Rescue Rally

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:

New home sales in the U.S. dipped 4.4% on a monthly basis in February to a seasonally-adjusted annual rate of 765,000, from a strong January report.    Orders for durable goods jumped 1.2% in February.  The final consumer sentiment index fell to 89.1 in March from a mid-month 95.9 and 101.0 in the prior month, according to the University of Michigan (this should continue down).

Initial claims for unemployment last week rocketed to a record 3.28 million as large parts of the U.S. economy shut down to cope with the coronavirus pandemic and the oil war with Saudi Arabia.  I normally report the 4-week average, which I like when times are normal, but I think this number is more informative given the situation.  We should all be stunned.  The previous one week record was 700,000, for this is four times higher than the previous record.  The obvious thing is this time it’s different, since this has a biological cause rather than an economic source.

Geo-Political:

Congress passed a rescue bill that will make bridge loans available to businesses that have suffered a  temporary cash cutoff, like airlines, cruise lines, hotels and oil companies.  Small businesses can get loans through the Small Business Administration.  Individuals paying income tax will get a one-time cash payment to pay rent and groceries and unemployment benefits are raised temporarily.  The bill is valued at $2 trillion that the government does not have, on top of the $1 trillion deficit we were regularly going to run.  The regular annual deficit will be much higher this year because income tax receipts will be lower due to the massive layoffs.  So, that $23 trillion debt we had last year will jump to $26 trillion by the end of this year.  Ahhh, who cares!  Nobody cares about fiscal responsibility anymore.  Just spend, spend, spend and print, print, print money.

This is not a traditional bear market.  Most bear markets occur as a result of the business cycle.  From a previous bear market low, green shoots occur, businesses that can start to satisfy needs that they see.  One person sees a success, then they try to start a business.  Existing businesses expand to meet new demands.  Eventually we get a sound economy again, with a good balance between production and consumption, it’s a bull market.  Then over optimism occurs and everyone thinks they can start a business and succeed.   Banks lend to everyone and the economy gets over extended based on excessive optimism.  The bull market is topping out.  Then there is too much production to satisfy the demand out there.  Businesses can’t grow because there are too many competitors.  Businesses cut prices to try to grab market share.  Eventually price competition for survival gets so low that somebody has to go bankrupt.  People get laid off, they stop eating out, don’t take vacation, and they cancel cable TV.  Then other businesses start to hurt.  We go into a down spiral, and we are in a bear market recession, with the economy contracting and the stock market falling.  That’s the business cycle.

What we have now is not a normal business cycle recession, it is a biological event and a government forced recession.  I don’t recall another one like it.  You could go back to the Spanish Flu of 1918, but I don’t know much about it other than it was very bad.  But I suspect that some rules from bear markets will apply, but all rules from bear markets may not apply, and in particular the duration of this one could be shorter.  The question will be now that we are stopping the economy, how easy or hard will it be to restart it?  Will people feel safe to fly again?  Eventually.

Technical Analysis:

The stock market ended the week up 11%, with the biggest three-day percentage rise since 1931.  The market did rise 20% from the recent low and some called it a new bull market.  Balderdash!  10% and 20% rise or falls do not constitute bull or bear markets, at least not traditionally.  This is simplistic terminology invented at CNBC for their all-day talking heads to squawk about the market.  They have no meaning.  A bear market is a long term event, at least several months, accompanied by disruption in the general economy.

Technically the market picture looks exactly like you would expect in a bear market, a severe drop followed by a bear market rally.  Many times these rallies are “short covering rallies”.  Some traders will sell shares short which is good if the stock is going down.  If the market trend turns up enough, the trade goes against the short seller and he may have to buy the shares at a higher price than he has sold them for, generating a loss for the short seller.  Depending on how long and how high the rally goes, the short seller’s loss grows.  At some point the pain becomes too great and the short seller wants to cap his loss by buying the shares in the open market, covering his short position.  When a great many short sellers all have to cover at the same time, there is great buying that must occur in a brief period of time and it forces the price of stocks up, hence a “short covering rally”.  This rally was started by optimism that the congressional rescue bill will at least prevent widespread bankruptcy by businesses and individuals.

Back to the technical, market conditions improved this week.  RSI at the top of the chart was rising to neutral at 43.  Momentum shown by MACD at the bottom of the chart halted its fall and tried to turn up, a short term positive.  Price action had a good week.

