Correction Continues

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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 primary bear market, 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:

Existing-home sales ran at a seasonally adjusted annual 5.19 million rate in April, 0.4% lower than March and 4.4% lower than a year ago.  New-home sales were at a 673,000 seasonally adjusted annual rate in April and the trend remains upward.  Minutes from the last Fed meeting were released on Wed. and indicate the Fed remains on hold.  Initial jobless claims dipped by 1,000 to 211,000 in the seven days ended May 18, near a 50 year low.  Orders for durable goods dropped 2.1% in April; if cars and planes are stripped out, orders were flat.

Home sales were mixed despite mortgage rates backing down in recent months and we are in the middle of the spring selling season, that is poor.  The Fed is on hold, employment is high and steady, and durable goods orders are steady.  It’s a stagnant situation, but further escalation of the China trade war could cause degradation of the economy.

Geo-Political:

The latest on the China trade war:

May 20, 2019 – Trade tensions between the U.S. and China stalled a global recovery and are continuing to endanger investment and growth, the secretary general of the OECD warned Monday.

“We were in the middle of a recovery when all these decisions about trade started and not only did it stifle the recovery, it basically has produced the slowdown and the potential for greater damage is still there,” Angel Gurria told CNBC.

“Everybody is betting today… on a deal between China and the U.S. but the problem is that on the face of it the tensions are getting greater and, second, the problem – the spillover effect of this tension – is becoming more and more evident,” he told CNBC’s Joumanna Bercetche at the start of the OECD’s Spring Forum in Paris.

https://www.cnbc.com/2019/05/20/us-china-trade-uncertainty-is-the-enemy-of-growth-oecd-warns-as-it-slashes-forecasts-trade-tensions-between-the-us-and-china-stalled-a-global-recovery-and-are-continuing-to-endanger-investment-and-gro.html

The above suggests stagnation.  CEO’s will be hesitant to commit to any long term major investment until they can clearly see the environment into which such an investment would be made.

The trade war is also impacting Europe as this report shows (it’s two weeks old):

The European Commission cut its growth forecasts for the euro area and slashed its projection for Germany as it warned that escalating trade tensions threaten to make the outlook even worse.

Most of the downgrades were less severe than in the previous report in February, apart from Germany, where the 2019 prediction was slashed to just 0.5 percent from 1.1 percent. Officials in Brussels warned that downside risks to the region’s outlook remain “prominent.”

https://www.bloomberg.com/news/articles/2019-05-07/eu-cuts-german-growth-outlook-sees-pronounced-euro-area-risks

Technical Analysis:

The stock market was down a bit this week and the 5-week losing streak is the longest since 2011.

Technically the chart shows we remain in correction mode.  Last week’s rally attempt failed.  At the top of the chart, RSI has weakened to 40, a low neutral level.  Momentum shown by MACD is weak and falling, not a good sign for the short term.  The price action is down, also a negative.  With Trump making threats to escalate the trade war again by placing tariffs on an additional $300 billion of Chinese imports, after he raised the tariff on the first $200 billion from 10% to 25%, and a new round of talks not scheduled, things look poor on the trade front.

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

What did I do this week?  I went to visit family and I did very little trading.  I remain cautious on the market and I hold lots of cash.  I had bought some TGT a few weeks ago, they reported good earnings and the stock popped up, so I sold it and took that profit.  My thinking is short term in this downtrend and I am only buying stocks that have sold off significantly.  If they pop significantly I will probably sell them, since even good stocks can get pulled down by a bad market.  I had sold a May 70 XOM put that expired without being exercised, so I kept that option premium, and I sold the June 70 XOM put.  I would not mind picking up some XOM at 70, and if not then I get to keep the option premium.  If you don’t have the money to buy the stock shares and the price drops below the strike price on your put option, you will have to “buy to close” an offsetting number of options, at a loss to you.

I keep my eye on the Oct. / May potential double top.  I think about the P/E ratio on the S&P that I post each month on the Long Term update (2 weeks ago, down below), which is moderately overvalued.

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

Flat week

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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 primary bear market, 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 this week so if you follow those, just scroll down after this one.

