Treading Water

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, google “Rich Investing and it should show up on the first page.

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. 

The monthly Long Term update for Feb. was posted on Wed. and is just below this post.

Economy:

An uptick in supply and lower prices failed to boost existing home sales in January, which unexpectedly fell 3.2 percent versus the marginally downward revised December level to an annualized rate of 5.380 million, well below the consensus estimate of 5.650 million and the lowest rate for January since 1999. Year-on-year, home resales were down 4.8 percent, the largest decline since August 2014.  The median selling price fell by a sharp 2.4 percent to $240,500 for a year-on-year increase of 5.8 percent.

Initial jobless claims continue to post very favorable readings that remain near historical lows, at 222,000 in the February 17 week down 7,000 from the previous week.  The index of leading economic indicators points to robust economic growth ahead, accelerating in January to rise 1.0 percent following a 0.6 percent gain in December.

The Federal Reserve’s assets totaled $4.412 trillion in the February 21 week, down $ 23.2 billion in the week and down $ 48 billion from the beginning of balance sheet unwinding in October 2017.

I have been concerned that when interest rates rise, home sales would be the first thing impacted and it would be negative.  The January numbers are poor, but it could be weather related.  Let’s watch.  Nothing interesting happened at the Jan. 31 Fed meeting, per the release of the meeting minutes.  We see the Fed winding down its balance sheet, letting some bonds that mature be sold by the Treasury into the private marketplace.  We also see longer dated bond prices fall and the interest rate tic up on them, which has spooked the stock market.  Bonds have fallen into a bear market and I won’t buy any of them until yields offer a decent value for my money.  We’re not close yet.

Geo-Political:

Let’s take a look at Europe, after focusing on the US for a few weeks:

“Jan. 25, 2018 – The euro surged Thursday afternoon to a new three-year high as doubts grew over the future of the European Central Bank’s (ECB) stimulus program.

The currency hit the $1.25 level against the U.S. dollar around 2:00 p.m. London time and was on track for its biggest weekly rise since May of last year. Traders noted that, despite comments from ECB President Mario Draghi on Thursday afternoon, they remain convinced that easy monetary policy in the region is coming to an end.

“Draghi failed to surprise the market,” Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC over the phone. “The economic data is too strong,” she said, adding that investors are therefore convinced that the central bank will have to tighten its policy, despite giving the opposite message on Thursday.

After a routine rate decision for the euro zone’s central bank, Draghi spoke at a press conference Thursday, telling reporters that the recent volatility in the exchange rate is a “source of uncertainty.” He added that it would therefore require monitoring.

However, he used the same wording back in September — a repetition that markets perceived as a lack of concern over the strength of the euro and thus an indication that the ECB will end up tightening its policy. Draghi nonetheless reiterated that the bank will keep its stimulus for as long as needed and stated that there are “very few chances” that it will change interest rates this year.

The euro has been on an upward trend against other currencies, including the U.S. dollar, for the past few weeks as the region’s economy keeps improving and political risks dissipate. However, a stronger euro could hurt European exports and affect inflation in the euro zone — which the central bank has tried to support in the last few years — potentially prompting a change in its policy.”

https://www.cnbc.com/2018/01/25/european-central-bank-leaves-its-benchmark-interest-rate-unchanged.html

Europe is a big part of the “coordinated global recovery”, which generally is good for stock markets worldwide.  Recently we showed how the value of the dollar has tanked, and the recovery in Europe is part of the reason, as the dollar is always valued RELATIVE to another currency.  One of the things I particularly dislike about Mario Draghi is his lying, where it is obvious to everyone the recovery is on track in Europe and interest rates there need to rise, but Draghi insists it is not true so perhaps he can keep the value of the Euro low to make European exports cheaper internationally.  In his defense, most central bankers around the world do the same thing, including the US.

Bottom line, economic conditions in Europe are improving, they will probably end QE in September, and in 2019 we will probably see them begin to normalize their interest rates.  That will be interesting, since Europeans have been big buyers of US Treasury bonds since their rates were even lower than ours, but they will probably return to buying Euro debt.  As the US deficit expands due to the tax cuts and spending increases, and the European buyers exit the market, interest rates could spike higher and imperil the US recovery.  Debt is always a dangerous thing if taken too far.