There is an old Wall Street saying, “buy the rumor, sell the news”.  There is generally a lot of optimism in the run-up to a known positive event, like the passage of the bailout bill just signed.  After it is signed, people decide it will not restore the prior bull market, the optimism fades when they see that reality has not changed that much.  Yes, the bill will help the terrible situation we are in, but the situation is still terrible.  Then bear market rallies fade.

I think we just had the buy the rumor rally and the question is how much further does it have to go up?  I don’t know, but if this a real bear market and I think it is, then the bear market rally will fade.  With the trailing 12-month P/E on the S&P 500 at 19, which is the long term average, valuation is too high to call the end of the bear market.  I’ve said it before, I think this is one of the most important metrics on the stock market, the trailing 12-month GAAP P/E on the S&P 500.  It’s the best measure of overall valuation of the stock market.

Look forward and what do you see?  The quarter ends Tuesday and earnings reports from the big banks will start on Tuesday the 14^th.  Some companies will report as early as 4/2.  I expect poor numbers as the quarter was good for Jan. and Feb., then the wheels fell off in March.  The stock market is forward looking, so what happened in Q1 will be interesting, but folks will be looking for the forward guidance as to how bad Q2 will be.  Much of that has supposedly been discounted, but that also could have been the market just taking out the overvaluation, and when the bad earnings come in, they will take it down to account for the new bad news.  Many companies have “pulled guidance” already, so what guidance they had provided for the year, they indicate that will not be possible and they actually have no idea what their business will look like.  Wall St. hates uncertainty, and we are really uncertain.

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

What am I doing?  I am retired and I need to generate a steady income.  I like capital gains also.  Bonds and CD’s don’t yield anything.  I have been a swing trader, but it requires a lot of ongoing effort.  I have used SPY as a primary vehicle to trade, but a large part of it is trashed now, so I think I will use more sector funds.  The market presents a good buying opportunity and it will for several more months before a new bull market begins.  I am rethinking my strategy and portfolio structure in light of the crash, the opportunities presented, and the needs of my age.  What I come up with may not be appropriate for you.  I have a standard brokerage account (taxable) and IRA account (tax deferred).

I will split the money to some quality core positions that I intend to hold long term, in my taxable account so that I don’t generate capital gains in there very often and if I do they will be long term capital gains and taxed at a lower rate.  As I have said before, think JPM, INTC, AMGN, C, BAC, TSM, MSFT, large cap leaders with decent dividends.  I will mix in some growth on big pullbacks like GOOG and AMZN even though they don’t pay dividends.  Part of the key is getting in at a good price, and now looks like a good time, although I think we will see lower prices ahead.  I have bought some already and will buy more on dips.

Then I will swing trade the IRA account where I don’t have to report trades to the IRS.  I may use the same stocks as above along with others, just trade them more actively.

I was a buyer during the selling panic because I had raised cash in December (go back and read the posts from the first 3 weeks of Dec.) and I will sell the news since the bill has been signed.  I sold some winners on Friday, but I kept core positions in JPM and others that I got into at very good prices (down 30% from their peak).  I will invest with an eye to implementing my new strategy and restructuring my portfolio.  After this bear market rally, I expect we will go down and test the lows as earnings reports come in gloomy.

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

Bear Market

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 Wed. and follows just below this post.  It’s one you should not miss.

Economy:

Retail sales slumped 0.5% in February, the biggest drop in a year, suggesting that worries over the coronavirus began to take a bite out of the economy.  The 4-week moving average for initial claims for unemployment was 232,250, an increase of 16,500 from the previous week which is very significant in a 4-week average.  The leading economic index rose a slight 0.1% in February, but that was before the coronavirus began to bring U.S. growth to a standstill.  Existing-home sales occurred at a seasonally-adjusted annual pace of 5.77 million, the strongest sales figure for the month of February since 2007.

When things are moving slowly, history can provide good insight into what is happening.  The world has changed before our eyes, in just about a month, and history is not nearly as important as the future, whatever our interpretation of the future happens to be.  That’s what I think right now.  You can see the slowdown in retail sales and the rise in unemployment, and these are going to get a lot worse.

Geo-Political:

The stock market is all about the changes we see happening in real time.  It’s a disaster out there.  Millions of people are essentially quarantined at home by their governors.  All large gatherings are cancelled or postponed.  Many businesses are shut down, like bars, restaurants, gyms.

The oil fight between Saudi Arabia, Russia and the US has not been settled.

