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

Tax Cut High

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 months Long Term update will be posted on Wed., Dec 20th.

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:

Higher gasoline prices gave a superficial boost to the CPI headline which managed to meet expectations with a 0.4 percent November gain while the core rate (excludes energy and food) inched only 0.1 percent higher. Year over year headline inflation came in at 2.2%.  Initial jobless claims fell 11,000 in the December 9 week to 225,000 which easily beats Econoday’s consensus for 239,000.  Retail sales surged 0.8 percent in November which is far beyond expectations and is 3 tenths over Econoday’s high estimate.

The economy looks good.

Geo-Political:

The Fed ended its December meeting on Wed. and Janet Yellin held her final regular press conference and announced they raised the Fed Funds rate by the expected ¼ point to the range of 1.25 – 1.5%.  The market yawned.

It appears the republicans will pass their tax reform package, and the final markup has fixed some of the more egregious giveaways to the rich.  One can question if we need a big tax cut at this time, especially one that will add $100 billion a year to the deficit that is currently running over $600 billion per year, bringing that up to $700 billion per year.  GDP is growing by a solid 2.5% annually and the unemployment rate is historically low at 4%.  We are told by the politicians that the tax cuts will incent companies to keep their jobs in the US by funding plant expansions here, and that companies will have the money to give pay raises to workers which will help with the problem of stagnant wages in the US for the last 20 years.

That is NOT what CEO’s are saying.

“November 29, 2017

  • President has said corporate tax cut will boost hiring, wages
  • Corporate leaders say tax cut proceeds will go to shareholders

Robert Bradway, chief executive of Amgen Inc., said in an Oct. 25 earnings call that the company has been “actively returning capital in the form of growing dividend and stock buyback and I’d expect us to continue that.” Executives including Coca-Cola CEO James Quincey, Pfizer Chief Financial Officer Frank D’Amelio and Cisco CFO Kelly Kramer have recently made similar statements.

We’ll be able to get much more aggressive on the share buyback” after a tax cut, Kramer said in a Nov. 16 interview.”

https://www.bloomberg.com/news/articles/2017-11-29/trump-s-tax-promises-undercut-by-ceo-plans-to-reward-investors

CEO’s are not talking about raising wages or expanding plants.  CEO’s raise wages when they have a turnover problem, when workers are quitting to go to companies that are paying them more.  That may be happening in the most highly skilled positions, but it is not happening for mainstreet workers.  CEO’s will expand plants when they sense DEMAND is growing.  With wages for most people stagnant for 20 years, while their expenses for housing, health care, retirement savings, and education are all rising, average workers have had their DISCRETIONARY INCOME eaten up by necessities and growth in consumer discretionary spending has not been adequate to spur plant expansion.  I think there will be some stimulus from the tax cut in year one, but beyond that I am less optimistic.  The final point is that if we take this stimulus now when the economy is already solid, what stimulus will be available when the next recession hits?

Does this tax cut for corporations do enough to keep companies from moving jobs offshore?  In the first place, manufacturing has already moved offshore, much to China.  Some is coming back to the US, but it is into highly automated robotic manufacturing and there are a few highly skilled positions needed to program the robots, but the labor content is much smaller than 20 years ago.

The fact is that manufacturing did NOT move to China because taxes were too high in the US, they moved because the difference in wages was massive, and it still is.  Below are the facts on manufacturing wages in China and the US.  If you convert the hourly wage in the US ($21.10) to annual, you get about $40K per year without overtime.  The Chinese wages are in Chinese yuan, and there are roughly 7 yuan to the dollar, so their annual income is about $9K, or about 75% less than the US.  The primary factor in manufacturing moving offshore has been the labor rate, not the corporate income tax rate.  So, we are not really fixing the problem.

Country                                           Last Survey

China                     59,470                   Dec/16                  CNY/Year             Yearly

United States        21.10                     Nov/17                 USD/Hour           Monthly

https://tradingeconomics.com/china/wages-in-manufacturing

If the tax cut passes, I think it will be good for the stock market next year, but I don’t see it helping wages rise, nor do I see it turning the tide and starting the movement of jobs back to the US.

Technical Analysis:

The market meandered around this week, then surged to a new high on Friday based on positive comments out of congress on reconciling the house and senate tax bills.  This will increase corporate profits next year and the market is trading on that news.  Seasonally this is the stronger part of the year as companies earnings estimates for the next year usually start out high and later they get revised lower.

Technically the market is overbought with RSI at the top of the chart up at 70, and momentum is positive shown by MACD moving up at the bottom of the chart.

