New Record High, What Shutdown?

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, do a google search on “Rich Investing” and it should show up in the first two pages.  It has been on the first page lately.

If you would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the toolkit button at the bottom right hand corner of your screen when you are positioned at the top of the page and select “Follow”, then enter your email address.  You do not have to have a wordpress account to follow a blog.

The monthly Long Term update was posted Wednesday and is just below this post.

Economy:

A rash of estimates in the January 13 week clouds an unusually steep decline in initial jobless claims which fell 41,000 to 220,000 for the lowest showing in 45 years (last week was a little high, this week a little low, all noise so far to me).  Consumer sentiment continues to edge down, to an index level of 94.4 for preliminary January in the softest showing in six months.

It was a light week for statistics, and the drop in consumer sentiment is in opposition to the general upbeat reaction in corporate America to the tax cuts.  Watching for more information.

Geo-Political:

Surprising softness in the Russian economy:

“Jan. 18, 2018 – MOSCOW (Reuters) – Russia’s economy unexpectedly contracted in November, hit by a drop in industrial production, the economy ministry said on Monday.

Gross domestic product shrank 0.3 percent year on year in November, the economy ministry said, contrasting with analysts’ consensus call for a 1.5 percent growth.

Russia’s oil-dependent economy was on the mend in 2017 after two years of recession, triggered by a sharp drop in global commodity prices as well as sanctions imposed by Western countries against Moscow for its role in the Ukrainian crisis.

In November, GDP was dragged down by the industrial sector where output contracted 3.6 percent compared with a year ago.”

https://www.reuters.com/article/us-russia-economy-gdp/russian-economy-suddenly-shrinks-in-november-idUSKBN1F41V1?il=0

When the Russian economy falters they become more dangerous to cause turmoil in the world and provoke an incident.  In this way, Putin can take the focus off of the internal incident and place the focus on an external foe.  The Russian people will support their president if there is danger of a threat to the nation.  If the Russian economy weakens more, watch out for an incident.

Technical Analysis:

The S&P continued its rise to another record high close for the week.  Earnings are coming in good, except for isolated cases like IBM and GE which are still weak.  The large cap tech leaders have yet to release earnings, companies like AAPL, NFLX and GOOGL, and that has been sparking a rise in recent quarters.

Technically, the market remains overbought with the RSI (top of chart) up at 80 (70 is overbought).  It remains extended well above the 50 day moving average.  These would tend to invite some corrective activity.  MACD (momentum, at the bottom of the chart) remains positive.  The tax cut news and positive earnings are trumping (pardon the pun) the extended technicals at this time.

I sold about 25% of my SPY and a few individual stocks that I will look to buy back at lower levels.

2018 01 20

It was a quiet week from a trading standpoint, but profitable from riding the market up.

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

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Long Term – January 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 – The BEA adjusted GDP growth in Q3 from 3.3% to 3.2% for the third estimate.  The Atlanta Fed GDPNow estimate for Q4 GDP released Jan. 12th is 3.3%.

If Q4 comes in at 3.3%, that would bring the year up to 2.7%, a nice number with inflation remaining low.

Annual GDP growth has been stable for a few years at a 2% annual rate.  This GDP number supports the assertion that the bull market continues. 

Year Quarter GDP %
2017 Q3 3.2
2017 Q2 3.1
2017 Q1 1.2
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 by the expected ¼ point at the December meeting, to the range of 1.25 – 1.50%.  The Fed indicated it expects 3 rate increases in 2018.  The size of the rate increases were not mentioned, but let’s assume the same ¼ point increases as Yellin has always stressed “gradual” increases.  The January Fed meeting will be Ms. Yellin’s final meeting, giving way to Jerome Powell who has been a Fed governor since 2012.  He is expected to continue Yellin’s cautious approach to Fed policy.  The Fed is also increasing the rate at which it is rolling bonds off of its balance sheet from $10 billion per month, to $20 billion per month, starting in January.  Even at $20 billion per month it would take 20 years to rationalize the Fed’s balance sheet, unless the Fed continues to raise the rate at which bonds roll off in the future.  Theoretically, the increased supply of bonds should reduce the price and raise the yield, but we have not seen that in the early stages of “quantitative tightening”, the opposite of QE.

Short term interest rates are in an uptrend, but nominal longer term rates remain historically low.  Rates still support the long term bull market.