The federal government is beginning to roll out enhanced unemployment benefits, some direct cash payments, and is working on support for industries that are dead during the corona virus outbreak.

There are going to be a few winners, Amazon, Walmart, Costco, traditional takeout and delivery restaurants like Papa Johns and KFC, some drug companies, 3M which makes the N95 masks, Zoom Video that facilitates working remotely by hosting meetings, and there are certainly many more.  Some have suggested Netflix while folks are bored at home.

But I think we are in the early innings on this one, and in general, I expect lower corporate profits for most companies, and lower stock prices ahead.

Some have asked me why I swing trade rather than just buy and hold.  The answer is that in swing trading I will sell out at overbought levels near the top of the uptrend channel.  In a big drawdown, I avoid the vast majority of the loss.  If you buy and hold and want to sell out only after the primary trend has changed from up to down, you will still incur quite a bit of damage before you sell.  This selloff has wiped out the great gains of 2019 in less than three months, and 2018 ended with a severe selloff that made that year a negative six percent year.

And this brings us to the final important question, can you time the market?  The mutual fund companies will tell you that you can’t time the market, just buy and hold.  That also maximizes their revenue stream via the annual fee they invisibly take out of your mutual fund.  Can I time the market and pick the day when it will turn from bull to bear?  Absolutely not, nobody can.  Can I time it to the month?  Approximately, March started a bear market so it you sell out now you can still protect some capital.  I got out in December, three months early on a swing trading call.  Is that timing the market, absolutely yes it is.  The pros do it all the time, they just don’t tell you how to do it.  Can you time the market effectively if you are not willing to become a student of the market?  No, I don’t think you can.  How often will it make a big difference in your return?  About once a decade, you can make a good call that really helps your return over the long term.  It is up to you, how you spend your time and manage your money.  I write this blog to share my observations, it helps me clarify my own thinking, and I try to bring a little perspective that you won’t find in the standard financial press.

Technical Analysis:

The S&P ended the week down 15%, bad dog!!!

Oil is hitting multi-year lows and it is taking down all the oil and service companies.  Large swaths of the economy are being shut down.  It’s bad, and it is going to get worse.  The corona virus case count is rising each day, and we still have only a small fraction of the testing capability that healthcare professionals say we need.  I’ll let you read about it all over the net.

Technically the market looks terrible and we have entered a bear market.  RSI at the top of the chart fell to near oversold at 31 and it’s declining.  MACD at the bottom of the chart has fallen out of bed and is in freefall.  Price action has fallen way below the bottom of the channel it was in for the last 10 months and has remained below the channel for 3 weeks, indicating a change in the trend from up to down.

Last week I wrote about bear markets being mirror images of bull markets and we can see it in the two new red circles at the top of the chart on the RSI.  In bull markets the RSI can go to overbought (70 and above) and then get more overbought, then back off a little and then go back up.  You seldom see fully oversold levels down at 30 in a bull market and when you do, you usually see RSI stay there only briefly and then move up above the neutral level at 50.  The reverse happens in a bear market.  You will see RSI fall to oversold at 30 or below, then get more oversold.  Rallies off of the oversold level tend to be brief and then you can go right back to oversold.  It’s reversed, and this looks like bear market action.

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

What am I doing?  Not much.  The money market funds have been pushed down to .2% a year, almost nothing.  I put in some very lowball limit buy orders and have bought a few quality dividend payers that I expect to survive the bear market, JPM, AMGN, and INTC.  Amazon looks to be a winner but it doesn’t pay a dividend.  I only buy small positions in these stocks and when they fall in the future, which I expect them to do, I will add a little more.  It’s dollar cost averaging on the way down.  Bond yields are too low for me to go there.  If you had bought into bond funds a year ago, the principal would be up now, but with the Fed at the zero boundary, I don’t expect bonds to go higher in value while the yield is pushed down.  But, I’ve been wrong about bonds for years now; I never expected to see the ten year treasury bond below 1% interest.

At this oversold level I would not go short on stocks.  I would wait for a rally, then wait to see it weaken, and then I may buy some SH, but that does not look like a good bet with the RSI at 31.  Going short after a rally would be investing with the primary trend which is now bearish, then you would sell the short position when the RSI is near oversold down by 30.

