At the Lower Bound of an Up Channel

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 the fourth Thursday 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.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update was posted on Thursday and follows this post on the website.

Economy:

Existing home sales for January came in at 4 million units, annualized, a weak reading.  New home sales for January were 670K annualized, which has improved slightly from the trough last fall.  The first revision of Q4 GDP was down slightly at +2.7%, which is a normal type quarter which is a good thing.  The U. of Michigan consumer sentiment index for Feb. was steady at 67.

The PCE inflation data was all up slightly from last month, whether month over month, or year over year.  This came out Friday morning and the market continued its selloff of the last three weeks.  The bond market has started to believe the Fed statements about rates remaining high for longer and bond yields have backed up.  As bond yields back up, in the discounted cash flow models that grind out an expected PE ratio, this will suggest a lower PE is justified.  It is much easier to get inflation down from 9% to 6%, than it is to get from 6% down to 3%.  It is reasonable at this point for inflation to pause or even backup a little, but it justifies the Fed statements about keeping rates high for longer to stomp out inflation.  That puts a drag on stock prices.

The economy looks fair, but inflation does not.

Geo-Political:

The Fed has been consistent about rates staying high for longer to kill inflation.  Neither the bond nor stock markets seemed to believe the Fed following the October low.  The bond traders have come into sync with the Fed and longer term bond yields have risen.  Now the stock market is adjusting to the “high for longer” view for interest rates, and that is putting downward pressure on stocks.

People continue to ask about peace talks in Ukraine.  China just put forth a vague set of proposals, which you can view a a proxy for Russia.  Putin and Ukraine will both talk tough, because that is how you negotiate during a war.  Putin will need to save face in Russia and perhaps a little land in the east will do the trick.  Ukraine will want guarantees of long term peace, perhaps by Nato membership or other military aid from the West.  Ukraine is seeking EU membership now.

Natural gas prices have come back down to normal levels.  A mild winter in Europe helped and US LNG shipped to Europe helped.  Good job USA!  I wonder what the long term implications will be in Europe?  Who can you trust as your energy supplier in order to keep your economy running?

A strange thing is happening with the 12 month trailing GAAP PE that I report on the monthly Long Term updates.  The PE jumped up from 19 to 24 in one month.  We see earnings falling below the year prior level, which makes the denominator smaller in the “price divided by earnings” PE fraction.  If earnings continue to come in below the year prior level, the PE can explode upward in a recession.  In the monthly long term updates in the Valuation section, I say my “TRIMMED 30 year average PE”, and you are looking at the reason I had to trim some data out.  If a recession got bad enough and earnings approach zero (does not usually happen), we know that division by zero tends to infinity.  Data that squirrely would skew the average so bad as to make average meaningless in good times, and usually times are good.

Another way to think about it is that the PE does not mean the same thing in a period where earnings are going down, than it does in normal times when earnings are rising.  Rather than being a measure of valuation, it more likely is a statement on corporate earnings ability, and that we are in unusual times.  That is still a bad thing.  In a recession, you want to buy stocks when they are at their lowest level.  That may happen when earnings are their lowest, and that may cause a spike in the PE ratio.  In this scenario, instead of avoiding high PE stocks as overvalued would be wrong.  Those stocks could just be at the bottom of an earnings trough, and ready to begin recovering and growing again.

Technical Analysis:

For the week ending 2/24/2023, the S&P 500 was down 2.6%.

Technically (see chart below) the market looks negative short term, fair medium term, and poor long term.  RSI at the top of the chart is neutral short term and falling.  Momentum shown by MACD at the bottom of the chart is negative and falling.  The price action is negative near term.

Overall the picture is bearish with the three downward sloping black fan lines.  For the intermediate read, we still have an uptrend shown by the two green lines rising to the right.  The very short term is negative, down three weeks in a row from the late January overbought condition.

The market is resting on support at the 200 day moving average at 3950, and that is also the bottom of the uptrend line since the Oct. low.

If the bear market is still in force, I would expect the market to fall below the uptrend floor.  It does not have to happen this week, it could rally to the middle of the up-channel and break below later.

