Nice Rally!

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

Economy:

In a mixed report that confirms a reputation for unusual volatility, new home sales swung 11.4 percent lower in April to a much lower-than-expected annualized rate of 569,000.  In the latest bad news for April housing, existing home sales fell 2.3 percent in the month following similar weakness in yesterday’s new home sales report.  Crude oil inventories fell by a larger-than-expected 4.4 million barrels in the May 19 week to 516.3 million, extending the drawdown streak to 7 consecutive weeks.   Jobless claims continue to hold near record lows and continue to point to solid strength in the labor market. Initial claims edged 1,000 higher in the May 20 week to 234,000.   Durable goods orders, down 0.7 percent in April, do not confirm the month’s big jump in industrial production nor all the strength in the regional factory reports.  First-quarter GDP gets a small but much needed upgrade in its first revision, now at a 1.2 percent rate of annualized growth which is nearly double the initial report of +.7 percent.  Corporate profits rose 12.0 percent year-on-year in first-quarter 2017, an excellent showing.  That is not due to just cost cutting, as the employment picture have been very strong.  Consumer sentiment is holding steady at optimistic levels, posting a final May reading of 97.1 which is up 1 tenth from April’s final.

The economy looks good, especially the upgrade of first quarter GDP to 1.2% growth, and the strength in corporate profits.  The softness in home sales and durable goods orders are bothersome.  Home sales usually rise April – July as school is ending and it is a good time to move, so the weakness is a concern.  Did low rates pull sales forward and now that rates are moving up, is it pushing home affordability out of the reach of working folks?  Durable goods orders are a view of the future, they become sales when they are shipped and invoiced.  It’s a cautionary note, although the service sector is now much bigger than the manufacturing sector.

Geo-Political:

The Fed released the minutes from its May meeting and took no action on interest rates.  The following excerpts are the highlights:

“Expecting economic weakness in March to prove temporary, most members said a rate hike would be coming “soon”. And expectations in fact are strong that the FOMC will, at the upcoming meeting in June, raise its target range by a 1/4 point to a 1.0 percent midpoint.

Today’s minutes also offer a proposed structure for tapering using “gradually increasing caps” aimed at unwinding the Fed’s $4.5 trillion balance sheet in a predictable manner. These “caps” would limit the amount of Treasury and agency securities that would be allowed each month to run off (not reinvested and moved out of the financial markets). This would fix the pace that the balance sheet is reduced. These caps would be initially set at low levels and then raised every three months making for a gradually increasing pace of stimulus withdrawal.”

The interesting part is the unwinding of the Fed balance sheet.  The Fed bought bonds of all durations during their QE (quantitative easing) program which was designed to drive down longer term interest rates.  The Fed provided a bid on bonds, and if you wanted some bonds, you had to outbid the government, driving the price up and the yield down on bonds.  This expanded the Fed balance sheet (inventory of bonds) from $1 trillion, to $4.5 trillion.  As short term bonds have matured, the Fed has bought new short term bonds with the proceeds, putting a bid under those bonds and keeping rates lower than natural.  Now, based on a schedule, let’s say $10 billion of 90-day notes mature and the principal goes to the Fed, they will buy $5 billion of bonds and hold the other 5 billion to loan to banks.  Some of the bid will leave the bond market, which will have to be made up by bids from other financial institutions in the private market.  Private players have the objective of capturing as much yield as possible, so they will probably bid less for the bonds than the Fed did, and that will put gradual pressure on rates to rise.  Investors from Europe still like US bonds as their yields are held low by the ECB, but even the ECB has been making noise about ending extraordinary accommodation, and if they do, that would remove another bid for bonds, which would put downward pressure on bond prices and upward pressure on rates.

The bottom line:  I have not liked bond funds or long term bonds for several years, and while I was very early in disliking them, the reason I disliked them has finally arrived.  The Fed was accommodative for much longer than they ever have been, a “black swan event”.  The market will always do what it is supposed to do.  Picking the time when the market will do what it is supposed to, is difficult.

