Earnings Season Starts Next 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 or so.  The more often you google it and hit the link, the higher it will show in your results.

I recently added a feature to the blog, a hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  For this to work out best, in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up.  Then size each window to about half of your monitor size.  As an additional benefit, if you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.  If you trade, this will get useful information to you sooner. 

Economy:

New-home sales ran at a seasonally adjusted annual 689,000 rate in May, beating the MarketWatch consensus of a 668,000 selling pace.  Orders for durable goods fell 0.6% in May following a revised 1% decline in April (hmmm).  Initial jobless claims climbed by 9,000 to 227,000 in the week ended June 23.  That exceeded the 220,000 estimate of economists polled by MarketWatch, but claims are still near the lowest level in half a century.  The growth in the U.S. GDP in the first quarter was trimmed to 2% from 2.2%, largely reflecting lower spending on health care and a somewhat smaller buildup in inventories.  The CPI rate of inflation over the past 12 months rose to 2.3%, the fastest pace since March 2012. The core inflation rate hit 2%, the Fed’s long-run target, for the first time since April 2012.  The final reading of the University of Michigan’s consumer-sentiment index in June was 98.2, slightly above May’s level of 98.

The economy looks good, with the exception of the small two month decline in durable goods orders.

Geo-Political:

The US stock market was buoyed in 2017 by improvement in economies around the world, “synchronized global recovery” from the financial crisis.  However that is coming into question now.

From Europe:

“May 15, 2018 – Economic growth slowed across Europe at the start of the year, with Germany seeing its pace of expansion cut in half amid weaker trade.

The 0.3 percent increase in Europe’s largest economy was softer than forecast and the weakest in more than a year. Dutch and Portuguese growth also cooled more than expected in the first quarter, while a similar trend was seen across central and eastern Europe.

A deceleration in euro-area momentum to 0.4 percent was confirmed, while investors’ expectations for the outlook remained close to the lowest since 2016. That raises the question for the European Central Bank whether this is merely a soft patch or indicative of something more alarming.”

https://www.bloomberg.com/news/articles/2018-05-15/german-economic-growth-slows-more-than-forecast-in-first-quarter

From Japan, another large trading partner:

“May 15, 2018 – The Japanese economy shrank by 0.2 percent in the first three months of 2018, snapping a run of two years of positive growth, according to data released by the Cabinet Office on Wednesday.

Business investment contracted by 0.1 percent on a quarter-to-quarter basis, and household spending — the largest driver of economic growth — remained flat, demonstrating the weak overall appetite for consumers to open up their wallets in a still-uncertain economy. When annualized, GDP was 0.6 percent lower than the previous quarter.

However, the latest preliminary numbers, often prone to statistical revision, may actually belie a relatively healthy economy on pace for modest growth in 2018, economists said.”

https://www.japantimes.co.jp/news/2018/05/16/business/economy-business/japans-economy-shrank-first-time-quarter-two-years-growth-amid-weak-consumption/#.WzeIwNVKiUk

I don’t know how the trade war scenario will play out, but seeing how Trump has failed to anticipate how other initiatives would proceed, like the separation of children from their parents at our border from which he rapidly backed off, it does not inspire confidence that he can manage a trade war.

The US has the most powerful economy in the world.  Mr. Trump likes to wield power.  What he may not realize is that while we can hurt other nation’s economy with the stated intent of helping ours, we could weaken our trading partners to the extent that they don’t have jobs or income to buy our goods.  In the long run, being too greedy can come back and hurt us.  This is the reason the US has spent decades helping other countries develop.

The global synchronized recovery thesis is falling apart and that is a reason for the volatility in our stock market.  Clearly there are other reasons as well, such is rising interest rates.

Technical Analysis:

The stock market ended the week down, mostly on trade war concerns.