The leading economic indicators have been negative each month for a year, the bong yield curve has been strongly inverted for a long time and both of those conditions usually precede recessions.  Q4 earnings are coming is about 5% below the prior year’s Q4, and Q1 and Q2 are projected by Factset to below their year prior quarters.  I just don’t see this as the backdrop to start a new bull market.  I could be wrong, but that’s my opinion. 

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

What am I doing?  I sold a few stocks into strength a few weeks ago, I mentioned I sold 1/3 of my KMI.  I am slowly buying it back at lower prices because I like the dividend.  I add to my JEPI on occasion on pullbacks.  I had a profit on ABBV and on the market pullback ABBV held up, so I sold it in case it decides to go down on this pullback.  I would buy it back if it goes down.  I continue to sell small PUT orders and it the stock goes lower I may sell a lower strike PUT.  I bought some DVN a couple of weeks ago and they reported a poor quarter and the stock got hammered.  It happens.  Oil prices usually rise for the summer driving season, so I am holding for a while.  I pick at the big banks, bought some BAC and sold PUTs on BAC at a strike of 30.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

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.

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.  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.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Long Term – February 2023

Once a month, on the fourth Thursday 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 – The second estimate of 2022 Q4 GDP is +2.7%, a down slightly from 2.9%. 

The economy continues to expand.  People look at this and the low unemployment rate and they say “what recession?  We don’t see one on the horizon.”

This is bullish for the stock market.

Year	Quarter	GDP %
2022	Q4	2.7%
2022	Q3	3.2%
2022	Q2	-0.6%
2022	Q1	-1.6%
2021	Q4	6.9%
2021	Q3	2.0%
2021	Q2	6.7%
2021	Q1	6.4%
2020 – Covid	Year	0.1
2019	Year	2.3
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – The Fed raised the Fed Funds rate by .25% on Feb. 2, as expected.  That brought the Fed Funds rate to 4.75%, up from zero a year ago. 

Inflation has slowed a bit and interest rate increases impact the economy estimated at a six month lag.    The next Fed meeting is in mid-March and the speculation is the Fed will hike the Fed Funds rate again, probably by .25%. 

You can see that interest rates, look at the yield in the 10 year Treasury bond, were declining last fall.  Bond traders thought the interest rate hikes would slow the economy and cause the Fed to cut interest rates to keep it moving.  Employment has remained very strong and the bond traders now think the Fed will keep raising interest rates to dampen wage inflation, one of the stickier components of overall inflation.  In the February numbers you can see that bond yields have backed up to higher levels, and this is a short term headwind for stocks.

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  This will force private companies and individuals to buy the bonds, and then those dollars are not available to buy TV’s, boats, or other big ticket items.  Money is going out of circulation shown by a outright decline in the M2 money supply, which does not happen often.

Fed policy is restrictive for the economy, and bearish for the stock market. 

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Feb 2023	4.7	4.2	3.9	3.9
Jan 2023	4.5	3.6	3.5	3.6
Dec 2022	4.5	3.9	3.8	3.8
Nov 2022	4.0	3.9	3.7	3.8
Oct 2022	3.2	4.3	4.1	4.3
Sep 2022	3.2	4.2	4.0	3.8
Aug 2022	2.5	3.0	2.8	3.0
Jul 2022	1.7	3.0	3.0	3.1
2022 Q2	0.8	2.9	2.9	3.0
2022 Q1	0.2	2.0	2.1	2.3
2021 Year	0.2	0.8	1.4	2.0
2020 Year	0.4	0.6	0.9	1.6 – Covid
2019 Year	2.2	1.9	2.2	2.6
2018 Year	1.8	2.8	2.9	3.1 – Tax Cut
2017 Year	1.0	1.9	2.3	2.9

Valuation:

S&P 500 earnings – Factset shows that for Q4 of 2022 with 82% of the S&P reporting, the blended earnings (82% actual, 18% estimated) are  -4.7% vs. Q4 of last year.  It is rare for earnings to show an outright year over year decline.  If this turns out to be true, and if year over year quarterly earnings went down for several quarters, that is called an earnings recession.

