Pullback starts

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 would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the Follow button at the bottom right hand corner of your screen.  You may have to scroll up or down a bit for it to appear, but click on it and enter your email address.  You do not have to have a wordpress account to follow a blog.

This is posted Thursday afternoon as I will be busy this weekend.  I may be late next weekend but I should have something up at least by Monday.

Economy:

Business investment is picking up sharply based on capital goods orders which highlight a very favorable durable goods report. Durable orders jumped 2.2 percent in September which is right at Econoday’s high estimate.  September new home sales surged 18.9 percent to a 667,000 annualized rate. This is the largest percentage gain in nearly 28 years.   Initial jobless claims rose 10,000 in the October 21 week to 233,000 which is just below Econoday’s consensus.

Everything looks good for a slow to moderate growth picture.

Geo-Political:

N Korea remains an issue.

To China, for an interesting view:

“Oct. 24, 2017 – China is looking to make a major move against the dollar’s global dominance, and it may come as early as this year.

The new strategy is to enlist the energy markets’ help: Beijing may introduce a new way to price oil in coming months — but unlike the contracts based on the U.S. dollar that currently dominate global markets, this benchmark would use China’s own currency. If there’s widespread adoption, as the Chinese hope, then that will mark a step toward challenging the greenback’s status as the world’s most powerful currency.

China is the world’s top oil importer, and so Beijing sees it as only logical that its own currency should price the global economy’s most important commodity. But beyond that, moving away from the dollar is a strategic priority for countries like China and Russia. Both aim to ultimately reduce their dependency on the greenback, limiting their exposure to U.S. currency risk and the politics of American sanctions regimes.

The plan is to price oil in yuan using a gold-backed futures contract in Shanghai, but the road will be long and arduous.

“Game changer it is not — at least not yet,” said Gal Luft, co-director of the Institute for the Analysis of Global Security, a Washington based think tank focused on energy security. “But it is another indicator of the beginning of the glacial, and I emphasize the word glacial, decline of the dollar.”

Beijing faces skeptical global oil markets and global perceptions it exerts too much state control. Those factors will hinder its drive to build a viable oil pricing benchmark that’s able to compete with more established benchmarks like West Texas Intermediate or Brent (both dollar-denominated).

The architects of the “petro-yuan” face an uphill struggle in dislodging the “petrodollar” and, with it, more than four decades of U.S. dollar-priced oil. Attracting interest from entrenched and active markets in Europe, the U.S. and the Middle East — used to price more than two-thirds of the world’s oil worth trillions of dollars – poses another major challenge.”

https://www.cnbc.com/2017/10/24/petro-yuan-china-wants-to-dethrone-dollar-rmb-denominated-oil-contracts.html

My personal opinion is that we won’t see another global war like WW II again; our killing and destruction technology is simply too good.  Large scale warfare does not pay anymore.

Economic warfare is how nations will vie with one another.  A strategic advantage of the US in the global economy is that the US dollar is the world’s reserve currency.  People have long trusted the US to manage their own financial affairs reasonably well, and when necessary to consider the US taking a currency hit if it is advantageous for the world economy.  Witness the US mortgage and financial crisis and it is easy to question whether we manage our financial affairs reasonably well.  The huge annual budget deficits further erode that assumption.

A characteristic of a global reserve currency is that there be enough of it in circulation to meet the global demand for its usage.  There are only 3 candidates, the dollar, the Euro, and the yuan.  When looking at the southern European economies it is doubtful that the Euro can ascend to reserve currency status.  The yuan might, but it will take time for many nations to believe the Chinese manage their affairs reasonable well (even in a financial crisis, which we have not seen).  It is also questionable if they will act in the world’s interest to their detriment if the global economy needed it.

This is not going to change overnight.  The point is that things that have been set in concrete for 70 years can change.

Technical Analysis:

Again, these remarks are through Thursday afternoon after the close.

After breaking above the channel we have been in for a few months, the S&P is taking a small breather.  Will it turn in to something more serious?  We’ll see.

Technically, the market has come down from its heavily overbought with the RSI (top of chart) at 62 which is still almost in overbought territory.  MACD at the bottom of the chart has turned down in a negative pattern, raising the possibility that there is more selling to come in this pullback.  However we just saw in the latest Long Term monthly update that the bull market remains intact, so it is time to start working on your buy list for when the selling stops.

2017 10 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

Powering Forward

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 would like to be notified via email when I post a new blog entry, you can “Follow” my blog by clicking on the Follow button at the bottom right hand corner of your screen.  You may have to scroll up or down a bit for it to appear, but click on it and enter your email address.  You do not have to have a wordpress account to follow a blog.

