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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Initial jobless claims came in at 209K, below the expectation of 230K. The first estimate for first-quarter GDP came in at a 2.3 percent vs 2.9 percent in the fourth quarter. That minor slowdown is traditional for the first quarter, impacted by snow storms in the north. The U. of Michigan consumer sentiment survey came in at 98.8, down from March’s 14 year high at 101.4. New home sales peaked late last year and have been struggling since, held down by rising mortgage rates and limited supply, but did manage to beat expectations handily with 694K sales.
The economy looks good.
If Europe is slowing more than just the “winter doldrums”, that would put a dent in the “coordinated global recovery” story, and that could be part of what is wrong with the US stock market.
“Apr. 26, 2018 – ECONOMISTS have spent the past decade wringing their hands over the health of the euro area’s economy. Last year, in a welcome respite, it expanded by a robust 2.3%, outstripping forecasts and matching America’s growth rate. But it has appeared less rosy-cheeked since.
Symptoms include moderation in a number of monthly indicators. Industrial production fell in January and February, as did business confidence; retail-sales growth was disappointing. The purchasing managers’ index (PMI), an output survey regarded as a good early indicator of GDP growth, has fallen from exuberant—and perhaps unsustainable—levels at the turn of the year, though it still points to decent growth (see chart).
Germany, the bloc’s largest economy, has not been immune. A summary indicator compiled by the Macroeconomic Policy Institute, a German think-tank, which includes production, sentiment and interest-rate data, suggests that the probability of a recession has risen, from 7% in March to 32% in April. A measure of economic sentiment based on a survey of participants in financial markets by the Centre for European Economic Research (ZEW), another German institute, has fallen sharply.”
I don’t like the action of the market in here, and as I said last week, if the market could not rally on great earnings I would be a seller, and I sold out on Tuesday during the market’s big drop. The market has recovered a bit since then, but when the market is free-falling like on Tuesday, I felt I had to stop the bleeding.
Technically, RSI (top of chart) is at 50, which is neutral, but in bearish periods 50 can be overbought. MACD (bottom of chart) is going sideways, so its neutral.
Two things are true now. We are in a trading range, shown by the “green line channel”, and there is a downward bias in effect shown by the purple line. The first thing that has to happen is we need to break out above the purple line. With us in corrective mode, and RSI at 50 (which is overbought), and the market unable to push higher on great earnings last week, I am not inspired to buy into the market right now. If I found a special situation on an individual stock, I’d do a deal on that, but I am not going to just buy the market via SPY.
With great earnings, why has the stock market not been able to push on up? We’ve even seen valuation come down (a good thing), as the PE ratios have fallen.
- The great earnings are a gift from the government in tax cuts, but the underlying business is no better.
- As the Fed raises the Funds rate, bonds become a better competitor to stocks and the relatively high PE ratios are not justified in today’s market.
- Trump’s threats to China and other nations on tariffs are very upsetting to the market. For every industry that is helped by protection, there is an industry hurt by retaliatory tariffs overseas.
- Tariffs placed on imported goods in order to protect US industries will result in higher prices for consumers, and that inflation will eat up some of the tax cut we got from the government.
The bottom line, there are a lot of cross currents in the market that we have not had to deal with in recent years, and this is being reflected in higher volatility. The huge stock market surge since Trump’s election has been based on the promise of implementing his ideas, cutting regulation and taxes, and getting better trade deals for the US. If the run-up in stock prices from the election to the January peak was based on these promises, and the reality is lower than expected and priced in, then stock prices need to correct, and that is what is happening.
I plan to be cautious. That means buying in slowly, and waiting for oversold periods to put money to work. We also need to not wait for a full overbought level of 70 on the RSI indicator as a “sell sign”, as values in the 50-60 range will by overbought while in this corrective phase.
One final risk I’ll mention, and that is the possibility that we’ve entered a bear market. I don’t believe it currently as I explained in the last “Long Term” update for April. But one thing that is true about bear markets is that they begin when nobody expects them to, nor realizes at first that one has started. That would describe most of a bull market run so it’s not that helpful. On the other hand, if you see price action that you don’t understand, could something else be wrong with the market? At nine years into this bull market, we may have forgotten that bear markets happen.
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Rich Comeau, Rich Investing