Trading Range

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. 

Hopefully you have a three-day weekend this weekend and I hope everyone gets to enjoy it.  We’re having good weather in Houston, as long as your river stayed in its banks on Wednesday.

If you wish the chart showed up larger, on the blog home page, hit the heading up at the top called “View Options” and it explains how to enlarge the page on your monitor.

Economy:

Fourth-quarter GDP is revised 4 tenths higher in the third estimate to a 2.9 percent annualized rate.  After-tax corporate profits fell a year-on-year 6.0 percent in the fourth quarter to $1.68 trillion.  Initial jobless claims fell 12,000 in the March 24 week to a lower-than-expected 215,000 and the lowest level in 45 years.  Consumer sentiment held strong the last two weeks of the month as the final March index came in at a 14-year high of 101.4.

The good numbers show the risk of a recession is very low at this time, which is good for the stock market.

Geo-Political:

Wall St. wonders how China will retaliate against the US for us placing tariffs on some of their exports to us.  Moving to dislodge the US dollar as the defacto world’s reserve currency could be one way.

“China is taking its first steps towards paying for imported crude oil in yuan instead of the U.S. dollar, three people with knowledge of the matter told Reuters, a key development in Beijing’s efforts to establish its currency internationally.

Shifting just part of global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.

A pilot program for yuan payment could be launched as early as the second half of this year, two of the people said.

Regulators have informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, said the three sources at some of the financial firms.

Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.

China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil. Its demand is a key determinant of global oil prices.

Under the plan being discussed, Beijing could possibly start with purchases from Russia and Angola, one of the people said, although the source had no details of anything in the works.

Both Russia and Angola, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.”

https://www.cnbc.com/2018/03/30/china-is-reportedly-taking-the-first-steps-to-pay-for-oil-in-yuan-sources.html

Being the world’s reserve currency is a huge advantage to the US, supporting the value of the dollar despite our perennially high deficits.  It is not necessary for the yuan to replace the dollar as the world’s reserve, but to be seen as a viable alternative would take some buying pressure off the dollar and thereby weaken it.  With the administration driving up the deficit in the face of good economic times, that could lead to more dollar weakness and higher inflation in the US.

Technical Analysis:

Another interesting week!  Monday was a big up day, then Tuesday was a big down day.  Then the market stumbled around looking to see if it could stabilize, which it did, followed by a decent up day on Thur. to end the trading week.

I updated the chart to clean it up, keeping the old uptrend lines (blue).  We see the tax cut euphoria in Dec. and Jan., followed by the inflation and Fed rate hike worries in Feb. and March.

It appears to me we have entered a trading range (green lines) from 2575 to 2800.  Whichever way the market decisively breaks out of the range will probably set the intermediate term trend.  I also observe that buy and hold investors can’t make money in a range-bound market, but this is ideal for a swing trader.  Last year with little volatility I under-performed the market, but this year in a more volatile environment I am out-performing the market by not suffering through the downdrafts.  Last year there were almost no downdrafts at all.

For the trading range scenario to hold true, the market needs to hold above 2575, or at least the recent intraday low of 2530.  If it fails to hold those levels, we have a large problem on our hands and will have to figure out what it is.  But, last week appeared to be basing at the low end of the range, following a successful test of the early Feb. low.  That looked good.

RSI is around 40, closer to oversold territory and still a decent entry point for the short term.  MACD looks like it may be bottoming as the histograms are just beginning to recede.

2018 03 30

Last week I began to buy on Monday and bought more on Thur.  I bought a lot of IVV, and some XLF and XLK,  along with INTC and CSCO.  The low-ball buy orders did not hit, oh well.  I sold some 4/13 XOM 70 Puts a few weeks ago that I still hold and hope to collect that option premium, we’ll see.  Selling Puts at market oversold periods is fun, but you have to have the cash to buy the stock if your Put gets assigned, or you have to sell the Put prior to expiration and take your loss if the trade goes against you.  I don’t recommend options trading to everyone, but it is pretty entertaining.

I’m aiming at the 4/10 start of earnings season and expecting a rally.  Whether the market goes up or down, I have dry powder that will get deployed.  Earnings for Q1 are expected to be up by about 15% on the back of the first quarter of earnings under the tax cut, and I just find it hard to see the market going down on excellent real earnings, unless a hot war breaks out somewhere (bullets or trade war).

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

Freefall

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. 

Wed. I posted the monthly Long Term update so if you follow them just keep scrolling down.

