The “News” vs Economic Data

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.

The monthly Long Term update was posted on Wed. and is just below this post, so just keep scrolling down if you like to read them.

Economy:

Initial jobless claims dropped 23,000 to a seasonally adjusted 216,000 for the week ended Feb. 16, which is near the number typically experienced the last few months, and low relative to history.  We’ll have to see if last week’s spike was an aberration or if this week’s number is the aberration.  Durable goods orders rose 1.2% in December.  The Philadelphia Fed manufacturing index in February dropped sharply to a seasonally adjusted reading of -4.1 from 17 in the prior month. This is the first negative reading since May 2016.  Existing home sales were lower by 1.2% than the 3-year low they hit in December and they were 8.5% lower than a year ago.  The leading economic index slipped 0.1% in January, was flat in December and rose 0.1% in November.

These economic indicators are mixed.  Employment is holding up, but that is a trailing indicator.  Durable goods orders are OK.  I don’t normally post the Philly Fed’s report, but this one was so low that it is noteworthy.  Existing home sales at 3 year low is disappointing.  The LEI has been weak for the last 3 months, which is discouraging for the future.  This adds up to a cautionary stance on the stock market.

Geo-Political:

Things around the globe have not changed that much, at least economically, in the last month.  The economy is slowing in Europe and China.  There are no major shooting wars.

Let me make an observation on the US stock market that has me bothered.

From the late Dec. selloff, the market has rallied straight up 19%.

Why?

The TV talking heads tell us that the Fed has backed off its aggressive plan to raise interest rates 3 more times in 2019, and news reports suggest the US is making reasonable progress in trade talks with China and the tariffs will not be increased from 10% to 25% on March 2nd.

But, that is just trading on the news.

What should drive the stock market?  Profits and valuation.  Profits come from a sound economy, and because of this, we watch economic statistics from multiple sources to gauge business activity as an early warning to the impact on corporate profits.  The classic valuation of stocks is the Price/Earnings ratio, and earnings are just profits, so in the end it all comes back to profits.  Profits are very concrete, determined by business activity expressed through the Generally Accepted Accounting Principles (GAAP), and profits are the END RESULT.

When the Fed says they will be patient with rate increases, that is a fact, but it is not the end result.  Companies make business decisions based on the new fact from the Fed, but we do not know what the impact on profit will be until the end of a quarter when the results are reported.  The Fed statement is NOT an end result, it is just an interim statement.  The statement influences events, but we won’t know the extent of the influence for months.

The same can be said for the statement from government negotiators with China about progress in the trade talks.  It is not the end result, and the argument goes the same as the statement by the Fed on interest rate policy.  Again, you don’t know the impact for a few months.

The above is called “trading on the news”, and when I see the market primarily trading on the news, I get concerned.

The market should be trading on profits and valuation.  The best way to get a handle on that in advance is to watch economic data, not news items whose impact is not crisply knowable.

So, what economic data am I talking about?

Home sales are at 3 year lows, that’s a fact.  As the Fed has raised the Funds rate from 0 to 2.5% and mortgage rates have risen, the affordability of homes moves out of the reach of a segment of the population.

GDP slowed significantly in Q4, I think.  The official first estimate should come out this week, but in the meantime the best estimate we have is GDPNow from the Atlanta Fed, and it is showing 1.5% growth, a significant slowdown from the prior 3 quarters.

Auto sales are slowing, durable goods orders are slowing, the leading economic indicators are weakening.  Most places that I look, I see softness.

We’re not in a recession, and nobody expects one in 2019.  That does not mean one can’t start this year.  People are pretty bad at predicting when a recession will start.

Then add that analysts are now forecasting weak earnings in Q1 (-2.2%), Q2 (+1.0%) and Q3 (+2.2%).  https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_021519.pdf

This is just not a healthy prescription, I don’t care if the Fed is on hold and we get a good China deal.  The Fed is on hold because they can see the economy weakening and they don’t want to see GDP growth go negative.  If we get a trade deal with China, who says a bad taste won’t linger in their mouths and they continue to shun American products like iPhones or McDonalds or KFC?