The market is due for a rally from this oversold state.  When Trump signs bailout bills and direct payments to individuals and they throw $1 trillion at the problem, I suspect the market will jump up on that news.  It won’t fix the problem and I expect the rally would fade, but it will be interesting to see how high the rally takes the market and what the series of higher lows looks like.  The other thing that could fuel a rally, and possibly end the bear market, would be to find an effective treatment for the corona virus that cuts the mortality rate down significantly.  The FDA will look at Chloroquine which is used to treat malaria and that drug is widely available and inexpensive.  There are stories that it improves some patients, but there has been no formal study.  With that said, I wonder why it would not be given to patients having a very hard time breathing and in danger of dying.  If it was effective even in 10 or 20% of the cases, that would be great news.  A company is looking at extracting antibodies from the blood of people who recovered from COVID19 and using that to treat the sickest patients.

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 – March 2020

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.

Folks, we have just seen a change in the primary trend, from bull market to bear market, in my opinion.   I exited the market in Dec. as a swing trader, my discipline is to sell into overbought overvalued markets and wait for a correction to buy back in, at least in bull markets.  If you don’t want to swing trade, and I understand that because it takes an interest in the market and constant attention, they you become a long term investor.  The question now is do you want to be a very long term investor and never sell out of the market, or do you want to be a plain long term investor, that as I say above, would like to sell out “relatively soon after a bear market begins”?  That is your decision to make.  If you believe we have entered a bear market, and you would like to sell out relatively early in the bear market, that would be now.  From the long term investor’s standpoint, this is as close as I can call it doing monthly updates.

This bear market is rather unique, brought on by a biological event rather than economic or geo-political event.  There was little foresight into this.  With the internet and computer trading, the ability exists today to move huge sums of money very rapidly, so even if you want to get out “relatively soon after a bear market begins”, a whole lot of damage can be done before you get out.  Welcome to modern times.

A lot has changed in this update, so read it slowly and in detail.  I worked on this for six or seven hours, it is one of the hardest updates I have written in 4 years.

Technical:

The market dropped precipitously in the last month because of governments and people reacting to the spread of the corona virus, COVID-19.  I have moved the technical analysis section to the top of the update because it shows more clearly than anything else, what is going on.

Technically, the chart looks terrible on a long term basis.  The long term primary bullish uptrend has been broken, decisively and with duration (a matter of weeks well below the trend line).  Technically, we are in a bear market now.  The RSI at the top of the chart has fallen to low-neutral at 37 and is moving down.  Momentum shown by MACD at the bottom of the chart has just given a sell signal with the faster moving line having crossed over the slower moving line and moving down (see red circle).  The price action is deadly and has fallen below the lower bound of the uptrend channel we have been in for 10 years.

Technically it appears the primary trend of the market has changed and we are now in a bear market, according to the chart.  I extended the chart back in time to the last primary bear market (late 2007 – early 2009) so you can see what a primary bear market looks like.

The market’s technical indicators show that a primary bear market has most likely begun.

Economics:

GDP – The second estimate of 2019 Q4 GDP was unchanged at +2.1%.

The latest estimates I have seen for GDP go like this, Q1 = +1%, Q2 = -2%, Q3 = flat, and Q4 = +2%.  Is that the way it is going to go, well it seems reasonable.  But, if corona virus lasts longer than anticipated in the US, Q3 could go negative also.  Remember, the best translation in this environment for “estimate” is “GUESS”.  Do you believe the “experts” guess?  How good were their recent guesses?

This GDP number for the future no longer supports the bull market.  The stock market is forward looking and it has already spoken that it believes GDP will shrink in Q2.  

Year	Quarter	GDP %
2019	Year	2.3
2019	Q4	2.1
2019	Q3	2.1
2019	Q2	2.0
2019	Q1	3.1
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

 

Fed interest rates –  The Fed did two EMERGENCY cuts to the Fed Funds rate in March, very unusual.  The funds rate is now 0 – .25%, let’s call it .2%

This is in response to the corona virus and the drastic decline in the stock market, down 30% from its peak in three weeks.  Most think it will not do anything to help business and the stock market since the problem is human health related and not originated in the economy.