 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
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 23.5, down from 25.0 last month.  I used 4 quarters of earnings with the most recent being Q3 2017.

We see the P/E ratio on the S&P decline many times in the first month of a new quarter because by that time, 100% of the  companies have reported earnings for the prior quarter.  So, a quarter that is 5 quarters back in history rolls off of the calculation of the earnings and is replaced with the latest quarter which usually has higher earnings.  As we have been running in the low 20’s range for a while, it shows that earnings are keeping pace with the stock market, although at a rich valuation level.

This remains moderately overvalued relative to my trimmed 30 year average of 19.

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 – The earnings estimate for Q4 from Factset is for a 10% increase over the prior year.  The corporate tax cut is projected to keep earnings increases near that level for all of 2018.

This indicator is supportive of the bull market.

Age of primary move, bull or bear market – The bull market is 8.8 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.  The N Korea situation looks like it will remain a potential flashpoint for the foreseeable future, so I will leave it in here.  Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching.

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 and possibly include the president.  At that point a constitutional crisis could emerge, where we find out whether the rule of law will govern our nation, or whether our government leaders decide they can ignore the law when it suits them and just do what they want.  A constitutional crisis is not a given, but if it occurs, I would expect the stock market to retreat for a while.

Global geo-politics is supportive of the bull market, currently.

Technical:

The market is overbought on a long term basis, with the RSI (top of chart) up at 88, where 70 is overbought.  In a bull market things can remain overbought for months, but 88 is a very high reading and if you look at the distance between the market and its 50 month moving average (blue line below the price channel) that is also pretty extended, raising the risk of a correction.  MACD momentum at the bottom of the chart is in a positive uptrend.

The counter-balance to the high overbought condition is that the tax cut will accelerate corporate earnings for 2018 at a faster rate than expected, and an unusual looking step up in price could be justified, since the underlying rules of the system have been altered.

If the stock market goes up based on the tax cut, does that mean the tax cut is a clear winner with no downside?  Not really.  The federal deficit will go up despite the republicans saying that if the bill is “dynamically scored” using “possible” increases in economic activity to 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.  You know, I like this paragraph so much, I am going to add a section at the bottom of this report for “Long Term Issues” and save some of these points for a long time and see how they turn out.

In general the chart looks good except for the concern about overvaluation and the risk of a correction somewhere ahead.

2018 01 17 Long Term

The market’s price action supports the thesis that the long term bull market remains in force. 

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.

Rich Comeau, Rich Investing

Rally On

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, do a google search on “Rich Investing” and it should show up in the first two pages.  It has been on the first page lately.

If you would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the toolkit button at the bottom right hand corner of your screen when you are positioned at the top of the page and select “Follow”, then enter your email address.  You do not have to have a wordpress account to follow a blog.

I will post the monthly Long Term update on Wednesday.

Economy:

In what might be an early sign of loosening in the labor market, initial jobless claims rose 11,000 in the January 6 week to a higher-than-expected 261,000.  Housing and medical care costs, which together make more than half of the CPI, firmed and fed a constructive 0.3 percent rise in the ex-food and ex-energy core rate for December. This hits the high end of Econoday’s estimates as does the 1.8 percent year-on-year rate.  Retail sales rose a solid 0.4 percent in December which is just shy of Econoday’s consensus.

It was a light week for data, but it looks good.  The slight rise in initial jobless claims, I will just call that noise in the data and wait for more data.  While we see job gains in some areas, retail in particular has been weak and we see store closings across the US.  Online sales, particularly from Amazon, have hit the malls and brick and mortar retailers.

Geo-Political:

Today let’s look a Japan:

“Japan is experiencing its second longest economic expansion in the post World War II era, with economists expecting the positive tone to hold through 2018 amid strong demand at home and abroad.

One key factor behind the boon this year, according to some economists, may be that companies could spend stockpiled cash reserves more actively to raise wages and make capital investments to overcome capacity constraints and improve productivity.

As for wages, some, but not all, say they are optimistic this year will see pay increases for part-time and full-time workers.

Another theme to watch is inflation, as it is likely to pick up, since domestic demand is expected to increase despite the labor shortage. This might prompt the Bank of Japan to make some adjustments, including allowing the 10-year government bond yield to rise slightly, a sign that it may seek to end its ultraeasy monetary policy.

“In terms of the growth picture, 2017 turned out be even better than we expected … (and) we remain very optimistic” this year as well,” said Izumi Devalier, an economist at Merrill Lynch Japan Securities.