I continue to lighten up on stocks because I think the fundamentals are poor right now and the “news” does not outweigh the fundamentals.  We may get a pop up on a China deal, but then the market will have to face that 2% decline in earnings when Q1 numbers come in (if the analysts get it right this close to Q1 earnings when we are over half way through Q1, there I go again taking a shot at analysts estimates, what can I say?).

I think I will get a chance to get back in the market at a lower level in the future.  In the meantime, the money market at least pays something semi-reasonable while you wait.

I apologize in advance for the length of that, but it is what I think is important right now and I tried to do the best I could with a somewhat difficult subject.  It’s a nuanced subject, so one has to be a bit careful and lengthy in dealing with it to try and make it clear.

Technical Analysis:

I explained so much of my current thought on the market that I will keep this short.

The market is overbought with the RSI at the top of the chart at 70, fully overbought.  In a bull market it can stay overbought for months, but if you look back over the last year, market volatility has kept the market from prolonged periods of being overbought.  The momentum of the advance has slowed and we see MACD at the bottom of the chart leveling out and the histograms receding back to zero.  The price action is good, but we are coming up to the third resistance level, the double top from Oct. and Nov. at 2815 (upper green line).  The rally can continue, but it is fighting the odds now.  My discussion in the previous section suggests a day of reckoning awaits.

2019 02 22

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

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 to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Long Term – February 2019

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

Economics:

GDP – Fourth quarter GDP first estimate is expected to be released on 2/28, a month late due to the govt. shutdown.

The Feb. 15 update from the Atlanta Fed on GDPNow for Q4 is +1.5%, down from the 2.8% estimate last month.  That would bring the annual GDP increase to 2.8%, not very impressive for the first year of the tax cut.  Of course we have to wait for the actual data.  The real trick will be what happens in 2019 when economists think the impact of the tax cuts will be lessened as they settle in and become the norm for families.

Annual GDP growth had 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.   However, if GDP for Q4 2018 comes in as weak as 1.5%, this would be a cautionary state, as much better results were expected.

Year Quarter GDP %
2018 Q3 3.4
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 left the Fed Funds Rate at 2.5% in Jan. as expected.  Commentary from the Fed has been dovish and the markets have liked that, helping fuel the Jan./Feb. stock market rally.

While rates are rising, I do not see a hostile interest rate environment.  For now, rates still support the long term bull market. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Feb 20, 2019 2.4 2.5 2.7 3.0
Jan 16, 2019 2.4 2.6 2.7 3.1
Dec 19, 2018 2.4 2.6 2.8 3.0
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
2018 Q2 1.7 2.8 2.9 3.1
2018 Q1 1.5 2.6 2.8 3.1
2017 Q4 1.2 2.1 2.4 2.8
2017 Q3 1.1 1.8 2.3 2.9
2017 Q2 .9 1.8 2.2 2.8
2017 Q1 .7 2.0 2.5 3.1
2016 Q4 .5 1.8 2.4 3.0

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 20.0, up from 18.5 last month.  I used 4 quarters of earnings with the most recent being Q4 2018 (85% of companies have reported).

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

In a bull market with valuation at the long term average level, this indicator is supportive of the bull market.

S&P earnings – The latest earnings estimate from Factset is for 13% higher earnings for Q4 than in the prior year.  That is a good number, but the Trump tax cut gave corporations a 10% cut, so the organic improvement in earnings was negligible at 3%.

What is worse is that the Feb. estimate from Factset for Q1 earnings is now -2%, and estimates for Q2 and Q3 are also poor, less than 3% growth.

The stock market struggled through an earnings recession a couple of years ago and it did not end the bull market.  It does induce volatility, and if it is not handled properly from a policy perspective, it could end the aging bull market.  This is a cautionary note, keep watching and be vigilant.

This indicator is supportive of the bull market, but if estimated earnings for 2019 are continually marked down, volatility will continue.

Age of primary move, bull or bear market – The bull market is 9.9 years old, which is a long bull market by historical standards.  In and of itself, this is meaningless.  It does provide some perspective that one should keep in mind.

Geo-Political:

Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching, centered in the Yemen conflict (noted Dec. 2017).