Technical Analysis:

This was a sideways week as the market took time out to assess what happened this month and where to head next.  The recent rebound high is at 2750 and the market has been bouncing around just under it.  Friday was a big up day and stopped just short of 2750.

Technically, the market indicators are neutral.  RSI at the top is neutral at 53, and MACD has just begun to turn up from a low level, a small positive.

Which way next?  I really don’t know.  I exited the market when it first hit 2750, except for a few stocks that were still rising like Micron (MU).

We are in a correction in a bull market, and will be until we set a new high above 2875.  That spells risk, so I sold out.  If the market fails to break through resistance at 2750, there will be more downside action and probably a test of the recent low at 2550.  If it successfully breaks through 2750 it can go up and test the old high at 2875, but if that fails there will probably be more downside correction.

If we begin to move up through resistance, I will start to buy back in slowly using SPY, buying a little each day the market moves up.  In that way I get to participate in the upswing, while limiting my loss if the market heads down.  If the market moves down from here, I may pick up a little SDS (short the S&P) and see if I can make some money while the market goes down.  Right now, we just don’t know which way the market will move next, it’s at an inflection point.

2018 02 24

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 Feb. 2018

Once a month, on the Wednesday following the 15th of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The BEA first estimate of GDP for Q4 came in at 2.6%, below expectations.  That’s a bit of a negative surprise as Q4 is typically strong.  It’s not far below expectations, just a little light.

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 Year 2.5
2017 Q4 2.6
2017 Q3 3.2
2017 Q2 3.1
2017 Q1 1.2
2016 Year 2.0
2016 Q4 2.1
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates – The Fed has left rates unchanged since the Dec. meeting, but in somewhat of a surprise, the bond market has been backing away from longer dated maturities, causing rates to rise on the long end of the yield curve (5, 10 and 30 year bonds).  This upset the stock market temporarily this month, precipitating the 10% correction in stocks.  I think this is a temporary adjustment period.

Short term interest rates are in an uptrend, and longer dated bonds have moved up for now, but nominal longer term rates still remain historically low.  Rates still support the long term bull market.

 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Feb 21, 2018 1.4 2.7 2.9 3.2
Jan 17, 2018 1.4 2.4 2.5 2.8
Dec 19, 2017 1.4 2.2 2.5 2.8
Nov 15, 2017 1.1 2.1 2.4 2.8
Oct 18, 2017 1.1 2.0 2.4 2.9
Sep 20, 2017 1.1 1.8 2.2 2.8
Aug 16, 2017 1.1 1.8 2.3 2.9
July 18, 2017 1.1 1.8 2.3 2.9
June 20, 2017 1.1 1.8 2.2 2.8
May 17, 2017 .9 1.8 2.3 2.9
Apr 18, 2017 .9 1.7 2.2 2.8
Mar 15, 2017 .9 2.1 2.6 3.2
Feb 15, 2017 .6 2.0 2.5 3.1
Jan 18, 2017 .6 1.9 2.4 3.0
Dec 21, 2016 .6 2.0 2.6 3.1
Nov 15, 2016 .4 1.6 2.2 3.0

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 25.6, UP from 23.5 last month.  I used 4 quarters of earnings with the most recent being Q4 2017, which 87% of companies have reported so far.

The market went on a euphoric rise in Dec. and early Jan., corrected a hard 10% in 2 weeks starting late Jan., then recovered much of the loss by mid Feb.

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

In a bull market, stocks can remain overvalued for years, so this is not a sell indicator, but it is a cautionary sign.

S&P earnings – The earnings estimate for Q1 from Factset is for a 17% increase in corporate profits over the prior year.  The corporate tax cut is projected to keep earnings increases near that level for all of 2018.  This is very positive for 2018, as corporate profits primarily power the stock market.

This indicator is supportive of the bull market.

Age of primary move, bull or bear market – The bull market is 8.9 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, centered in the Yemen conflict (noted Dec. 2017).