Technically, RSI at the top of the chart ended in the low end of moderate territory at 43.  One usually does better to enter the market close to oversold at 30, but nothing says the market has to go to totally oversold.  MACD at the bottom of the chart is headed down, which has been negative for a few weeks, but the histograms are shrinking ever so slightly and a turn up could be coming.  Price-wise, we are sitting on the 50-day moving average (squiggly blue line), and the lower end of the up channel the market has traced over the last year (pair of uptrending blue lines).  Both the 50-day and bottom of the up channel can provide support to the market.

Technically we could be set up for a change of direction to an upswing.

2018 06 29

Click this link to open the chart in a separate window.

Earnings season is upon us and earnings are expected to be good, up approximately 18% year over year.  It appears that the market is discounting the huge jump in earnings since it is due to a government action (tax cut) and NOT due to any improvement in the economy.

I was a buyer last week on weakness (buy low), and moved a moderate amount into the market, about 25%.  I picked up a tiny piece of GLD on the theory that import tariffs will lead to inflation and gold does well in inflationary times (I expect this is a long term position, maybe two or three years).  I bought some SPY and IWM.  IWM is the Russel 2000 small cap index and these small companies tend to be US domestic focused and less impacted by tariffs.

If earnings season moves the market up, I would continue to buy as long as it is going up, then be ready to sell as earnings season tails off, if the market goes to overbought with RSI up around 70.  That’s my plan, but the market seldom goes according to my plan.  I’ll also watch and change plan if warranted.

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, or send me an email, my address is on the “About” page at the top of the blog.

Rich Comeau, Rich Investing

Minor Retreat

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 or so.  The more often you google it and hit the link, the higher it will show in your results.

I recently added a feature to the blog, a hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  For this to work out best, in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up.  Then size each window to about half of your monitor size.  Let me know via email how this is working for you.  As an additional benefit, if you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones, like breaking through the purple downtrend line currently on the chart.  If you trade, this will get the information to you sooner.  If you like this or have a question about it, send me an email at sharplet@gmail.com .  I’m not sure how often the location of the graph will change, but I’ll update the link when it does.

On Wed. 6/20 I published the Monthly Long Term update for June, which is just below this post if you are interested.

Economy:

Existing-home sales ran at a seasonally-adjusted annual 5.43 million rate in May, down 0.4% from April.  Sales of previously-owned homes fell for the second straight month, as a supply shortage continues to bite the market.  I think with rising interest rates, the builders are being cautious and not building too much in case the buyer dry up, and that is healthy.  Initial jobless claims declined by 3,000 to 218,000 in the seven days ended June 16, a good low number.  The leading economic indicators index rose 0.2% in May, and while it’s a decent gain, the index had climbed twice as fast in March and April.  The economy looks good.

Geo-Political:

The stock market hates uncertainty, and that is exactly what we have on the trade front.  Are the Trump threats of tariffs a negotiating tactic, or the real deal?  The steel tariffs are real right now.  The threat of inflation is that our manufacturers have to pay more for steel and aluminum from outside the US, so they will have to charge more for their products to cover their higher costs.  That may eat into the benefit they got from the tax cut.

“June 22, 2018 – Even as growth ramps up to what could be the fastest rate since before the financial crisis, economists are worried that a trade war could tip the U.S. into a significant slowdown or even a recession.

Fears over a GDP pullback come as President Donald Trump threatens another, more severe round of tariffs aimed both at China and the European Union.

Specifically, the worry is that the duties could spark a larger global trade war that triggers inflation and kills U.S. growth just as it appears to be accelerating out of its post-crisis malaise.

“Our calculations suggest that a major trade war would lead to a significant reduction in growth,” Michelle Meyer, U.S. economist at Bank of America Merrill Lynch, said in a note. “A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession. We continue to believe that the probability of a full blown trade war is low but the risks are rising and it remains a key uncertainty to our outlook.””

https://www.cnbc.com/2018/06/22/increased-threat-of-a-trade-war-is-ramping-up-fears-of-a-full-blown-recession.html

Technical Analysis:

The stock market fell this week, probably in trade tariff fears.  We remain in the trading range that started with the correction last Jan.

