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.
Crude oil inventories fell by 4.7 million barrels in the July 14 week to 490.6 million, paring down the year-on-year gain by 0.5 percentage points to 0.4 percent. In a positive indication for the July employment report, initial jobless claims fell a very sharp 15,000 in the July 15 week to 233K. Housing permits gave the index of leading economic indicators a major lift in June which posted a 0.6 percent gain.
It was a light week for economic data. With the crude oil inventory falling, oil price should increase a bit which it has. This data looks encouraging.
The world seems pretty stable. Nobody is talking about N Korea. Europe seems to be getting their economy stable and showing some growth, finally recovering from the financial crisis. There are still problems in spots in Europe, like Italian banks and the Greek budget. Europe has turned away from Austrian school austerity to cure the patient, and backed off harsh efforts to balance the budget in the middle of a recession. This is why their recovery has lagged so far behind the US recovery. They are just getting around to cleaning up their banking crisis in places like Italy.
“26 JUNE 2017
Italy’s long-simmering banking crisis has erupted again. The emergency plan to wind down two Venetian lenders at a cost of up to €17bn is a fiasco of the first order.
While the Italians have let the crisis fester, the underlying cause is the unworkable policy regime imposed by the EU authorities themselves.
Had Brussels and Frankfurt let Italy nationalize Veneto Banca and Banca Popolare di Vicenza on flexible terms two years ago, the crisis could have been contained with less damage to the Italian economy and at far lower cost to the state.
The emergency plan unveiled by EU regulators on Friday night bails out senior bondholders and depositors above €100,000, leaving Italian taxpayers to foot the bill.”
We bailed out the banks in the US in 2008 and while some are philosophically opposed, as a practical matter it was probably necessary. The depositors were kept whole, the stockholders were wiped out, and the bond holders were kept whole when they should have taken a bigger haircut in my opinion. But the bottom line is that the nation needs a banking system, and it needs one that the citizens have faith in. Small business don’t go to the stock market to fund their operation and expansions, they go to their bank, and it has to have depositor money or small business can’t get the loans they need.
In the US, the failure by Republicans to come up with a better healthcare proposal along with the on-going investigation into Trump – Russia ties, is a cloud over the stock market. Can this administration govern? Our system in congress is set up to rule through compromise between the two parties; that’s the way it worked for two centuries. The hard liners in the republican party have vowed not to compromise and it is very hard to get ANYTHING done, even things that clearly need to be done. This worries people, and people who are worried about the ability of their government to function sanely will not be so bullish on the economy, nor the stock market. This is a long term risk.
The market has rallied nicely into good earnings, as expected. Some things had gone up too far to fast, and I sold out of the big tech names I bought a few weeks ago in the tech selloff. This week will be the biggest reporting week of the earnings season.
Technically, we did not get fully overbought with the RSI (top of chart) resting at 66 after peaking at 68. That will work to limit upside progress unless earnings are gangbuster. MACD (bottom of chart) is still in the earnings driven uptrend which is positive. Price action is up at the top of the rising channel (2 black lines on upper right of the chart), and that will provide resistance to rising at a faster rate. I was glad to see last week that the 12 month trailing GAAP PE on the S&P fell to 23 and change, which is still moderately overvalued, but a little less than it has been.
I lightened up quite a bit last week. I hope the market rises through earnings season and if it does I will slowly add SPY back, but the market didn’t feel right to me last week. Microsoft announced great earnings, then dropped the next day. All the good news had been priced into the stock before the earnings call. How many other stocks are out there like that?
Looking beyond earnings season, there is a possible battle on the debt ceiling that hard line republicans loath voting for (but they can get democrat votes so they will get that done IMO), and a budget debate. What to do about healthcare is still a problem. Everyone agrees we should do some tax reform, but everyone has a different idea on what that actually means. In reality we will probably get some compromise on it, but that would make it smaller than most people would like to see. All these fights will go on through the summer and into fall. There is ample opportunity to frustrate and scare the public, which is not good for the market.
So, I took a lot off the table after a nice run in July. If we don’t hit a down pocket, I’ll be buying back in slowly to SPY and looking at some oil and oil service companies that I can buy cheap. I’ll look for those that pay a dividend.
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Rich Comeau, Rich Investing