In the US, we are approaching the point in the investigation into Russian meddling in the 2016 US presidential election where we will find out whether charges will be filed against the president’s closest advisors and possibly include the president.  At that point a constitutional crisis could emerge, where we find out whether the rule of law will govern our nation, or whether our government leaders decide they can ignore the law when it suits them and just do what they want.  A constitutional crisis is not a given, but if it occurs, I would expect the stock market to retreat for a while. (noted January 2018)

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

Technical:

After a quiet and positive 2017, the market experienced its first 10% correction in 2 years in Feb.  The market was overvalued and it was time.  The stated reason was early signs of emerging inflation, and the fear that this would spur the Fed to raise interest rates faster than the market previously anticipated.  The market rebounded quickly by today (2/21).

Technically the market looks better than last month.  RSI (Relative Strength – top of the chart) has backed down to 76, still overbought, but not as bad as Jan.  MACD (Momentum – bottom of the chart) is still heading up on a long term basis.

The market is still extended above its 50-month moving average, at a level where corrections can still be out there months ahead.  The market will eventually “revert to the mean”.

For 2018, the best news is the strong forecast of earnings from Factset.

In general the chart looks good except for the concern about over-bought status and the risk of a correction due to extension of the market above its 50-month moving average.

2018 02 21 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.

 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  With the Fed no longer buying the US government debt that is currently running at $650 billion per year, and will likely expand to $750 billion per year, who is going to buy that debt, and what interest rate will they demand before committing their capital to that investment?  If that causes interest rates to rise unexpectedly fast and high, that would pose a significant risk to the US economy.

The total national debt exceeds $20 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.

Rich Comeau, Rich Investing

Rebound

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, google “Rich Investing and it should show up on the first page.

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

The monthly Long Term update will be posted Wed. Feb. 21.

Economy:

Tangible increases in many basics lead a stronger-than-expected 0.5 percent jump in the consumer price index (CPI) for January. The core, which excludes food and energy, confirms the strength, up 0.3 percent which hits Econoday’s high estimate.  Jobless claims remain near historic lows consistent with strong demand for labor. Initial claims came in at 230,000 for the February 10 week with the 4-week average at 228,500.  Optimism over tax cuts is easily offsetting concern over the stock market, according to the consumer sentiment index which jumped sharply to 99.9 in preliminary February.

Retail sales not only proved very soft in January, but a sharp downward revision to December looks certain to pull down what had been outstanding strength for consumer spending in fourth-quarter GDP. Retail sales fell 0.3 percent in January compared to Econoday’s low estimate for no change. December is revised down 4 tenths to unchanged.

For months, all of the economic data has been positive, or noise caused by dislocations like the hurricanes.  This month, there are real concerns if these indicators become trends rather than one-off noise.

Headline inflation at .5% increase for one month equates to 6% annual inflation unless it is a short term phenomena.  But it was other indicators that concerned economists about inflation ticking up that caused the sharp correction in the stock market.  The problem with inflation ticking up is that the Fed would be forced to increase interest rates faster than they would like, in order to combat inflation.  Higher interest rates slow business investment and consumer spending.  The softness in retail sales in Dec. and Jan. is equally concerning.  Let’s keep an eye on this and see if things pick up soon.

Geo-Political:

As the international situation is relatively stable these days, and the US stock market is not, I’m focusing a bit more domestically these days.  Of particular note is keeping track of the US dollar, what it is doing and what it means for us.

What it is doing is dropping like a sinker!  That chart below shows the dollar has lost 12% of its value in the last year, which is a huge loss for any currency, much less the world’s reserve currency.

2018 02 17 USD

This has a positive effect in international trade by making US goods cheaper and more competitive abroad.  The stocks of companies with significant exposure internationally should do well.  Domestically, it means we will have to send more dollars overseas to buy imported goods, which is inflationary in the US.  Refer to the section above on the scary rise in inflation, yes it is just one month, but we have to watch it.

There are many factors that affect the value of the dollar, and some of the major ones are US interest rates, economic activity, stock market and bond market activity, and US fiscal discipline and the budget deficit.