According to estimates by Merrill Lynch, Japan’s real gross domestic product growth for fiscal 2017 was 1.8 percent, which is expected to keep a moderate growth rate of 1.7 percent in 2018.”

https://www.japantimes.co.jp/news/2018/01/04/business/economy-business/economists-generally-upbeat-japans-2018-outlook/#.WloVhK6nGUl

Japan is important because it is the 4th largest economy in the world behind the US, European Union, and China.  Japan boomed in the 70’s and 80’s, but it went bust in the early 90’s and was recessionary for 20 years.  They are finally showing slow sustained economic growth, which is a positive for the rest of the world.

Technical Analysis:

It was another strong week for the stock market, pushing to new record highs almost every day.  We’ve also entered earnings season and JP Morgan kicked us off with good earnings and positive comments about the year.  It’s hard to see the market cracking materially in that environment.  The technicals are not good, but the news is good, and the news seems to be winning.

Technically, the market is very overbought, with RSI is at 82 (70 is overbought).  There are no hard rules here, but allocations to severely overbought markets do not yield good returns in the short run.  It’s probably too late to get in, and too early to get out.  I stopped my buying early last week, but when I did go in, I went in quick and heavy, going about 80% long the first week of the year, mostly using SPY and some IJT (smaller cap stocks).  MACD at the bottom of the chart is pointing up, a positive.  My biggest concern is the 4 vertical red lines I put on this week, going from the 50-day moving average blue line, up to the price point above.  I looked at the maximum spreads, and currently we have the largest difference in the last year.  Eventually that will be corrected, so there is a yellow caution light out.  The theory on which we base a belief that the rise will be corrected is called “reversion to the mean”, where the mean is the 50-day moving average, or in a worse case in a bull market, to the 200-day moving average (on the chart it is the red line below the blue 50-day moving average line).  Averages are created by some observations above and below the average.  On the other hand, we are in a euphoric rise, and in earnings season it can continue for several weeks.

I took profits on silver, gold, and TBT (short against the longer bond maturity).  I could buy them back if they correct enough.

Now it is a matter of figuring out when to sell, if you are a swing trader.  Maybe the market will start going sideways and that will be a prelude to a correction.  Given the strength lately, a sudden swift correction would be a surprise, but I’ve been surprised before.  For now, I’m riding the wave, but I know where the sell button is.  You have to get prepared for the next move.

2018 01 13

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

Powerful 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, do a google search on “Rich Investing” and it should show up in the first two pages.  It has been on the first page lately.

If you would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the toolkit button at the bottom right hand corner of your screen when you are positioned at the top of the page and select “Follow”, then enter your email address.  You do not have to have a wordpress account to follow a blog.

Economy:

Unit vehicle sales proved solid in December, at a 17.9 million annualized rate vs 17.5 million in November.  Initial jobless claims rose 3,000 in the December 30 week to 250,000 which is higher than Econoday’s consensus but still consistent with strength in the labor market.   Hiring cooled though employment levels are very high and there’s also a hint of wage inflation in December’s employment report. Nonfarm payrolls rose 148,000 which is lower than expected but still favorable and enough to absorb new entrants into the jobs market.  November’s factory orders report closes the book on what, despite a 1.3 percent headline jump, was not a uniformly strong month for manufacturing.

Headlined by a 14-year high for new orders, ISM’s manufacturing index rose 1.5 points to 59.7 in December (anything over 50 shows growth).  A little bit of cooling can be a good thing especially for a sample that has been reporting unusually strong and perhaps unsustainable strength. ISM’s non-manufacturing index slowed by 1.5 points in December to a 55.9 level that misses Econoday’s low estimate.

There are no weak spots in the economy.

Geo-Political:

Today we’ll take a look at Britain and their economy in the aftermath of the Brexit decision their voters made a year and a half ago.

“28 Nov. 2017 – The OECD expects Brexit to result in a sharp slowdown in UK growth

In its November forecast, the Paris-based multilateral think tank projects UK GDP growth this year of 1.5 per cent, slowing to 1.2 per cent in 2018.

In 2019, when the UK is set to leave the EU, the OECD expects growth of just 1.1 per cent. 

 “The growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power,” said the OECD, adding that there would be a “moderate” rise in the UK’s current 4.3 per cent unemployment rate.