Normally I would not buy into an overbought market like this, but it is being driven by an unusual political event, the tax cut.  So, I’ve continued to buy in slowly since the last minor pullback.  I’ve been using SPY and IWM for the broad market, and XLK (tech), XLF (financials), and XLV (healthcare) for sectors.  I watch these daily, or you could put a close “trailing stop” sell order on them to protect yourself from a pullback (but you do open yourself up to a “whipsaw”, where the market goes down quickly, you are stopped out, then the market quickly heads up again, darn).

The market is rising at a faster rate than the last few months and it is getting pretty far extended above the 50 day moving average, and technically that increases the likelihood that at least a minor pullback will occur relatively soon.

2017 12 16

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

Trading on the News – Tax Reform

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:

ISM’s non-manufacturing report for Nov. came in at 57.4, at the low end of expectations but is still a very strong rate of growth.  Initial jobless claims fell 2,000 in the December 2 week to a lower-than-expected 236,000.  Overheating may not be the description of the labor market but heating up definitely is. Nonfarm payrolls rose a stronger-than-expected 228,000 in November led by outsized gains for manufacturing at 31,000, construction at 24,000, and professional services at 46,000.  The consumer sentiment index, at 96.8 for preliminary December, remains elevated though continues to edge back from October’s expansion peak of 100.7.

Everything is looking good.

Geo-Political:

Today we take a look at Japan, one of the top 5 economic zones in the world, but one that has struggled following the pop of its stock market bubble in 1989, and subsequent recession.  One of the reasons that all stock markets are performing well is the “global coordinated expansion” currently going on.  The US recovered from the financial crisis of 2008 faster than anyone, and everyone else is finally catching up.

“Dec. 8, 2017 –  Japan has sealed its longest stretch of economic growth in more than two decades, helped by a rise in business investment.

The economy expanded at an annual rate of 2.5% in the three months to September, revised data showed.

The growth rate was faster than expected, and higher than the initial estimate of 1.4%.

The solid growth figures come after more than four years of economic stimulus by Prime Minister Shinzo Abe.

Growth was driven by rising exports thanks to robust global demand, and also by increased spending by Japanese firms on equipment and facilities. That helped to offset a drop in consumer spending at home.

The world’s third-largest economy has now grown for seven straight quarters. Marcel Thieliant, senior Japan economist at Capital Economics, said this put Japan in its longest stretch of uninterrupted growth since at least 1994, when comparable data was made available.

Mr Abe’s economic policies – dubbed “Abenomics” – have been partly credited for the expansion.

The programme, a mix of monetary easing, government spending and structural reforms, was designed to reignite the once-booming economy and lift consumer prices.

Japan has battled years of deflation, or falling prices, and slow growth following an equity and property market bubble in the early 1990s.”

http://www.bbc.com/news/business-42275994

 

Technical Analysis:

It was a quiet week in the markets, a few down days followed by a few up days.  The market seems to be driven by the news at present, with tax reform being the biggest driver.  It appears to me that something will get passed, since bills have been passed by the house and senate.  They will be reconciled and passed into law.  Corporations will get a tax cut, but not everyone.  Many large corporations already have their deductions lined up and pay less than the target rate of 20%.  It should help smaller companies.

We see the market has moved up above the trend it was in for several months.  Even if you add 10% for corporate profits for tax reform next year, you are still looking at a healthy P/E ratio on the S&P, and that creates a vulnerability out there somewhere.  For now, the market seems to be ignoring that and moving up.

Technically, the market has moved back to overbought with RSI at 70 at the top of the chart.  MACD at the bottom is still positive.  Price action is extended farther above the range than I’d like to see, but with a big issue like tax reform out there for the next two weeks, it seems unlikely to back off much.

2017 12 09

I’ve been buying in slowly for a few days using SPY and IWM, and plan to sell if the market reaches egregious levels of overbought.  The FANG stocks (FB, AMZN, NFLX, GOOG) pulled back a bit recently as they are not viewed as major beneficiaries of tax reform (their tax lawyers already positioned them for low taxes using existing methods) and I bought some FB on the pullback.

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

Going Parabolic?

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.

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Economy:

Third-quarter GDP proved even more solid than the first estimate, revised 3 tenths higher in the second estimate to an as-expected 3.3 percent annualized rate.  New home sales are suddenly on fire and far surpassing the highest estimate for a second month in row, up 6.2 percent in October to a 685,000 annualized rate and a new expansion high.  Corporate profits, at an annualized rate of $1.86 trillion in the first estimate for the third quarter, rose 10.0 percent compared to the third quarter of 2016.  Crude oil inventories fell by 3.4 million barrels in the November 24 week to 453.7 million, 7.1 percent below the level a year ago.   Initial jobless claims fell 2,000 in the November 25 week to 238,000, which historically is in the low range for this metric.   Vehicle sales slowed in November to a nearly as-expected annualized rate of 17.5 million.  November’s ISM manufacturing report composite headline was down 5 tenths to 58.2, but any number over 50 is still good.

