Decline on Low Volume 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 15^th 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.

Just below this post is the monthly Long Term update for Nov., so if you follow those, just keep scrolling down.

I am sorry for being a day late with this update, but family was in the house on Saturday.

Economy:

The University of Michigan’s consumer-sentiment index fell to 97.5 in November from 98.6 (this has been going mostly sideways in 2018).  Existing-home sales ran at a seasonally adjusted annual rate of 5.22 million in October, marking the first monthly increase in six months.  The leading economic index rose 0.1% in October after 0.6% and 0.5% gains in the prior two months, pointing to a slight cooling of the economy in the months ahead.  The economy continues to perk along, but the rate of growth is slowing a bit.

Geo-Political:

The most important issue for the stock market in the week ahead is the G20 meeting in Buenos Aires, where Trump and China president Xi are scheduled to talk.  At the recent Apec meeting in Asia, for the first time it ended without a joint communiqué on the outcome as not all members could agree on a statement.  More countries are joining with the US in opposing China trade practices and investment opportunities in China.

From China:

China has warned against a repeat at the upcoming G20 summit of the failure of Apec nations to take a united stand on economic development last weekend.

China issued the warning on Friday as preparations were under way for Chinese President Xi Jinping and his US counterpart Donald Trump to meet on the sidelines of the G20 gathering in Buenos Aires, Argentina, next week.

Chinese vice-minister of commerce Wang Shouwen said Beijing did not wish to see the failure of the Asia-Pacific Economic Cooperation forum happen again.

“On the reform of the World Trade Organisation and multilateral trade organisations, certain members insisted on imposing their own interest first at the expense of other members’ interests,” Wang said. “So there was no consensus reached on this issue, nor was there a joint declaration produced after the leaders’ summit.

“We do not want to see the same situation happen again at the G20.

“We hope the G20 can discuss WTO reform, and express opposition to unilateralism and protectionism.”

https://www.scmp.com/news/china/diplomacy/article/2174650/beijing-says-mutual-respect-will-be-key-success-xi-and-trump

If the US does garner broad support for changes in China, then China will have to change.  Unfortunately, getting there can be painful for all of us.

Technical Analysis:

It was another down week for the market, ending right at the low for the week.  Keep in mind that the holiday week has many traders out so volume is low, and one should not draw conclusions based on such odd data.

Technically the market action is bearish.  RSI at the top of the chart is at 36 and falling, which is near oversold.  MACD at the bottom of the chart is negative and heading down.  Price action is precarious sitting at first support at 2632, the late Oct. low.  We could put in a small double bottom here for a short term rally, or continue down to the next support level at 2580, the April low.  Much will depend on the news coming out of Buenos Aires.

My suspicion is that CEO’s are calling anyone that will listen in the administration and telling them they better do a deal with China as the economy is slowing, China is slowing, Europe is slowing, Asia is slowing, and we are at risk of having a big global problem.  Trump is scheduled to raise tariffs on $250 billion of Chinese imports in January, from the current 10% imposed in Sept., to 25%.  He could lessen the scheduled increase, or better yet, push it back based on making progress in talks with China.  That’s probably the best outcome, and I would expect a rally based on news like that.  If no progress is made then we could see another selloff.

Click THIS LINK to open the chart in a separate window.

I didn’t do anything last week, except work on a buy list.  I’m mostly out of the market, the monthly long term update continues bullish for the long term, so at some point I will want to buy back in, although bonds are more attractive now and I am considering how much to allocate to individual bonds and CD’s (no bond funds) that mature in one year, as we are late in the bull market.

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.

You can use the 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.  To do this 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.  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.

Rich Comeau, Rich Investing

Long Term – Nov. 2018

Once a month, on the Wednesday following the 15^th 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 – Third quarter GDP came in at 3.5% for the first estimate.  Through three quarters, the average GDP growth is 3.2%, a nice growth rate.

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	Q3	3.5
2018	Q2	4.2
2018	Q1	2.0
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 2.0 – 2.25% on Sept. 26, as expected.  The next Fed meeting is Dec. 18 – 19, but the market conviction that the Fed will hike another ¼ point has dropped from 90% to 75% following the stock market turmoil.

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.  Rising rates are not a problem on their own, they actually indicate the economy is doing well and the Fed thinks higher rates are called for.  However, at some point rates get so high that they become a barrier to business and consumer purchases, and then oppressively high rates begin to kill the expansion.