TLT, a long term bond ETF holding treasuries, is down 10% since last summer.  Making 3% interest while losing 10% of your principal is a disaster.  This situation has a long way to go on the downside.  The Fed will move slowly to try and avoid an all-out bond market panic, but there is no guarantee on that.

Why do I watch interest rates so closely in my stock market analysis?  One, it is the Fed’s tool to stimulate or cool the economy.  Two, the cost of capital is a major expense to business when they want to expand, so if their cost of borrowing rises, their profitability will fall a bit.

Technical Analysis:

The market sold off hard last Wed. (the 17th) on news that Comey had documented when Trump asked him to let go of the Flynn investigation.  I took that as not significant to the market beyond a short term shock, and I started buying on Thur. the 18th and continued on Friday and Monday.  The market recovered its loss quickly so I quit buying, and as the market neared overbought status, I sold out on Thur. this week.  The S&P set a new record high on Thur. and while it usually follows thru to the upside, I’m running around visiting my new grandson and just can’t watch the market that close on a daily basis at the moment.  I had a good one week profit, I took it, and I have to live life for a few days.

Technically RSI has zoomed up to near overbought at 62, and MACD has turned positive this week showing good momentum.  The fact that we broke out above the potential double top and moved to a new high is very good news, confirming the bull market is still in effect.  I don’t want to be a buyer at near overbought levels, but I will plan to buy the next dip.  Technically, if I was going to be watching the market closely, I would have stayed in a little longer and let the market show me what it was going to do.  I just don’t sense a lot of strength here, but I could be wrong.

2017 05 26

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

Obstruction Selloff

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.

Economy:

Industrial production rose a stronger-than-expected 1.0 percent with the manufacturing component, after falling 0.4 percent in March, also up 1.0 percent. These are the strongest monthly gains for both of these readings since February 2014.  Crude oil inventories fell 1.8 million barrels in the May 12 week to 520.8 million, the sixth consecutive weekly drawdown which narrowed the gain on the year ago level by 0.6 percentage points to 2.2 percent.  There’s been no let-up in demand for labor, judging by jobless claims which remain right at record lows. Initial claims fell 4,000 in the May 13 week to a lower-than-expected a 232,000 level that pulls the 4-week average down 2,750 to 240,750.  The index of leading economic indicators remains very solid, at a 0.3 percent gain in April with March also revised to 0.3 percent.

No real concerns here, the economy looks good.

Geo-Political:

The big news event of the week that affected the markets was a report on Tue. night that Comey documented a meeting in which Trump asked him to let go of the Flynn investigation.  That raises the specter of an obstruction of justice charge against the president himself, and it unsettled the markets on Wed. and took the S&P down nearly 2%.

From China, their economy looks good, but it is still being carried by govt. spending as they try to transition from the govt. supported industrial / infrastructure stage to a consumer-led free market.  They are not on easy street, and there are risks over there.

“Mizuho Securities Asia on China’s early 2017 economic outlook

May 11, 2017  –  Based on a significant rebound in 10 leading economic indicators, we believe the pickup in China’s economy starting in 2H 2016 is continuing into 1H 2017. Increasing PMI, SMI, and new yuan loans to the corporate sector show that manufacturing industry is on a recovery track. The rebound in new housing starts suggest that a turning point in the real estate market is yet to come due to lagging effects following cooling measures. Strong PPI, railway freight, coal consumption, steel production, heavy truck sales, and excavator sales are all evidence of solid government-supported investment centering on infrastructure investment. We expect steady economic growth in the first half of 2017, both directly via infrastructure and indirectly through positive spill-overs to related manufacturing industries, supported by government stimulus. However, we think the downward pressure on the economy will become stronger in 2H 2017.”

http://www.chinaeconomicreview.com/pundits-ponder-new-normal

All of that government stimulus fails to inspire me to believe they have created what they want, yet.  They may, but risks remain in China.

