues to obtain plea deals that close in on the president, the defense secretary resigned with a scathing letter denouncing Trump policy in military and foreign affairs, and there is the sense that growth is slowing.  It seems hard to find anything good to bolster the stock market right now.

Technically the market looks awful.  What happens in the next few weeks will be illustrative.  The next 10 days will mean nothing because so many professionals will be on vacation, volume will be low, and a few moves will be able to move the market on the low volume.  The real tell will be when the pros return on Jan. 2nd and in the next week.

On the chart, RSI at the top is heavily oversold at 22.  This suggests that if this remains a bull market, we should get a bounce to the upside soon.  If we do not get an upside bounce soon and the market tends to remain oversold and then get more oversold, the case begins to build that it is bear market action and the primary trend may have changed.  Everyone needs to be thinking about what to do in that case.  Momentum is clearly down shown by MACD at the bottom of the chart.  The price action is negative and on a more negative note, it has broken below the lower level of the trading range from last winter at 2580.  The market is unhinged.

2018 12 22

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

What am I doing?  I don’t have to do much since I sold out (mostly) several weeks ago, so I have missed most of the carnage, although I did sustain some damage before I sold out.  As I mentioned at the time, I bought CD’s and Treasury bonds with the longest maturity of one year, taking each account to 10% or 20% fixed income.  I only bought the actual bonds, NO bond funds.  I picked up a couple of stocks on very lowball buy orders that I had out so I’ll see how that works out, but its speculative and I see no reason to entice my readers to speculate.

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

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, or send me an email, my address is on the “About” page at the top of the blog.

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 so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.

Rich Comeau, Rich Investing

Long Term – December 2018

Once a month, on the Wednesday following the 15th 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 – Third quarter GDP remained at 3.5% for the second estimate.  Through three quarters, the average GDP growth is 3.2%, a nice growth rate.

Annual GDP growth has been stable for a few years at a 2% annual rate and moved up a bit in 2017 to 2.6%.  This GDP number supports the assertion that the bull market continues. 

Year Quarter GDP %
2018 Q3 3.5
2018 Q2 4.2
2018 Q1 2.0
2017 Year 2.6
2017 Q4 2.9
2017 Q3 3.2
2017 Q2 3.1
2017 Q1 1.2
2016 Year 2.0
2016 Q4 2.1
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates –  The Fed raised the Fed Funds Rate .25% to the range of 2.25 – 2.5% on Dec. 19, as expected, but they also indicated they see only two rate hikes in 2019 instead of the three they previously discussed.  The Fed will also change a policy in 2019 and they will have a press conference after each of the eight meetings of the year.  Since the Fed has not raised rates at a Fed meeting where there was not a press conference, this means that all eight Fed meetings will be “live” and could have a rate increase, where in the past there were only 4 “live” meetings per year.

Note that while the Fed Funds rate has edged up, the five, ten and thirty year bond rates have fallen, flattening the yield curve a bit.  An inverted yield curve is more dangerous, and a flattening yield curve “may” be at step on the way to an inverted curve.  It bears watching right now.

For now, rates still support the long term bull market. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Dec 19, 2018 2.4 2.6 2.8 3.0
Nov 21, 2018 2.1 2.9 3.1 3.3
Oct 17, 2018 2.1 3.0 3.2 3.3
Sep 19, 2018 1.9 3.0 3.1 3.3
Aug 15, 2018 1.9 2.7 2.9 3.0
Jul 18, 2018 1.9 2.8 2.9 3.0
Jun 20, 2018 1.9 2.8 2.9 3.1
May 15, 2018 1.6 2.9 3.1 3.2
Apr 18, 2018 1.6 2.7 2.8 3.0
Mar 21, 2018 1.6 2.7 2.9 3.1
Feb 21, 2018 1.4 2.7 2.9 3.2
Jan 17, 2018 1.4 2.4 2.5 2.8
Dec 19, 2017 1.4 2.2 2.5 2.8
Nov 15, 2017 1.1 2.1 2.4 2.8
Oct 18, 2017 1.1 2.0 2.4 2.9
Sep 20, 2017 1.1 1.8 2.2 2.8
Aug 16, 2017 1.1 1.8 2.3 2.9
July 18, 2017 1.1 1.8 2.3 2.9
June 20, 2017 1.1 1.8 2.2 2.8
May 17, 2017 .9 1.8 2.3 2.9
Apr 18, 2017 .9 1.7 2.2 2.8
Mar 15, 2017 .9 2.1 2.6 3.2
Feb 15, 2017 .6 2.0 2.5 3.1
Jan 18, 2017 .6 1.9 2.4 3.0
Dec 21, 2016 .6 2.0 2.6 3.1
Nov 15, 2016 .4 1.6 2.2 3.0