For Q1 of 2023, Factset projects that earning will be -5% lower than the year-prior quarter, which is a weak number.  For Q2 Factset projects an earnings decline of -3% also.  Normal year over year earnings growth is about 5%.  Last month the estimate for Q1 earnings called for a -1% decline over 2022, so the estimated are coming down.

The forward PE for the S&P is 18 compared to the ten year average of 17, but remember, the forward PE is just a guess and nobody’s guess has been very good lately.  The valuation has gotten stretched a little because earnings fell by 4.7% vs. last year.  When the denominator in a fraction falls in value, the quotient will rise if the numerator is unchanged.

The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $220, down $4 from last month.

The outlook for earnings is bearish, below the long term trend of +5%.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 24, up from 19 last month and down from 31 in the summer of 2021.  I used 4 quarters of earnings with the most recent being Q4 2022. 

Q4 earnings from 2021 were rich and they were rolled off, and replaced with Q4 of 2022 earnings which were 4.7% lower than the year prior quarter.

This metric is  moderately overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.  On the downside, I will go with 14-18 being moderately undervalued and 9-13 being significantly undervalued.  As a last resort, I will go with 4-8 as being egregiously undervalued, and hope we never see that because all investors will be in pain at that point.

This indicator is bearish.

Age of primary move, bull or bear market – This bear market is 1.2 years old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political: No Change this Month

COVID-19:  In terms of news that would affect the economy, China has relaxed its city lockdowns and their economy is slowly starting to pick up again.  Hopefully supply chain issues will moderate further.  Expect the Chinese to start driving their cars more and tighten global oil supply.

Liquidity:  Central banks globally are withdrawing emergency accommodation for Covid.  They are tightening financial conditions by raising interest rates to fight inflation.

US / China:  It appears that the US and China are engaged in a tug of war to see who is the world’s economic leader.  China has advantages in low cost labor and some natural resources such as rare earth metals, but they lack oil and natural gas.  China developed the ability to produce advanced electronics with the aid of the US, but the primary market for those items is the US and Europe.  The US has long been a technology leader and we have sophisticated financial markets that are usually well regulated.

Ukraine:  Thewar in Ukraine drags on.  Ukraine is having more success on the battlefield than most expected, with the help of western weapons.  Russia is destroying much of eastern Ukraine’s cities and rebuilding will be difficult.  Sanctions against Russia are disrupting commodity markets since Russia was such a large exporter or oil, natural gas, and metals.  Ukraine was a large exporter of wheat and other foods and that export is hindered by the war.  It appears that after the initial shock in the commodity markets when Russia invaded, prices have stabilized and the world is dealing with new sources and trading patterns.

Geo-politics is currently bearish, mainly due to the war in Ukraine.

Technical:

Technically the chart below is negative near term (months), but still positive longer term (year).

RSI at the top of the chart is neutral at 50, moving sideways.  Momentum shown by MACD at the bottom of the chart is negative and falling, but the rate of deline is moderating.  The price action is negative for the medium term, but still positive longer term.  For the last 9 months, we’ve been in a trading range from 3500 – 4200.  I wonder which side of the range we will pop out, above or below?

2022 was dominated by the Fed raising interest rates to fight inflation.  Valuations had become “dangerously overvalued” on a PE basis, as far back as the spring of 2021 (go back and look at some of the Long Term updates from spring and summer of 2021, in the valuation section).  The govt. had printed too much money and kept interest rates low, which is a prescription for creating an overvalued market.  It had to be corrected.

In 2023, most think the Fed is near the end of its interest rate hikes.  The strength or weakness of earnings will dictate the market direction.  The yield curve is strongly inverted and that happens when the bond traders see economic weakness ahead, they think the Fed will lower interest rates in the future, so they better buy bonds now and lock in the yield before it falls further.

Since the Oct. low, the market has performed well.  Earnings season is wrapping up, and the market will look forward to future Fed activity and Q1 earnings will start in April.

S&P 500 Ten Year Chart

This is bearish in the short run, but remains bullish longer term.