Everything looks good in the economy.  Corporate profits at 10% growth over last year’s Q3 are strong.  It looks like tax reform will pass and that will help corporate profits next year, which should help drive the stock market higher.  Adding $100 billion a year to the deficit which is already running an obscene $600 billion a year will not be good in the long run, but apparently nobody cares.  The CEO’s want their corporate profits NOW, so they can juice their profits and cash out their stock option windfall before anything too bad happens.  Things that are good in the short term are not necessarily also good in the long term.

Geo-Political:

I’ve had a domestic focus for a few weeks and continue this week with two very successful and wealthy US investor’s observations on the market, Dennis Gartman and Carl Ichan.

“The fact that the stock market wants to climb even higher is “stunning” but true, widely followed investor Dennis Gartman told CNBC on Thursday.

The Dow Jones industrial average soared more than 350 points on Thursday, breaking above 24,000 for the first time, on optimism over tax reform.

You’re at this point in the stock market where it can do anything. It’s gone parabolic,” the editor and publisher of The Gartman Letter said in an interview with “Power Lunch.”

“It is stunning to me, surprising to me, but it still wants to go up.”

The odds of success increased for the Republican Senate tax bill on Thursday after Sen. John McCain said he would support the legislation. The upper chamber is expected to vote later in the day.

If it passes, the House and the Senate will have to work together to reconcile the two bills and then send the final legislation to President Donald Trump to sign.

Gartman said the bull market “will stop eventually.” He thinks that may occur when the Federal Reserve begins to tighten monetary policy aggressively.

Gartman has been calling the stock market “egregiously overpriced” and recently predicted when the bull market does end, it “will end badly.”

Earlier Thursday, billionaire activist investor Carl Icahn told CNBC he thinks the market has “gotten into a euphoric state.”

However, he also acknowledged a lot of underlying strength in the market.

“It’s run away and there might be a big correction but I can’t say it’s insane,” Icahn said.”

https://www.cnbc.com/2017/11/30/the-stock-market-has-gone-parabolic-says-dennis-gartman.html?recirc=taboolainternal

They pretty much reflect my thoughts.  It appears the market has lost touch with reality and nothing can stop its rise, until it stops going up.  It looks like main street is losing its fear of the stock market gained in the 2008 crash and entering the market.  Millennials finally have decent paying jobs and are buying houses and leaving their parents basements, and they are investing in the stock market.  This could go on for a long time.  Alan Greenspan said the US stock market showed signs of “irrational exuberance” in 1996, but it did not materially correct until the “dot com” bubble burst in 2000.  The market had gotten highly overvalued by that time, and the ensuing correction lasted 3 years, not ending until late 2002.  That is what Dennis Gartman means when he says it “will end badly”, something big to the downside.  The more overvalued the preceeding bull market, the deeper and longer lasting the following bear market runs.  That is the lesson of history.  For now we enjoy it, but start to keep a close eye on it.

Technical Analysis:

The market had a good week, probably in anticipation of the tax cut bill.  The biggest beneficiary will be corporate America and profits there will jump next year if the cuts take effect in 2018.  If corporate profits rise by 10% due to the tax cut, over and above an expected 10% rise just due to the sound economy, that will drive the stock market higher next year.  I am not sure how much of this expectation is being pre-priced into the stock market now, and if much of it is being priced in now, when the bill passes, you could get a selloff (“buy the rumor, sell the news”, is an old saying in the markets).

Technically the market looks fairly good, as both RSI and MACD have broken above their downtrends (the purple lines at the top and bottom of the chart).  RSI is overbought at 70, a short-term negative.  It is clear to see that the price action has as Mr. Gartman says “gone parabolic”, rising quickly well above its long established rising channel (the blue lines).  This is not sustainable in the long run, but it can continue for a while.

I have been buying in on small pullbacks and I continue to buy daily into SPY and IWM (Russell 2000) until the market gets egregiously overbought, then I sell out and wait for a small pullback.  I sold out on Friday morning before the Flynn guilty plea news broke.  The market sold off hard on the Flynn news, then recovered nicely to end the day.  I’ll see how things go Monday and Tuesday and I could go back to small buys if the market looks like it will rally on the Senate passage of the tax cut.

2017 12 02

I am going to underperform the market this year, and I’m ok with that.  I’ve taken what the market will safely give me and stepped aside when the market got overbought.  I promise you I will outperform the market when it decides to take the next big fall.  I say that with some confidence, since I always have missed the big downdrafts (1987, 2000-2002, 2008).  It suits my retiree status as well as my personality.

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Rich Comeau, Rich Investing