Fed policy is accommodative but is not considered sufficient to avoid negative GDP in Q2.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Mar 2020	0.2	0.7	1.0	1.6
Feb 2020	1.7	1.5	1.4	2.0
Jan 2020	1.7	1.6	1.8	2.3
Dec. 18, 2019	1.7	1.7	1.9	2.3
Nov. 20, 2019	1.7	1.6	1.7	2.2
Oct. 16, 2019	1.9	1.6	1.8	2.2
Sept 18, 2019	1.9	1.7	1.8	2.2
Aug 21, 2019	2.2	1.5	1.6	2.0
July 17, 2019	2.4	1.9	2.1	2.6
2019 Q2	2.4	2.1	2.3	2.8
2019 Q1	2.4	2.5	2.7	3.0
2018 Q4	2.2	2.8	3.0	3.2
2018 Q3	1.9	2.8	3.0	3.1
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	0.9	1.8	2.2	2.8
2017 Q1	0.7	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 19.4, down from 24.3 last month.  I used 4 quarters of earnings with the most recent being Q4 2019 (98% reported).

This metric is at neutral relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions, since the P/E behaves very abnormally during those times.

Since I started writing this blog nearly 4 years ago, we have not talked about the P/E ratio during bear markets, but bear markets usually end with the valuation much closer to 10.  That is because while earnings fall during bear markets (the denominator of the PE ratio), the stock prices fall even further.  Remember, earnings reports have not come out yet, and I expect them to be bad.

This corona virus crisis has come on very fast and its impact is much broader than people anticipated.  The question is, how long will it last?  If it goes well into summer and looks like it will impact Q3 earnings as well, the market psychology is going to get dark.  Investor psychology is interesting, but most people cannot take month after month after month of their stock market holdings going down.  Eventually there is a capitulation and most people sell.  Then values are so compelling that a new bull market can begin.  In a real bear market, stock prices go down OVER TIME.  It is early to start looking for bargains.  I bought some JP Morgan down 30%, but I expect them to survive, they pay a good dividend, and I need some income.  If you are sure the company will not go bankrupt, that the dividend is safe, you understand the stock price will go lower before it goes back up, and you need some income, you may want to do some stock buying.  But, you have to be verrry verrry careful (in his best Elmer Fud voice)!

This indicator is richly valued and bearish in a bear market.

S&P earnings – Factset states that earnings for Q4 are +1% versus a year ago, the only quarter in 2019 to show an increase in earnings year over year.

From their March 6 update on earnings: “Expectations for earnings growth for Q1 2020 have been falling over the past few months. On September 30, the estimated earnings growth rate for Q1 2020 was 7.1%. By December 31, the estimated earnings growth rate had fallen to 4.4%. Today, the estimated earnings decline is -0.1%.”

This is why I have told my readers for years, whether S&P earnings forecast, or Factset earnings forecast, I usually include “if you believe them”.  I always take them with a grain of salt.  The reason is that they always FAIL to anticipate CHANGE.  They always assume that the stable trend in place will continue forever.  Sometimes they are wrong, and their mistake can get you hurt very badly.  That is why I take a multi-discipline approach to deciding what is going on.

This is also why I used the 12 month TRAILING GAAP P/E for valuation.  It is not an estimate, and NO data has been deleted from it like they do with operating earnings.  All the data is in the GAAP numbers, giving us the most precise factual data available.

Forward estimates are guesses, you must understand that.  When times are stable, those guesses work out pretty well.  When life throws us a curve ball, those estimates can be very far off.  Obviously the guess about what Q1 earnings would be that was made back in Sept. 2019 was pitifully far off, because the world changed.

For Q2 Factset is forecasting earnings growth of +3.3%, but I will crawl out on a small limb and say I don’t think it will be that high.

This indicator is in such flux due to the corona virus that I do not consider it reliable enough to be used as an investment planning indicator at this time.

Age of primary move, bull or bear market – The new bear market is one month old.

Geo-Political:

COVID-19 (March 2020): Corona virus is expanding in the US and we are implementing wide scale social distancing which is ripping a hole in much of US commerce.  Europe is in worse shape than the US, especially Italy.  China seems to be recovering after implementing radical social distancing for a couple of months.

Oil War (March 2020): Corona virus has curtailed activity and therefore demand for oil.  Saudi Arabia and the OPEC nations want to cut production to support the price of oil, and they asked Russia to cut their product a bit to help out.  Russia refused, so the Saudi’s increased production to drive down the price of oil and force Russia to cooperate.  All of this ignores the role of the US in the oil market, and the US is the LARGEST producer of oil in the world since we discovered fracking of our shale fields.  I assume the Saudi’s are sending a message to the US that we need to participate in controlling production also, we just don’t see that message in public.  What is the discussion in private, phone calls between Saudi-Aramco and Exxon/Chevron?  In the mean time, revenue and earnings are falling dramatically at all oil companies in the world including the US, and we can expect to see significant layoffs in oil company and oil service company workers.  Exxon stock is down 50% from Jan. 2020 to March 2020, 3 months.