This month’s Long Term update is just below this weekly update, just keep scrolling down.

Economy:

Initial jobless claims have mostly returned to pre-hurricane levels, at a lower-than-expected 222,000 in the October 14 week.  This edges out 227,000 back in late February as the lowest reading in 44 years.  Hurricane-driven spikes in jobless claims pulled down the index of leading economic indicators in September which, at minus 0.2 percent, came in well below Econoday’s low estimate.

Existing home sales posted their first gain in four months, rising 0.7 percent in September to a 5.390 million annualized rate that is near Econoday’s top forecast. Hurricane effects are hard to gauge with the National Association of Realtors reporting that sales in Florida were down substantially though sales in Houston have already recovered.  The sales gain came at a price discount as the median fell 3.2 percent to $245,100 for what is still, however, a respectable 4.2 percent year-on-year gain.  This is just my opinion, but with the median price at 245K, as interest rates rise, more people will be priced out of the home market.  I think eventually people will have to discount the home price to get them sold, but that’s down the road.

The small decline in the leading economic indicators (LEI) gets a pass due to the hurricanes.  Not many stats this week, but all looks good.

Geo-Political:

N Korea remains the hot spot and events there could impact the markets at any time.

In Europe:

“10/9/2017 – Euro zone banks are well prepared for sharp changes in interest rates, the European Central Bank said on Monday after simulating scenarios from sudden monetary tightening to the lending freeze that followed Lehman Brothers’ collapse.

The results come as the ECB prepares to start dialing back its monetary stimulus after years of ultra-low interest rates and massive bond purchases, paving the ground for rate hikes further down the line.

The ECB found that higher interest rates would lead to higher net interest income in the next three years for a majority of the 111 banks in the stress test, but also to a lower economic value of their equity.”

https://www.cnbc.com/2017/10/09/ecb-finds-interest-rate-risk-is-well-managed-in-most-european-banks.html

The US halted QE (bond buying by the government), started to raise interest rates (very slowly), and this fall will begin to slowly shrink the Fed’s balance sheet by letting some of its bond portfolio return to private hands as the short term bonds mature.

Europe is behind the US, but is embarking on the same steps.  They intend to end their QE program after the first of the year.  Then they will have to begin a slow increase in interest rates.

The article says that according to their financial models, the slow increase in interest rates will not negatively impact the banks.  Bank profitability will improve with higher rates the same as it will for US banks, as their “net interest income” improves.  The interesting part of the article is the last phrase, “lower economic value of their equity”.  What does that mean, and why will that happen?  Their equity is represented by the price of their stock, and there is an expectation that bank stocks in Europe could see falling prices.  That’s what it means.  Why would it happen?  There could be many possible explanations, and NONE are offered.  One possible explanation is that higher interest rates on “safe” investment like Euro bonds would offer a more viable alternative to riskier stocks, and money could leave the stock market for the bond market when yields on bonds become more attractive.  I think that is a way off, but it will bear watching.  The same discussion will apply to US utility company stocks over the next 2 years, which have been used as bond proxies for several years.

Technical Analysis:

The stock market has moved higher in spite of its high valuation level.  We’re in the middle of earnings season and earnings are good, but not exceptionally so.  On the dip in the market Thursday morning, I sold most of my remaining XLK technology ETF and now I just hold a few deep value stocks that I bought for a turnaround, probably a couple of years out.  Then the market outfoxed me and popped higher on Friday.  It happens.  The pop may have occurred because there was news that the republicans in the senate agreed on a budget deal they could pass, which will allow them to do tax reform under a budget reconciliation process, so the democrats can’t filibuster a stand-alone bill.  That doesn’t mean tax reform is a done deal, but it was a prerequisite and it now is out of the way.

I think it will be interesting to see how next week goes, but I am loathe to buy into this overvalued market right now.  Sometimes you just have to have patience.  If the market keeps moving higher, I usually make some small buys and if the market moves higher and I have a profit, I make another small buy and use the profit I just made to cushion any loss if the market heads down.  I would keep making small purchases as long as the market kept going up.  You will not beat the market return over a year using this technique, unless the market suffers a big correction.  But that is the point of swing trading, be sure you are out of the market before it takes a big leg down.  Never take the big loss.  In a way, its like insurance, you pay it and hope you don’t need to use it.

Technically, the situation remains like the last few weeks.  The market is overbought, with RSI (see glossary) at the top of the chart up at 80, where 70 is overbought.  You can also see how far above the 50 day moving average (blue squiggly line) we are, and we usually correct from that extreme.  MACD (momentum) at the bottom of the chart looks like it has peaked for the moment as its going sideways the last couple of weeks.  We’ll keep an eye on it.