The Fed has been raising interest rates on a regular quarterly basis and yet the dollar continues to fall.  What is going on here?

First, other countries are healing from the financial crisis to the point that they are raising rates also, so the US bonds are not more attractive to foreign investors.  The stock market is doing well (late Jan. and early Feb. excluded).

The problem is the US government is not acting fiscally responsible and our budget deficit is rising too fast.  We are cutting taxes and raising spending, with the result that the deficit will rise too fast, much faster than our GDP grows.  I think that is why the dollar is falling, and we should expect some inflation.

“Feb. 9, 2018 – The U.S. Federal deficit was $587 billion in Obama’s last year and it grew to $666 billion in Trump’s first year of his presidency. I’ve been reviewing a report from the U.S. Treasury Department, which shows that the U.S. Federal Deficit will probably increase this year (fiscal 2018), could come close to if not exceed $1 trillion in fiscal 2019 and will likely exceed $1 trillion in fiscal 2020 and beyond. And this is before the additional deficits created by the tax reform bill and the just passed two year budget.”

https://www.forbes.com/sites/chuckjones/2018/02/09/trumps-federal-budget-deficit-1-trillion-and-beyond/#1af3ce03544f

Who is going to buy this trillion dollar per year US debt?  Not me for sure, at least not at 3% interest on a 10 year bond.  A ten year bond should pay the inflation rate plus 2% real return, so now that would be 2% for inflation and 2% for a real return, or 4% total, yet the ten year bond today yields 2.9%, not a good deal.  If you think inflation will accelerate over the next ten years, then you would demand a higher interest rate (I would), so the 10 year bond should be yielding 5 or 6% before I would be interested, and that would approximate the low end of historical norms.  A rise in interest rates will expand the deficit even more as we pay higher interest rates to carry the $20 trillion total debt of the US.

I think that is why the dollar has lost 12% in the last year.  It is not the whole reason oil has risen 50% from 40 to $60 a barrel in the last 2 years, but it is part of the reason.

Anyone can stimulate an economy in the short run.  The question is what are the long term consequences, do you know what they are, did the economy really need the stimulus, and are you OK with the long term consequences?  You can’t control it; can you deal with it?

Technical Analysis:

It was a good week in the stock market, up all 5 days.  Technically things look good, RSI rose to 51 which is neutral territory, and MACD at the bottom of the chart has turned up although technically a buy has not been registered where the faster moving black line crosses over the top of the slower moving blue line.  I’m a bit more aggressive in trading and don’t wait for all of the technical signals to be triggered.

The technical condition of things is not all that anyone should rely on.  The question here is what is going to happen next and how to you align yourself?  The market is in rebound mode to the upside, I bought in near the lows and have enjoyed the rebound, in SPY and some quality individual stocks.  The market will either continue to rebound and go on and set new highs, or it will test the old high at 2875, fail, and head back down extending the correction.

2018 02 17

If this was a simple technical glitch, I could go with the rise to new highs.  I don’t think that is the case, I think the market is responding to some major shifts, rising interest rates and possibly rising inflation.  If I’m right, I’d expect the rally to fail before it hits 2875 and head back down test the recent low at 2540, near the 200 day moving average.  That makes me nervous in here.  I sold a few individual stocks that I had nice profits in since the crash low.  If the market begins to move lower next week, I’ll be a seller.

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

10% Correction

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, google “Rich Investing and it should show up on the first page.

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 non-manufacturing index rose nearly 4 points in January to 59.9 which is well beyond Econoday’s high estimate (anything over 50 shows growth).  Initial jobless claims have posted four straight very favorable readings, at 221,000 in the February 3 week which takes the 4-week average to 224,500 and a new 45-year low.

It was not a big week for data, but the data is good.

Geo-Political:

Let’s focus on the US and why the stock market suffered a 10% correction so far, over the last 2 weeks.  This all started on Feb. 2 when the Employment Situation report showed hourly earnings advanced at a 3% rate, higher than expected.  With the unemployment rate at 4.1%, investors think they see the seeds of inflation.  This led them to fear that the Fed would be more aggressive raising interest rates, which could limit the upside to growth, and mark down the valuation level on stocks to reflect a more competitive rate from the bond market.  This started the problem.

