I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market. 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 leading economic indicators from the Conference Board rose .5% and combined with the prior month, they see growth in the economy in the months ahead. New home sales for January were at an annualized rate of 923K, up a bit from the Dec. rate. Initial jobless claims for the prior week were 730K, down markedly from the prior 841K. The second estimate of Q4 GDP was +4.1%, up one tenth from the first estimate. Durable goods orders in January were up 3.4%, a strong move up. Consumer spending in January was up 2.4%, compared to -.4% in December. Consumer sentiment for February from the U. of Michigan improved to 76.8 from 76.2, which is still way down from 100 in 2019.
Every single number looks better; the recovery is on track. The housing market has been strong through the pandemic, on the back of low interest rates. Initial jobless claims were in the 700K range weekly in the late summer, then began to tick up sharply in the fall when the virus began to rage again. New cases of the virus are falling now and the layoff rate is falling also. Companies may be holding on to their workers anticipating a pickup in business activity as vaccinations progress. There is a lot of pent up demand, people have been cooped up, the savings rate went way up if you kept your job, and people want to go out and have a sit down meal in their favorite restaurant. Then they want to take a vacation. The downer in the discussion is the initial jobless claims. They are better, but not enough better. That rate in 2019 was 200K per week, not 700K. If restaurants, bars, and hotels start hiring again, they support a lot of jobs, and that would be very good for the economy.
The biggest thing going in Washington is the next Covid relief bill, hopefully the last Covid relief bill. It appears there is no serious attempt at a bipartisan bill, the sides are simply too far apart with the dems at $1.9 trillion and the repubs at $600 billion. The dems probably will have the votes to pass their bill unless Joe Manchin defects, but I would not expect him to do that on relief as W. Virginia is a low income state and would benefit from the bill.
Think about this from Biden’s point of view. You can go for a solution that is well short of getting the job done, or is well large enough to get the job done; nobody knows the number so you will miss low or miss high. If you are the president, what is the answer? You MUST get the job done, so if you are going to miss, miss high. It really is the only thing that makes sense. Personally I would prefer to see things targeted a bit more, and I think Manchin has said the same, so we’ll see. Maybe they can reconcile this after the Senate votes on the bill.
The thinking of the investing pros on TV is that a large relief bill will prevent a large decline in the stock market. That has worked so far in this pandemic, so it is hard to bet against it.
For the week the S&P 500 was down 2.5% and we are 3.5% down from the high, a minor correction so far. The yield on the ten year Treasury bond jumped up higher and faster than expected on Thursday before falling back a little on Friday.
Technically (see chart below) the market looks poor. RSI at the top of the chart is in neutral territory at 43 but it is falling. Momentum shown by MACD at the bottom of the chart is falling and negative. The price action is falling and negative.
I refreshed the chart this week and it is interesting. On a longer term basis, there is a nice rising channel using the lowest blue line. But, on a medium term basis, there is that middle blue line that forms a rising wedge formation with the upper line. A rising wedge is usually resolved to the downside. The wedge could become more narrow so a larger correction is not ensured immediately. The price is sitting on the lower boundary of the wedge, so it could break below soon; that’s another possibility.
Fed chairman Powell tried to reassure the markets that the Fed stood ready to support the economy. Powell is the first chairman in memory to state he is OK with inflation running above the usual target of 2%. That in itself is unsettling to bond traders. Who wants to buy a treasury bond yielding 2% when inflation is running 2.5 or 3%? The bond market may help Powell decide when it is time for the first rate hike, and it could be well before the Fed currently anticipates. What has been a fairly certain interest rate picture now has a bit more uncertainty and the stock market does not like uncertainty.
What am I doing? I have a lot of cash, some I got in January when my big bank stocks were called, and some I got last week when I was stopped out of ARKK. All of my call options expired on 2/19 so I am free to sell those stocks if I choose. Sensing weakness I sold AAPL at 128 and bought it back at 124. I sold MPC and can buy it back cheaper. These are small trading opportunities, not major positioning moves. I bought MRK and sold a covered call on it. All purchases are small positions in case the correction deepens. I don’t see a bear market approaching so I will buy this dip. I took a small position in IWN, small cap value ETF. I want to diversify and avoid sky high PE stocks, companies like ZM. ETF XLV for healthcare is dropping with the market, but the PE’s are not sky high so it is on my shopping list. Banks do well when interest rates rise, so XLF goes on the shopping list, and it pays a 2% dividend. Semiconductors are in short supply so SMH should work after it is finished correcting. I’m not buying yet except for special situations, so I wait for a clearer indication the current correction is over. We don’t have that now, so work on your shopping list.
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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. If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones. The picture in this post is a static .jpg so it does not update.
I am a retired person and preserving capital and seeking income are important objectives for me. I also want a growth component to my portfolio, while minimizing major risk. My style of investing will not suit everyone. I like to sleep well at night.
I will do trading in my IRA account. I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains. JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples. At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year.
Rich Comeau, Rich Investing