Technically, RSI (top of chart) retreated on the daily chart to 52, in neutral territory.  MACD at the bottom has turned down, a negative sign.  We bumped up against resistance at the top of the trading range (green line) and the top of the rising channel for most of this year, the blue lines.  It’s almost like the computers knew those lines were there and selling set in (or was it the trade war fears?).  Whatever, the market is in a slow retreat.

2018 06 22

Click this link to open the chart in a separate window.

I have held a lot of cash for weeks and I’m looking for special situations.  I’d like to put cash to work before the July 10 start to earnings season.  I’d like to see some more selling and get the market a bit closer to oversold before buying in, but if the market stops going down, I may have to buy in prior to getting to oversold.

I picked up a small amount of ETF “ROBO”, for robotics companies.  This is not going away, it is a tech space that will grow and evolve for a long time.  If the market corrects more and I would probably add another small buy to ROBO.  I consider this position a long term hold and would only sell it if the market enters a bear market phase, in which case I would sell all stocks.

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, or send me an email, my address is on the “About” page at the top of the blog.

Rich Comeau, Rich Investing

Long Term – June 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.

I added a note in the Long Term Issues section at the bottom of the report, regarding the Federal Deficit.  I highlighted it in blue so you can easily pick out the update.

Economics:

GDP – The BEA second estimate of GDP for Q1 came in at 2.2%.  It’s an OK number, but not very inspiring.  On the other hand, Q1 is usually the weakest.

Annual GDP growth has been stable for a few years at a 2% annual rate and moved up a bit in 2017 to 2.6%.  This GDP number supports the assertion that the bull market continues. 

Year Quarter GDP %
2018 Q1 2.2
2017 Year 2.6
2017 Q4 2.9
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 1.75 – 2.0% on June 13, as expected.  Longer dated maturities have moved down a hair in June.  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.  The move up in rates has caused a temporary upset in the stock market while it adjusts to a new rate environment, but this always happens when rate cycles turn upward, in a normal economy.

The yield curve (interest rates for Fed Funds rate, 90 day, six month, 1 year, 2 year, 5 year, 10 year, and 30 year government bonds, plotted into a graph) is relatively flat right now, and that is somewhat concerning.  While the Fed Funds rate is up 1.8% over the last 2 years, the yield on the 30 year bond is only up .8%.  Normally that would suggest some problem in the US economy.  But, times are not normal.  Rates are still negative in Europe, causing many of those fixed income investors to come and buy US bonds for a better yield.  Maybe there is nothing wrong with the US economy, and the ECB needs to normalize their rates over there (that is my operating theory presently).

Interest rates tell us a lot about the economy and that is why it is so important to watch interest rates for a hint on future stock market activity.

For now, rates still support the long term bull market. 

 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Jun 20, 2018 1.9 2.8 2.9 3.1
May 15, 2018 1.6 2.9 3.1 3.2
Apr 18, 2018 1.6 2.7 2.8 3.0
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 22.9, down from 23.6 last month.  I used 4 quarters of earnings with the most recent being Q1 2018 (98% of companies have reported).

In 2017 stock prices rose much faster than earnings, and that can’t continue forever.  This year, particularly with the corporate tax cut, we are seeing earnings grow faster than stock prices, a catch-up sort of, and the valuation is correcting a little.  It’s uncomfortable to watch, but it needed to happen.

This changed from moderately overvalued to MILDLY OVERVALUED in the current month, relative to my trimmed 30 year average of 19.  This is a significant milestone in rationalizing the valuation of the market, which I have characterized as moderately overvalued for at least 3 years.  This is good news, but it’s not a  buy sign.  It’s a smaller negative for future returns.

