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.
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.
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%.
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.
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.
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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