Economy:

Existing home sales for February rose 3.0 percent to a higher-than-expected 5.540 million annualized rate to lift the year-on-year rate out of the negative column to plus 1.1 percent.  The FOMC did raise its federal funds target rate by 25 basis points as expected, to a midpoint of 1.625 percent within a range of 1.50 to 1.75 percent, but FOMC forecasts still have 2.1 percent as the median projection for the end of the year.  Initial jobless claims in the March 17 week inched 3,000 higher to 229,000, still a low number over the long term.  Weakness in the stock market and building permits are trouble spots but they couldn’t hold down the index of leading economic indicators which rose 0.6 percent in February on top of a revised 0.8 percent jump in January.  The report says the LEI’s trend is the best in 7 years and points to “robust” economic growth throughout 2018.  Durable goods orders jumped 3.1 percent in February to just top Econoday’s high estimate.   New home sales came in near expectations, at a 618,000 annualized rate in February with upward revisions in the prior two months totaling 39,000. Despite the results, February sales are up only 0.5 percent year-on-year.

The economy looks good.

Geo-Political:

The economy looks good, so why is the stock market in correction mode?  In addition to the good economy, the tax cut will improve the bottom line of corporations, making the correction more perplexing.

First, the Fed is in an interest rate raising mode.  At first the hikes were far apart, but now they are coming closer together.  This is just for short term rates, but this usually influences longer term rates to rise also.  When evaluating whether to invest in the stock market, one should always ask what the long term rate of return on the stock market is (although it may not exhibit that return in the short run), versus what is the return on a “safe” long term investment like a 10 or 20 year US government treasury bond.  As the Fed has raised short term rates, longer maturity bond yields are going up, and while they do not yet offer a compelling yield, the direction is that in the foreseeable future they will.  For the last 9 years, the stock market was the only game in town, and in the future that will no longer be the case.  Some funds will begin to leave the stock market and flow to the bond market.  Historically, an acceptable valuation measured by the price / earnings ratio on stocks is figured RELATIVE to a safe yield on bonds.  When the yield on bonds falls, the stock market can support a higher P/E ratio, and when the yields rise, the P/E ratio needs to come down to reflect the strength of the alternative safe investment in a bond.  That is what is going on now.

The second thing is Trump’s activity with trade tariffs on steel, although so many exceptions have been granted that it now just targets China.  This week Trump announced new tariffs just against China.  China will retaliate, and we have a trade dispute going on.  If we get into multiple rounds of retaliation, we can get into a trade war with our 3rd largest trading partner.  There are no winners in a trade war.  Some say that Trump will drop the tariffs if China commits to some reforms in allowing US company’s free’er access to Chinese markets and stops theft of US corporate intellectual property.  These are proper goals, the question is whether this is the best route to achieve them.  The bottom line for the markets right now is UNCERTAINTY, and the stock market hates uncertainty.  How will this end up?  Nobody knows.  Combined with rising rates, some folks want to step aside until we find out how this ends up.

Technical Analysis:

It was a bad week for the market, down about 6%.  I’ve discussed the reasons just above.

Where do we go next?

Technically we are at a key spot on the chart.  The market is sitting on the 200 day moving average (thin red line that has been rising), and this is usually a strong support level in bull markets.  If it is violated decisively it opens the door to further declines.  Note the two aqua lines at the 2585 level, could that be a double bottom?  A double bottom occurs at market turns and can be a good thing, but until we see what happens, we won’t know.  RSI at the top of the chart is oversold at 30 so hopefully we are getting close to the bottom of the correction.  The monthly long term update I posted on Wed. says we continue to be in a long term bull market and supports the belief that the market will bottom soon.  MACD (momentum) at the bottom of the chart is clearly heading down and is a negative for the picture right now.

2018 03 24

Next week will be very interesting.  There is no natural catalyst to pump stocks higher in the next two weeks, until the start of earnings season around Apr. 10th.  Until then, in corrective mode, it’s not a time to get too aggressive.

I’ll throw some low-ball buy orders out there, like FB at 150 and BAC at 25.  They may not hit, but it won’t cost me anything to try, and if the correction turns into a short term rout, I’ve picked up some nice bargains over the years doing that.  Remember, if your fishing line is not in the water, you can’t catch a fish!

They say buy low and sell high, and the market is getting low.  I think the long term bull market remains intact.  Earning season starts in two weeks, the first with the tax cuts in effect.  I’m more disposed to buy soon rather than sell, but the market needs to indicate that it has stopped going down, and thus far it has not done that. I did my big selling 3 weeks ago when the market was higher.  Buy low, sell high.

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 – March 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.

Sorry I was a bit late today, but I waited for the official Fed announcement of their meeting result at 2 PM Eastern time.