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 Q2 from Factset is for a 19% increase vs. the prior year.  The corporate tax cut is projected to keep earnings increases near the 17% 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 9.2 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, but risk has receded a little following the Trump/KJU summit.  The US has responded to Syria’s use of chemical weapons, but I don’t expect an attack on US ground troops in Syria (Apr. 2018).  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).  The US has withdrawn from the Iran Nuclear Deal, which has the potential to destabilize the Middle East further, as well as create some sanction tensions with our traditional allies France, Germany, and England (May 2018).

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.  At that point a constitutional crisis could emerge.  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.  However, the list of concerns that could tip the market is growing.

Technical:

The market is up slightly month to date for June.

RSI at the top of the chart remains overbought for the long term at 72, 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 5 histograms are shrinking.

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, which keeps the market vulnerable to a correction.

2018 06 20 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.

With the ECB ending their QE bond buying by the end of 2018, and probably beginning to raise rates in 2019, this may eventually (2019-2020) divert some buyers of US treasury bonds to Euro bonds, and that would put upward pressure on US interest rates (noted June 2018).

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 too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.

Rich Comeau, Rich Investing

Resistance at Top of the 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 or so.  The more often you google it and hit the link, the higher it will show in your results.

I recently added a feature to the blog, a hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  For this to work out best, in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up.  Then size each window to about half of your monitor size.  Let me know via email how this is working for you.  As an additional benefit, if you bookmark the link you can look at it each day of the week to see how the market is progressing to certain milestones.  If you trade, this will get the information to you sooner.  If you like this or have a question about it, send me an email at sharplet@gmail.com .  I’m not sure how often the location of the graph will change, but I’ll update the link when it does.

The monthly Long Term update will be posted Wed. 6/20.

Economy:

The CPI rose by .2% in May, and the core rate of inflation (excludes energy and food, which are highly variable) was also .2%.  The year over year rise was 2.8%, the highest since 2012.  The combination of good economy and tight labor market are pressuring inflation upward, which the Fed has actually sought for several years.  Initial jobless claims for the prior week were 218K, down a little from the prior week.  Retail sales were up .8% in May, but some of that was driven by rising gasoline prices.  Consumer sentiment for June came in at 99.3, up from 98.0 last month, which is a good showing.  The economy looks good.

Geo-Political:

There is a LOT going on around the world.

The Fed hiked the Fed Funds rate here in the US by the usual 1/4 %, as expected, and was a little more hawkish indicating they could raise 4 times this year rather than 3 (that would mean 2 more hikes this year, probably Sept. and Dec., if it happens).  Mario Draghi in Europe left rates unchanged, but indicated the ECB would begin tapering their bond purchases in Sept. and END their QE bond buying by Dec.  This is a tightening in Europe even though they are not expected to raise interest rates this year.  Global economies are strong enough that the major nations will soon all be in tightening mode, in an effort to return to “normal” monetary conditions (normalization).

It looks like Trump is proceeding with tariffs against China and our allies as well (Canada, Mexico, and Europe), and they are all expected to levy retaliatory tariffs of their own.  I am not opposed to the US seeking to rectify certain unfair trade practices, but I question whether public threats and real tariffs are the best way to pursue the goal.  Did we try hard-nosed negotiations in private over an appropriate amount of time?  I have not heard that we did, and if we did, we would look much better if we could tell the world that we had attempted negotiations behind closed doors and they failed.  We would not look so reactionary.

Regarding N. Korea, I do not see the situation has improved very much.  Trump tries to make it seem he is the only reasonable president who agreed to meet with Kim Jung Un (KJU).  This is a false representation.  N. Korea has pursued a nuke for 30 years and without one, there was no significant threat to the US and no real reason to meet with them.  Now they have a nuke, and that FORCED the US to go and try to negotiate with them.  There is NO reason to believe the statements by KJU will be implemented, any more than his father’s or his grandfather’s commitments to prior presidents.  Nothing has changed that I can see, except we are talking, again.  Of course, talking is better than shooting at this point.  China likes having N. Korea as a buffer between themselves and the democracy and US troops in S. Korea.  The last time US troops fought N. Korean troops in the 1950’s, we ended up also fighting Chinese troops who aided N. Korea.  I don’t think we want to do that again, especially after the long wars in the Middle East.  So, we talk.