Conclusion:

1. GDP growth is positive with Q4 GDP rising by 2.7% so that is bullish. 
2. The Fed has short term rates at 4.7%.  That is restrictive and bearish, and they are expected to continue tightening. 
3. S&P earnings for Q4 are projected to be -4.7% below Q4 2021 which is below trend and bearish. 
4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 24, which is moderately overvalued and bearish.
5. The geo-political factors are bearish.  
6. Technically the chart looks bearish short term, but bullish longer term.

By that way of looking at it, the market is bearish, with one factor bullish, and five bearish.

Long Term Issues to Keep in Mind:

National Debt: 

(December 2022) – The national debt stands at $31.5 trillion.

(Updated March 2020) – Covid 19 begins.  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)  The deficit 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.

(Late 2020) – The total national debt exceeds $26 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

Two Consecutive Down Weeks

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 the fourth Thursday 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.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

The monthly Long Term update will be posted Thursday 2/23.  I am switching to Thursday for the Long Term update because the GDP number always comes out on Thursday morning and that is important.

Economy:

The CPI data for January came in hotter than expected, with the monthly gain of .5% and the year over year gain at 6.4%, down marginally from last months 6.5%.  The stock market did not like that because it will motivate the Fed to continue the rate hikes.  The bond market futures eliminated the two interest rate cuts they had priced in late in 2023.  The analysts are saying the bond market and the Fed view are now in sync, with a slightly more hawkish view.  Retail sales in Jan. were strong at +3%.  The producer price index (PPI) for Jan. was hot at +.7%.  That sounds bad, but it is not as important as the CPI because businesses have a choice to either absorb the higher input cost, or pass it along to consumers, so it does not always show up at retail prices.  The index of Leading Economic Indicators (LEI) fell .3% in January, and while it has been down each month for the last year, this was one of the smaller declines.  This sustained decline in the LEI has typically foreshadowed a recession in the future.  So far the indicator has not done a good job forecasting an economic downturn, but interest rates are a big component of the LEI, and I wonder if the system was distorted by the zero interest rate policy after Covid that was in effect for two years.

Geo-Political:

I’m going to let the world take care of itself this week and talk about some economic theory for a bit.

Here is a quote from Peter Schiff, who predicted the financial crisis of 2008, at least two years in advance.  He nailed it, even wrote a book called “Crash Proof” in 2007, and he was spot on. 

Here is one of his recent twitter posts:

Peter Schiff 

@PeterSchiff

The reason governments want to “fight” #inflation with tax cuts and not spending cuts is that the former is popular with voters. But what voters don’t understand is that only the latter will work. Tax cuts will actually make the inflation problem they’re supposed to solve worse!

Sep 26, 2022

I take Mr. Schiff with a grain of salt, I give him credit where credit is due (and a lot is due to him), but I reserve the right to disagree with him, at least to an extent.  Mr. Schiff has run for office so he has a political ideology.

Reading his comment of its face, you would view it as anti the Republican philosophy of tax cuts, and pro the Democrat philosophy of tax increases to pay for things.  He ran for office as a Repub.

So here is my problem with Mr. Schiff’s statement.  In short he is saying tax cuts are bad and tax increases are good because of their effect on inflation.  That is an over-simplification.

Tax cuts combined with equal spending cuts do not increase the deficit and would have no effect on inflation.  Tax increases that are spent on items costing the same amount have no effect on the deficit and will not bring inflation down.

So, talking about tax cuts or tax increases is missing the boat.  What matters is the deficit, and the deficits have gotten out of hand for the last 23 years since Bill Clinton delivered the last balanced budget.

The way we got to a balanced budget in 2000 was that George H. W. Bush broke his “read my lips, no new taxes” campaign pledge and raised income taxes in order to deal with the rising budget deficit, fully a decade after the Reagan tax cuts (and large increase in defense spending on “Star Wars”).  Early in Clinton’s first term, he passed another tax increase on top of Bush 41’s.  Clinton did not increase government spending with any big programs, and the result 8 years later with the first balanced budget in 40 years.  There were also some spending cuts.

We can balance the budget, we have balanced the budget just 23 years ago.