The 1.2 per cent forecast for 2018 growth is actually up on the OECD’s September forecast of growth of just 1 per cent.

“The upward revision of 0.2 percentage points for 2018 in part reflects the slower pace of fiscal consolidation announced in the Budget, and also partly reflects our revised technical assumption on the exit from the EU,” the OECD said.

The organisation now assumes that the UK will secure a trade and regulation transition agreement with the rest of the EU, to begin after March 2019, rather than leaving with no deal.

But that rate of growth for 2018 would still be the joint weakest of the 19 countries covered by the OECD – with the sole exception of South Africa, which is projected to grow by only 1 per cent next year.”

http://www.independent.co.uk/news/business/news/brexit-oecd-economic-forecast-paris-gdp-eu-european-union-a8079586.html

You have to be careful what you wish for.  Sometimes you get it and the unintended consequences are harmful.  London has long been a financial center of Europe.  When the EU was formed, it was natural to let much of the EU financial analysis be done in London, since they had the people and infrastructure to do it, already up and running.  These are highly skilled and well-paying jobs.  With Brexit, the EU has indicated it will move those jobs, probably to Paris.  London has squawked, but when you leave the EU, you are saying you don’t care about the other members.  You can’t have your cake and eat it too.  You can’t skip the regulations and keep the EU funded jobs.  The development of the sophisticated financial skills in Paris can have long term benefits for them, as other tasks become necessary if Paris has the skills and infrastructure to do them.  Will the EU nations ever turn to Britain to do an important job for them, or will those go to EU nations?  The answer is obvious; the EU nations will ignore Britain economically.

Technical Analysis:

The stock market came out strong on Tuesday, as I expected, and continued strong all week.  I made a large buy Tuesday in SPY, and followed with another big bite on Wednesday, and I bought more on Thur. and Fri.  I am mostly long at the moment.  The economy looks good in all areas, the tax cut will help corporate profitability, and there is plenty of cash on the sidelines to fuel the stock market.

When you are light in your allocation to the market and you have to move fast, I have not found a better vehicle than SPY, the ETF for the S&P 500.  You buy the market, or at least 500 large diversified companies.  They almost all have significant international exposure and usually good management teams or they would not be so successful.  It is highly liquid and can accommodate large purchased on the way in and out.

Technically, it is getting riskier to make new allocations to stocks, as they are now significantly overbought on a short term basis.  RSI at the top of the chart is overbought at 78, where 70 is overbought.  The strength of the push upward has been strong and it can continue, but there will be at least a minor pullback soon.  If you are not in and want in, that would be your opportunity.  For the most part I will ride out that correction as long as it remains a small one.  MACD at the bottom of the chart is moving upward, a good sign, but when it gets high in its range, up around 25, corrections have followed.

2018 01 06

My biggest concern about the market is I’m getting a sense of euphoria about things.  It can go up a long time on euphoria, but when reality strikes, it can fall a long way on excessive valuation that needs to be corrected.  But for now, euphoria rules.  I am not ready to sell yet, completing the swing trade, but I want to be sure I know the location of my sell button, so I can exit quickly if conditions so indicate.  That is one place where the use of SPY as one’s trading vehicle comes in handy, quick in and quick out, regardless of the size of the trade for us mortal human beings.

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

Low Volume 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, do a google search on “Rich Investing” and it should show up in the first two pages.  It has been on the first page lately.

If you would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the toolkit button at the bottom right hand corner of your screen when you are positioned at the top of the page and select “Follow”, then enter your email address.  You do not have to have a wordpress account to follow a blog.

Economy:

Initial jobless claims were unchanged at 245,000 in the December 23 week.

It was a light week for statistics due to the Christmas holiday.

Geo-Political:

China is still in the transition from state sponsored infrastructure spending to fuel growth, to consumer driven GDP growth, but it appears the state is still carrying much of the growth by taking on debt.  No telling when that could blow up, but just note it as a risk out there.

“Dec. 28, 2017 – China says it’s on a mission to curb high levels of borrowing in its economy — and it even aims to cut money supply next year. But people who watch the country closely aren’t sure that will happen.

Experts question whether the world’s second-biggest economy can kick its addiction to debt-fueled growth. While Beijing may want to slow the country’s growth, the risk is that a sharp deceleration may derail the entire economy.

“I think it’s very clear, and I think the leadership knows this. They have this very difficult problem of balancing financial risk — which is too much credit growth — against economic growth,” said Fraser Howie, independent analyst.