The housing market has slowed down with mortgage rates near 5%.  Rates in the 5% range have not killed housing before, but the median house price has never been as high as $320K before.  It is not the interest rate that is killing housing; it is the combination of inflated home prices and higher rates than a couple of years ago.

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

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Nov 21, 2018	2.1	2.9	3.1	3.3
Oct 17, 2018	2.1	3.0	3.2	3.3
Sep 19, 2018	1.9	3.0	3.1	3.3
Aug 15, 2018	1.9	2.7	2.9	3.0
Jul 18, 2018	1.9	2.8	2.9	3.0
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 20.8, down from 22.2 last month.  I used 4 quarters of earnings with the most recent being Q3 2018 (93% of companies have reported).

This metric is slightly overvalued relative to my trimmed 30 year average of 19.

This valuation is based on the 11/15 market price, after its recent significant drop.  The market is not overheating in this late stage of the expansion, which is good.  On the other hand, one might reasonably ask why the market is not doing better this year with the strong economic performance.  Higher interest rates from the bond market are starting to attract investment that a few years ago would have flowed into stocks.  This has the natural effect of lowering the P/E that investors are willing to pay for riskier stock investments, relative to bonds.

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 actual earnings for Q3 from Factset as of Nov. 21 is 25% increase vs. the prior year, which significantly exceeded the projected earnings for the quarter of 19%.  So, why has the stock market corrected in light of such excellent earnings?  Guidance for Q4 has not been as strong as usual, Apple will stop reporting unit sales of their devices by product line (analysts think they are hiding something), and when investors look to 2019 with higher interest rates and the trade war, they see headwinds that can lead to downgrade of earnings projections.  The stock market tries to look 6 months ahead, and apparently it does not like what it sees coming up.  The problem is not Q3 earnings because they were very strong.

This indicator is supportive of the bull market.

Age of primary move, bull or bear market – The bull market is 9.7 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 N Korea situation risk has receded a little following the Trump/KJU summit, but N Korea is up to its old tricks and failing to make progress in the negotiations to denuclearize (July 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, a dispute over secondary sanctions against our allies if they were to trade with Iran (May 2018).  The US withdrawal from the Iran deal was not seen as a possibility in the past as new presidents honored prior agreements.  This will change the future negotiating stance of our allies, being more careful not to box themselves into situations they do not want to be in if the US changes its mind.

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)

The trade issue with Mexico and Canada appears resolved, probably with limited impact on any of the trading partners, but it is good to get this behind us.  Trade wars are in effect with China and the EU.  I think some of the objectives Trump pursues are valid, but I am not confidant the method being used is the best.  This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products.  This is already a small negative for the economy, and has the prospect of getting worse.

President Trump and President Xi will have dinner on Dec. 1 in Buenos Aires and some are hopeful that the exclusion of Peter Navarro, a noted China hawk, is a positive sign for getting a deal done.  I think Trump realizes that the difficulty the trade tariffs are inflicting on US business probably cost him some votes in the midterms and he has to get this resolved if he wants to win in 2020.  Saving “face” for the participants is paramount.  The challenge will be to have one side lose, but not have it obvious that they lost.  Perhaps China gives on 3 important issues and the US gives on 3 minor issues, and they make it look like a somewhat even settlement if you just read the number of bullets and not the actual content of the bullets.  If this does not get settled in the near term, it can have a significant impact on the world economy.  The US and China are just the #1 and #2 sized economies in the world.

Global geo-politics is supportive of the bull market, currently.  However, the list of concerns that could tip the market is growing.  The trade issues are less supportive of the bull market than a year ago.

Technical:

After a brief rally following the hard Oct. selloff, the market continued the selloff this month.

Technically the long term RSI at the top of the chart has come down to 57 which is in the neutral range.  The long term MACD at the bottom of the chart has turned down, a negative at present.  Price action has come down to the bottom of the long term trading range of the S&P, shown by the two blue lines.

The question is, has the long term bull market ended, or are we just in a correction?

If this is just a correction, we can watch for stocks to put in a tradable bottom and buy in.  Prices are more attractive on a long term basis than they have been in months.  If a bear market has started, additional investments in the stock market will lose money in the intermediate term future.

Some people call a correction a decline of 10% and a bear market a decline of 20% or more.  I call a bear market a significant decline in both magnitude and duration.

Based on everything I see, there is no evidence that the economy has entered a bear market.  The decline is not large enough nor has it persisted long enough.

If the market has in fact not entered a bear market phase, then a buying opportunity in the longer term will present itself after a clear trend change to the positive emerges.  I would rather buy into a bull market when long term valuations are lower rather than very high levels.  If you look at the long term chart, this has occurred when the price is near the bottom of the range, close to the lower of the two blue lines that define it.