There you have it, what I think, and what I’m doing.

2017 10 21

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 October 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 in its third report of GDP for Q2 increased from its initial 2.6% to 3.1%, a nice quarter indeed.

The Atlanta Fed GDP Now forecast for Q3 as of last week is +2.7%.  If that is where the final (third estimate in December) comes in, that would put us on track for a +2.4% year, depending on what happens in Q4.

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 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 has been on hold for short term rates since June.  They had forecast 3 rate hikes this year, we have had 2 (each .25%), and with economic data coming in consistently positive, it appears we are on track for the third rate hike this year in Dec.  Inflation in the last month ran a little hotter than normal, solidifying the case for a hike.  The Fed has also talked about 3 rate hikes in 2018, presumably .25% each but not guarantee.

Rate hikes right now have good and bad implications.  For the economy, it is good since it indicates the Fed thinks the economy is sound enough to return to a more normal operating mode.  For the stock market, it can give some pause as it signals the end of super accommodation by the Fed, a major change of trend.  However, the stock market seems to have gotten over is initial shock and proceeded upward.  This should continue until rates get so high that they begin to constrain business expansion and consumer spending.  I think we are a long way off from that.

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
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 24.6, up slightly from 24.0 last month.  I used 4 quarters of earnings with the most recent being Q2 2017.

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 current forecast of earnings for Q3 from Factset has been revised down to +2.1% from +4.5% vs. the prior year’s Q3.  This is not a good sign in the short run, but it is not a negative for the long term view.

This indicator is supportive of the bull market.

Age of primary move, bull or bear market – The bull market is 8.6 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.

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 80, where 70 is overbought.  That does not mean the market can’t push higher, because bull markets that are overbought can get more overbought.  As far as committing new funds to the stock market with the intent of leaving it in, after a pullback would be a better entry point.  MACD (momentum) looks very strong, clearly in an uptrend, so that is good.  Price action is still in the middle of the channel the market has been moving up in for the last several years, so it can accelerate of decline a bit without disturbing the long term trend.

2017 10 18 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 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

New Records in Earnings Season

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 will be on Wed. this week.

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 Follow button at the bottom right hand corner of your screen.  You may have to scroll up or down a bit for it to appear, but click on it and enter your email address.  You do not have to have a wordpress account to follow a blog.

Economy:

Initial jobless claims fell again to 243,000 as the effects of the two hurricanes fade and people go back to work.  CPI data came in hot for Sept. with headline inflation running .5% for the month.  Year over year CPI stood at 2.2%, right at the Fed target of 2%.  This will bolster the case for the Fed to continue normalizing interest rates with another ¼ point hike in December.  Consumer sentiment took a big jump up in Sept. from 95 to 101.  Retail sales were up nicely, climbing 1.6% vs. August.

Geo-Political:

We haven’t checked on China in a couple of months, whose economy size wise compares with the US and the EU.  Things look good in China, as they try to transition from a government infrastructure build-out economy to a consumer lead economy.

“2017-10-14

WASHINGTON — China’s stable and healthy economic growth mainly stems from major progress in economic reform and the government’s ability to maintain a stable macroeconomic policy, Chinese Vice Finance Minister Zhu Guangyao said Thursday.

The stable macroeconomic policy demonstrates China’s steering capacity in economic development while promoting reforms and opening up, Zhu said.

The IMF on Tuesday raised its forecast for China’s economic growth in 2017 and 2018 to 6.8 percent and 6.5 percent respectively, both 0.1 percentage point higher than the earlier forecast in July.

For an economy with a total volume of over $11 trillion, maintaining such high growth is not easy, Zhu said. The upward revision is a “strong affirmation” of the Chinese government’s achievements in supply-side structural reforms by the IMF, he said.

Despite the positive revision, the IMF has urged the Chinese authorities to intensify efforts to rein in credit expansion and strengthen financial resilience.

In that regard, Zhu said the IMF is encouraged that the Chinese government attaches importance to its policy suggestions. It also supports China to enact economic policies according to national conditions.”

http://www.chinadaily.com.cn/business/2017-10/14/content_33237833.htm

Things look good for China with GDP growing 6% annually, but there are risks with their expansion of credit and financial resilience.  Financial resilience is typically bank capitalization levels, which became a major problem in the US and Europe during the mortgage financial crisis in 2008.

The Chinese economy is so large that we must keep an eye on it.  If they slow down, US exports will slow down and that will back up into the US stock market.

Technical Analysis:

The market had a sound but muted week.  The economic data is all positive, and the republican talk of tax cuts is like crack for the stock market.

Technically, the market is overbought with RSI at 72.  Of concern is MACD on the lower part of the chart, where the histograms are shrinking and the two indicator lines are converging and look like they could roll over and head down.  It hasn’t happened, but that’s where it looks like it is heading.  The price action has been above the channel we’ve been in for the last 5 months, and that is of some concern.  Mitigating that concern, note that the channel has been quite narrow and could be due for an expansion.  The distance between the price action and the blue 50-day moving average line is larger than usual, so some reversion to the mean (correction) could be near.

I sold out of the banking ETF (XLF) this past week.  The banks had run up and then on positive earnings reports, then failed to follow through.  The good earnings had already been priced in.  I continue to hold technology stock ETF (XLK) and that is still doing well.  XLK is overbought, but earnings for big tech have not been announced yet and they sometimes beat estimates by so much that they climb again.  I do keep a wary eye out for a correction now that we are fully overbought.  N Korea can test a missile any day.

2017 10 14

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

Fed Starts the Balance Sheet Run Off

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.

This week in the Geo-Political section, I put my thoughts on the risk to the economy as the Fed begins to shrink their balance sheet.  If you think I have any inkling what is going on with the economy, this is “must read”.

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 Follow button at the bottom right hand corner of your screen.  You may have to scroll up or down a bit for it to appear, but click on it and enter your email address.  You do not have to have a wordpress account to follow a blog.

Economy:

ISM’s manufacturing index, already running well beyond strength in factory data out of Washington, is accelerating even further, to an index of 60.8 in September which is a 13-year best.  Orders and employment continued to rise through September in ISM’s non-manufacturing sample which is showing no worrisome effects from Hurricanes Harvey and Irma. The headline index jumped to 59.8 for the highest score in more than 3 years.  Crude oil inventories fell by a larger-than-expected 6.0 million barrels in the September 29 week to 465.0 million, 0.9 percent below the level a year ago.  Hurricane impacts appear to be fading as initial jobless claims fell 12,000 in the September 30 week to 260,000 which hits Econoday’s low estimate.  Increasing strength in capital goods is the good news in today’s factory orders report where a headline 1.2 percent gain is 2 tenths above Econoday’s consensus.

The Department of Labor can’t quantify September’s hurricane effects on payrolls or the unemployment rate but they appear to be very dramatic nonetheless. Nonfarm payrolls were negative in September and, at minus 33,000, were well below Econoday’s low estimate. But the big surprise in today’s report are sudden indications of excessive labor market tightness as the unemployment rate fell 2 tenths to 4.2 percent and average hourly earnings spiked 0.5 percent with the year-on-year rate jumping 4 tenths to 2.9 percent.

All systems are go.  Hurricane affects aside, with the unemployment rate falling to 4.2% and hourly earnings up at .5% (that’s a 6% annual rate), it looks like the Fed will remain on target for a Dec. rate hike, and the 3 more rate hikes next year.

Geo-Political:

This is not geo-politics.  It will be a rambling discussion of my view of the big picture.  Buckle your seat belts.

Let’s go back to 2008 and the crash of the financial markets.  Don’t worry about why it happened, that has been hashed over and over.  Just think about what happened in the aftermath, and where that leaves us going forward.  The way the big banks worked, particularly the investment banks, is the borrowed short term money (lower rates) and lent long term money (higher rates), and lived on the spread.  With all the toxic mortgage backed securities out there in 2008, and lenders not knowing the credit quality of what was in a bank’s “book” of assets, they refused to roll over the short term debt of the big banks, making them insolvent.  At this point, the government stepped in the Troubled Asset Relief Program (TARP) and they recapitalized the banks and wiped out the existing holders of the common stock.  That got us by the initial danger.  However, Bush’s final deficit was $1 Trillion in 2008, not counting the $700 billion TARP that he signed in early Oct. and put that debt on Obama’s first year.  The structural deficit appeared to be $500 billion a year that Bush handed to Obama.  That is because the 2001 ($110 billion per year) and 2003 ($60 billion per year) tax cuts never paid for themselves, and the $300 billion annual increase in defense spending, and the $50 billion annual expense of the Medicare Part D drug coverage program that there was no tax to cover.  Obama added the Stimulus spending at $300 billion per year for 3 years, so the deficit was running close to $1 trillion per year for 3 years, then began to come down back to the former structural level of $500 billion per year.

The government had to sell bonds to get the cash to pay for those programs.  In the middle of a great recession, who was going to buy all that US debt, running at $1 trillion per year?  Certainly not corporations, and not individuals either.  If the individuals had bought US government bonds, they would not have had money to go eat out, buy Air Jordans, or buy any consumer goods that kept the economy humming.  The final option was that the government would buy its own debt, so the Fed printed some money up, and in the Quantitative Easing program, they bought mortgage backed and government bonds and held them on the Fed’s balance sheet.  They bought long and short duration bonds, and when the short duration bonds matured they rolled that money and bought more bonds so the size of the Fed’s balance sheet remained the same.  The Fed’s balance sheet is around $4 trillion dollars, quite huge.  Now the Fed is going to start unwinding their balance sheet, so when bonds mature, about half will be reinvested in bonds, but half will not, and the private markets will be expected to buy the bonds.  We are beginning to see longer rates tic up already, and that is probably a good thing.  Rates are normalizing.  It will be a good thing, until it is not, but it is also debatable whether it will turn dangerous to the economy.

Here is the big potential RISK to the economy.  It is one thing for the Fed to buy a 30 year bond that yielded 2.2% interest annually for the next 30 years.  They don’t have a family to feed and if it turns out to be a bad investment, they can always just print some more money.  That is not true in the private market where corporations and individuals buy bonds.  We look at the investment value of the bond, its ability to generate a yield that is attractive to all the other investment options we have, at a risk profile we are comfortable with.  But, we all know that when interest rates rise, the value of bonds issued at lower yield levels will fall.  That is investment risk.

If we know that interest rate increases are coming and the value of the underlying bonds will fall, why would I go out and buy a longer term bond?  The answer is that I would not; I would wait until the yields had risen.

That is the RISK to the economy, a sudden rise in interest rates when consumers realize what is happening.  A sudden rise in interest rates is bad for many reasons.  It increases borrowing costs for business which will reduce their profitability which drives their stock prices.  It would discourage plant expansion or equipment modernization, slowing the economy.  It would make it harder for individuals to buy goods, particularly large expensive purchases like cars and homes.  The value of the dollar would spike as international investors flock to our bond market to lock in attractive yields, which would make our goods more expensive in international markets, at least until the stock market began to crumble due to flagging profits.

So, is that scenario going to happen?  I don’t know.  The Fed will try mightily to not let it happen.  While the Fed has a lot of power, at the end of the day, the rest of the world has more power.  The Fed is moving very slowly with these quarter point rate hikes 3 times per year.  Can they hold all the water behind the dam and not have the dam break?  We’ll see.

What should you do?  I have not bought a bond since 2009 as the yields were simply too low for me.  I have not recommended bonds, especially bond funds (even short term bond funds), nor even balanced funds that hold a mix of stocks and bonds.  A little bit of gold is a safety hedge, although the government bought gold from private hands during the great depression. https://en.wikipedia.org/wiki/Gold_Reserve_Act

The main thing you can do is be aware that we suffered a financial system crash in 2008, the Fed and Congress both played a long term game and manipulated markets to prevent a depression, and that risks remain as the Fed ends the manipulation of the financial markets, directly in the bond market and indirectly in the stock market.  The Fed is just beginning to normalize their $4 trillion balance sheet, and we’ve never done this before!

Technical Analysis:

It was a good week for the market, with the major averages setting new record highs.  From a trading perspective, now is the time to think about when to sell, since it is too late to buy.  The market is already overbought, with the RSI at 76 (top of chart, 70 is overbought).  The market can push higher, but the odds favor a pullback soon.  MACD (momentum) is rising strongly in full bull mode.  I was buying a few weeks ago on the 1% pullback, so this week I sold about 1/3 of my holdings, locking in some profit.  I’ll keep a sharp eye out to sell remaining holdings before the next pullback.  Experience says that with RSI up at 76, we’ll get a pullback in the near future.

Pullbacks have been very shallow and with the bull market remaining in effect, as a trader one must jump back in quickly (buy the dips).  Seasonally we are entering the better half of the year as all the earnings forecasts for next year will be the best that they will be all year.  That may not happen, but people will buy the forecast because it makes them feel good.  I prefer to look at the actual earnings, as the forecast is just a story, and many times we see through the year that companies reduce their earnings forecast.

We’ll start earnings next week, and Factset expects earnings to be up 4% this quarter.  Stocks will have the weak dollar supporting them.  With strong economic activity the odds favor continued normalization of rates (higher rates) so bank stocks have risen.  When rates rise, banks can increase their margin between what they pay to depositors and charge to borrowers, which increases their profit.

2017 10 07

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