Economics:

GDP – The BEA second estimate of GDP for Q4 came in at 2.5%, below expectations and revised down .1% from the first estimate.  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 2.5
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 raised the Fed Funds Rate .25% to the range of 1.5-1.75% today (March 21), as expected.  Longer dated maturities remained largely unchanged.  I think they overshot to the upside last month so there was no need for them to rise further.  The expectation for 2018 was for three Fed hikes of the funds rate, so we are basically on schedule.  The Fed sounded a slightly more hawkish tone and the door could have been opened to a fourth rate hike this year if the data comes in hot enough.

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
Mar 21, 2018 1.6 2.7 2.9 3.1
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 25.0, down from 25.6 last month.  I used 4 quarters of earnings with the most recent being Q4 2017, which 98% of companies have reported so far.

I hope that when we get a reading on Q1, that with improved earnings that will come from the tax cut, the PE ratio on the S&P could come down, but if investors bid up the price of stocks because of the improved earnings, the ratio would not change.  Let’s see if the stock market really looked ahead and priced the tax cut into the stocks before the earnings were announced, in which case the price may not move much and valuation would improve.

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 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:

The market appears to have stabilized in March, vs. the very volatile Feb.  Currently the market is flat with where it ended Feb.

The technicals are not very encouraging on a long term basis.  RSI at the top of the chart remains overbought at 73, and MACD at the bottom of the chart is going sideways, but the faster moving black line looks like it could turn down, and the last 2 histograms are shrinking.  The price point is closer to the top of the range than the bottom, consistent with being overbought longterm, so it’s not an attractive entry point for a long term holding situation.

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 for the long term, 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 03 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

Down 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, 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 will be posted next Wed., the 21st.

Economy:

The CPI and the core CPI both managed only 0.2 percent increases as was expected with the year-on-year rates at 2.2 percent overall, which was also expected, but at only 1.8 percent for the core.  Despite the Feb. tizzy about inflation heating up, these numbers show inflation at the same rate we’ve been at for a couple of years.  The big tax cut isn’t being passed to the nation’s retailers. Retail sales once again missed expectations badly, at minus 0.1 percent in February vs Econoday’s consensus for a 0.4 percent gain.  Jobless claims continue to point to strength in the labor market with initial claims down 4,000 in the March 10 week to 226,000.  The consumer sentiment preliminary index for March jumped more than 2 points to 102.0 which is a 14-year high.

The economy looks good, except that retail sales have been weak for a couple of months.  That’s OK, consumers had been taking on credit card debt, and unlike the financial crash, they may be controlling themselves this time.

Geo-Political:

Good report coming in on the Eurozone for Q4:

“February 28, 2018

Growth continues to cruise at fast pace in Q4

The Eurozone economy continued its spell of robust growth in the final quarter of 2017, capping off the best year of expansion in over a decade. Preliminary estimates revealed that GDP increased a buoyant seasonally-adjusted 0.6% from the previous quarter in Q4, down a notch from Q3 2017’s 0.7% increase. While a breakdown by components is not yet available, the Eurozone’s growth story is expected to have remained largely unchanged, with high sentiment, improving labor markets, ultra-accommodative monetary policy and a strong global backdrop propelling fast growth.   

Looking at the individual countries for which data is available, GDP growth was robust in Germany in the fourth quarter, albeit down a notch from the previous quarter’s pace. Strong foreign demand for German goods and services was largely behind the robust result. Similarly, Austria, Italy and Spain’s economies lost momentum slightly but remained resilient overall. Conversely, the French economy closed out the year on a strong note, gaining steam. Portugal’s economy also accelerated.”

https://www.focus-economics.com/regions/euro-area

This is part of the “coordinated global recovery” story, and it is supportive of a good stock market.

Technical Analysis:

It was a poor week for the market, down every day except Friday, which was a standoff.

Last week I thought the pattern was potentially positive, but I said the market had to DECISIVELY break above the downtrend line, and the market thus far has failed to do that.  That kept me pinned to the sidelines this week.

Technically, the market is in neutral territory.  RSI is flat at 52, and MACD on the chart is trendless, going sideways.

2018 03 17

I still see the start of earnings season in the new tax cut world to be the next major catalyst, to the upside, provided we don’t get a geo-political event to mess that up.  But I think we are in an “air pocket” and there could be some bumps before we get there.

I don’t see any major risks currently operating on the market.  The bond market has calmed down a bit from its inflation fear in Feb. and the yield on the 10 year Treasury has come back down slightly, which is good.  Other risks are potential trade retaliation announcements from China or the EU.  The trade tariff situation is new and countries have not analyzed their options sufficiently to state their reactions, but news on that front could come in the next few weeks.  Russia has been acting badly with assassinations and attempts in England, and the coordinated response from England, Germany, France and the US could spark a problem.