Brexit is getting underway in England, with some heartburn:

“May 11th 2017 – BREXIT has thrust a mundane, if crucial, bit of financial-market plumbing into the spotlight: the clearing of financial instruments. Clearing-houses sit in the middle of a securities or derivatives transaction, and ensure that deals are honoured even if one counterparty goes bust. In November a study commissioned by the London Stock Exchange (LSE) warned that if euro clearing was forced out of the City, 83,000 British jobs could be lost, and a further 232,000 affected. On May 4th the European Commission said it was looking into new rules for euro-denominated clearing. One option is relocation from London, an idea greeted in the City with a mixture of incredulity, disdain and fear.”

http://www.economist.com/news/finance-and-economics/21721949-tens-thousands-jobs-are-stake-britain-eu-ponders-moving-euro?zid=307&ah=5e80419d1bc9821ebe173f4f0f060a07

 

Technical Analysis:

Wed. produced serious heartburn for investors, but this report was mostly cash and looking for buying opportunities.  The news seemed like an excuse for a short term blowoff, as the economic news sees solid.  As stocks were sold off, money moved to bonds, driving prices up and yields down.  This was negative for the banks and net interest margin was compressed.  I bought some banks since the Fed is expected to raise rates on the short end in June, which is usually good for the banks.  I bought some oil companies.  When I can’t move money fast enough, I just buy a fist full of SPY,  just buy the market.

Technically the short term overbought was cleared and RSI dropped to 40 before rebounding to 50 on Thur. and Friday.  MACD is trending down, but I am discounting it somewhat since it appears based on political news so far.  If Monday looks good, I will continue buying, probably SPY and some XLF (financials).  I am still cautious, and if the rally peaks below the recent high, I could get out as quickly as I got in.  We need to see some follow-thru on the upside.

2017 05 19

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 May 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 Bureau of Economic Analysis released the first estimate of Q1 GDP and it was uninspiring.  Q1 is always weak due to weather, but the weather was worse last year, so this is a mild disappointment.  Let’s see what happens next quarter.

I will stop using the Atlanta Fed “GDPNow” estimates of the next quarter’s GDP, since it has proven to be too unreliable to be an effective tool.  They seem to come out initially optimistic, then revise the number lower month by month.  I can just wait for a real number.

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 Q1 0.7
2016 Q4 1.9
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates – The Fed raised the Fed Funds rate by a quarter of a point at the March meeting and maintained its projection of two more hikes this year.  The focus now shifts to the June meeting, and the markets have priced a 70% probability that the Fed will hike by a quarter of a point at that meeting.  Longer term rates have remained stable.

Interest rates are in an uptrend, but nominal rates are historically low and supportive of the bull market.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
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 23.7 last month.  I used 4 quarters of earning with the most recent being Q1 2017 (85% of companies have reported, so there is enough to justify using this incomplete data).  Earnings are significantly better than last year, but stock prices have risen, blunting the possible improvement in valuation.

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 – As of May 12 (with 85% of the companies in the S&P 500 reporting actual results for Q1 2017), earnings estimates are projected to come in 13.6% higher than a year ago, the biggest Y-o-Y increase since Q4 2011.

This indicator is supportive of the bull market.

Age of primary move, bull or bear market – The bull market is 8.2 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 issue continues to simmer.  The market is selling off 1% today on the rumor that Trump asked Comey to drop his investigation into Mike Flynn back in Feb., which could have serious repercussions in the months ahead.

Global geo-politics is supportive of the bull market, but the Korea risk remains.

Technical:

Technically the S&P continues to run in the bull market channel it has been in for the last 8 years.  RSI at the top of the chart is overbought at 71, and MACD is leveling out and the histograms are weakening ever so slightly.  Technically, on a longer term basis, the market should have a hard time mounting big gains.  However, since it is a long term chart, the market can remain overbought for months, just look at 2013 and 2014.  Also realize that those persistent good gains occurred when the valuation was much lower.

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

2017 05 17 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

Double Top?