Economy:

Retail sales dropped 0.2% last month for the second drop in three months, a caution sign on the consumer.  The U of Michigan’s consumer sentiment index in May climbed to a reading of 102.4, a 15-year high, out of character with the drop in retail sales.  The index of leading economic indicators for April reflected a 0.2% gain over March, following a 0.3% increase that month, and 0.2% rise in February, so there is little chance of a recession in the next six months.

The economy is chugging along, not too hot and not too cold, especially if you are lucky enough to not be in a sector that China is targeting or retaliation.

Geo-Political:

Status of the US / China trade negotiation:

May 17, 2019 – Negotiations between the U.S. and China appear to have stalled as both sides dig in after disagreements earlier this month.

Scheduling for the next round of negotiations is “in flux” because it is unclear what the two sides would negotiate, two sources briefed on the status of the talks said. China has not signaled it is willing to revisit past promises on which it reneged earlier this month, despite showing up for talks in Washington last week.

Both sides have dug in on their positions this week. China propped up its currency and cut U.S. pork orders, while state media took on an increasingly nationalistic message. The Trump administration, meanwhile, put Chinese telecommunications company Huawei and its affiliates on a business blacklist and banned it from the supply chain, actions it had shelved earlier in the trade talks to smooth relations.

China has invited the U.S. delegation to Beijing, and earlier this week, Treasury Secretary Steven Mnuchin appeared open to accepting the offer. But sources say scheduling discussions have not taken place since the Trump administration ratcheted up its scrutiny of Chinese telecom companies. The move was seen as a shot across the bow.

President Donald Trump on Friday again said the world’s two largest economies came close to a trade agreement before China backtracked.

“We actually had a deal and they broke it, OK?” the president told the National Association of Realtors.

A spokesperson for China’s Foreign Ministry said that China prefers to resolve disputes through dialogue. The countries’ two presidents have been in touch, the spokesman said, but the U.S. overall has been “insincere” in its position.

“Words must be matched with deeds,” spokesperson Lu Kang said at a daily briefing.

Reacting to U.S actions on Huawei, China’s Commerce Ministry said in a statement, “We firmly oppose the act of any country to impose unilateral sanctions on Chinese entities based on its domestic laws, and to abuse export control measures while making ‘national security’ a catch-all phrase. We urge the US to stop its wrong practices.”

https://www.cnbc.com/2019/05/17/us-china-trade-talks-have-stalled-sources.html

What is really going on?  Who knows, not me.  Usually what the sides are saying publicly is for show and has little bearing on what is REALLY going on.

It is possible that the Trump administration views China as a strategic threat and they aim to throttle their progress economically.  In that case, tariffs and “no deal” would hurt China the most, economic warfare.  In shooting wars, people die.  In economic wars, companies earn less per share, or they may go bankrupt.  When we attack China economically, there will be casualties on both sides, US and China.  Who would you expect China to retaliate against when the US levies sanctions?  The farmers of course, since they account for the largest exports from the US to China.  Could the farmers be considered “collateral damage” in the trade wars, to try to stop the Chinese from stealing valuable intellectual property from our high tech sector?  That’s possible; I mentioned this scenario last year.  We still don’t have a deal, and one possible reason is that we don’t really want a deal from the Chinese because we intend to stifle their economy, and we realize there will be damage done to ours, but we think strategically it will help the US in the long run.  Nixon had Kissinger participated in the Paris Peace Talks with the N. Vietnamese for years before signing a deal.  The US presented one deal only, which we knew the N. Vietnamese would not accept.  Why?  We did not want to make peace, but the pressure was rising in the US and we had to make it LOOK like we were doing something to achieve a peaceful settlement.  It was only for show.  The peace was done after we had conducted a massive bombing campaign against the North that failed to break them in time, before the pressure from the public became too strong to resist.  Is that what is going on currently with China?  I don’t know, but it is one possibility.

There are other ways to proceed beside a trade war.  We could have assembled a broad coalition of our allies and all agreed to move our manufacturing elsewhere, without tariffs.  This administration has riled so many of our traditional allies that it does not appear likely that we could have lined up enough support.  Germany would not be likely to support a US initiative while the US is threatening tariffs on imported autos from there.