Then a product issue with the VIX (Volatility Index) exacerbated the selling.  Volatility is the propensity of the market to go up and down.  2017 was a particularly quiet year in the stock market, and many of the large investors had bet “short volatility”, making money as the market remained calm.  As the position always won, more money lined up, in fact some of the larger players bought “short vol” products called ETN’s.  When the market headed down due to interest rate concerns, the VIX spiked rapidly.  The “short vol” players who had borrowed money to buy more (called buying “on margin”, which means borrowing money from your brokerage house if you are approved) began to get margin calls.  Part of your margin agreement with your brokerage house stipulates that if you have margin loans, you MUST maintain a certain ratio of assets to your loan debt.  If some of your assets decline rapidly in value, you are forced to sell other assets you hold in order to pay off part of the margin loan, in order to restore the prescribed ratio of loan debt to assets.

This is not a friendly process (the margin call), and it must take place within a couple of hours.  That is why you saw the market up at lunch time, and down 500 points on the DJIA an hour later.

Here’s another description of the process:

Negative Fallout: Cascading wave of selling which could lead to a Stock Market Crash

The result of all of this is likely a stock market crashThis could take place over the next few days or the next few weeks. There are many different players, so the time frame is hard to predict. Let’s walk through the process. There are two parts: retail and institutional.

The retail effect is fairly straightforward:

  1. First, XIV shareholders are liquidated. Either at or near Net Asset Value which represents an 80-100% loss.
  2. Second, margin calls affecting some XIV holders will force them to sell any and all assets, including stocks, to raise cash to meet their margin calls. This will promote initial selling pressure.
  3. Third, large selling pressure across the board will make many investors cautious to buy into an ongoing crash, reducing bid liquidity.
  4. Fourth, an initial decline triggers stop-loss trading strategies to sell at a loss removing further liquidity from the market.
  5. Finally, the ongoing decline causes an even larger rise in volatility, and hedge funds, pension funds, and corporations with secondary exposure to short volatility become impacted. The cycle then repeats.”

https://seekingalpha.com/article/4143945-xiv-short-volatility-fund-forced-liquidate-black-swan-2018?page=4

 The short volatility ETN products have been around since 2010, and while big players used to trade futures on the VIX, the ETN’s made it easy for smaller investors to get in the game, which had gotten much bigger by 2018.

So, that’s what happened.  Feel better?  Not really, but when you get hurt, it always pays to figure out how the world did it to you, so you can protect yourself better next time you see there conditions.  I’ll admit I did not see the “short vol” trade as being this dangerous, and I don’t really have much insight into the size of bets on these products.

Technical Analysis:

The two week correction took the market down 10% and it was pretty painful.  If you follow this blog, you saw that I began lightening up on Jan. 16 selling 25%, and on Jan. 24 selling another 25%.  The following week I sold my remaining 50%, totally exiting the over euphoric market.  That saved me lots of money.

How to proceed?  First we ask is this a correction or the start of a bear market?  Our last monthly Long Term update showed we thought it was still a bull market.  This is vital to know.  You must always understand if you are in a bull or bear market.  That is the only way you can plan an appropriate action, because what is appropriate in a bull market is definitely not appropriate in a bear market.

My belief now is that this is a correction in a bull market.

Correct procedure, if we are right and this is a correction in a bull market, will be to buy back in at some point and enjoy the ensuing rally.

Technically, the market reached oversold status last week, and the RSI (top of the chart below) ended the week at 34, near oversold.  During a correction in an on-going bull market, this is usually a good entry point.  There is nothing that actually says this correction is over, but I’d rather be buying at a 10% discount than two weeks ago at full price.  MACD (momentum, bottom of chart) is in bear mode for the short term and still heading down.  It is very hard to pick “the day” of the turn, so I just try to get close and spread my buys into several pieces, usually 3 or 4.