I’m looking for opportunities in individual stocks.  I have a 30 day Put option for sale on Anadarko Petroleum at $55.  I completed one of those over the last month and picked up some walking around money.

I want to get in before April 10th, but don’t want to get caught in an air pocket in the meantime.  This week was disappointing, so I’m still looking for my  opportunity.

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

Decision Made?

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. 

Economy:

The ISM non-manufacturing index, at 59.5 in February, follows this morning’s services PMI to hint at accelerating and perhaps unsustainably strong conditions for the bulk of the nation’s economy.  Tuesday’s factory orders report, down 1.4 percent at the headline level but showing life underneath, closes the book on what was a mixed to soft month of January.  Initial jobless claims popped higher from the prior week’s 49-year low, up 21,000 to 231,000 in data for the March 3 week.  In the Employment report, nonfarm payrolls rose an outsized 313,000 which is more than 80,000 above Econoday’s high estimate; revisions add to the strength, at a net 54,000 for January which is now 239,000.

Weakness in factory orders is a bit concerning and the last few weeks have had a few concerns.  Home sales have been weak.  Is a pattern forming?  I don’t think so, but we need to keep watching.  The very high number of new non-farm jobs sent the market higher on Friday, but it is so high I wonder if it will be revised down next month?

Geo-Political:

The event of the week was Trump signing an order to place tariffs on imported steel.  The market fell last week when they were announced, and it soared this week when we found out that Canada and Mexico (our two largest suppliers of steel) had been exempted.  I doubt this will work out well.  It invites those nations affected to retaliate by targeting select US imports to their nations for tariffs that will hurt US industries.  It will raise the price of manufactured goods made from steel.  You might say that they can switch to using US steel that does not have the tariff applied, but that steel already was higher than imported steel or they would have been using it in the first place.  Our international competitors still have access to lower priced non-tariff steel, so their manufactured products have gained a price advantage vs. the US manufactured goods.

My theory is that economic reality can never be avoided; it can only be postponed for a time by economic policy.  Tariffs have a valid use to protect young industries getting started in emerging economies.  Eventually though, the tariffs need to come off and the industry being protected must stand on its own or die.  If you subsidize the industry, you don’t force them to innovate and become more price competitive.  When they do eventually collapse, the economic damage is worse than if they had been exposed to economic reality sooner.  The thing that makes this hard to see is that these tariff situations are typically long term and it may take a decade or two for the final result to be seen.

One can make the case that a country is using unfair trade practices and “dumping” a product at an unfairly low price, and that presents a strategic threat to your industry.  Inside the US, that has been made illegal by the Sherman Antitrust Law.  Companies cannot use revenue from one region to subsidize another region, while low prices in the second region are used to bankrupt a new competitor (which some of the railroads and oil companies did in the 19th century, and that’s why we have the laws on the books).  The only nation accused of dumping steel in the US is China, and while we import 15% of our steel from Canada, we only import 3% of our steel from China.  The argument that we need the tariffs to protect from Chinese steel dumping seems weak.

Technical Analysis:

It looks like the correction is over.  We had a good week with the market up every day.

Technically the market formed a decision diamond and has popped out to the upside.  Last week the market went down to test the low at 2575 and the test was successful.  This week the market jumped above the downward trend line (purple line), which is a good sign.  The last minor hurdle is to better the recent high at 2775, which I marked with an aqua line.  The other thing to watch for technically is that one day above the down trend line is not sufficient to say the trend is broken.  The market needs to break the trend decisively, which it has not done yet.  You really need to see 3 days of market close results to be a decisive break.  How do you deal with that as an investor?  I buy in slowly at first and buy more each day that the trend continues.  How slow is slow?  Maybe 5% the first day the trend is broken, 10% the next day if the new trend continues, and 25% the third day, and when the trend is confirmed go in with the rest of the money.  You won’t reap the highest reward from an uptrend, but if the market fakes you out and heads back down, you won’t lose very much.  There is no perfect system for maximizing returns, and this method offers good safe results that minimize losses.  It’s a compromise in order to manage risk.

RSI (top of chart) is at 59 and rising, which is in the moderate range leaving room for progress.  MACD (momentum, bottom of chart) has turned up which is also positive.

2018 03 10

There are risks.  We are a month out from the start of the new and expected strong earnings season, and subject to the market being driven by the news.  Countries could announce retaliatory trade tariffs that could rile the market.