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 20.3, down from 20.8 last month.  I used 4 quarters of earnings with the most recent being Q3 2018.

This metric is slightly overvalued due to the recent rally in stock prices, relative to my trimmed 30 year average of 19.

This valuation is based on the 12/13 market price, after its recent significant drop.  The market is not overheating in this late stage of the expansion, which is good.  On the other hand, one might reasonably ask why the market is not doing better this year with the strong economic performance.  Higher interest rates from the bond market are starting to attract investment that a few years ago would have flowed into stocks.  This has the natural effect of lowering the P/E that investors are willing to pay for riskier stock investments, relative to bonds.

In a bull market, stocks can remain overvalued for years, so this is not a sell indicator.

S&P earnings – The earnings estimate from Factset is for 13% higher earnings for Q4 than in the prior year.  Unfortunately, that is down from their estimate of 17% growth for Q4 that they put out on Sept. 30, so Factset is taking down earnings estimates.  The stock market tries to look 6 months ahead, and apparently it does not like what it sees coming up for Q4 and the first half of 2019.

This indicator is supportive of the bull market, but if estimated earnings for 2019 are marked down, volatility will continue.

Age of primary move, bull or bear market – The bull market is 9.7 years old, which is a long bull market by historical standards.  In and of itself, this is meaningless.  It does provide some perspective that one should keep in mind.

Geo-Political:

In the US, we are approaching the point in the investigation into Russian meddling in the 2016 US presidential election where we will find out whether charges will be filed against the president’s closest advisors.  At that point a constitutional crisis could emerge.  A constitutional crisis is not a given, but if it occurs, I would expect the stock market to retreat for a while. (noted January 2018)

Trade wars are in effect with China and the EU.  I think some of the objectives Trump pursues are valid, but I am not confidant the method being used is the best.  This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products.  This is already a small negative for the economy, and has the prospect of getting worse.

Global geo-politics is supportive of the bull market, currently.  However, the list of concerns that could tip the market is growing.  The trade issues are less supportive of the bull market than a year ago.

Technical:

December has been a tough month, with the S&P down 10% so far this month.

Technically the chart shows a lot of risk.  RSI at the top of the chart has fallen from overbought to neutral at 48, and is still headed down.  Momentum shown by MACD at the bottom of the chart has turned down and that is negative.  Price action has deteriorated significantly and is poking below the bottom of the long term up-channel we have been in since 2010.  We have dipped below the trend line briefly in the past without losing the longterm uptrend (see Oct. 2011).  However, the last time we dipped below the uptrend channel, we were early in the bull market, and now it is late in the bull market.  Traders who follow this long term view of the market have committed that they don’t want to sell out except to avoid the majority of a bear market, which means they are OK to absorb some of the bear market losses, when the downturn cannot be distinguished from a serious correction.  For that set of investors, it is still too early to call this a bear market.  The violation of the lower bound of the long term uptrend must be definitive, both in magnitude and duration, and we are just not there yet in my opinion.  However, we are closer than we have been in years.  Even long term investors need to take a hard look at this market and ask what do you want to do if it does turn into a primary bear market.  My market philosophy is that during a primary bear market, you need to sell out and wait for the next bull market to begin.

2018 12 19 Long Term

The market’s technical indicators support the thesis that the long term bull market remains in force, however that support is the weakest it has been in over six years.

Conclusion:

The stock market remains in a long term bull market technically, and there is nothing in the general economy, in Fed policy, or in the global geo-political realm to overturn that conclusion.  However, the price action of the market has dipped below its long term uptrend lower level and this is a significant danger.  If this persists it would indicate the primary trend of the market has changed.

 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Negative – Noted Jan. 2018)  It 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.  With the Fed no longer buying the US government debt that is currently running at $650 billion per year, and will likely expand to $750 billion per year, who is going to buy that debt, and what interest rate will they demand before committing their capital to that investment?  If that causes interest rates to rise unexpectedly fast and high, that would pose a significant risk to the US economy.

With the ECB ending their QE bond buying by the end of 2018, and probably beginning to raise rates in 2019, this may divert some buyers of US treasury bonds to Euro bonds, and that would put upward pressure on US interest rates (noted June 2018).

The total national debt exceeds $20 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.

Rich Comeau, Rich Investing

Market Down Nearly 3% This Week

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update will be posted on Wed. Dec. 19.

Economy:

The consumer price index was unchanged in November, due to the drop in gasoline prices.  Initial jobless claims plunged by 27,000 in early December to 206,000 and they remain near a 50 year low.

It was a quiet week for data.

Geo-Political:

The ECB (European Central Bank) announced it will end their QE bond buying program after the Dec. purchase, and they do not expect an interest rate hike until summer.  The private market will have to buy the bonds formerly bought by the ECB, and that money will move to the sidelines and not be available to put into the stock market or to consume goods.  Liquidity will be reduced.

The trade war is taking a toll on the Chinese economy, and unfortunately also on the US economy.

Dec. 13, 2018 – China on Friday reported industrial output and retail sales growth for the month of November that missed expectations, according to data from the National Bureau of Statistics, as the world’s second-largest economy started to show signs of slowing amid a bitter trade dispute with the U.S.

Industrial output in November grew 5.4 percent from a year ago — the slowest pace in almost three years as it matched the rate of growth seen in January to February 2016, according to Reuters records.

The growth in industrial production was lower than the 5.9 percent analysts in a Reuters poll had predicted.

Retail sales rose 8.1 percent in November — the weakest pace since 2003, according to Reuters’ records — lower than the 8.8 percent the analysts expected. November retail sales growth was down from 8.6 percent in October.

Fixed asset investment rose 5.9 percent from January to November, marginally higher than the 5.8 percent the economists had forecast. FAI rose 5.7 percent from January to October.

https://www.cnbc.com/2018/12/14/china-reports-november-fixed-asset-investment-industrial-production.html

The Chinese also announced they will roll back the tariff they placed on imported US autos.  This is constructive, since the US announced they will not hike our latest tariff on Chinese imports from 10% to 40% on Jan. 1.  Both sides are showing some willingness to give a little to get the negotiations started.  Now we wait 75 more days to see if anything substantive can be worked out.  The issues are large and complex and it will take more than 75 more days, but SOME progress needs to be made before March.  The stock market remains skeptical as it is continuing down.  Perhaps the stock market is bearish on earnings for 2019 also.

Our Fed meets next week and will announce its decision on interest rates on the 19th.  Most expect they will hike ¼% but soften their view of the future to be more “data dependent” and indicate a willingness to halt the rate increases if economic conditions weaken.  The market would probably like to hear that.

Technical Analysis:

The market was down about 1.5% for the week, with the biggest loss coming on Friday.  Some investors are moving to the sidelines for now.

Dec. 14, 2018 – Investors fled U.S. equity funds at the fastest pace on record in the week ended Wednesday, according to data from Lipper. More than $46 billion was redeemed from U.S. stock mutual funds and ETFs between Dec. 5 and 12, the largest weekly outflow since Lipper began tracking weekly flows in 1992. The data comes amid a continued stock market selloff that’s driven the S&P 500 (SPX) into correction territory and left it on track for its biggest quarterly loss since the third quarter of 2011.

https://finance.yahoo.com/m/5459f0cc-d9eb-3b34-9545-5e25690d2cd3/investors-flee-u.s.-stock.html

The S&P is down 3% year-to-date and it is down 13% from its October peak.  I’m still positive for the year and beating the S&P which is always nice.  As a conservative investor, I tend to under-perform on the way up, and I try to be out of the market for the big drops, so I tend to outperform in corrections and bear markets.  That helps me to sleep better at night.  If you read in the tutorials section of this blog (top of the page, on the headings line), you will see that an “x%” loss hurts you more than an “x%” gain helps you, you will understand something about my investment philosophy and hopefully that will help you in the long run.

Technically, there is nothing to like about the chart.  RSI at the top of the chart is at 37 and heading down.  Momentum shown by MACD at the bottom of the chart is headed down.  Daily movement of the price action is down.  To make things a little worse, the price has dropped below the double bottom at the bottom of the trading range we were in for the last two months.  The next downside support is at 2580, the bottom of last winter’s trading range, but that is just a scant 20 points down.  If that is breached, the next downside support is at 2475 back in July 2017.  I added a small purple circle on the right hand side of the chart and that is where the “death cross” occurred, where the 50 day moving average crossed below the 200 day moving average.  There have been death crosses that did not portend a dire future, but sometimes they do.  The 50-day moving average is below the 200-day moving average, and the price is below both of them.  That is classic “serious correction” or bear market mode.  The longer the market remains in that pattern, the more credence it gives to the idea that the market may have changed from a bull to a bear.

2018 12 14

 

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

I sat on the sidelines last week.  I bought a bit of AT&T with a low-ball buy order.  I am only buying small quantity of stocks at a time, just starting positions.  I’m looking for a large quality company with growth opportunity and a dividend.

I continue to believe we are in a correction in a long term bull market.  Why?  None of the classic causes of a bear market appear to exist.  GDP growth is good, interest rates are rising but not hostile to economic activity, the market is not extremely overvalued, and short of a shooting war, there are no geo-political risk factors that would torpedo the market unless Trump ratchets up the trade war with China.

That is easy to say, but let me be hard on myself and ask what could be wrong with that simple analysis.

GDP growth is good, and there is no denying that, it is a fact that is regularly published by the government.  The market is not extremely overvalued, that is a fact that I obtain from Standard and Poors website each month.  This is the easy good news.

Now let’s question the assertion that interest rates are rising but not yet hostile.  Clearly they have risen; you can check this on any monthly “Long Term” post in this blog.  So, are they hostile???  Hostile is a relative word, somewhat in the eyes of the beholder.  1) Relative to history, a Fed Funds rate at 2.2% is low, and a ten year bond yield at 3% is low, and they should not be “hostile”.  On the other hand, things could be different this time!  When you hear anyone say that about long term trends, be suspicious, but sometimes it is true.  In the housing market, 30 year fixed mortgages have moved up from 3.5% to 5%, and long ago when home prices were half what they are now, 5% was no problem (people actually had 8% mortgages, on much lower loan amounts).  But it is different now; the median home price in America is $320,000, and it has never been that high before.  This time it is different in the housing market and it is possible that the interest rate is hostile to some sectors of the economy and not to others (like Tech).    2) The economy was heavily manipulated by the government and the Fed the last 10 years to recover from the financial crisis in 2008, and as we normalize we don’t really know what the long term effects of that manipulation will be.  This time it MIGHT be different!  3) The last thing that MIGHT be different is unprecedented levels of debt, domestically, internationally, government debt and corporate debt.  Many corporations borrowed money simply because it was so cheap, and some used it simply to buy back their stock and drive the stock price up for the benefit of the current CEO (who may be retired when the money has to be paid back and represents a drag on earnings).  Everybody has to service all this debt, and that could put a drag on economic activity.  So, there is a case that can be made that “this time it’s different”, in a bad way.  It is possible that interest rates are at a level that historically would not be viewed as hostile, but given the facts regarding the structure of the economy today, the interest rates could in fact be hostile.  I don’t know enough to say that for a fact yet, but if this stock market was to turn into a bear market, it would have to do so while the main historical indicators are all positive, or at least they appear positive because something fundamental in the underpinnings has changed and old rules of thumb no longer apply in the same way.  This is a long paragraph (sorry!), but you should read it again and understand it.  I am going to be wary of blind belief in the old rules of thumb, and that will make things more difficult to assess.

That leaves geo-political risks and they are out there.  Watch the China trade situation, and the slowing of GDP in most regions of the world.  They are not bull market killers yet, but they could become killers of the bull market if they head in the wrong direction.

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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 so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.

Rich Comeau, Rich Investing