The market’s technical indicators support 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 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

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 15^th 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.

The monthly Long Term update will be posted Wednesday 11/21.

Economy:

The consumer price index (CPI) climbed 0.3% in October to mark the biggest advance since January while the increase over the past 12 months rose to 2.5% from 2.3%.  Initial jobless claims edged up by 2,000 to 216,000 in the seven days ended Nov. 10, but is still near a 50 year low.  Retail sales surged .8% in October, but the most of the money was spent on gas and new autos and the increase came after the first back-to-back declines since 2015.

The economy looks good.

Geo-Political:

China continues to slow down as a result of the US trade tariffs.

October 31, 2018 – Growth in China’s factory output slowed for the second consecutive month in October, according to official data, a sign that the economy is continuing to lose momentum amid the backdrop of an escalating trade war with the United States.

The National Bureau of Statistics’ (NBS) manufacturing Purchasing Managers’ Index (PMI) fell to 50.2 in October – the weakest reading in two years and a significant drop from the 50.8 score posted in September.

The reading surprised the market on the downside, which had an average forecast of 50.6, and compares poorly with the average across the first nine months of the year (51.2). The index is benchmarked at 50, with anything higher indicating sector expansion.

NBS representative Zhao Qinghe said that the October decline was partly attributable to a “complex and variable external environment” causing “fluctuations” in demand and supply.

The loss of momentum was broad-based, with all five components of the index (new orders, output, employment, delivery times and raw materials inventories) falling. New orders saw a particularly steep drop to 46.9 from 48.0 in September, fitting with the wider trend of weaker domestic demand.

https://chinaeconomicreview.com/china-manufacturing-growth-falls-short-of-estimates/

There is no doubt that the US is punishing China.  The problem is that the US is suffering also, and since production in China drives so much economic activity in the Pacific Rim, the entire region suffers when China suffers.  After the sugar high surge in economic activity in Q2 and Q3 in the US following the tax cuts, we are seeing a slowdown in the US.  Europe is slowing.  The narrative has shifted in one year from a global synchronized growth to a global slowdown.  If this is the effect of the US trade wars, they will be a failure.

I continue to believe that if “forced technology transfer” from US companies to China is a problem, then the CEO’s of those companies are responsible.  All they have to do is “just say NO” when China says they have to give their tech secrets to Chinese companies in order to do business in China.  If the secret is that vital of a competitive advantage, you CANNOT give it away, no matter the size of the market you might enter.  That is not a government problem, that is a CEO problem.  That is also a problem with the corporate form of business organization.  CEO’s understand their average tenure is five years, so if they give away key secrets that will damage the company over 10 years, but they gain a huge market and grow revenue and profits over five years, they may be willing to give it away and take the short term (five year) gain, as they don’t expect to be around in 10 years when the Chinese are taking their business away by using their trade secrets.  A founding owner gets all the company profits now and in the future, but a CEO does not.  That creates a conflict of interest for the CEO, of short term profits vs long term positioning, that a true owner does not have.  The true owner must balance short term profits with long term profits, while a CEO only worries about short term profits (I define short term profits to be when the CEO’s last stock grant has vested!).

Regarding THEFT of trade secrets, it is still the responsibility of the CEO to only do business with companies that you trust, and that you have recourse to in US courts.  Don’t offshore any activity that is so key to your success that you can’t afford to have it stolen.

I see this as much more of a corporate problem, one of corporate irresponsibility, than a government problem that needs to be addressed by tariffs.  If enough companies refused to give their technology to China, Chinese economic activity would slow so much that eventually they would be forced to stop trying to steal our technology.  Another possibility is that the CEO’s do give SOME technology to China, but not the most important competitive advantages.  If we play the game wisely, we might take advantage of cheap Chinese labor and preserve our key competitive advantage.  I just don’t know how much we have given away or had stolen.  Therefore it is also unclear that the tariff war is an appropriate response.  The details of this situation have not be shared with the US public, so we are basically in the dark regarding whether this trade was is even necessary.

If anyone has factual data describing real incidents, I would love to receive it and post it in the blog!

This is important because the stock market fluctuations seem driven by Fed activity on interest rates, and by the tariff wars.

Technical Analysis:

The stock market was down for the week, its first down week in Nov.