If events have not messed the market up too bad, I want to be invested when earnings season starts, so I’ll probably be a buyer the next couple of weeks.  Financials (XLF) and technology (XLK) have been strong, and I always use SPY or IVV for the S&P 500.

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

Correction Continues

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.

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Economy:

Total durable goods orders sank a sharp 3.7 percent.  New home sales came in at a much lower-than-expected 593,000 annualized rate in January though, in offsets, the two prior months are revised a net 25,000 higher.  In the second estimate of fourth-quarter GDP, it was revised 1 tenth lower to 2.5 percent annualized rate.  Since October’s hurricane-replacement sales boom, vehicle sales have been very soft, posting steep declines in two of the last three retail sales report and sales in February failed to improve, coming in at a 17.1 million annualized unit rate vs 17.2 million in January.  Initial jobless claims were down 10,000 in the February 24 week to a lower-than-expected 210,000 for the best reading in 49 years.  No sample has been reporting consistently stronger results than ISM manufacturing where the composite index rose to 60.8 in February, easily topping Econoday’s high estimate and the strongest reading in 14 years.  Consumer sentiment, at 99.7, ended February well above January’s 95.7.

Durable goods orders, new home sales, fourth quarter GDP, and vehicle sales were all soft.  That’s concerning, and maybe that’s why the stock market has been weak lately.  I’ve written in the past that as interest rates rise, home sales would be the first to feel the pain.  Home prices inflated far too much in the crazy run-up to the housing bust in 2008, where home prices fell.  During the recovery, every attempt was made to re-inflate home prices so people would not be under water when they eventually sold.  It worked, but now the only way people can afford the price of today’s home is to buy them at the artificially low interest rate that the Fed had set the last seven years.  The market will figure this out, but it will probably spell a problem for some parts of the housing marketplace.

Geo-Political:

Today we take a look at South America, which seems to be improving:

“February 14, 2018

Incoming data suggests that the Latin America economy ended 2017 on a healthier note, with regional GDP projected to have grown 2.3% annually in Q4. If confirmed, the reading would mark the strongest growth rate since Q1 2014 and a notable pick-up from Q3’s 1.7% expansion. The region’s economic backdrop has improved in recent months as the long-awaited recovery takes hold and growth benefits from improving confidence, accommodative financial conditions, rising prices for commodities and solid global demand.

The building momentum is being chiefly driven by stronger activity in major player Brazil. Inflation fell to historic lows in Q4, allowing the Central Bank to aggressively ease monetary policy to boost growth. Moreover, the unemployment rate edged down in the quarter, and industrial production growth hit an over two-year high in December. In addition, a preliminary estimate of GDP revealed that the Mexican economy gained steam in Q4, although growth remained weak overall. Robust demand from overseas and healthy services activity spurred growth; however, high inflation, tighter monetary conditions and fiscal activities weighed on momentum. 

While the recovery has been welcome news for the region, growth is still moderate overall, and economic slack persists. To kick growth into a higher gear, it is critical that policymakers focus on addressing structural issues and macroeconomic imbalances in their respective economies. In the face of these economic challenges, the region’s busy election cycle and political developments are taking centerstage. Political developments have in recent weeks evolved in a broadly favorable way for the regional economy.”

https://www.focus-economics.com/regions/latin-america

Bottom line, South America is improving, but still has a way to go.

Technical Analysis:

The market was up on Monday (faked me out), then down the rest of the week.  I was a buyer on Monday and sold out by Wed.  I knew the market was in a precarious position, took a chance, and got burned.  The only saving grace, my position was small.

Now for the bad news.  There’s a new line on the chart, the purple down-sloping line connecting the all-time high and the lower high we recorded on Monday.  As I have written in recent weeks, if that happens, it is likely we are in an extended correction.  We should go down and test the recent low at 2575 at the 200 day moving average (red line) or possibly 2530.  If that test fails, the next technical support would be at 2425.

Technically, the market remains in a precarious position in the short run.  The “lower high” formation is bearish short term.  RSI (top of the chart) is neutral at 47, but MACD (bottom of the chart) looks suspiciously like it could roll over and head down, which would be bearish short term.

2018 03 03

To rehabilitate itself, the market will decisively have to get above the downward sloping purple line, to get out of this corrective phase.  Looking forward, I hope this happens during the next earnings season which begins around April 10.  This will be the first earnings season where the new lower corporate tax rate applies, and corporate earnings should be excellent.  In addition the dollar has fallen over the last year, so US goods should be price-competitive internationally, which is a positive for most of the S&P 500.

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Rich Comeau, Rich Investing