President Obama set up a bi-partisan commission to come up with a plan to get the deficit under control following the 2008 financial crisis and they produced a reasonable plan, called the Simpson-Bowles Plan.  I thought it was well thought out, and NOTHING was done.  Ideologues on both extremes in Congress would not compromise for the good of the nation.  They were more interested in being re-elected in their gerrymandered districts, so here we are with a huge annual deficit.

https://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform

Technical Analysis:

For the week ending 2/17/2023, the S&P 500 was down .5%.

Technically (see chart below) the market looks fair.  RSI at the top of the chart is neutral at 50 and falling.  Momentum shown by MACD at the bottom of the chart is slightly negative and just beginning to head down.  The price action is negative the last two weeks, but it has been in an upward channel since the October low.

I erased all the old lines and simplified the chart to those patterns I think are important now.  You see three black down-sloping lines that technically are called “fan lines”.  The upper line is dashed because I am not sure the move to the upside is over.  There are two green lines that slope up to the right and they define the current uptrend, which could just be a correction in an on-going bear market, or could be the start of a new bull market.

There are many possibilities as to where we are in the market.  It could be a correction in bear market, a new bull market, a brief bull market in an on-going secular bear market.  You can find analysts in all of those camps.

Interest rates are rising across the duration spectrum (1 yr., 3 yr., 5 yr., 10 yr.).  That will give us an opportunity to build up the fixed income portion of our portfolios.  I sold out of the GOVT ETF two months ago when yields bottomed, but I may buy back in when rates quit rising.

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

What am I doing?  My activity level is low.  I look to increase the quality of company that I buy, and I like dividend payers.  If you buy into a dividend payer and the stock price falls for a long time, the dividend will pay you to wait until the stock price recovers.  I sold one-third of my KMI stock because it looked like it had peaked and was falling back.  Natural gas prices are down and you would think it would not affect a pipeline company, but it does.  The price weakness could be seasonal as winter is almost over and the demand for nat gas will decline a bit.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

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.

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.  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.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Does the January Rally Have Legs?

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 the fourth Wednesday 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.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

There was no important economic data this week.

Geo-Political:

Last week there was a lot of discussion about Jerome Powell’s press conf. on 2/1.  He was not very hawkish, nor very dovish.  While the Fed rate hikes have been programmed in for a while, it appears we are returning to a “data driven” Fed.  Rate hikes will depend on what the current economic data shows.  On the Fed “dot plots” where each Fed governor shows their projection of where Fed Funds rate will be in the future, two Fed governors put their projection up at 5.0% and 5.2%.  That does not mean the terminal rate has to be in that range, if inflation is still hot the Fed has the ability to keep raising rates.  But if that projection holds, we are at 4.75% on Fed Funds, so that would be one or two more quarter-point rate hikes.  The stock market took that as good news the day after the Fed news conference, but this week economists are thinking about the recent history of all the data, and it seems there is a case that the Fed could go over 5.2% on Fed Funds, and stay high for longer.  The bond market had priced in one or two rate cuts in late 2023, but CNBC reported that last week those rate cuts were priced out of the bond market, and rates rose for all durations from 2 years out to 30 years.  Rates didn’t go up much, but the bond market got into step with the Fed view, which has not been the case for at least the last six months.  Stock indices stopped going up and retreated a bit. 

Russia announced a 500,000 barrel per day cut in their oil production, in protest of the price cap that Europe put on crude they buy from Russia.  Oil prices rose a bit last week.  As China opens from Covid, that could raise demand for oil and put upward pressure on the price of crude.

https://www.usnews.com/news/business/articles/2023-02-10/russia-says-it-will-cut-oil-production-over-western-caps

Technical Analysis:

For the week ending 2/10/2023, the S&P 500 was down about 2%.

Technically (see chart below) the market looks fair, but it is questionable in my opinion.  RSI at the top of the chart is neutral at 55 and falling.  Momentum shown by MACD at the bottom of the chart is neutral, but it looks like it is trying to roll over and fall so stay tuned.  The price action is negative short term and it is indeterminate intermediate term because it has managed to trace out a short term up channel.  You can see a new line on the chart, a dashed black line on the right of the chart, which forms the top of a rising channel.