Technically, it appears the correction grinds on.  RSI at the top of the chart ended the week at 48, near neutral.  MACD at the bottom of the chart has flattened out and is in neutral.  Price action is negative for the week.  Of more concern, the small “potential” double top at 2820 (two acqua lines) appears to have turned into an actual small double top since its prior upward move has been completed, and will now be resistance on the upside.  On the downside support would be at 2640 and if that is violated, next would be at 2580 at the old low from last winter.  We’re still in correction mode for stocks, unless you see an individual stock that has been mis-priced by the overall market pullback.

Click THIS LINK to open the chart in a separate window.

What did I do last week?  Not much.  I bought some T-bills for 30 days in a couple of accounts, and after the next Fed rate hike on 12/19, I plan to roll that into a one year T-note or CD.  I will not buy a bond fund in a rising rate environment, so I buy the individual bond or CD with a specific maturity date that I select.

As a bonus today, let’s look at the performance of the PIMCO Total Return bond fund, one of the larger and better performing bond funds over time, and I will show you what I mean.  The ticker symbol is PTTRX.  The fund has an average maturity of 4.7 years, and its current 30 day yield is 2.76%.  But, look at this from the PIMCO website:

In the last year, the fund has lost 1.5% of your principal.  So, if you made 2.75% interest and lost 1.5% of your principal, your total return for the year was 1.25%.  You could have bought a 1 year CD a year ago, gotten a lower interest rate but a higher total return, and had no risk to your principal if you were committed to holding for a year.  The CD would have been a better deal than the PIMCO bond fund in my opinion.  That continues to be my opinion in this rising rate environment.  What might the loss of principal be in the bond funds this year?  Nobody knows, and I don’t like that uncertainty.  Much better to buy an individual bond with an exact maturity date that is relatively near in time (I like one year right now, and as interest rates rise, move out to 2, 3, or 5 years).

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.

You can use the 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.  To do this 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.  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.

Rich Comeau, Rich Investing

Divided Government

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 15^th 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 ISM non-manufacturing index slipped to 60.3 last month from 21-year high of 61.6 in September.  Initial jobless claims dipped by 1,000 to 214,000 in the seven days ended Nov. 3.  The producer price index jumped 0.6% last month after barely any change since July.  The University of Michigan’s consumer-sentiment index fell slightly to 98.3 in November from 98.6 in October.

Overall, the economy looks good.  A concern is the jump in producer prices, which is caused by the tariffs on parts and equipment that US manufacturers import, as well as the tariffs on steel and aluminum.  It is not known if or when companies will pass these cost increases on to consumers and ratchet up inflation.  Oil prices have fallen recently, which would dampen inflation.

Geo-Political:

The big news of the week was the mid-term election in the US, where the dems took over the House of Representatives and the repubs held on to the Senate.  Now we have divided government, some call it gridlock.  It’s not all bad.  Only very important things that both parties agree on can get done.  The dems can’t roll back the tax cut because the Senate would never pass the bill.  There is some talk about both parties wanting to do some infrastructure spending, but with the deficit already so high I don’t see much happening on that.  The dems in the House will want to investigate Trump on Russian meddling in our election in 2016 and 2018, and with the Mueller investigation nearing an end, when he delivers his report to congress, we will see if the House proceeds with impeachment.  That will get ugly, and the stock market will probably react negatively to all the uncertainty, but just a correction.

Technical Analysis:

We had an up week, up Mon., Tue. and Wed., then down Thur. and Friday.

What I see is that the correction continues.  Why?

I’ve added some new lines (black and red bands) in the top section of the chart on RSI (Relative Strength Index) and you can see that in uptrends, the RSI generally varies from 50 (neutral) to 70 (overbought).  In downtrends (corrections or bear markets), RSI generally varies from 30 (oversold) to 50 (neutral).  Currently RSI is varying between 25 and 55, not a good sign until that trend is broken.  Short term momentum is up shown by MACD at the bottom of the chart and it is still up.  The price action is suspicious, as we are looking at a potential “double top” at 2820, on Oct. 12 and Nov. 8.  I would like to see the market go down and test the recent low at 2640, but that may not happen.  There is certainly no “all clear” and we could just be looking at an oversold bounce.

Click THIS LINK to open the chart in a separate window.

What did I do this week?  Not much.  I had bought a few severely oversold stocks a few weeks ago, and with the potential double top, I sold them and took a few profits, hoping to buy them back lower.  I also look at fixed income options.  I will probably buy a 30 day T-bill to get me to the next rate hike in Dec., then buy a one year T-Note at hopefully a quarter point higher rate assuming that the Fed does hike in Dec. (80% chance).