The other factor is the election in 18 months.  For Trump to have a chance to win, I think he must have a deal with China, or a damn good explanation why not.  Sectors of the US economy are suffering, and if this continues without the US getting something very valuable in return, voters will be angry at paying a price without a commensurate gain.  China is suffering, but Xi does not have to stand for election.  Most observers think we will get a deal, but they don’t know how many concessions we will extract from the Chinese.  I think we will get a deal, but I am still open to another possibility.  There are 1.3 billion consumers in China that US businesses want to sell their products to.  The CEO’s want a deal, they just don’t want to be forced to have a Chinese joint venture to do business in China.

Technical Analysis:

After some gyrations, the market ended nearly flat for the week.

Technically the chart is in a neutral mode.  RSI at the top sank briefly to oversold before rebounding to end the week in neutral at 47.  Momentum shown by MACD at the bottom of the chart is moving sideways.  The price action is mildly positive, rebounding from the recent 5% correction.

Earnings season is almost over, the Fed is on hold, and the trade talks are stalled.  The economies in Europe and China are sluggish.  The US economy is in good shape currently, but earnings on the S&P are uninspiring.  It’s hard to make a strong bullish case.

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

What am I doing?  I still hold a lot of cash.  I’ve had some lowball buys hit.  I mentioned last week that I bought some ZM on a pullback at 75; I sold it this week at 86 and put the buy order back in at 74.  ZM is a recent IPO and has not reported earnings so I don’t consider it a long term hold yet.  I had sold a BA May 340 Put, and it expired worthless Friday, and the same with an XOM 70 Put.  I picked up very small starter positions in SPY, not expecting another correction as harsh as last fall.  I have a low ball buy out for AMGN, PE of 13 and dividend of 3.25%, currently oversold on the chart.

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 – May 2019

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 – First quarter GDP first estimate of +3.2% was released on 3/28.  The inflation number used for Q1 was light compared to Q4, and that accounts for much of the GDP increase quarter over quarter.

Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit to 2.6% in 2017 and 2.9% in 2018.  This GDP number supports the assertion that the bull market continues.  

Year	Quarter	GDP %
2019	Q1	3.2
2018	Year	2.9
2018	Q4	2.2
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 2.0 – 2.5% in March as expected.  Commentary from the Fed has been dovish and the markets have liked that, helping fuel the stock market rally so far this year.

The Fed has moderated their stance substantially since the last rate hike in December, indicating they will pause the rate hikes and watch the data for a while.  For now, rates still support the long term bull market. 

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
May 15, 2019	2.4	2.2	2.4	2.8
Apr 17, 2019	2.4	2.4	2.6	3.0
Mar 20, 2019	2.4	2.4	2.6	3.0
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

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 21.4, down from 21.8 last month.  I used 4 quarters of earnings with the most recent being Q1 2019 (90% reporting).

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

This indicator is supportive of the bull market since the valuation is not extreme.

S&P earnings – For Q1 2019, the blended earnings decline for the S&P 500 is -0.5% which marks the first year-over-year decline in earnings since Q2 2016.  Earnings had been projected to fall -4% y-o-y as of March, so we got a modest positive earnings surprise.  Earnings estimates for Q2 (-1.7%)and Q3 (+.6%) are also poor.  The most often cited factors in the earnings decline are the strong US dollar and higher wages.  The low unemployment rate is leading to many employees being enticed to leave an employer for higher wages, and employers responding by raising wages to retain their staff.

This indicator is neutral to 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 10.2 years old, which is a long bull market by historical standards.  In and of itself, this is meaningless.  It does provide some perspective that one should keep in mind.

Geo-Political:

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 ratcheted up pressure on Iran, sending a carrier group to the region (May 2019).

Robert Mueller has issued his report and no serious indictments came out after Roger Stone.  The report was made public on 4/18/2019.  This will be kept alive through the 2020 election in my opinion.  If the House decides to impeach, it will put a drag on the stock market.

Trade wars are in effect with China and the EU.  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 to China.  Growth is slowing in both Europe and China.  This is already a small negative for the economy.

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:

May has been a corrective month, primarily on disappointment over the breakdown in China / US trade talks.  S&P earnings are weak, stalled versus last year’s earnings.