Will the rising channel be durable, or is this just a bear market rally?  Nobody knows for sure.  My guess is that it’s a bear market rally and will not be durable.  Earnings are not great and we are on pace to match the Factset estimate of Q4 earnings, which was -4% vs. last year’s Q4.  The LEI has been negative, and the yield curve remains inverted.  That does not seem like a prescription for a new bull market.  Another option is that we just put in place the third “fan line” that is pointing down, falling to the right (it is not drawn yet, I’m waiting on some more data points).  I think next week I will clean up the chart, start a fresh one and the focus will be on the fan lines.

I could write more, but the important question is on the table, has the trend changed, or is this just a bear market rally?  What do you think?  Your comments are welcome on WordPress.com, to share with my 80-90 readers.

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

What am I doing?  I bought some DVN which has a nice although variable dividend, expecting higher oil prices in a few months based on oil analysts comments.  Since stock prices may have peaked I sold some covered calls, and bought back some put options I sold in the past.  The weather was good, so I got some yard work done.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

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.

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.  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.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Downtrend is Broken, for Now

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 the fourth Wednesday 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.

If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.

Economy:

The S&P Case Schiller home price index for Nov. was -3.1%.  Home prices have been coming down and housing is in a recession.  The ISM manufacturing index for Jan. was 47.4, where anything under 50 shows contraction, although manufacturing has shrunk from about one-third of the US economy down to 12%.  The ISM services index that covers most of the economy rose strongly to 55.2 in January.  Motor vehicle sales for Jan. were at a 15.7 million units annualized rate, a big improvement over last year’s rate, and probably due to supply constraints loosening up and cars making it onto dealer lots.  Factory orders in Dec. rose 1.8%. 

Non-farm payrolls in Jan. jumped up a massive 517K, about double the recent rate, while the unemployment rate fell to 3.4%, the lowest in 53 years!  I’ll withhold judgment on the jobs gain until next month in case there is some flaw that is revised next month.  Nobody expected this kind of number.

Fed Chairman Powell announced a .25% hike in the Fed Funds rate on Wed. the 1^st, bringing the rate to 4.75%.  The Fed recently indicated they thought the “terminal rate” where they would stop hiking is around 5.0 – 5.2%, so they are probably almost done.  Powell was not hawkish, so the market went up.

It’s a mixed bag.

Geo-Political:

This may take a few minutes, but if you make it through this, it will be beneficial in observing the stock market.

We have to talk about secular bull and bear markets, and cyclical bear and bull markets. 

Cyclical bull (the market is rising) and bear (the market if falling) markets are typically short duration.  Average cyclical bear markets last one year, while cyclical bull markets last from three to six years.

Secular bull or bear markets last for a long time, and they average ten to twenty years.  Look at the chart below, a long term chart of the S&P 500 that begins on the left at the bull market top in 1929.  Those are the six secular moves over the last 90 years.  Keep this in mind, the stock market moves from periods of extreme overvaluation measured by the P/E ratio on the S&P 500, to periods of extreme undervaluation on the P/E ratio, and back to overvaluation, and it does that over long periods of time in what we call “secular” moves.

Here is the dictionary definition of secular in Economics:

“(of a fluctuation or trend) occurring or persisting over an indefinitely long period.”

One of the big problems with the stock market that makes it so challenging is that within these secular bear markets, you can have a cyclical multi-year bull market.  The reverse is also true, in a secular bull market, you can have a cyclical bear market. 

A clear example of this is right after 2000, there was a three year bear market, followed by a five year cyclical bull market, followed by the mortgage fraud and banking collapse of 2008-2009, which took the market from an extreme overvaluation to extreme undervaluation, over ten years, with a five year bull market sandwiched in.

Above is a chart of the long term S&P 500 index.

Now let’s take a quick look at market P/E ratios on the S&P over time, and if you correlate the charts by year, and you will see bull markets top with the P/E in the 20’s to 30’s, and they bottom with the P/E in the low teens to single digits for the worst bear market bottoms.

Above is a long term chart of the S&P 500 P/E ratio (Price / Earnings ratio).

OK, NOW PAY ATTENTION!!!!!

DID THE STOCK MARKET ENTER A SECULAR BEAR MARKET IN JANUARY OF 2022?

First, I don’t know.  What are a couple of things that would even cause me to ask that question?

1. The 12 month trailing GAAP P/E on the S&P 500 was 31 during the summer of 2021, which I called “dangerously overvalued” on the monthly Long Term updates, for several months.  Look at the chart above and what do you think that tells us about where the stock market is?
2. The current trailing P/E is 19, which is around the long term average.  Most bear markets have bottomed with the P/E below 19.

Could a new bull market have started at the October 2022 low?

My answer is yes, maybe.  It is possible that we have started a cyclical bull market in the context of a secular bear market that started in January 2022.  Why do I say that?

1. We have broken above the downtrend line that persisted through 2022.
2. The market has been decisive in the breakout, throughout earnings season.
3. Earnings season is going fairly well, with no major damage, and CEO’s message is that “we are dealing with higher interest rates, and the consumer is hanging in with us”.
4. We have broken above near term resistance at 4100.
5. While the Fed has raised interest rates a lot, nearly 5% in a year, it is not as bad as it seems, because WE STARTED AT ZERO!  I think the long term neutral rate for Fed Funds is 3%, and my gosh, we are only 2% above that.
6. Inflation is clearly coming down each month.  Housing costs work with a lag the way they are calculated in the CPI data, so they show inflation late on the way up, and on the way down, the housing cost come down late.  The CPI now overstates inflation and it will come down for several months more based on the lag in housing costs. 
7. Employment is strong, and laid off workers are getting new jobs quickly.

Technical Analysis:

For the week ending 2/3/2023, the S&P 500 was up about 2.5%.

Technically (see chart below) the market looks more positive in the short run.  RSI at the top of the chart is high neutral at 64, but it did hit overbought at 70 during the week.  Momentum shown by MACD at the bottom of the chart is positive.  The price action is positive, it has broken above the 2022 downtrend line, and it has broken above the Dec. resistance at 4100.

How the market behaves with the RSI near overbought will tell a lot about the nature of the action.  In a bear market rally the market can run up to overbought at 70, but usually it will not remain overbought for long.  Look at the overbought period around August 15.

But, what about the historical recession indicators that are flashing, the one year of negative Leading Economic Indicators (LEI) that I report each month, and what about the significantly inverted bond yield curve, both of which usually precede recessions?  What about the fact that with the Fed doing Quantitative Tightening (letting bonds mature and roll off their balance sheet at $95 billion per month), and the M2 money supply is actually shrinking a little?  These are all real risks.  Many wise analysts like Mike Wilson at Morgan Stanley and Eric Johnson at Canter Fitzgerald think the recession will begin in Q2.  They could be right about a recession coming, and they might be wrong about WHEN it will start.

I’ve given you a lot, so I’ll shut up.

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

What am I doing?  I’m concerned that the market has gone up too fast.  On the other hand, there are a lot of positives and I am looking to take on some more risk with the trailing PE at its long term average.  I am looking for stocks with a long track record of earnings, pays a good dividend, and is not currently overbought the way the market is.  I added to PFE last week since it has been coming down.  I bought a little ABBV and XLF.  I was stopped out of my IEO at a small loss.  With the market being overbought-ish, if you are a trader it may be a good time to lock in some profits and wait for a correction to buy the stock back at a lower price.  Or you could use a trailing stop loss percent order to protect your gains, while letting the stock continue to rise if the market continues up.  The trailing stop loss percent order works well on ETF’s, which are baskets of stocks.  I’m selling covered calls on stocks that are up.  With the market up, call premiums are high, so you get a good premium when you sell them now.

———————–  

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

There are currently 3 Classic topics posted:

1. Is it a bull market or a bear market?
2. Why does healthcare cost so much?
3. Implications of a large national debt. (posted August 2022)

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.

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.  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.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing