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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Existing home sales fell 3.6 percent in December to an annualized rate of 5.570 million, but that was from the best number in the last 9 years in November, so no worry. Initial jobless claims rose in the January 20 week but remain low and favorable at 233,000. The index of leading economic indicators continues to signal strength ahead, at a December gain of 0.6 percent following upwardly revised gains of 0.5 percent in November. Aircraft and vehicles fed a very strong 2.9 percent jump in December durable goods orders which is nearly double Econoday’s high estimate. The first estimate of fourth quarter GDP was 2.6%, lighter than expected. The domestic economy was quite strong, but US exports were weak.
Everything looks good except weakness in exports. There are two more estimates coming on GDP, let’s see if there are any revisions.
Could Ukraine heat up again?
“Dec. 22, 2017 – WASHINGTON —The Trump administration has approved a plan to provide lethal weapons to Ukraine, U.S. officials said Friday, aiming to fortify the former Soviet republic military as it fights separatists backed by Russia.
The new arms include American-made Javelin anti-tank missiles that Ukraine has long sought to boost its defenses against tanks that have rolled through eastern Ukraine during violence that has killed more than 10,000 since 2014. Previously, the U.S. has provided Ukraine with support equipment and training, and has let private companies sell some small arms like rifles.
The officials describing the plan weren’t authorized to discuss it publicly and demanded anonymity.
The move is likely to escalate tensions between the United States and Russia, as President Donald Trump contends with ongoing questions about whether he’s too hesitant to confront the Kremlin. Ukraine accuses Russia of sending the tanks, and the U.S. says Moscow is arming, training and fighting alongside the separatists.
Trump had been considering the plan for some time after the State Department and the Pentagon signed off earlier this year. President Barack Obama also considered sending lethal weapons to Ukraine.
The State Department, responsible for overseeing foreign military sales, would not confirm that anti-tank missiles or other lethal weapons would be sent. But in a statement late Friday, State Department spokeswoman Heather Nauert said the U.S. had decided to provide “enhanced defensive capabilities” to help Ukraine build its military long-term, defend its sovereignty and “deter further aggression.”
Things have been quiet in Ukraine for a couple of years, I suspect that Russia does not have plans to extend their incursion into Ukraine anyway. International sanctions against Russia are intended to make the cost of acquiring territory higher than the benefit, and therefore deter aggression. Russia went into the nation of Georgia and seized South Ossetia over a decade ago and that incursion has not expanded. Let’s hope the Ukraine seizure is also over.
The parabolic rise in the stock market this month is a direct response to the tax cut benefit to corporate America. Most parabolic rises suffer a crash in the future, but in the near term I do not expect a crash. A correction can occur any time, but the market has adjusted to a significant change in the system so it now reflect a new reality and a major correction is not necessary.
The rate of rise witnessed in January is a one-time event in my opinion and we should not expect a repeat. A 6% rise in the stock market in one month is unusual.
There are some macro events that are positive for the stock market in 2018, beyond just the tax cuts:
- Repatriation of cash from overseas – Corporations can move cash back to the US at much lower tax rates, and they will. What will they do with it? CEO’s say they will increase dividends, buy back their own shares, and consider acquisitions. Buying back their shares or acquiring other companies will reduce the number of shares available for trading, and that can put upward pressure on prices.
- Flight from bond funds – See the chart below on long term treasury bond ETF called TLT. We see the bond values have lost 10% in 18 months, or roughly 6% per year. As interest rates rise, the value of existing bonds falls. Those bonds are paying about 3% a year, so investors are losing 3% a year holding that ETF for the long term. The Fed has forecast 3 interest rate hikes for 2018, probably ¼% each. A hike to short term rates does not guarantee a rise in long term rates, but there is at least a good possibility. Folks are going to figure it out and many will switch to stock funds, helping drive up or at least sustain stock prices. We see the double bottom in bond prices in Dec. 2016 and March 2017 led to a sustained rise for a year. Now there is a double top in Sept. and Dec. 2017, will that lead to a sustained decline? The sideways wedge shape (purple lines) is a decision point, and the direction the market moves coming out of that wedge usually sets the direction for a while. It looks like it is breaking down.
Now for the current condition of the stock market, see the chart below. The market continues to power ahead, accounting for the new reality of corporate profits rising as a result of the tax cuts. Apart from that, corporate profits were expected to rise about 8% this year anyway, so the combination of the two is powerful. A negative is the moderately high valuation of the S&P, but with the rise in profits the valuation level could drop is stock prices do not run up too far too fast. The overall outlook for stocks this year is positive.
In the short run, the stocks are strongly overbought and vulnerable to a correction. RSI (top of chart) is at 87 where 70 is a normal overbought level. MACD (momentum, bottom of the chart) is still trending up, a good sign. But, technicals appear to be swamped by the narratives above. It is not that they are irrelevant, but they are not as important in the short term than the impact of the tax cut and the reallocation of assets going on.
I bought in heavily in early Jan. and have enjoyed the runup. I sold a second time last week, lightening up a bit and locking in profits. I would buy any dip here. I still have a significant exposure to SPY, but taking some profit is not a bad idea.
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Rich Comeau, Rich Investing