Technical Analysis:

The market ended the week almost unchanged.  The economic data is very positive, the geo-politics is unsettling, and on a long term basis the market is moderately overvalued.  Many are hoping that as the tax cut benefits roll into the economy that stocks can rise in the second half of the year.  Corporations will have plenty of cash they will bring back to the US from overseas as a result of tax cuts and they plan to use it to fund stock buybacks which should boost prices.  There are valid reasons to have hope for the second half, but hope can be a dangerous thing.

Technically, RSI (top of the chart) has dipped a bit to 63, still closer to overbought than neutral.  MACD (bottom of chart) is going sideways, but the histograms are shrinking, a slight negative.  The S&P price is up against a couple of resistance levels, the top of the channel of the last year (blue lines) and the top of the 4 month trading range (green lines).  Also we are well above the 50-day moving average line (thin blue squiggly line) and some reversion to the mean could be in order.

2018 06 15

Click this link to open the chart in a separate window.

Will we break through resistance or fail at this level and come back to try and break resistance later?  I don’t know.  It almost looks like the computers know there is resistance at 2800 and are pausing rather than push out buy programs.  While I don’t really know, my guess is we have a minor pullback here, and push through next month on good earnings.  But that’s just a gut guess.

I have been buying in slowly, using SPY, XLF and KRE.  If we get a small pullback I expect to be a buyer at a faster clip.  I want to get ready for July 10 and earning season, even though we did not get rewarded last quarter for excellent earnings.

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, or send me an email, my address is on the “About” page at the top of the blog.

Rich Comeau, Rich Investing

A Good 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 or so.  The more often you google it and hit the link, the higher it will show in your results.

I recently added a feature to the blog, a hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  For this to work out best, in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up.  Then size each window to about half of your monitor size.  My thanks to the reader for an excellent suggestion that I hope has value for all of my readers!  As an additional benefit, if you bookmark the link you can look at the chart each day of the week to see how the market is progressing to certain milestones, like breaking through the purple downtrend line currently on the chart.  If you trade, this will get the information to you sooner.  If you like this or have a question about it, send me an email at sharplet@gmail.com .  I’m not sure how often the location of the graph will change, but I’ll update the link when it does.

Economy:

Factory orders for April were down .8% on weakness in aircraft orders, but aircraft orders are irregular in timing and sometimes skew the number.  The ISM non-manufacturing index for May was strong at 58.6.  Initial jobless claims for the June 2nd week were 222K, in line with last week and a generally low number.  The economy looks good.

Geo-Political:

The biggest international risk I see is the trade disputes provoked by Trump.  Tariffs are just beginning to hit, as well as retaliation.  Whether this brings any resolutions, or an escalation from a skirmish into a trade war, remains to be seen.  This is going to linger for a while and inject volatility into the market for a few months.  Generally it will be a negative for the markets until we see what the new reality is.

The view from China:

“June 2, 2018 – Tuesday evening’s unexpected White House announcement to push forward with $50 billion worth of fresh tariffs for Chinese goods has created yet more uncertainty over the future of a trade resolution between the countries. However, whilst it may not result in any immediate change in China’s negotiating position, it has certainly cast doubt over the true intentions of the Oval Office.

The competing voices of parties whispering in the President’s ear, all seeking their own brand of retribution against China, has created a climate where observers, including Beijing, simply don’t know what’s coming next. Whilst Congress push for strict punishment on national security grounds, the mind of the President seemed until this week to be fixed on the trade imbalance.

Instead of a directed plan of attack and consistent narrative, the deficit, intellectual property, national security, and illiberal markets have all been swirled together, with emphasis swinging from one issue to the next with each passing week. Chinese foreign ministry spokeswoman Hua Chunying was correct on Wednesday when she said the move “damages the US’s national credibility” – but not in the sense of sticking to commitments: its getting harder to believe any justification the US gives.

The latest announcement seems to show that the President’s attention is back on intellectual property, after the bilateral trade imbalance briefly took centre stage as the administration’s principal grievance. The duties of 25% will target goods “imported from China containing industrially significant technology,” read the White House’s official release, making special reference to China’s ambitious industry renovation project “Made in China 2025”. The new tariffs will be applied by invoking Section 301 of the Trade Act of 1974, which identifies four main circumstances under which punitive protectionist measures may be taken: forced technology transfer; state-directed acquisition of sensitive US technology for strategic purposes; requiring licensing at less than economic value; and outright cyber theft. The statement also reiterated its intention to pursue a trade case made against China at the World Trade Organisation regarding the protection of sensitive US technology.

For many on Capitol Hill, the combined threat to US technological hegemony posed by unfair practices and the aggressive top-down Made in China 2025 initiative is the core problem that Trump has so far failed to address in his dealings with China.”

https://chinaeconomicreview.com/the-us-doesnt-know-what-it-wants-so-how-can-china/

Technical Analysis:

In a nice up-week for the market, it was significant that we decisively broke above resistance that was a small double-top at 2740.  The market is showing strength again following 4 months of correction.

Technically, RSI (top of chart, see glossary) is at 65, which is near overbought (70 is overbought).  During the 4 month correction we did not get over 60, so this is encouraging.  MACD (bottom of chart) is trending up so that is also positive.  Price action is positive having broken through the resistance at 2740.  We’ve been in a trading range (the green lines) for 4 months from 2580 to 2800 and the next question is will we break through the trading range top at 2800, which would be very positive.  If that is achieved, new record highs are not that far up at 2870.

The picture is positive, but getting decisively through the top of the trading range can be difficult.  On a short term basis, with the market nearing overbought, the possibility of a small pullback comes into play.  The Fed meets June 12-13, with a quarter point rate hike expected.  I don’t think it will rile the market since it should be baked in.  Earnings season will start around July 10, and earnings are expected to be excellent on the back of the corporate tax cut.

2018 06 08

Click this link to open the chart in a separate window.

I don’t like to buy in heavily into an overbought market because the prospect of a correction looms.  But in a bull market, an overbought market can get more overbought.  What to do?  Don’t get eaten up by fees; most brokerage houses offer some ETF’s that can be bought for free.  At Fidelity, IVV is an S&P 500 ETF that you can buy for free and it is free to sell if you hold for over 30 days.  I’ll make small daily purchases while the market is in an uptrend and has just broken through a resistance level that kept me from being more fully invested.  I have a lot of dry powder and that’s my plan.  I bought some KRE and XLF (regional and larger banks) last week since they had corrected hard, and I felt there was more value there than in the tech sector where things look overbought.  I’ll keep buying in slowly as long as the uptrend continues, and get ready to sell when the upward momentum stops.

In the last earnings season, earnings were excellent but they did not propel the market higher because it had already run up so much in Dec./Jan. on the tax cut news.  Hopefully we will do better in the upcoming earnings season.  The market has settled into the uptrend channel (blue lines) of the last year, a more sustainable growth rate.  I’d like to have more money in the market by July 10.  This idea, having a timing sense of what is going to happen in the market a few weeks down the road, and having a plan of what you would like to do in advance, should be helpful to many investors.  I don’t talk to many people who make the effort to try and “look ahead” to natural events that can move the market and make a plan to handle the situation.

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, or send me an email, my address is on the “About” page at the top of the blog.

Rich Comeau, Rich Investing

Up and 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 or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

The second estimate for first-quarter GDP came in at a 2.2 percent annualized rate vs 2.3 percent in the first estimate.  Initial jobless claims came in at 224,000 in the May 26 week for a 10,000 decrease from the prior week.  Motor vehicle sales came in at 17.1 million annualized rate, down just a tad from last month’s 17.2 million.  The employment situation report shows the economy added 233K non-farm jobs in May, in line with recent history.  The ISM manufacturing index accelerated to 58.7, up a bit from last month (anything over 50 shows growth).

The economy looks good.

Geo-Political:

As Trump tries to alter the trade agreements with the rest of the world, mainly China, but also our NAFTA partners Mexico and Canada, we need to be aware of unintended consequences in business as well as political influence.  The US had placed sanctions on Russian following their invasion of Ukraine, and now Trump is placing tariffs on China in order to reduce our trade deficit with them.  One result is that we are driving Russia and China to team up in an effort to improve both economies.

“Feb. 27, 2018 – In Europe the discussions about the construction of the Nord Stream 2 pipeline, Brexit and the crisis in the Eurozone dominate the public discourse. The further east we go the more we hear about the deepening cooperation between Russia and China.

The recently completed negotiations on a trade agreement between the Eurasian Economic Union and the People’s Republic of China is a clear reflection of this trend. The agreement between the Eurasian Economic Union (EEU) and the People’s Republic of China is important for two reasons:

  • as the next stage of balancing the United States and European Union’s economic influences in Europe and Asia through the deepening of cooperation between regional groups – this phenomenon expresses the hopes for the continuation of peace in the region of Eurasia;
  • as a challenge to the economic position of the EU in the world, due to the attempt to shift the economic center of gravity in Europe this could lead to the escalation of tensions between Brussels and Moscow.

https://financialobserver.eu/cse-and-cis/the-russia-china-agreement-is-a-warning-for-the-eu/

If Chinese businesses can’t sell their product in the US because we placed a tariff on it, they will seek to sell that product elsewhere, and the business relations they cultivate in seeking out a new market can open the door to other forms of cooperation that do not include the US.  In trying to reduce our trade deficit, we could lose more than our market in China, we could lose political influence.  Is reducing our trade deficit with China a valid objective?  Probably so, especially to the extent that some unfair Chinese restrictions on US participation in their markets are reformed.  Is the WAY that we are going about changing the trade practices an appropriate approach?  It does not appear that way to me.

Trump’s threats may work well with a city trying to get a Trump Hotel built in their city, where he is trying to get property tax relief for years.  If Trump does not build the hotel, they may not have any other option to bring in jobs.  In dealing on the international stage, these countries do have other options, and in the case of China and Russia they have exercised that option.  Beware of unintended consequences.

Technical Analysis:

The market had a very up and down week, then ended not much changed from last up, but slightly higher.  Some of the fear was over Italy electing a non-traditional prime minister, and some of the market recovery was based on a belief that the problem may not be as bad as initially feared.  If the new prime minister is going to be a problem, we’ll have to wait and see.  What he actually does will take some time.  It’s not over, rather it is just starting.  Wait 3 to 6 months.

Technically RSI at the top of the chart is at 55 which is neutral, but in a downtrend market it can be overbought.  MACD at the bottom of the chart is moving down, showing that even if the market is going sideways recently, it is losing momentum over time, which is not a good sign.  Price-wise we are just below the current resistance level of the little double top at 2740.  We are living above the purple downtrend line that starts at the Jan. high which is good, but we have to get above 2740 decisively as the next objective.

2018 06 02

Open chart in a separate window

I had started a small position is SDS during the Tues. selloff, but I closed it out when there was no follow-through, and I bought a little XLF because they had corrected so hard.

There are no earnings coming is currently, so we will be news driven until July 10th or so.  We will be news driven, and the news will be about the N. Korea summit on 6/12, and tariff / trade war talk.  That could be bad for the market in the short run.  I have a lot of powder dry.

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, or send me an email, my address is on the “About” page at the top of the blog.

Rich Comeau, Rich Investing