And I finally got back to a shorter report….     🙂

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.

You can use the 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.  To do this 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.  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.

Rich Comeau, Rich Investing

Little Rally

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 15^th 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:

Initial jobless claims fell by 2,000 to 214,000 in the seven days ended Oct. 27 (this is near a 50 year low).  The Institute for Supply Management’s (ISM) manufacturing index fell to a six-month low of 57.7% in October from 59.8% in September, as corporate purchasing managers lamented rising prices, tariffs, shortages, and waning foreign demand.  Total light weight vehicle sales in October reached a seasonally adjusted annual rate of 17.57 million, up from 17.44 million last month and the best showing since November.  The rapidly growing economy generated 250,000 new jobs in October, keeping the unemployment rate at 3.7% (a 48-year low) and increasing worker pay to the highest level in more than nine years at 3.1% in the last year.

The nation’s trade deficit rose 1.3% in September to $54 billion, a seven-month high, as imports set a fresh record, confounding efforts by the Trump White House to bring deficits down.  I don’t normally look at the trade deficit, but since Trump has stated it as a primary goal of the tariff war, I’ll watch it for a while.

The economy looks good.  The only minor concern is the ISM manufacturing index falling to a six month low, but anything over 50 represents growth, and at 57.7, that is still a strong reading.

Geo-Political:

Today I am going to do something out of the ordinary and show you an article from one of the world’s biggest BEAR’s on the US stock market, Mr. Peter Schiff.  From Wikipedia:

 “In an August 2006 interview, Schiff said, “The United States is like the Titanic and I am here with the lifeboat trying to get people to leave the ship…. I see a real financial crisis coming for the United States.” On December 31, 2006, in a telecast debate on Fox News, Schiff forecast that “what’s going to happen in 2007 is that real estate prices,” which had peaked in December 2005, “are going to come crashing back down to Earth.”

In his 2007 book Crash Proof, Schiff wrote that US economic policies were fundamentally unsound.”

I take Schiff with a grain of salt, as he has continued to be bearish during the succeeding bull market years.  But, he is beating the drum hard again, and may yet be proven correct.

So, I present excerpts from his recent interview as an opposing view.  Most of the talking heads on TV are stock brokers who’s job it is to sell you stocks, and mutual funds primarily in the US.  You get one point of view from them.  Mr. Schiff’s company sells investments that focus primarily outside the US, and you will get a different point of view from him.

Excerpts from his article of Nov. 2, 2018”

“All of the bulls were out in force on the financial networks claiming that the correction is over. Everybody was confident that the lows are in, that the big back-to-back rally is proof and you better buy now, otherwise you’re going to miss the rally, and this is the typical correction and now it has run its course. And you know what? If this really was the end of the correction, most likely there wouldn’t be so many people that were so confident that it’s over. You’d have a lot more fear, especially on a Halloween. The fact that there is no fear, to me, shows that it’s more likely that this is not the end of the correction, but the beginning of the bear market and that this rally is a correction.”

Peter noted that it wasn’t just the stock markets that took a beating in October. The junk bond market had its worst month since 2008. This indicates increased worry about defaults.

“If the economy is booming, why would people think that the risk of a company defaulting is going up? Because when the economy is really good, that’s when companies don’t default. It’s when the economy is bad, that’s when companies might default.”

But the bulls are oblivious.

“All the bulls who are just so confident that this is a correction that’s already over are ignoring all the signs that the economy is not nearly as strong as everybody wants to pretend it is.”

Peter pointed out some other disturbing economic numbers, particularly in housing. Home sales in California are at the lowest level in 10 years. As Peter noted, interest rates are only at 2%. Mortgage rates have just gotten back to 5%. And yet we’re already seeing the negative impact in housing. Keep in mind, the housing market is a leading indicator of the impact of rising interest rates.

“If the US economy is really going to stay strong and if interest rates are going to keep rising, how is it possible that the economy can continue to stay strong with high interest rates when the economy, or the strength of the economy, is predicated on debt?”

Peter once again noted the skyrocketing levels of government debt. We shouldn’t be seeing huge deficits like this during a booming economy. And yet, the US Treasury plans to borrow another $425 billion in the final quarter of 2018, bringing total borrowing for the year to $1.34 trillion. This level of borrowing looks more like we’re in the midst of a deep recession.

The truth of the matter is, we don’t have a booming economy. We have a bubble. And when you have a bubble economy, debts go up. Budget deficits go up. Trade deficits go up because you’re not productive. You’re just going into debt to consume.”