It’s a problem of their own making. For too long, they allowed credit to expand. For too long, they focused on GDP growth rate,” Howie told CNBC recently.

Although the political commitment to cut debt appears strong at the top, there may be problems further down the pecking order. Performance by local and provincial government officials is often judged based on growth — which is boosted by debt, Howie said.

There are concerns about local debt levels among central government leaders, with Beijing officials detailing concerns about “hidden debt” to China’s Caixin magazine, as reported this week.

Major worries include debt related to trusts and shadow banking, which refers to lending that happens outside the formal banking sector. Such debt is subject to less regulatory oversight and higher risk. And that lending is often nowhere on the balance sheets.

Such debt is believed to have been taken by local governments trying to hit growth targets or fund infrastructure work.

There are fears that weak accounting practices mask the amount of risk that banks and other financial entities, such as insurance companies,are taking on. Those concerns have led some to claim that shadow banking in the Chinese economy could eventually lead to a financial crisis if the bubble pops.

However, it may be possible to head off a collapse now — if the government bites the bullet.”

https://www.cnbc.com/2017/12/28/china-debt-vs-china-growth-beijing-faces-big-questions-in-2018.html

All governments are loath to bite the bullet and deal with the resulting financial impact, usually a recession.

Consider the parallels in the US economy with the over-stimulation of the housing market in the early 2000’s, with very low interest rates and the failure to regulate the mortgage industry.  Bills were presented in 2005 to regulate Fannie Mae and Freddie Mac, one passed the House of Representatives but its companion bill (S-190 if I recall correctly) was never even voted on in the Senate.  Our government could not find the strength to “bite the bullet” and they just stood by and let the economy fall off a cliff.

China will try to deal with the situation with a gradual approach.  I understand the motivation to try that, but one wonders if it will succeed if what is really needed is more forceful action now?

If China fails, it will have an impact on our markets as they are a major trading partner.  I don’t expect anything imminently, but do not be lulled to sleep thinking there are NO risks out there.  Not all of the risks to our markets have to be domestic ones.

Technical Analysis:

The market moved sideways last week, down slightly.  That’s not unusual for the week between Christmas and New Years, as most traders are off and volume is low.  It looks like a small correction has started, but I will disregard the appearance because the backdrop is not a normal market period.

The real story will begin on Tuesday when everyone gets back to work.  I’m expecting good things on the heels of improved corporate earnings, although this will be muted somewhat because the market is already moderately overvalued.

The risks to the market are overvaluation, international disruption from China (not near term IMO), and the next steps from the Mueller investigation, if any are to come.

Beyond that, corporate tax cuts and the repatriation of funds to the US bode well for the market.  CEO’s have said the repatriated funds will primarily be used to increase dividends and fund share buybacks, both of which should raise stock prices.  The year should be a good one, but there is always the possibility of a 5-10% correction.

With all that said, I expect a good January and I will be buying if the market heads up, but buying at a measured pace.

I added some OEUR which is Kevin O’Leary’s European quality dividend company ETF, which is yielding around 8%.  With Europe in a long slow recovery, I am expecting share price appreciation on top of the dividends.  There is a similar fund, IEUR from Blackrock, which has a much lower “fee”, but it only yields 2.5%.  I’ll pay an extra .5% fee for an extra 5.5% yield.  Price appreciation has been comparable the last 12 months, but nobody can guarantee the future.

Technically, RSI at the top of the chart has backed off a bit from oversold and reads 60, where 50 is neutral.  MACD at the bottom of the chart is turning down, but I don’t lend much credence to it as it was a low volume week.  What happens Tuesday and Wednesday will tell the real tale.  Stay tuned.

2017 12 30

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

Sideways 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.

The monthly “Long Term” update was posted Wednesday and is just below this post, so just keep scrolling down to read it.

If you lose your bookmark to the blog, do a google search on “Rich Investing” and it should show up in the first two pages.  It has been on the first page lately.

If you would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the toolkit button at the bottom right hand corner of your screen when you are positioned at the top of the page and select “Follow”, then enter your email address.  You do not have to have a wordpress account to follow a blog.