I update 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.

First, let me say “Happy Mother’s Day” to all the mom’s out there!

Second, I will post the monthly long term update on Wednesday.

Economy:

Initial jobless claims fell 2,000 in the May 6 week to a lower-than-expected 236,000. The 4-week average is up slightly to 243,500 but still down roughly 5,000 to 10,000 from early April and late March.  The Consumer Price Index (CPI) failed to show much traction in April, rising an as-expected 0.2 percent at the headline level and managing only a 0.1 percent gain less food & energy.  Retail sales did recover in April but not as much as expected, up 0.4 percent overall and up 0.3 percent excluding autos which both miss Econoday’s consensus estimates by 2 tenths.  Consumer sentiment remains strong, beating expectations by 4 tenths with a 97.7 for the preliminary reading on May.

All the numbers look good and support a Fed rate hike in June.  The unemployment rate has fallen to 4.5% which economists consider “full employment”.  There are reports that business is having to offer higher wages to get employees to switch jobs, and to keep their employees from being stolen.  We see a slight uptick in inflation, which is what the Fed has wanted.

Geo-Political:

While there is a lot of intrigue in Washington, the rest of the world is relatively stable.

Let me talk about oil today, which is the most important commodity on the planet.  Oil powers our transportation, lubricates our industry, and provides the raw material for a big segment of the chemical industry.  Fracking technology has changed the world equation on energy, particularly in the US.  The US has more oil in shale rock than Saudi Arabia has in their reserves.  We knew that for decades, but we didn’t know how to get the oil out of the shale economically.  Fracking has allowed us to access that oil.  Two years ago, Saudi Arabia could see the worldwide glut of oil and they chose to continue producing, flood the world with oil, and attempt to “break” the frackers in the US.  Oil fell from $100 a barrel to $35 a barrel, causing much pain in the US oil patch, bankrupting smaller players and causing many layoffs.  The rig count in the US dropped, stabilized, and production has moved to larger stronger players.  Oil has recovered to the range of $45 – 55 per barrel the last few months.  Now Saudi Arabia is cutting their production to try and hold the price at these levels.  These low oil prices cause severe pain in most major oil producing nations, since their economies tend to be less diverse on than the US economy.  I don’t expect this to change any time soon.  Fracking has ended any chance of an oil shortage, short of a war that would radically alter short term supply.  I buy some XOM or CVX (both pay a dividend over 3.5%) when oil is near 45 and the market is in correction mode, and look to sell when oil moves up to 55 and a stock market rally is underway.

Technical Analysis:

The chart this week looks negative for the short term.  The market failed to break through 2400 and is setting up a potential double top (aqua lines) which would bring a larger correction into possibility.  We don’t know if that will happen, but it is a risk.  At the top of the chart, RSI rose to nearly overbought and now is retreating.  MACD at the bottom of the chart looks like it may roll over and head down, a negative.  The histograms have shrunk to zero, dead neutral, but the trend has been down.

Earnings season is drawing to a close; 90% of the S&P companies have reported and earnings came in about 14% higher than a year ago, which was a weak quarter.  That had to buoy the market.  What will buoy the market until July and the next earnings reports?

Short term, technically the market looks risky.  Politically, the market rose following the election on the “Trump hope”, but that appears to have stalled since the republicans in the House could not even agree on what to do with healthcare.  This has drawn into question just what of the other Trump initiatives can be accomplished, and when.  N. Korea has fallen to the back page, but is still simmering.

What will the market do next week?  I don’t know.  I never really know, and neither does anyone else.  We just play the odds.  There is some probability that the market will go up, and some that it will go down.  We pay our money and take our chances.

With all that said, the risks are sufficiently high to keep me pinned mostly to cash right now.  As more of a value investor, I am looking at individual stocks that pay a good dividend and have been beaten down.  I keep some “low ball” buy orders out there and recently bought some Apache Corp. (APA) at a 52 week low near 47.  I put a “high ball” sell order on it immediately at 56, we’ll see.  The thesis is that oil will trade in a range of roughly 45 – 55, and that APA will be higher sometime this year or next.  APA has already risen to 51, giving me an 8% gain in a few weeks.  Just because the overall market does not look attractive does not mean that there are not opportunities in certain sectors or individual stocks.

Looking slightly longer term, what will the effect of more normal interest rates have on the stock market?  If the Fed hikes another quarter point as expected in June, money market rates will rise to about 1.1%.  That’s pathetic, but infinitely better than zero!  If federally insured CD’s go back to normal and you could get a safe 4% return on a five year CD, how much money would flow out of the stock market?  I don’t know, but with more and more baby boomers retiring each month, that’s certainly a home for some of their savings, and will put some pressure on stock prices in 2018 and 2019, or at least weaken a major underpinning.

2017 05 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

Sideways Week

I update 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:

After 7 straight months of beating expectations, the ISM manufacturing index finally fell short and sharply so, at 54.8 in April which is 7 tenths below Econoday’s low estimate but anything above 50 shows growth so this is still a strong number.    Two different samples and two very different results from PMI services, which was released earlier this morning and was very soft, and ISM non-manufacturing which is pointing to sharp acceleration at 57.5.  Week-to-week volatility has been pronounced but the trend in jobless claims is clearly favorable. Initial claims fell a very sharp 19,000 in the April 29 week to a 238,000 level that more than reverses the prior week’s 14,000 jump.  Factory orders, like much of the economy, fizzled in March, up only 0.2 percent and skewed higher for a third month in a row by aircraft.  From the employment report, the labor train is back on the tracks as nonfarm payrolls reversed the prior month’s weakness and came in on the high side of expectations, up 211,000 in April vs a revised 79,000 in March for the third 200,000 plus reading so far this year.

Consumer spending may have slowed in the first quarter, concedes the FOMC in its May statement, but the fundamentals that underpin the consumer remain solid and point to only “transitory” weakness and a bounce back for the second quarter. As universally expected, policy makers held their federal funds target range unchanged at 0.75 to 1.00 percent at the May FOMC.

The data looks favorable to me.  The betting on Wall St. is about a 65% probability that the Fed will hike another quarter of a percent at the June meeting, and this data would support that.

Geo-Political:

It was a quiet week, with no international data noticeably impacting stock prices.  That doesn’t mean nothing is going on, but most major issues have been in process for a while, and the process remains on the expected path.  The French election is Sunday and the polls show a comfortable margin for centrist and pro-EU candidate Macron.  I think a Macron win is already priced into the markets, so if it occurs, I don’t expect a big pop on Monday.

Technical Analysis:

The market moved sideways this week, but did manage to hit a record high on the S&P.  Earnings are coming in very strong, with 83% of the companies reporting as of May 5, 75% have beat earnings and earnings are up 13% vs. the projected 9% before the reporting began.  That is VERY STRONG.  Why isn’t the market performing better?  Is it just digesting the “Trump Hope” rally since the election?  I’m not sure, but something does not feel right to me.  Oil is down to $45 a barrel and OPEC is supposed to be controlling production.  Is global economic activity that weak?

We’ve moved decisively above the temporary correction channel (purple), and now we’re looking at a possible “double top” if the rally fades.  That would probably mean a larger correction.

The RSI (Relative Strength Index, top of chart) is at 65, nearing overbought.  This is not a problem in a strong bull move, but this bull market is not that strong in its mature stage.  MACD is weak, looks like it could roll over and turn negative; look at the shrinking histograms.

The overvaluation I have been concerned about will be reduced when this quarter’s earnings are finally in the 12-month trailing GAAP earnings.

It is a cloudy picture overall, but I am mostly on the sideline at the moment.  The good news is that the long term bull market remains in effect, so I’ll be a buyer on pullbacks.

2017 05 06 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!   You can also send me a question on email, my address is in the “About” section.

Rich Comeau, Rich Investing