The bulls say we shouldn’t worry because nothing has changed. The economy wasn’t fundamentally different in October than it was in September. Peter said they are actually right.

“What they don’t understand is nothing has changed, which is exactly why they should be worrying, because the economy was a bubble back then and it’s still a bubble. The only difference is the bubble may have pricked. See, the fundamentals have not changed; that’s true. They were lousy before October and they were lousy in October. That’s what they don’t get. The market never should have been going up.”

https://seekingalpha.com/article/4217490-peter-schiff-truth-booming-economy-bubble?page=1

Mr. Schiff is clearly from the Austrian school of economics and they are very conservative, they are wary of debt and leverage.  In the extreme, they are usually right, too much debt is harmful.  The other major school of thought on economics is the Keynesian school, popularized by John Maynard Keynes, and they believe debt can be very useful to manage the economy, particularly to stimulate it during recessions.  I think even Keynes would agree however that too much debt, even at the depth of a crisis, can be a bad thing.

Will Mr. Schiff be proven correct?  I don’t know.  More importantly if he is proven correct, WHEN will that happen?  I don’t know.  Does Mr. Schiff need to be controversial to keep his name in the news to sell his 5 books and promote his company?  Yes, he does.

But I would do a disservice to myself and to you to ignore disturbing ideas that go counter to the prevailing ones.  A bit of provocation can be a good thing.  Think about it.

Technical Analysis:

This week we had a nice rally up from the deeply oversold lows.

Technically the good news is we’ve finally rallied from a deeply oversold bottom.  We have not challenged or broken above significant resistance levels on the way up, such as the 200 day moving average (old support becomes resistance), so nothing is proven.  RSI has rallied from oversold to low neutral level at 43 (50 is neutral).  Momentum shown by MACD at the bottom of the chart has bottomed and turned up a little.  Short term that is good.  Price action is concerning, because if you look back to Feb., we went down as hard as this correction, but we did not break below the 200 day moving average (red curvy line).  This correction we decisively violated the 200 day moving average and we remain below it.  For the bull market to continue we will have to get back above it.  The last correction of 10% in Feb. took 5 months to recover from, and this will probably be similar.  I like the fact that the corrections have been brief time-wise and violent.  That is the way corrections act, in a bull or bear market.

Looking forward, earnings in 2019 will surely not grow at 20% like they did this year with the tax cuts.  The question is, will they grow closer to 5% or 10% in 2019, giving us a poor or a good stock market?  Rising interest rates will raise borrowing costs for corporations, and will keep the dollar strong which is a headwind for corporate profits.  The tariffs are increasing input costs to corporations and we already see a drag on manufacturing profits.  Our tariffs are hurting China’s economy and when it slows, it will back up into other Pac-Rim countries that trade with China.  Europe is growing, but the growth rate has slowed recently.  I will be cautious.

Click THIS LINK to open the chart in a separate window.

What did I do last week?  Not much.  I bought a little Canopy Growth, a Canadian cannabis stock.  I was in it earlier this year from 25 to 35, then it went to 50.  I bought it back at 37.  Constellation Brands invested $4 billion in Canopy Growth, and that indicates a lot of faith in the company and Canopy now has financial strength.  I think this will be a long term growth story.  In the US, nine states have legalized weed.  A Constellation spokesman said he believes the federal government will eventually turn over pot regulation to the states, but it will be years.  That would open a huge market as the US has ten times as many people as Canada.  Other than that, I am waiting for a retest of the recent closing low of 2640.

Since the market has been so volatile, let’s take a look at the long term position 2 weeks prior to the monthly Long Term update.

Looking at this chart, there is nothing to suggest to a buy and hold investor who would only like to sell before a bear market has eaten a very large hunk of your savings, that a bear market is in effect and that one should exit.  The RSI at the top of the chart is at 60, high neutral.  The correction has brought the market down from its heavily overbought status.  Momentum seen in MACD at the bottom of the chart has turned down slightly so there is still danger in the trend.  Price action has only moved to the bottom of the trend channel we have been in for years and so far, there is nothing to indicate a change in the long term trend.  The big risk is that the current short term volatility is not clearly over.  That means we cannot rule out further damage to the market, and even a decisive (volume and duration) violation of the long term trend that would signal a bear market.  GDP looks good, but there have been bear markets without a recession.  These are rare, but with the manipulation of the markets the last 10 years, we are in rare territory.

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.

Tip: You can use the 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.  To do this 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.  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.

Rich Comeau, Rich Investing