Economy:

Existing home sales jumped 5.6 percent in November to a 5.810 million annualized rate that easily beats Econoday’s high estimate. November’s rate is by far the strongest of this expansion with 5.700 million in March last year the next closest.  The third estimate puts third-quarter GDP at a very solid 3.2 percent annualized rate.  After swinging sharply on hurricane effects in September and October, the index of leading economic indicators is back at a steady and healthy pace of growth at a 0.4 percent gain in November.  A jump in aircraft skewed durable goods orders 1.3 percent higher in November which is well below Econoday’s consensus for 2.0 percent and no better than the low estimate.  New home sales rose to a 733,000 annualized rate in November for a 17.5 percent monthly spike that is the largest in 25 years.  Consumer sentiment slowed in December, down to a final 95.9 which, compared to the mid-month preliminary reading of 96.8, implies a roughly 95 score for the last two weeks for the softest showing since September.

The economy looks good, led by home sales.  Weak spots are durable goods orders which foreshadows future sales and consumer sentiment, which although weaker, is still a healthy number.

Geo-Political:

I don’t like bitcoin, don’t own any, don’t plan to own any.  What is its value proposition, that it will be harder to track money laundering if they use bitcoin, and the number of bitcoins is a fixed number that cannot be manipulated by the central banks?  It is not compelling to me.  Who will regulate the marketplace, a bunch of 20 something computer jocks?

“12/22/2017 – Coinbase, one of the biggest bitcoin marketplaces in the U.S., said Friday that trading was up again after being down for more than two hours amid a price rout in cryptocurrencies.

“Buys and sells have been re-enabled. We are monitoring for stability,” Coinbase said on its status website as of 1:44 p.m., ET.

Earlier, the company said that buying and selling was temporarily disabled and that the service “may be temporarily offline” due to high traffic.

Bitcoin traded about 14 percent lower near $13,283 on Coinbase as of 2:22 p.m. ET. Earlier, the digital currency had fallen as low as $10,400, down 44 percent from its record high hit Sunday.

Coinbase, whose mobile app is one of the most popular overall applications in the Apple App store this month, is a leading way in the U.S. to buy and sell major digital currencies bitcoin, ethereum and litecoin. The company added trading for bitcoin’s offshoot bitcoin-cash in a rocky rollout this week.”

https://www.cnbc.com/2017/12/22/coinbase-one-of-the-biggest-bitcoin-marketplaces-says-buying-and-selling-temporarily-disabled-amid-price-rout.html

While there is a fixed number of bitcoins in the universe, apparently there is no limit on the number of digital currencies like bitcoin that can be invented, as we see above they are already trading in “ethereum” and “litecoin”.  Maybe it’s just me, but a responsible central banker and some sound regulations sound like a good thing to me.

From a volatility perspective, we see bitcoin having fallen 44% in the last week, far too volatile for my blood.  What is driving the volatility?  In the stock market we can look at economic indicators, political events and even technical indicators, and with several hundred years of experience judging what those indicators mean to the stock market action, we have something to base our buy and sell decisions on.  With bitcoin, or any of the crypto currencies, what would you base your buy or sell decision on?  Will the addition of etherium “devalue” bitcoin?  Will litecoin?  After the 20 something computer jocks add the one thousandth or the ten thousandth digital currency, will they all devalue bitcoin?  I have no idea, none at all, and I have more faith in a central banker who has to testify openly every quarter and let me judge whether they are lying or not, than some faceless 20 something that gives a press interview when they feel like it.  I don’t know if those behind bitcoin have a plan to rip you off, but I also don’t know if they have a viable plan to protect the value of their crypto currency in the long run.  I need to see much more experience in the marketplace and learn some rules of trading before I participate.

Technical Analysis:

It was a quiet week with the market consolidating recent gains.  The president signed the tax cut bill and the question now is did the market build in the increased profits of the corporations receiving the tax cut to the stocks prices, or is that to come.  There is an old stock market saying “buy the rumor, sell the news”.  The stock market is an anticipatory market, always looking 6 months ahead.  We’ve seen stock prices surge the last few months as it became clear a bill would pass, and that surge was not based on current earnings as the price earnings ratio on the S&P jumped up to 25 this month from 24.2 last month.  But the tax cut represents real profits to corporations, so I don’t see a big “sell the news” requirement, other that it’s been a long time since we’ve had even a 5% correction.

Technically, the market is still overbought with RSI up at 70.  MACD at the bottom of the chart looks like it is weakening and could roll over to the downside.  The spread between the current price at 2680 and the 50 day moving average (blue line) at 2600 is wider than usual and this usually foreshadows a correction, even if minor.