2018 02 10

During last week I moved 1/3 of my funds back into the market, around Tuesday.  That means I suffered a bit on the big Thur. selloff, but not as bad as if I was still all in the market from earlier in the month.  Friday I was looking for some quality names and I bought JP Morgan, Lockheed Martin, and Raytheon.  The latest budget deal allocates new billions to defense, so the defense contractors should get their piece of the pie.  I was glad to see the market recover Friday afternoon.  If the market calms down in the week ahead, I’ll keep buying.

An option to consider is that on the next rally, we fail to exceed 2875 on the S&P, which would give us a “lower high”, and could start a down channel which would mean a multi week or month correction.  If that happens, I will sell out when the “test” of the old high at 2875 fails.  It helps to envision what could happen, and have a plan about how you will deal with it.  Then you don’t have to invent a plan on the fly.

An interesting note, look how the market has fallen back into the old uptrend channel that it climbed out of on the tax cut euphoria.  I like to keep the old trend lines around as I think they are useful.

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

Woosh!

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, google “Rich Investing and it should show up on the first page.

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 totaled a modest 230,000 in the January 27 week following a revised 231,000 in the prior week.  Overheating has to be the concern of ISM’s manufacturing sample where the January index came in at 59.1, a level held down by a slowing in employment which may signal that the sample can’t find enough people to keep up production.  Consumer sentiment has shot higher the last 2 weeks as January’s final reading comes in at 95.7, which is at the high end of Econoday’s forecast range and up a very sizable 1.3 points from the mid-month preliminary reading.

A very solid employment report for January, one however tinged with a hint of weakness, is led by a 200,000 gain in nonfarm payrolls, which is near the high estimate. The unemployment rate is steady at a very low 4.1 percent but it’s average hourly earnings that take the headlines: up a noticeable 0.3 percent with December revised 1 tenth higher to a 0.4 percent increase that joins September 2017 as an unusually strong month.

The numbers all look good.  If there is any concern, it is with the wage inflation, which is not serious yet.  The Fed has kept rates lower longer than anyone expected, favoring business expansion at the expense of savers.  They had the luxury of doing this due to low inflation, even in the face of massive money printing called QE.  Now, with unemployment down at 4% and a several years old recovery, employees who have not had decent raises in years are doing what they can, they are voting with their feet and moving to better paying jobs.  Businesses that want to compete must pay for their help.  Wage inflation usually leads to general inflation as businesses pass along the higher cost to consumers.  Then you get an inflation cycle and the Fed has to raise interest rates to cool off the economy, which leads to the next recession at some point.  So, that’s the longer term concern.

Geo-Political:

The big news is the rout in the US bond market, which is also affecting the stock market expectations.

“Feb. 2, 2018 – The Dow Jones Industrial Average tumbled 666 points in the biggest plunge since June 2016, as the worsening bond rout stirred angst that the Federal Reserve will accelerate its rate-hike schedule.

Solid jobs data that underscored the strength of the economy sent bond bulls scurrying and rattled equity investors who haven’t seen a week this bad in two years. The tandem selling accelerated after Dallas Fed President Robert Kaplan suggested officials may need to hike more than three times this year to cool the advance. The 10-year Treasury yield popped above 2.85 percent for the first time since January 2014.

Yields have risen, inflation evidence is rising rather broadly. It’s that combo of factors that’s starting to mount,” Jim Paulsen, chief investment strategist at Leuthold Weeden, said by phone. “And then you get a report, and that’s the straw that breaks the camel’s back, and that’s kind of what we got into today.” 

There was nowhere to hide on the stock market, with all 11 S&P 500 sectors lower. The index’s five-day rout reached 3.9 percent — marking its first pullback of at least that much in a record 404 days. Energy shares sank 4.1 percent as earnings disappointed and crude slumped. The tech selloff worsened, sending the Nasdaq 100 Index lower by 2.1 percent. Its weekly rout hit 3.7 percent, most since February 2006. Not even a record rally at Amazon.com Inc. could rescue the measure, as the world’s biggest company, Apple Inc. hit its lowest since October.

People are finally starting to reprice reflation, it’s about time,” Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management, said by phone. “Global economic growth is strong and corporate earnings are very solid, so there’s no reason to question the equity bull market. The rise in bond yields is good, it’s just the speed at which it’s happening that is making investors nervous. Bottom line: this is a healthy correction.”

https://www.bloomberg.com/news/articles/2018-02-01/asia-stocks-to-slide-as-tech-stumbles-bonds-drop-markets-wrap

OK, the bond market surprised people by moving rates up and bond prices down, faster than we have seen in years.  The yields that are available in the bond market provide competition to the stock market, and that competition has been lacking for years, allowing the stock market to rise.  If bond yields provide reasonable competition and provide a more normalized return, stock prices will be moderated.

I don’t specialize in the bond market, but I certainly don’t ignore it.  It’s very important to keep an eye on it and respect the size of the market, because when it moves, it is like an elephant moving, everyone notices.

Technical Analysis:

It was a big down week for stocks, taking prices down 4%.  That sounds bad, but remember, it was up 8% in Dec. and Jan., and most thought it was going up too far too fast and needed a good correction.  I said in recent posts that the market was acting euphoric, and that can’t go on forever.  We don’t know exactly when it will stop, but technical indicators are some help, and I mentioned that with RSI in the high 80’s when 70 is overbought, it was closer to selling time.  I made two sales, one in mid Jan. and the other in later Jan., that took me half out of the market.  On Tuesday this week, it seemed to me the selling was serious, so I bailed on the rest of my SPY.

I talked recently about “reversion to the mean” and the vertical red line on the chart in early Jan. shows how far the market had moved above the 50-day moving average, which is a danger area for a correction.

So now, everyone is scared and selling, so now is the time to work on your buying list.  What stocks do you want to buy when prices stop falling.  You always have to keep in mind the “Long Term” outlook, and we recently posted that it is still a bull market.  Obviously, if the Long Term view was bearish, you wouldn’t be working on a buy list, unless you were very sure of yourself.

How low will this correction go?  I have no idea.  Could it get to 10%?  Sure, we haven’t had a 10% correction in 2 years, so we are due.

Technically, the chart looks terrible short term.  It looks like the market is in freefall, with a big drop on Friday and closing on the low.  RSI tumbled down to 48, where 50 is neutral, but MACD has turned down from a high level and it looks like it has further to fall.

2018 02 03

I still have a few individual stocks like AAPL and FB that I plan to keep.  I hold some CELG stock and at its recent peak I sold a covered call option, a CELG Feb 23 111 call and I got $2 a share for the option.  (it was probably an inexperienced option trader who made a mistake he regrets that resulted in me collecting a $2 premium on a 30 day option.  Maybe he didn’t grasp the nuance of bid / ask spreads in thinly traded markets.)  Selling covered calls works best when you can do it while the stock is overbought, then it has a hard time going up to the strike price and if you are lucky, you keep the stock and your option premium.

In this selloff, the opposite will often work.  As prices come down, they eventually reach an oversold level and probably won’t go any lower.  Then selling a Put option may work, lets say, selling a 30 day option to let someone sell you shares of Exxon at 77.50 a share.  The key is to not sell the Put option until XOM “actually” stops going down!  If XOM stops going down at 80, you may keep the option premium free and clear, and if XOM does go to say 77, you will by “Put” the shares and you need to come up with 77.50 to buy a 77 stock.  (Prior to option expiration you could also “buy to close” you option position, especially if you don’t have the money to buy the stock shares that could be put to you.  Just understand that an option holder can put the shares to you prior to the expiration date.  I never sell a put option that I don’t have the cash to buy the shares if I had to take them.)  You can lose money trading options, very easily.

I hate to admit this, but I don’t bet much on my option trades.  I do it because I find it intellectually interesting, I learn by doing, and I don’t get near the adrenaline rush from buying a big slug of SPY.  Options have that time value component, and it forces you to provide your attention to the trade often.

I don’t do a ton with options, but my batting average is good.  In the last year, I probably made money on about 80% of my option trades.

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Rich Comeau, Rich Investing