Middle East: 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).

Trade wars are in effect with China and the EU.

Global geo-politics are downgraded to bearish based on the scope and depth of the corona virus and the oil economic war.

Conclusion:

The stock market has entered a bear market in my opinion.  The market was moderately overvalued on entry to the bear market, so I expect a moderately long bear market to correct the overvaluation.

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(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.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $23 Trillion (late 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.  The thing saving us today is how poorly all the other nations are managing their economies.

Rich Comeau, Rich Investing

S&P Down 8% this 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 will be posted on Wednesday.

Economy:

The consumer price index edged up 0.1% last month, while the increase in the cost of living over the year slipped to 2.3% from 2.5% in January.  The four-week average of initial jobless claims edged up 1,250 to 214,000 (a low number).  The consumer sentiment index fell to 95.9 in March from 101.0, according to the University of Michigan, the weakest reading in five months.

The fall is consumer confidence caused by Corona is large and will be painful, since the consumer drives 70% of the US economy.

Geo-Political:

This past week the market was hit hard when an economic war broke out between Russia and Saudi Arabia.  Demand for oil is falling due to reduced activity in China and fewer airline flights.  OPEC wanted to cut production to support the oil price, but Saudi Arabia asked Russia to pitch in and cut production also (Russia is not in OPEC).  Russia said no, they would not cut, so the Saudi’s said they would not cut either.  Now production is running high and demand low, so the price of oil has fallen.  This impacts US shale oil producers that need at least a moderate price to remain profitable.  Expect to see US production shrink, smaller shale producers come under pressure to be able to service their debt, some of them may default, and that could result is a few bank failures if they have high exposure to shale company loans.  That is why the US energy stocks took a big hit.  You can expect to see layoffs coming in the oil patch, which will have nothing to do with Corona virus.

The Corona virus continues to expand in the US, with 1,700 confirmed cases and 40 deaths.  People are worried and “social distancing” is taking a bite out of the economy.  The major sports leagues have suspended or postponed parts of their seasons.  That will back into hotel, restaurant, bar, and airline businesses.  With all the school closings, Uber activity will fall.  It is going to slow down.

China is trying to re-open its manufacturing with different work area hygiene rules.  It will be good news if this works out.

The Fed did an emergency interest rate cut of .5% last week, and they meet again in the coming week and are expected to cut the rate by another .5% or possibly 1% and take rates all the way to zero again.  Longer dated treasury bonds yields have come down, with the 10 year bond yielding .8% on Friday.  With inflation running about 2%, that is a “real” negative yield for the next 10 years, so don’t buy any 10 year bonds.  People are flocking to bond funds during the stock market downturn and the buy pressure is pushing prices up and the yield down, but that can turn around at any time.  But savers who need income are getting the shaft here.

Technical Analysis:

It was a wild week for the market, but the S&P ended the week down 8.5%.

The market appears to be pricing in a recession.  The fall is precipitous because we started with a moderately overvalued market that went up 29% in 2019 while earnings were flat.  That did not make sense to me; earnings are what should drive the market and earnings growth was absent.  That sent me mostly to cash in December, and while it was a little painful in January and February to watch the market go up while I was on the sideline, in a few months it paid off as my loss has been minimal.  Now I can pick up the pieces at much cheaper prices.  If you have not read my blog weekly, go back and read my updates in the technical section from the first three weeks of December.  In hindsight, I had the right idea.  Fundamentals count, eventually.  Valuation, the P/E ratio on the S&P 500, is an incredibly important fundamental.  Eventually it has always been honored, although at times it has been ignored for years, such as during the dot com bubble of the late 1990’s.

Technically the chart looks terrible.  RSI is in low-neutral at 38, but it went fully oversold three times in the last 3 weeks.  That is not bull market action.  Momentum shown by MACD at the bottom of the chart is down.  The price action is down.

A friend asked me recently about the chart, when stock prices rose above the upper blue line of the trend channel, why didn’t I just redraw the upper blue line.  The answer is that it is fundamental to technical analysis.  Trend channels that are formed by connecting the peaks and connecting the minimums, are important.   Once set, history has shown that stocks tend to bounce around in these channels and when the channels are violated, it is an unusual event.  I did not like the violation to the upside of the blue channel shown by the two black lines, it was unusual and I thought eventually it would be corrected.  Now we have violated the two blue lines to the downside, by both magnitude and duration, which indicates a change in trend.  It is likely that the trend has changed from a bullish uptrend to a bearish downtrend.  The true test of this idea will come on Wed. when I look at and post the Long Term update.  A change in the primary trend is a long term event, not a short term one.

If we are now in a bearish downtrend, then everything you learned about the stock market the last eleven years is now useless.  Bear markets behave the mirror opposite of bull markets.  In bull markets, they can remain overbought for weeks or months at a time.  In bear markets, they can get oversold and remain oversold for weeks or months.  In bull markets you may hold stocks through corrections to the downside as they will eventually be higher.  In bear markets, you should sell interim rallies because over time, the stock prices will eventually go lower.  In bull markets, they may be oversold when the RSI hits 50 (neutral level), where in bear markets the market could be overbought when the RSI rises to 50 from fully oversold at 30.  In bull markets, corrections are moves down from overbought levels.  In bear markets, corrections are moves up from oversold levels.  Everything is reversed.

You will do better investing over time when you are correctly aligned with the primary trend.  In a bull market you can buy and hold over time and going short is dangerous.  In a bear market you want to buy at strongly oversold levels and don’t hold for long periods, sell into upward corrections (buy the dip, sell the rip) because the upward correction does not last long in a bear market.  Everything is reversed.

The key question is, has the primary trend changed from bullish to bearish?  I do not subscribe to the new simplistic rules that a market down 10% is in a correction and down 20% is a bear market.  These are new fangled arbitrary definitions.  In a bear market, there is generally real economic disruption that takes down the stock market and it extends over time.  The average bear market lasts 9 months and the typical range is from 4 months to 18 months.

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

What am I doing?  Not a lot last week, but on Friday I did make small buys in JPM, AMGN, and INTC, large cap companies that have sold off, with low P/E ratio and decent dividends, that are NOT airlines, cruise line, hotel chains, or oil companies.  I would not buy SPY here because it contains favored companies and out of favor companies, it’s all lopsided.  I would rather buy sector funds in good sectors or individual stocks.  JPM is a bank and banks do poorly when the Fed reduces interest rates because their “net interest margin”, the difference between their borrowing cost and lending rate, gets compressed, and the banks are heavily regulated following the financial crisis.  That is true, but I consider the biggest banks to be almost like and electric utility these days, with a slightly better growth option when the economy recovers.

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

Gyration!

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:

The Institute for Supply Management  (ISM)said its manufacturing index dipped to 50.1% last month from 50.9%. Readings over 50% indicate more companies are expanding instead of shrinking.  The index has been above the 50% cutoff point for two months in a row, but before that the index had been negative for six straight months.  The ISM survey of service-oriented companies such as restaurants, hospitals and grocers climbed to 57.3% in February from 55.5%, a very good reading.  U.S. vehicle sales fell by 0.5% m/m in February to 16.8 million (seasonally adjusted annualized rate) units, still good.  The four-week average of initial jobless claims rose by 3,250 to 213,000.  Factory orders slipped 0.5% in January.

The picture is a sluggish economy.  But, that is history, and the market is being moved by anticipation of what lies ahead.

Geo-Political:

The market is being moved by Corona virus, nothing else matters right now.  Things are getting worse, more nations reporting cases, with more cases worldwide and more deaths.  People are starting to change their behavior.  Corporations are cutting back on discretionary travel and pulling out of conferences.  Conferences are being cancelled.  Hotel chains will be hurt, airlines are being hurt, the cruise lines will be hurt, the oil companies are being hurt as people drive less, particularly in China.  Health and life insurance companies will have unexpected large payouts that will cut into profits.  Schools are being closed.  All of this will ripple into the broader economy and slow it down.  Guesses are that it will take .5% off of US GDP in Q1.

Will this be over in a few weeks, a few months, or will it die down in the summer and resurface like seasonal flu in the fall?  Nobody knows, and the market hates uncertainty.

You will be happy that I see no need to drone on and on about the outbreak.  Enough is being said by the cable news networks, so I am sure you know as much as I do about the virus.  Listen to the CDC and try to stay safe!  An ounce of prevention is worth a pound of cure!

Technical Analysis:

After a wild week with 1,000 point single day loses and 1,000 point single day gains, the week ended nearly unchanged from last Friday, up less than 1%.  The market went up on Biden’s victory in the Super Tuesday primaries as most observers felt Sanders no longer has a path to the Democratic nomination.  The Fed stepped up with a .5% rate cut that is not expected to do much in a virus outbreak, but at least they cannot be criticized for being too tight.  After all, saving face is important.  On the negative side, the virus continues to spread and that negated any good news.

We’ve been bouncing around between 2925 and 3125, and whichever is breached next may tell us something about the short term direction.

My gut says this will be longer term than a few weeks, things look poor, and if I were to guess, I’d guess we’ll see some more downside action.

As a retiree, I have another problem.  Interest rates are going down, perhaps to zero again, and there is some talk that rates may go negative, even Trump mentioned that he thinks they should go negative to competitively match our overseas competitors.  That’s IDIOCY!  Japan and the EU have had negative interest rates for years and both economies are teetering on recession and have not been vibrant at all during the period of negative rates.  Negative rates do not work, at least I know of no examples of them producing good economic performance.  They are essentially a tax on lenders, confiscation of the money of lenders by the government.  If I buy a US bond for $1,000 and a year later they return $980 to me, they have taxed me $20 for letting them use my money.  Eventually this would break all the savers who need income and prefer a safer source of income than the stock market.  But, only losing 2% of my money could be a better deal than investing in Exxon, which has a 6% yield right now, but the stock is down at least 25% in the last year.  You always have to be careful in the stock market, especially if we go into a bear market.  Negative interest rates are a radical new policy (the US has not used them before) that has never been shown to work.  God forbid that we subject our economy to such an unproven experiment!  What is the intended result, and why will it happen?  Is it a predictable result?  Could another result, other than the one that is intended, be the actual result (unintended consequences)?  Who will definitely be hurt by negative interest rates?  Do we really want to hurt those people or businesses?  Who would negative interest rates actually help, and how would it help them?  There is a lot that needs to be explained to the American people before that radical policy would be implemented.  The Fed so far has said they do not intend to use negative rates, but they have changed their minds before.

Utility stocks are being driven to unusually high valuations by people searching for yield.  I hold some utility stocks.  If rates ever return to normal, the valuation on those utility stocks will also return to normal, that is, they will go down in value.  Utility stocks are a good place for some of your money, but they must be protected with a trailing stop loss order.  I try to pick up a little at a time during market corrections, when I see that they are down.

Technically, the market is a mess.  RSI at the top of the chart went to oversold last week, recovered a bit this week, but is now headed back down.  That is different behavior than the last year when oversold was the bottom and it quickly recovered.  Let’s see what happens.  Momentum shown by MACD at the bottom of the chart is down.  The price action is negative, but if a base forms here it could improve.  Again, it’s a “let’s see” situation.

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

What am I doing?  Not much.  I sold a Put on JNJ with a strike at 140, so I may pick some up by 3/20.  I mentioned recently that I had some shares of SQ called at 77 and I would like to buy it back lower.  It looks like I will have that opportunity next week with the stock closing at 73 on Friday.  I will put in small buys at 71, 68, and 62 and see what happens, all limit orders, good till cancelled.

Corona virus could be a minor event, a significant event or a catastrophic event.  It has moved past minor to significant.  Will it move past significant to catastrophic?  I don’t know, but it looks like a months-long event.  Does it have the ability to trip the stock market from a bull market to a bear market?  Maybe it does, and you have to ask yourself, are you prepared for that eventuality.  What would you do if the market went down significantly over an extended period of time?  Proper procedure in a primary bear market is to sell out and buy stocks back at lower prices.  Your mutual fund company will tell you that you can’t time the market so just buy and hold for the long term.  It is interesting that that advice also results in the greatest revenue for the mutual fund company as they charge their “fee” invisibly from inside the mutual fund (you never see a bill, do you?).  If you go to their money market account, their fee is lower on that instrument and their revenue goes down.  They have a conflict of interest in advising you.  Can you trust them?  In this case, I don’t, at least I am well aware of the conflict of interest with which they operate.

I try to keep these things short, then I think of other points of view that I think YOU, my readers, should be aware of, then I start writing about that.  I do, because many times I think you will not and maybe cannot hear it spoken of or written about in the normal commercial finance outlets.

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