Technically, the chart looks rather suspect.  RSI at the top of the chart has come down marginally to 60, high neutral.  Momentum measured by MACD at the bottom of the chart is still trending down on the long term basis.  The price action is declining a bit, but nothing serious, and the price remains solidly in the channel it has been in for years and that is good.

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 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.

 

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 $22 Trillion (early 2019), 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

Trade Correction

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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 primary bear market, 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. the 15th.

Economy:

Initial jobless claims fell by 2,000 from a seasonally adjusted 230,000 in the prior week, still on the low end of the historic range.  The consumer price index rose 0.3% in April, the core CPI was only up .1%, and the 12-month rise in inflation was 2%.  It was a light week for statistics, but all of the data was tame.

Geo-Political:

The big news of the week was Trump scolding the Chinese for pulling back on trade commitments and raising the tariff on $200 billion of goods coming in to the US from 10% to 25%.  Trump says that China is paying the tariff, but US business says they pay the tax in the US and pass on what they can to US consumers in higher prices.  Farmers in the Midwest are facing a second summer of weak sales to China, and they are concerned that a market they have worked to develop for 20 years may permanently find a new source in Brazil and not return to purchasing US products.  The stock market did not like it and ended down for the week, but it was a rare down week in 2019 so far.

UBER went public with its IPO on Friday.  The advertised price was $45 per share, but it ended the day down at $41.57  per share.  That’s uninspiring, like the LYFT IPO before it.  What’s going on here?

Over the last 20 years with tax cuts from both Bush and Trump, the top 1% and particularly the top .1%, have gotten much richer much faster than the rest of us, while the middle class has shrunk a little as CEO’s offshored much of our manufacturing to China.  The ultra-wealthy have pooled their money into venture capital (VC) pools and they are sought out by entrepreneurs, both for their funding and management help.  The VC’s can pick and choose from the best startup ideas, get in early, and ride the venture to its IPO when they get their big payback.  What is different today is that 20 years ago, companies needed to IPO soon to get the funding they needed from the public market.  UBER is a ten year old company!  UBER did not need to IPO for funding as it had all the backing it needed from the VC’s.  The VC’s decided, why IPO these startups early and watch the public investors ride the growth phase of the company to big gains?  Let’s keep the company private longer, let us capture the phenomenal rise in value from the rapid growth, and when the growth slows down we’ll IPO the company and get the liquidity to cash out our positions.  The company will be growing much more slowly, the public won’t be rewarded so richly like they were from the Amazon IPO, and us VC’s will keep most of the capital gain for ourselves.  It’s the new model.  There is nothing wrong with it, I just always try to understand how the game is being played.

 And even if Uber were a decent business, which it is not…

Most of the upside is long gone. Early private investors have claimed it all.

For example, former cyclist Lance Armstrong is an early investor in Uber. He invested $100,000 around 2009 when the company was valued at less than $4 million.

Since then Uber has surged 25,000x in value! If Armstrong held onto his whole $100,000 stake, it’d be worth roughly $2.5 billion today.

As I said, the allure of buying a company when it goes public is “getting in on the ground floor.” You buy when a promising company is small and 20x gains (or better) are on the table.

But Uber is already HUGE. As I mentioned, it’s worth $100 billion. It’s already among America’s 100 largest companies.

Uber’s IPO is no ground-floor opportunity. Uber is a giant, overvalued, money-losing enterprise that early investors have already milked dry.

https://www.forbes.com/sites/stephenmcbride1/2019/05/10/investing-in-uber-is-the-dumbest-thing-you-can-do-with-your-money-in-2019/#1e7ac065648a

 

Technical Analysis:

It was a corrective week for the S&P, down 3%.

Technically the chart looks poor, but this correction has been necessary and expected.  I have said the market looked tired as it has labored for a few weeks without much progress.  RSI has fallen to 47 at the top of the chart, which is neutral territory.  Momentum shown by MACD at the bottom of the chart is negative and falling.  Price action is clearly negative.  I added an aqua blue horizontal line over the peak back in October.  It may turn out to be nothing, but we could be looking at a potential “double top” in the market with the peak we just had this month.  Nobody knows yet, but it bears watching.  Double tops are bad and spell a correction.  The longer apart in time that the double top occurs, potentially the larger the correction.  These are seven months apart, and that could mean a big correction lasting a few months.  Or, it could mean nothing if we go on and set more new highs.  We have to wait and see, but I am cautious and I hold plenty cash.  At least you are paid something to wait these days, 2% in the money market.

The poor earnings season is coming to a close.  The trade deal has been pushed farther out.  I see analysis showing that the good 3.2% GDP print for Q1 was helped by an unusually low inflation number used in the calculation, which when corrected could make Q2 look bad, and that could spook the market, but that won’t happen until late July when Q2 GDP gets announced.

Peter (Schiff) said he thinks we just delayed the day of reckoning by a quarter.

“I think this time it’s going to be the second quarter that’s going to be a big disaster. I mean, we may even get a negative number in Q2.”

In the first place, we won’t likely get positive contributions from lower trade deficits and inventories. But Peter thinks the biggest problem is going to be the inflation number. According to the government, the annualized rate of inflation was 1.7% in Q4. That was the number they used to deflate the nominal GDP and arrive at the reported number. In Q1, the annualized rate of inflation was just 0.9. That means the nominal GDP number was deflated significantly less in Q1 than in Q4 2018, giving us a higher reported GDP. Had the deflator been the same in Q1 as it was in Q4, GDP would have come in at 2.4%, which would have been pretty close to the consensus.

https://seekingalpha.com/article/4257918-peter-schiff-going-gdp

Schiff is a perma bear since 2005, and I take him with a grain of salt, but he called the 2008 crash and made good money off his book talking about it before it happened.  He’s been wrong much of the last decade, but I like to listen to folks who are not in the consensus and who have knowledge, and Mr. Schiff has some credibility in my book.  The 3.2% GDP number for Q1 appeared to be too high to me when it came out, but I didn’t know what was the matter with it.  This is a plausible explanation and adds to my sense of caution as we move into the summer.

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

So, what am I doing?  I hold a lot of cash, and I am SLOWLY building positions in “fallen angel” stocks, quality stocks that are being taken down by the correction.  It only costs me $5 to make an online stock trade at Fidelity.  I don’t know where the bottom is during corrections so rather than buying all of a stock that I want (known as a “full position”) in one purchase, I will break it up into 3 or 4 purchases.  If I buy 1/3 and the stock goes up to overbought, I may sell that third.  I didn’t make as much as if I had gone all in, but I was not exposed to large losses if the stock had continued down during the correction.  If the stock goes down significantly and I think it is a quality company I would then add another third to my position and I own a quality company at a lower cost.

I started a position in ZM at $75, a recent IPO that is already making a profit.  I sold an XOM June 70 put, so I will either collect the option premium, or own some XOM shares at 70 next month.  I sold my AMZN into strength a few weeks ago above 1950, now I have my eye on it at 1890 but I am not ready to pull the trigger until I think this correction is over.  It is a good time to be working on your buy list.  I have sold some well out of the money covered calls on positions I own.  They are cheap, I don’t make much, but if you add them all up over a month, it is a decent activity when the market is going down and you want to keep a stock.  I always put the strike price on a covered call at a level where I would be happy to sell the stock.  It limits the option premium, but you generally stand to make a lot more on the stock it it sells.  I have some low ball buy orders out there in case the market takes a real tumble, and I don’t expect them to hit, but occasionally they do.  It does not cost me anything to have the order out there.  You can’t catch a fish if your line is not in the water!

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

Fed Remains on Hold

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 primary bear market, 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 Institute for Supply Management (ISM) said its manufacturing index slipped to 52.8% last month from 55.3% in March.  The ISM nonmanufacturing, or services, index slowed to a reading of 55.5 in April from 56.1 in March, the slowest reading since Aug. 2017.  The Fed announced on Wed. that they left the Fed Funds rate unchanged and would remain “patient”, so no rate hike on the horizon.  The initial jobless claims at the end of April stood at a three-month high of 230,000 for the second week in a row, but this is on the long term low end of the scale.  Factory orders jumped in March after two straight declines rising a seasonally adjusted 1.9% after a revised 0.3% drop in February.  The employment report showed the U.S. created 263,000 new jobs in April, while the unemployment rate slipped to 3.6% from 3.8% in March, but nearly a half-million workers dropping out of the labor force and that skewed the unemployment rate.

On balance, it was a good week.  Hiring is strong and it is nice to see a rebound in factory orders as they eventually become sales.  The ISM manufacturing and non-manufacturing reports are coming down, showing growth, but at a slower pace of growth than last year.  After the US shipped much of its manufacturing to China last decade, the non-manufacturing sector is the larger one now.

Geo-Political:

I recently have written several times about the falloff in “earnings” for Q1, and concerns about Q2 and Q3 as well.  That was part of the cause of the fall selloff which was also caused by hawkish Fed comments (since reversed), the govt. shutdown, and the China trade war.

Analysts got busy and slashed earnings estimates for Q1 from +7% to -2%.  Everyone is giddy now because 76% of companies who have reported so far have beaten (lowered) estimates.  Big deal, I am not impressed.

Earnings so far in Q1 are running -.8% relative to last year, close to the latest analyst estimate.  We have this from Factset:

 The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the first quarter is -0.8% today, which is smaller than the earnings decline of -2.3% last week. Positive earnings surprises reported by companies in multiple sectors (led by the Health Care sector) were responsible for the decrease in the overall earnings decline during the week. If -0.8% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decline in earnings since Q2 2016 (-3.2%). Six of the 11 sectors are reporting year-over-year growth in earnings, led by the Health Care and Utilities sectors. Five sectors are reporting a year-over-year decline in earnings, led by the Energy, Information Technology, and Communication Services sectors.

The blended revenue growth rate for Q1 2019 is 5.2% today, which is slightly above the revenue growth rate of 5.1% last week. Positive revenue surprises reported by companies in multiple sectors were responsible for the slight increase in the overall revenue growth rate during the week. If 5.2% is the final growth rate for the quarter, it will mark the lowest revenue growth rate for the index since Q2 2017 (5.3%). Nine of the 11 sectors are reporting year-over-year growth in revenues, led by the Health Care and Communication Services sectors. Two sectors are reporting a year-over-year decline in revenues, led by the Information Technology sector.

Looking at future quarters, analysts expect a decline in earnings in the second quarter, low single-digit earnings growth in the third quarter, and high single-digit earnings growth in the fourth quarter.

The forward 12-month P/E ratio is 16.8, which is above the five-year average and above the 10-year average.

https://insight.factset.com/earnings-season-update-may-3-2019

That is concerning.  The stock market runs on PROFITS, not whether 75% of stocks beat lowered estimates.  But the talking heads on TV mostly talk about “earnings beat” and the retail investors (you and me) are happy (well, not me).  Factset analysts are projecting another decline in earnings in Q2, and they got Q1 about right.  The forward 12-month P/E is slightly elevated relative to history and I think that represents an intermediate term risk with another earnings decline on the slate for Q2.

Technical Analysis:

The market was flat for the week.

Technically not much changed from last week.  RSI at the top of the chart is still near overbought at 68, and momentum shown by MACD at the bottom of the chart is moving sideways to slightly down in uninspiring mode.  The price action appears stalled for the time being, having just set new all-time highs, but not following through.  It looks like a market that is tired, and with 75% of companies already reported, most of earnings season is over.  There are rumors that the China trade deal will be announced this month, possibly they are holding some good news until earnings season ends to help hold the market up.  There are also rumors that the US will not get as much from the Chinese as we hoped, as the Chinese agreed to some measures, only if they were reciprocal and the measure applied equally to the US.  Then the US backed off of some demands.  Then there is the issue of we get a good looking agreement, but the Chinese don’t enforce it on their side.  There is a long way to go to see how this turns out.

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

What did I do last week?  I bought some fallen angels, GOOG and INTC after their earnings misses and stock pullback.  AMZN had a good earnings report and I sold at its recent high.  If the market corrects and AMZN comes down, I would buy it back.  I have a position in CGC (pot stock in Canada) that I bought in 3 chunks as the price went lower the last couple of months.  I sold a May 50 call and the stock closed over 49 today, so it will probably be called unless the market corrects, and I am OK with that as it will be near a 52 week high.  I would buy it back on a pullback.

I remain cautious, with stocks fully valued to slightly overvalued, in a weak earnings environment.

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