Trading Sideways

The monthly Long Term update was posted on Wed., so if you missed it just scroll down past the bottom of today’s post.

Updating each Saturday.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.  You can always scroll down a few weeks and find the latest “Long Term” update.

Economy:

The CPI rose 0.3 percent in December to lift the year-on-year rate by 4 tenths to 2.1 percent.  In a solid signal of strength for the January employment report, initial jobless claims fell a very sharp 15,000 to a much lower-than-expected level of 234,000.

It was a light week for statistics.  The Fed has wanted to get inflation up to their target of 2% prior to hiking rates, and we are hitting the 2% year over year mark.  This should give the Fed a green light for at least 2 rate hikes this year, or 3 if they think they are behind the curve.

Geo-Political:

China is planning how to retaliate against Trump tariffs, to hurt the US and not hurt China:

“Boeing aircraft and U.S. soybeans may be among U.S. goods targeted by China if bilateral trade tensions escalate and Beijing retaliates against U.S. tariffs threatened by president-elect Donald Trump’s administration.

Capital goods – including aircraft manufactured by Boeing, turbines for power generation and transportation equipment – are an ‘obvious candidate’ for retaliation, wrote Eurasia Group analysts Evan Madeiros and Michael Hirson in a report on January 18.

“Beijing will target sectors it believes will resonate politically with the Trump team, including sectors that touch Trump’s political base,” the analysts wrote.

Beijing would approach alternative suppliers in Latin America for agricultural goods and in Europe for commercial aircraft should trade relations with the U.S. sour, former U.S. ambassador to China Gary Locke told CNBC on Friday.

“Chinese airlines do not have to buy Boeing planes, they can buy Airbus,” Locke said. “The list goes on and on, and that will cost American jobs, good paying jobs.”

http://www.cnbc.com/2017/01/20/boeing-and-beans-on-chinas-blacklist-if-us-trade-tensions-worsen.html

Trump may be used to negotiating where he is the only billionaire in the room, and he is offering something of value (a hotel or casino, and the tax revenue and jobs that it brings) to a city that will get NOTHING if they don’t get the hotel, or to a business that could double its sales if they get the deal.  It is different in dealing as head of a nation, because when dealing with China, they have comparable strength.  The USA, China, and the European Union are the three largest economic spheres in the world, and their GDP’s are all comparable in size.  The US can hurt China with tariffs, but China has the power to hurt the US back by taking their purchasing elsewhere.  The playing field is much more even than a city or another business negotiating with Trump.

Technical Analysis:

The market is just treading water here.  There was a nice Trump rally looking forward to a trillion dollar infrastructure stimulus, and his other proposals.  Trump is a good marketer and likes good publicity, and he has promised to sign executive orders to reduce regulations, so we will see some low hanging fruit, good news actions in the coming week.  Eventually reality will hit; not everything will be easy.  That is when we will be vulnerable to a correction.  Politics, and investor psychology are a bigger factor in the market now than they usually are, which is normal for a presidential change in power.

We are early in earnings season, with about 10% of companies reporting so far.  Earnings so far look good, particularly at the banks who report early.

Technically (the chart), the market rallied to the top of its current channel, then started trading sideways.  RSI is the upper graph and on the right we see it is at 58 and trending down, in neutral territory.  MACD is the lower graphic and it is trending down showing slow momentum of the market.

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Market vulnerabilities:  I’m watching earnings reports to see if anyone mentions the dollar rally as depressing revenue and earnings, but so far it has not been mentioned.  I don’t expect a fight between Trump and congressional republicans early on, but it could happen.

I did my first day trade in 10 years, buying and selling VXX in expectation of volatility picking up, and I had to get out before the inauguration when I expected a good day.  Made a little and had some fun.  I also sold my FB and AMZN, they had run up to overbought since I bought them.  I’m light on stock now, waiting on a correction to provide a better entry point.  I’d like to see a pullback to at least the 50 day moving average (“MA(50)” on the chart legend on the upper left), which is not that far away.

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!

Rich Comeau, Rich Investing

Long Term January 2017

Once a month, on a Wednesday around mid-month (15th or the next week), 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 when a bear market begins, or enter the market when 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 revision (12/22/2016) of GDP for the third quarter showed the economy grew 3.5%, a good number.  Not to get too excited about it, GDP is very seasonal; it is usually weakest in Q1, better in Q2, and best in Q3 and Q4.  This GDP number supports the assertion that the bull market continues.

Year Quarter GDP %
     
     
     
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates – The Fed hiked short term interest rates by a quarter of a point on Dec. 14, to the range of .5 – .75%, which I call .6% in the table below.  The market has accepted this rate increase without complaint, so it must think the economy is strong enough to take the rate hike.  The direction of rates has changed from falling rates to rising rates.  This will be OK until it begins to slow home and car purchases.  Home prices have risen to pre-crash 2006 levels in most cases, but wages have not kept up, and only historically low interest rates have allowed consumers to buy the homes at these prices.  As interest rates rise, and home affordability slips, I expect some pressure on home prices and auto sales.

Higher rates are driving the dollar up in value, and this will depress the earnings of multi-nationals.  Let’s watch for this during the current earnings season.

The higher rates will be good for savers, who have been punished for the last 10 years, with low yields on safe investments like bonds and CD’s.  This puts a drag on the economy, when retirees don’t see the disposable income to go out and spend on eating out or taking vacations.

Low rates have been a two-edged sword.  Higher rates will have the same two edges, in reverse impact.  I don’t like bond funds in here, and if you buy a bond on CD, keep it short term in maturity, like a year.

Rates have no impact on the bull market, yet.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
         
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 25.5, up from 25.1 last month.  I used 4 quarters of earning with the most recent being Q3 2016, the last quarter that we have complete earnings data for, and the Jan. 12, 2017 S&P value.

This is moderately overvalued relative to my trimmed 30 year average of 19.  The lower the interest rate which represents a safe return, the higher the PE that the market can support.  Rising rates will threaten the valuation unless earnings rise faster than stock prices, to move the PE lower.

You will hear analysts talk about a PE or ‘multiple’ on the market of 19 vs. an average of 17, and they are using FORWARD earnings, which are ESTIMATES.  Sometimes they come true and sometimes they don’t.  I use trailing earnings since they are all FACTS.

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

S&P earnings – Earnings for the S&P for Q3 ended UP 9% vs. the same quarter a year earlier, and they were also up quarter over quarter.  This is where the rubber meets the road, and with earnings improving, the stock market is in better shape than it was the last couple of years when we had an earnings recession.  Hopefully the acceleration in earnings will be faster than the rise in the stock market itself, and move the valuation down to safer levels.  There is no threat to the bull market here.

Age of primary move, bull or bear market – The bull market is 7.8 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:

The global economy is relatively quiet at the moment and most regions show slow steady growth.

Technical:

Technically the S&P continues to run in the bull market channel it has been in for the last 7 years.  This is good news as the market’s price action indicates the long term bull market remains in force.  The RSI (Relative Strength Index, upper right) is at 69, near overbought, but you can see months-long periods where the RSI remains overbought.  MACD (Momentum, lower right) is turning up showing good market momentum now.

2017-01-18-sp-long-term

Conclusion:

The stock market remains in a 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.

Rich Comeau, Rich Investing

Rally on Hold

Updating each Saturday.  The monthly “Long Term” update will be on Wednesday.

Economy:

Jobless claims remain very low, at 247,000 for initial claims in the January 7 week vs Econoday expectations for 255,000.  Retail sales did post a very solid gain in December, up 0.6 percent, but without autos the gain falls to only 0.2 percent.  Consumer sentiment is holding at cycle highs but isn’t climbing further, at 98.1 for the preliminary January index for a 1 tenth dip from December.

Data on fourth-quarter inventories are looking heavy, up 0.7 percent in November in an offset to a revised 0.1 percent draw in October. Both retailers and wholesalers show large 1.0 percent builds in November with manufacturers at a 0.2 percent build. Given weakness in total sales, up only 0.1 percent, the stock-to-sales ratio rose 1 tenth in the month to 1.38.  Rising inventories are often a negative for future production and employment but they are a positive for current GDP where the fourth-quarter calculation will get a lift from November’s build.

Things are looking fine.  The buildup in inventory is a small concern at present; let’s see if it is just temporary.

Geo-Political:

China’s economy is weak:  “For 2016, Chinese exports dropped 7.7 percent on-year, the worst fall since 2009, according to Reuters. Imports declined 5.5 percent. That left the world’s second-largest economy with a 2016 trade surplus of $509.96 billion. In yuan terms, 2016 exports dropped 2 percent on-year, while imports picked up 0.6 percent.”

http://www.cnbc.com/2017/01/12/china-2016-exports-fall-while-imports-rise-slightly.html

In Europe, fear of deflation is vanishing, and that is good.  What made the Great Depression so bad was the deflation.  As prices fall, there is no incentive to buy now, rather the incentive is to NOT BUY now, since you will probably be able to buy an item at a lower price later.  Already slow economic activity stops; you only buy necessities.  That is why a little inflation is desirable.  Plus, you can always kill inflation, just raise interest rates until business activity slows, like Fed Chairman Paul Volker did in the late ‘70’s and early ‘80’s.  The cure for deflation is more complex.  The Fed can print money and make it available at low interest rates like we have done recently, but consumer confidence must be positive so that people feel secure enough to go buy a big item like a car.  The Fed cannot make a consumer confident that his job will be there long enough to pay off his car note.

IT WAS telling that Germany, a country with a phobia of rising prices, in the first week of 2017 reported a jump in inflation. Its headline rate rose from 0.8% to 1.7% in December. After two years of unusually low price pressures, inflation across the rich world is set to revive this year. Much of this is because of the oil price, which fell below $30 a barrel in the early months of 2016 but has recently risen above $50 (see chart). Underlying inflation, too, seems poised to drift up. That is good news. The story for 2017 is not of inflation running too hot but rather of a welcome easing of fears of deflation.”

http://www.economist.com/news/finance-and-economics/21714375-deflationary-fears-are-last-point-being-banished-inflation?zid=307&ah=5e80419d1bc9821ebe173f4f0f060a07

Technical Analysis:

The rally is on hold.  It will probably remain on hold through the inauguration from a sentiment perspective, but earnings season has begun and that will drive the market for now.  JP Morgan, Bank of America and Wells Fargo all beat earnings expectations and gave good guidance for 2017, so we’re off to a good start.  The earnings beat did not drive their stock price, as the banks have already had a huge surge in their stock prices, based on higher interest rates in 2017, and an expected expansion in their “Net Interest Margin”, the difference between the rates they borrow at vs. lend at.  Higher rates allow the banks to expand the NIM and their profits.

The banks are mostly domestic, so we have not seen the impact of the dollar surge for multi-nationals.

I’m looking at nice profits on the fallen angels I bought early in the Trump rally, FB and AMZN.  I have high ball sell orders on them.

Technically, as far as buying the SPY, I’m waiting for a better entry point.  RSI is moderately high at 60 and MACD is trending down.  After the inauguration, the honeymoon will end.  Will Trump end up fighting Republicans in congress over tariffs (probably)?  When the multi-nationals start reporting earnings, how much will the strong dollar impact them?

2017-01-14-sp

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!

Rich Comeau, Rich Investing

Dow, S&P and Nasdaq set new highs

Updating each Saturday.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.  You can always scroll down a few weeks and find the latest “Long Term” update.

Economy:

ISM’s manufacturing index had a very strong December. The composite index hits Econoday’s high estimate at 54.7, up a sharp 1.5 points from November for the best score in 2 years.  Motor vehicles sold at a much stronger-than-expected 18.5 million annualized rate which is a new cycle high.  U.S. consumers set nine-year high for December spending according to Gallup’s consumer spending measure. The $105 daily average for the month tops December 2015’s $99 and is the highest for any month since $114 in May 2008.  The small handful of chain stores that continue to report monthly sales are reporting mostly lower sales in December (The belief is that their loss is Amazon’s gain, not that retail sales are slowing).    Seven states had to be estimated and holiday weeks are always difficult to adjust for, but initial jobless claims in the December 31 week are strikingly low, down 28,000 to 235,000.  Hiring is less active but new orders are unusually strong in December’s ISM non-manufacturing report where the index, at 57.2, matches November as 2016’s best.  Factory orders fell 2.4 percent in November but were actually up 0.1 percent when excluding transportation equipment and a 94 percent monthly downswing in commercial aircraft orders.

In the employment report, nonfarm payrolls rose a lower-than-expected 156,000 in December but, in an offset, revisions added a net 19,000 to the two prior months (November now at 204,000 and October at 135,000).  But the big story is another outsized 0.4 percent rise in average hourly earnings, the second such gain in three months. The year-on-year rate is now at 2.9 percent which is a cycle high. A 3 percent rate and above is widely seen as feeding overall inflation.

The reports the last few months have shown improvement in all aspects of economic activity so my characterization is the economy has improved from consistent slow growth to consistent moderate growth, which I consider ideal.  Too slow, and an economy can slip back into recession, too fast and things can get overheated which is followed by a bust.  This has all been aided by abnormally low interest rates, and now that the Fed is raising rates, has the economy healed enough to walk on its own two feet without the crutch of low interest rates?  What will happen to home and auto sales when rates normalize?  There is a challenge ahead.

Geo-Political:

Trump on China:

“So far, Trump has publicly criticized Beijing for unfairly manipulating its currency, applying insufficient pressure on rogue nation North Korea, taxing U.S. products, and militarizing the South China Sea. He’s also questioned the decades-old “One China” policy, which stipulates Taiwan is a part of China, prompting criticism in China.

“The relationship between the U.S. and China is simply too big to fail, Trump needs to figure out how to take it forward,” Christopher Hill, former U.S. ambassador to Iraq and South Korea, told CNBC.

Indeed, many have warned that a severed U.S.-China relationship would only result in a ‘lose-lose’ situation for both parties.

U.S. companies and consumers would lose access to China’s low-cost workers and cheap Chinese imports while Washington would be unable to borrow from China, which holds more U.S. debt than any other country. Meanwhile, China’s economy would get hit if Trump slaps higher tariffs on Chinese goods and places restrictions on Chinese investors from doing business in the U.S.”

http://www.cnbc.com/2017/01/06/will-trump-china-tensions-ease-after-inauguration-day.html

 

My take:  Anyone can stimulate an economy in the short run, just print some money and spend it.  But, it also has long term consequences that are not so obvious, like a longer term devaluation of the currency.

Anyone can change the balance of trade in the short run by applying tariffs, but that will come with longer term consequences as well.  The protected nation will become less competitive because it is not in fact “competing” in the real world.  We will pay more for goods, increasing inflation.  If we pay more for goods and then use them to build our products to sell, those products will go up in cost and make us less competitive internationally.  Eventually this will come home to roost, people will stop buying our expensive goods and we’ll declare that protectionism has failed.  It’s just a matter of timing.  We can compete in the real world and accept the consequences of a slow erosion of our standard of living as other nations catch up to us faster than we make progress on our own (since we already were so far ahead), or we can try to live in a fantasy world created by artificial protectionism until the system breaks down and reality crushes down on us.  This is basically what happened to England, which was the world’s superpower for several hundred years, with its large navy and military supported by its colonial empire.  It’s “subjects” wanted to be free and when England gave up its colonies, it lost its artificial position as a superpower.  It can take a long time for these artificial constructs to fail, but eventually the reality of the world will assert itself.

 

This is from a late 1980’s study published in the Harvard Business Review:

“Moreover, while trade shelters may temporarily slow the shrinkage of a particular industry, it can lead to fewer jobs for those distributing protected goods as well as those using such goods in their own manufacture. This is especially true for “linkage” industries. By raising domestic prices for steel, for example, quota protection undermines the competitiveness of the car and machinery industries, heavy users of steel.

So protection is an extremely costly, unpredictable, and inefficient device for saving jobs. Indeed, by encouraging relocation and automation, by screening domestic producers from competition, and by raising production costs, it may actually reduce the number of jobs in some industries. And even if protection temporarily preserves jobs, the effects wane with time while workers elsewhere in the economy may actually be harmed.”

https://hbr.org/1987/05/why-protectionism-doesnt-pay

The entire article makes for great reading if you are interested in the effects of protectionism; I just posted the Cliff Notes conclusion.

 

Technical Analysis:

I added the two black lines which define a new up-channel, less steep than the 2016 rise from the February lows.  This is good, as a rise that is too steep is not sustainable for the longer term.

You can see the market is near the top of this new up-channel, having enjoyed a great run on Trump’s promise of tax reductions, tariffs on imported goods, and infrastructure spending.  The first week of the new year rebounded from the 2% correction during the holiday week.  Technically, the market has neared overbought again with RSI (upper right) at 64, and MACD (momentum, lower right) is trying to turn positive (the histograms are shrinking back to zero which is neutral).  The odds favor some profit taking which I will do this week.  For money on the sidelines, I will wait for a better entry point.  On the chart, the 200 day moving average is the red curvy line, the 50 day moving average is the blue curvy line, and we can see the market is extended pretty far above both of them (the legend for the curvy lines is on the left hand side of the chart), and as that distance becomes greater, the tendency to “revert to the mean (average)” increases.  Reversion to the mean will occur, it is just a question of when.

2017-01-07-sp

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!

Rich Comeau, Rich Investing

Happy New Year!

Updating each Saturday.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.

Economy:

Initial jobless claims fell back as expected in the December 24 week, down 10,000 to 265,000 with the 4-week average down slightly to 263,000.

It was a slow week for economic statistics, but no damage done.

Geo-Political:

Russia and the Syrian govt. have achieved their military goals in Syria, so they now press for a cease fire with the main rebel forces, but not with ISIS.  Iraq appears to be succeeding in pushing ISIS out of Mosul which would mean ISIS has lost control of almost all the area they had taken in Iraq.  These two events should make the Middle East more stable for the moment, which is usually good for the markets, but the Middle East events have not been driving the markets lately.

Trump is in a major disagreement with Obama, the democrats, and traditional republican hawks (McCain and Graham) over Russian hacking during the presidential campaign.  This could result in an early end of the honeymoon period for Trump.

Technical Analysis:

While it was a light week for economic statistics, the backdrop we have seen has been for moderate activity that has provided support for the market.  On the other hand, the two month rally has made the market more overvalued, with the 12 month trailing GAAP PE now over 25, a long term caution flag.

Alcoa kicks off the earning season on Jan. 9th, and we’ll start to see the impact of the stronger dollar in reduced earnings for multi-national companies.  The dollar surged from 95 to 102 (8%) since Oct. 1, a significant headwind for overseas earnings.  On the other hand, international economies seemed to be stable to show signs of improving growth, and hopefully that will offset some of the strong dollar.

Technically we are entering a corrective phase with the market down 2% from its all-time recent high.  RSI has backed down to a neutral 51, and MACD is in declining mode and the histograms are still growing more negative.  I don’t like the week between Xmas and New Year, as there are few participants and minor volume can give false impressions.  We’ll get back to business on Tuesday, and earnings season will bring some reality to the market starting Jan. 9th.  Did the market emotionally price in all the good news from Trump’s proposed economic policies prematurely, and will it be corrected (given that the market is richly valued), or will the market look past the current valuation to anticipated earnings?  I’m cautious in here.

2017-01-01-sp

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!

Rich Comeau, Rich Investing

Happy Holidays!

First let me wish all of you a happy holiday season and best wishes for a prosperous 2017!

Wednesday I posted the Long Term Update for December, so if you follow them keep scrolling down after you finish today’s update.

I’ll be on the road a bit next weekend, so the post will go up on New Year’s Day or Monday the 2nd.

Updating each Saturday, normally.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.

Economy:

Existing Home Sales rose a surprise 0.7 percent to a 5.610 million annualized rate which is a cycle high, well ahead of October’s 5.570 million which is the second highest of the cycle.  New home sales jumped 5.2 percent in November to a 592,000 annualized rate that is the second strongest of the recovery.  The third-quarter GDP lived up to its early expectations, rising with each new revision to an inflation-adjusted 3.5 percent annualized rate for the best showing in two years.  Initial jobless claims rose 21,000 in the December 17 week to a much higher-than-expected level of 275,000.  Corporate profits rose 4.3 percent year-on-year in the third quarter vs a prior estimate of 5.2 percent.  Weakness in building permits and factory indications offset gains in the rate spread, jobless claims, and stock prices to keep the index of leading economic indicators unchanged in November.  Consumer sentiment (U of Michigan) ends December at 98.2, up 2 tenths from mid-month for a new cycle high.

All of the indicators are positive except initial jobless claims.  Earlier this year we saw some wild swing in month to month numbers, but when you averaged the two months, I’m thinking June and July, you were basically in line.  Let’s see what happens in Jan.  But the economy is in good shape.

Geo-Political:

I searched for current articles on China and Europe, but there is no real new news.  All of the major economies are in slow growth mode.  Europe announced they will taper their QE more slowly than they had previously stated, indicating lingering weakness, but that is a couple of weeks old.

There is a little concern over Trump’s talk of imposing a 5% tariff on imports and the possibility of trade wars, particularly with China.  Some say this is just a threat Trump would throw out to bring the Chinese to the negotiating table, and that he would not really do it.  I am sure the Chinese have read his book “The Art of the Deal” and understand his negotiating tactics, and they have cut a few deals over the years themselves, so I am doubtful that this will achieve much for the US.  It gives the talking heads something to talk about, like Brexit did back in June (does anyone remember Brexit, or has anyone been impacted by Brexit?  No.).

Technical Analysis:

The market is in stall mode this week.  Following its run up since the election, many feel much of the economic good news from Trump’s proposed tax reform and capital repatriation have already been priced in, so what is there to push prices higher in the short run.  The market has backed down 1% from its record high and could stand more correction to bring buyers back in.

The RSI is at 66, backing off a little from overbought (70), see the upper right of the chart.  MACD on the lower right is turning down and two daily histograms have slipped below zero showing declining momentum.  It’s not a good entry point and I’ve been taking some profits.  The week between Christmas and New Year is a low volume week and usually not indicative of anything as most traders are on vacation.  We’ll have to wait until after Jan. 2 for true price action.

2016-12-23-sp

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!

Rich Comeau, Rich Investing

Long Term December 2016

Once a month, on a Wednesday around mid-month (15th or the next week), 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 when a bear market begins, or enter the market when 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 revision of GDP for the third quarter showed the economy grew 3.2%, a good number.  Not to get too excited about it, GDP is very seasonal.  It is usually weakest in Q1, better in Q2, and best in Q3 and Q4.  The harsh winters up north suppress economic activity every year in Q1 since people do not get out and car shop or look for a new home during blizzards.  Given weaker activity earlier this year, we will probably be looking at another 2% year for GDP growth.

Year Quarter GDP %
     
2016 Q3 3.2
     

 

Fed interest rates – The Fed hiked short term interest rates by a quarter of a point on Dec. 14, to the range of .5 – .75%, which I call .6% in the table below.  I’ll keep the data in the table for a while so we can track what is going on.  You can see all of the rates have moved up, which they should, given the strength in the economy and unemployment under 5%.  The bad news is that rates are moving up, and the good news is that it is for a good reason, the strong economy, and rates are still historically in the low range and should not present a barrier to business expansion.  On balance this is good.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
         
         
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 25.4, up from 24.2 last month.  This is moderately overvalued relative to my trimmed 30 year average of 19.  The lower the interest rate which represents a safe return, the higher the PE that the market can support.  Rising rates will threaten the valuation unless earnings rise faster than stock prices, to move the PE lower.  In a bull market, stocks can remain overvalued for years, so this is not a sell indicator, but it is a cautionary sign.

S&P earnings – With 98% of S&P companies reported, earnings are 4.3% higher than Q3 2015.  Q3’s earnings will be the highest since Q3 of 2014.  Q2’s earnings were also higher than Q2 2015, so now with 2 consecutive quarters of earnings higher than the year prior quarter, it appears the earnings recession has ended.  That is good news for the market going forward.  With interest rates rising, the dollar has climbed by 5% and that will weigh on multi-national earnings starting in January.

Age of primary move, bull or bear market – The bull market is 7.7 years old, which is a long bull market by historical standards.

Geo-Political:

The global economy is relatively quiet at the moment and most regions show slow steady growth.

Technical:

Technically the S&P continues to run in the bull market channel it has been in for the last 7 years.  This is good news as the market’s price action indicates the long term bull market remains in force.  The RSI (upper right) is at 69, near overbought, but you can see months-long periods where the RSI remains overbought.  MACD (lower right) is turning up showing good market momentum now, with the first histogram above zero in 2 years.  That’s a good sign.

2016-12-21-long-term-sp

Conclusion:

The stock market remains in a 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.

Rich Comeau, Rich Investing