2017 12 23

Next week between Christmas and New Years, trading volume is always light and the big Wall St. traders are on vacation.  In low volume markets, a small amount of trading can cause a big swing in prices, so very little will be learned next week.  Everyone will be back on Jan. 2nd.

What am I doing?  My buying pace has slowed, in case a “sell the news” event happens.  I had sold a covered call on my Viacom stock and that got called at a nice profit.  I had sold a covered call on my Celgene which expired on Friday leaving me with a profit on the stock which I still hold plus the option premium.  I’ll look to sell another covered call on CELG if I can get a good enough premium at a good enough strike price.  My last call was at a $110 strike, for about $1 per share premium.  I won’t sell an option below a 110 strike, nor materially below $1 per share.  I may look to sell a 115 strike at a lower premium than $1, and I usually look a month to six weeks out.

I continue to look for opportunities in pullbacks on high quality companies.

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 2017

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 – The BEA upgraded GDP growth in Q3 from 3.0% to 3.3% for the second estimate.  The Atlanta Fed GDPNow estimate for Q4 GDP released today in 3.3% also.

If Q4 comes in at 3.3%, that would bring the year up to 2.7%, a nice number with inflation remaining low.

Annual GDP growth has been stable for a few years at a 2% annual rate.  This GDP number supports the assertion that the bull market continues. 

Year Quarter GDP %
2017 Q3 3.3
2017 Q2 3.1
2017 Q1 1.2
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 by the expected ¼ point at the December meeting, to the range of 1.25 – 1.50%.  The Fed indicated it expects 3 rate increases in 2018, the same number as this year.  The size of the rate increases were not mentioned, but let’s assume the same ¼ point increases as Yellin has always stressed “gradual” increases.  The January Fed meeting will be Ms. Yellin’s final meeting, giving way to Jerome Powell who has been a Fed governor since 2012.  He is expected to continue Yellin’s cautious approach to Fed policy.  The Fed is also increasing the rate at which it is rolling bonds off of its balance sheet from $10 billion per month, to $20 billion per month, starting in January.  Even at $20 billion per month it would take 20 years to rationalize the Fed’s balance sheet, unless the Fed continues to raise the rate at which bonds roll off in the future.  Theoretically, the increased supply of bonds should reduce the price and raise the yield, but we have not seen that in the early stages of “quantitative tightening”, the opposite of QE.  A reason that bond yields are not rising more is probably that Draghi and the ECB are still buying bonds (QE) until September, and they still have negative rates, which leads their bond investors over to the US market to get a better yield, which creates buying pressure that raises bond prices and lowers yields.  So, we have some competing forces for the longer term yields.  I still don’t like bonds, particularly bond funds.  The yield is simply too low, bond prices are in bubble territory, and I don’t see this working out well over the long term.

Short term interest rates are in an uptrend, but nominal longer term rates remain historically low.  Rates still support the long term bull market.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
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 25.0, down slightly from 24.2 last month.  I used 4 quarters of earnings with the most recent being Q3 2017, which 98% of companies have reported.

This remains moderately overvalued relative to my trimmed 30 year average of 19.  With the passage of the corporate tax cut, that will increase earnings and reduce the valuation level on the S&P 500 by about 10% to 23 if the stock market did not rise from here, still leaving the market moderately overvalued in 2018.

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 – The earnings estimate for Q4 from Factset is for a 10% increase over the prior year.  The corporate tax cut is projected to keep earnings increases near that level for all of 2018.

This indicator is supportive of the bull market.

Age of primary move, bull or bear market – The bull market is 8.8 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.  The N Korea situation looks like it will remain a potential flashpoint for the foreseeable future, so I will leave it in here.  Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching.

Global geo-politics is supportive of the bull market.

Technical:

The market is overbought on a long term basis, with the RSI (top of chart) up at 85, where 70 is overbought.  In a bull market things can remain overbought for months, but 85 is a very high reading and if you look at the distance between the market and its 50 month moving average (blue line below the price channel) that is also pretty extended, raising the risk of a correction.  MACD momentum at the bottom of the chart is in a positive uptrend.

In general the chart looks good except for the concern about overvaluation and the risk of a correction somewhere ahead.

2017 12 20 sp Long Term

The market’s price action supports the thesis that the long term bull market remains in force. 

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.

Rich Comeau, Rich Investing