In the US, we are approaching the point in the investigation into Russian meddling in the 2016 US presidential election where we will find out whether charges will be filed against the president’s closest advisors.  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)

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.  Growth is slowing in both Europe and China.  This is already a small negative for the economy, but currently the reports out of China on trade talks with the US are mildly positive.

Global geo-politics is supportive of the bull market, currently.  The trade issues are less supportive of the bull market than a year ago.

Technical:

February has been a good month so far, up about 3%.

Technically, the market is in a fairly neutral position.  RSI at the top of the chart is in neutral territory at 60.  The momentum on a long term basis is headed down, shown by MACD at the bottom of the chart, but the histograms shrunk ever so slightly in Feb., a minor improvement.  The price action is encouraging since it has climbed back into the uptrend channel it has been in for years.  That looks good on the graph, but the chart is the history.  Where is the market heading if earnings go flat for 3 quarters, as the folks at Factset are predicting?

2019 02 20

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. 

The earnings projections from Factset for 2019 Q1, Q2 and Q3 are negative to low single digit increases vs. the prior year’s respective quarters.  That will limit upside progress in the stock market this year, and if these earnings “guesses” are still too high, and you must realize they are just guesses at this point and they are much lower than the last set of guesses, well, worse results are possible.  The last set of guesses (oh, I mean “estimates”, like that is any better, but who would invest if we called them guesses) was poor, so why should we believe this set of guesses is any better?

 

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

Progress with China, Poor Economic Data

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.

The monthly Long Term update will be posted on Wed. Feb. 20.

Economy:

The consumer price index was flat last month; economists had forecast a 0.1% advance.  The increase in the cost of living over the past 12 months slowed to 1.6% from 1.9%.  Weekly jobless claims rose by 4,000 to a seasonally adjusted 239,000 in the seven days ended Feb. 9 while the four-week average of new jobless claims climbed by 6,750 last week to 231,750, marking the highest level since the January 2018.  Retail sales sank 1.2% in December, it’s largest drop since September 2009.  The preliminary University of Michigan consumer sentiment index for February rebounded, with the index rising to 95.5 from 91.2 in January, which was the worst since November. 2016.

Every real economic indicator disappointed again this month.  Consumer confidence rebounded based on the stock market rally, dovishness from the Fed, and talk of progress in the China trade talks.  The economic numbers are not very bad, the weakness is just slight.  This could be a soft patch from which we recover.  But with global softness seen in Europe and China, that is not going to help the US any.  The economy is signaling caution until these readings turn up from here.

Geo-Political:

With China’s economy slowing due to tariffs the US placed on imports from them, the Chinese central back has eased reserve requirements on their member backs, encouraging them to lend more and support the economy internally.

Feb. 16, 2019 – China’s credit growth surged unexpectedly to a record pace in January, strengthening production in the real economy and easing overall downward pressure, People’s Bank of China, the country’s central bank, said on Friday.

Bank lending in domestic currency increased by 3.23 trillion yuan ($476.8 billion) last month, the fastest single-month growth since the figure was first tracked in 1992. It increased by 2.9 trillion yuan in January 2018, the bank said.

Total social financing, a broader measure comprising all money the real economy receives from the financial sector, including off-balance-sheet financing activities, rose by 4.64 trillion yuan in January, which was also the fastest monthly growth ever, according to the central bank.

The month’s rapid credit growth was a result of a series of precautionary measures to ease the negative effects of slowing domestic demand and external headwinds, according to Sun Guofeng, head of the bank’s monetary policy department, at a news conference.

“The increased bank lending could match the real economy’s needs,” Sun said, adding that it doesn’t mean an aggressive easing of monetary policy.

The monetary authority has rolled out a series of policies in recent months to ensure adequate liquidity in the financial sector and accelerated loan issuance to companies. The measures include a new lending facility, called the targeted medium-term lending facility, which was introduced in December to encourage commercial banks to increase lending to small and private firms.

The central bank further cut the required reserve ratio for financial institutions by 1 percentage point in January and injected another 800 billion yuan of capital into the market. That followed four reserve ratio cuts last year.

Supported by the liquidity, the average interest rate in financial markets had already declined by January, which actually provided much cheaper funding to commercial banks and borrowers in the corporate sector, Sun said.

http://www.chinadaily.com.cn/a/201902/16/WS5c674167a3106c65c34e9a65.html

The US economy is more mature, diverse, and self-sustaining due to the broader middle class and consumer led economy.  While both countries suffer is the trade war, the US suffering is in specific segments so far, which have not spread noticeably to other areas of the economy.  China is working hard to overcome the headwind of the US imposed tariffs.  Both nations need a solution, and most observers expect progress to be announced by March 1, with tariffs remaining at 10% and an extension to keep working on unfinished issues.  The stock market should like that.

Technical Analysis:

The market had a good week ending up 3%.

Technically the action looks good, but the rally is extended right now.  RSI at the top of the chart is up to overbought level at 70, which generally is not a good time to buy into the market.  The market can continue up and we have seen the market stay overbought for months at a time in strong uptrend periods in the bull market.  However, this is not a strong uptrend period; we are still in the correction.  MACD momentum at the bottom of the chart is high but the histograms are shrinking and near zero, which is suspect.  Price action has been good, getting through the purple downtrend line, then breaking above the 200-day moving average (the red line) this week.  The last major hurdle of resistance is to break above the recent double top at 2815, shown by the upper green line.

What bothers me here is that the market seems to be ignoring all the negative indications and focusing on the Fed dovishness and progress on China talks.  It is ignoring softness in housing, poor factory orders, soft consumer sentiment, and the earnings cuts by the analyst community for Q1 earnings that will start being reported in April.  I just don’t like this; it doesn’t seem right to me.

2019 02 15

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

So, what do you do when the market continues to rise, but you don’t think that it should?  The market does not always do what you expect it to.  What I do is buy in small amounts each day and keep a “trailing stop loss % order” under the position, and update it for the new amount of shares owned.  I buy IVV which is the same as SPY, but at Fidelity there is no commission to buy it.  I still have a few stocks that I bought in early Jan. with some nice gains, and I will let them run until we get a reversal.  I just don’t think it is time to get real aggressive in here.

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 to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Temporary Peak?

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:

Factory orders dropped 0.6% in November, faster than the .2% decline economists had expected (reports are coming out late due to the govt. shutdown).  Factory orders are an early indicator as they later become sales that drive GDP, and that is why I consider “factory orders” an important report.  The ISM non-manufacturing survey slipped to 56.7% in January from 58%, the lowest reading since July.  Initial jobless claims, a rough way to measure layoffs, declined by 19,000 to a seasonally adjusted 234,000 in the seven days ended Feb. 2.  The decline is a bit misleading since the previous week was high due to termination of temporary holiday season hiring, 234K is actually a bit higher than the recent trend.

Folks, we have 3 important reports, and they are all disappointing.  We’ve gone from all reports being positive a year ago, to some positive and some backsliding like housing, and now all 3 reports are disappointing.  The economy is still growing, but its rate of growth is slowing, and that is playing into the stock market volatility.

The stock market was strong for the first two years of the Trump presidency based on deregulation and the promise of tax cuts that were supposed to provide cash to corporate America and encourage investment.  Then Trump has put a major hurt on that plan by starting his trade wars, and business is reluctant to invest in the environment of uncertainty.

Geo-Political:

The Fed is on hold, forget about Brexit, China and the US will come to an agreement sometime in my opinion.

The big deal is going to be Q1 earnings that will come out starting around April 10, and they will be ugly if the Wall Street analysts are finally correct (as they get closer in time to the reported earnings, they usually get closer to the truth, always question earnings estimate over 2 quarters out).  Most folks are focused on Q4 earnings being reported now, and that is the last quarter of the Trump tax-cut easy comparisons to the prior year.  We had some fun with the reasonably good earnings, but the pros are going to shift to look 2 months ahead to Q1 earnings. 

“Feb 5, 2019 – Profits in the first quarter are now expected to decline as company outlooks fall short

  • Wall Street expectations for earnings growth for the first quarter of 2019 have turned negative, which would mark the first decline in more than two years, according to FactSet.
  • Wall Street analysts now expect S&P 500 companies to report an average 0.8 percent decline in first-quarter profits, according to FactSet.
  • At the end of September, analysts expected first-quarter profits to increase by 6.7 percent, on average.
  • Six of the 11 sectors are expected to report a decrease in earnings for the first quarter, with the information technology sector projected to decline the most by 8.9 percent, the data show.

https://www.cnbc.com/2019/02/05/profits-in-the-first-quarter-are-now-expected-to-decline-as-company-outlooks-fall-short.html

The first important point about the above piece is how far off the “analyst estimates” of future earnings can be.  From Sept. to Jan., just 4 months, estimated earnings for Q1 fell from 6.7% up to .8% down.  That is why on the monthly Long Term update, I use the prior 4 quarters of TRAILING earnings to determine the E in P/E.  I know the future earnings are just guesses.  Why would you base an investment decision on someone else’s guess?  Usually their guess is pretty good, but when the primary trend of the market is changing and the future assumed growth rate fails to materialize, their guess will kill you at the time when you need it most.  Many of those big institutions trade for their own account and I notice is big downturns that they don’t lose as much on average as “Mom and Pop” lose.  Why?  The institutions trading for their own account don’t follow the advice they give to you.  They don’t “buy and hold for the long term”; rather they sell out of the market.  Many times they don’t use their own “retail analysts” forward projection of earnings, rather they look at forward looking economic data and try to discern where the market will be 3 to 6 months ahead.  Remember, for these institutional investment advisors you come into contact with, their job is to sell you stocks or mutual funds that will generate income for their company and for themselves.  Mutual funds provide a monthly income stream for the companies they work for.  There is a built in conflict of interest for these advisors, between telling you to do the best thing for you (which is what their in-house account traders are doing), and their company earnings and hence their personal earnings.  Instead you usually hear “don’t panic, the market will come back”.  But the reason you are worried at that point is that you were not looking 3 months ahead.  I realize it is hard to do, but if you don’t try to do it, I guarantee it will not happen.  My point in writing this blog is to try and help you get a broad perspective on the market so you can deal with it better.  The blog also forces me to get organized once a week, which I find is a personal benefit.

I have been light on stocks for a few months now, and with this news on lowered earnings expectations, I plan to stay light on stock allocation.  The ECB meeting recently discussed slowing economic conditions, and we know that China is slowing, so if the US also slows that would put the 3 largest economic areas in the globe in simultaneous slowing.  That is not a good picture for a strong stock market.

For the last few months I’ve been talking about interest rates finally reaching a point where CD’s and Treasuries finally represent a decent investible value.  You can get near 3% for 3 years and a bit better for 4 years.  Going out to 5 years does not buy you much, unless you think we are in for a replay of the financial crisis with rates staying low for an extended period like a decade or so.  My crystal ball is not good enough to call a shot that far out in the future.

Technical Analysis:

The market was flat for the week, a few up days and down days.

The technical condition of the market was deteriorating.  At the top of the chart we see that Relative Strength (RSI) fell from 69 down to 60, back in neutral territory.  At the bottom we see momentum flagging as MACD looks like it might roll over, and the histograms are shrinking back near zero.  The price action is slightly negative as it has fallen late in the week.  The market may have made a temporary peak at 2740 on Tuesday, right up at the 200 day moving average, which is a natural support or resistance level depending where the market price is.

In light of the above commentary on the economy and Q1 earnings, it seems to me there is a lot more risk in the market right now than opportunity for gains.

2019 02 08

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

What did I do this week?  I was selling stocks into strength.  I am not completely out of the market, but I am very light.  I bought another CD this week.

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 to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Good News on China Trade Negotiations

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:

Initial jobless claims jumped by 53,000 to a seasonally adjusted 253,000 in the seven days ended Jan. 26, probably due to reductions following the holiday season.  New-home sales ran at a seasonally adjusted annual 657,000 rate in November, 17% higher than October’s sales pace and an 8-month high.  That was still 8% lower than a year earlier reading, and the median sales price was $302K which was 12% lower than a year earlier, so as the price has come down, sales have picked up recently.  The U.S. gained 304,000 new jobs in January — the biggest increase in almost a year — in another show of strength for an economy that’s still growing soundly even in the face of more headwinds.  The unemployment rate was 4%.  The ISM manufacturing index rebounded in January to 56.6% from 54.3% in the prior month; anything over 50 shows growth.  The University of Michigan’s consumer-sentiment index plunged to a reading of 91.2 in January from 98.3 in December, the worst since Donald Trump was elected president.  The trade war with China and the hard selloff in the stock market are obviously weighing on main street.

The numbers generally look good, except housing still looks weak.  It remains to be seen if the big drop in consumer confidence is reflected in GDP data next month.

Geo-Political:

The most important issue for the stock market continues to be the trade talks with China.  If these are successfully resolved by March 1, or partially resolved with a new target date being extended, the market should rise on the news, at least for a while.  Right now, the news is good.  It is in the interest of both sides to find a resolution, so they should.

“Feb. 2, 2019 – Important progress made during the latest round of China-US trade talks paves the way for a complete solution in next-step negotiations, officials, business leaders and analysts said.

They also said China has been opening up its economy to the world, offering ample opportunities for global investors.

They made the comments after the wrap-up of the latest round of talks between China and the United States in Washington on Thursday, in which the two sides had specific and constructive discussions covering such topics as trade balance, technology transfers, protection of intellectual property rights and non-tariff barriers, according to the Chinese delegation.

“Important progress has been achieved in the current stage, and the two sides had candid, specific and constructive discussions,” the Chinese delegation said in Washington on Thursday.

Vice-Premier Liu He met with US President Donald Trump, who confirmed that a US trade delegation will visit China in mid-February for further consultations, according to a Xinhua News Agency report.

During the talks, the two sides also determined the timetable and road map for next-step consultations. They attached great importance to the issue of IPR protection and technology transfers, and have agreed to further enhance cooperation in this regard.

The Chinese delegation said that creating a market environment of fair competition is in line with the general direction of China’s reform and opening-up, and therefore China will actively address relevant US concerns.

http://www.chinadaily.com.cn/a/201902/02/WS5c54cbc8a3106c65c34e7da4.html

This is going very well for the US.  My long term view is that when the US opened trade with mainland China in the early ‘80’s under President Reagan, we wanted them to become a good trading partner like Germany and Japan, because international cooperation becomes a much more important consideration when your economy is linked to it.  That theory seems to have generally worked since WW II.  When China was starting from such a backward position, they needed to catch up with the world’s 20th century manufacturing and technology, and the US tolerated some abuse by China while they were in “catch up mode” economically.  Then there comes a point where they have caught up enough and they should be able to stand on their own in competition with us, and it seems that President Trump feels that time is now.  The abuse that we tolerated to build the Chinese economy up to a late 20th century level should not be tolerated after it starts to cause material harm to the US economy.  Then the abuse has to end, and everyone has to play fair.  I think that is what is going on.

Positive announcements with China should help the stock market for a month or two, and then the stock market will have to move forward or back on its own.

Technical Analysis:

The market gained a percent this week, earnings season is going reasonably well.

Technically we achieved a significant milestone, with the market rising above the purple downtrend line from the 3 month correction.  That is significant and shows the correction could be ending.  That does not mean that it is in the clear for an “up up and away” rally from here.  We could still go back down and test the Dec. low at 2350.  I would not trust a one day breach above the downtrend line, but the market has 3 days above, and each is higher, and that is good action.  Now the not-so-good news.  The RSI at the top of the chart is in very high neutral range at 64 and nearly overbought (70 is overbought).  Next week is a big earnings week and with earnings coming in good, the market can push higher.  At this stage, it is no longer a good entry point, unless you are committed to a nimble trade.  I may attempt a nimble trade, but I would limit the size of my bet.  Momentum looks good, shown by MACD at the bottom of the chart.  Price action looks good, moving above the purple downtrend line for multiple days.  The market could be in a position where it is too late to get in, and too early to get out!

2019 02 02

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

I took some profits in stocks that had jumped, and I closed out the XOM Feb 68 Puts that I sold, for a nice little profit.  I enjoy option trading, but I usually only do it when they are almost sure bets, selling a Put option on a severely oversold stock that has started moving back up, and in a quality company like XOM.  I bought a little EEM (emerging markets, the Fed pause should moderate the US dollar and steady interest rates benefit EM, as would a China trade deal).  I also bought a little SPY (see nimble trade comments above).

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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 to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing