New Record High, then a Little Selling

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 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

Existing home sales for December increased 3.6 percent from the previous month to a seasonally adjusted annual rate of 5.54 million units, the highest since Feb. 2018.   The 4-week average of initial jobless claims was 213,250, a decrease of 3,250 from the previous week’s revised average of 216,500.

The Conference Board US Leading Economic Index declined .3% in December, driven by negative contributions from rising unemployment insurance claims and a drop in housing permits. The LEI has now declined in four out of the last five months, with the manufacturing indicators pointing to continued weakness in the sector. Financial conditions and consumers’ outlook for the economy remain positive, which should support growth of about 2 percent through early 2020.

Economic conditions remain positive with slow growth, but the persistent weakness in the LEI flashes a caution signal for the summer.

Geo-Political:

The Trump impeachment trial is certainly a major political event, but it is not one that I expect to impact the stock market.  With 47 democrats in the senate, they would need 20 republican senators to cross over and vote to convict the president and remove him from office, and that will not happen.

The corona virus outbreak in China is having an impact on the Chinese market in the travel and lodging sectors and the retail sectors as shoppers avoid stores in the impacted cities.  The US market used it for an excuse to do some selling on Friday.  Gold rose to a seven year high on flight to safety trading.

Let’s look at the bond market and see what it is telling us about stock values:

A key interest rate is moving to levels last seen in the fall when markets were worried about the trade war, and that falling yield may be a warning signal.

Investors have been buying bonds big time this week amid fears the coronavirus could spread and impact the global economy. Yields move opposite price, so as investors jumped in, the 10-year note yield has dipped to 1.68%, its lowest level since the beginning of November, and it could keep moving lower.

In the past week, the yield has fallen from 1.83%, as investors fear the virus could have an immediate impact on the economy in China and broader Asia, and then ultimately chill global growth. The 10-year is important since it influences a whole slew of loans, including home mortgages.

But the spread of the virus, which has shut down transportation in Wuhan and other Chinese cities just as the Chinese new year begins isn’t the only factor weighing on bond yields.

The question is what’s the economy going to do this year, and I think right now the 10-year note is saying we don’t really know, but given what we’ve seen in 2020, it’s telling us we should hedge the other way,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities. The softness in recent labor data and lack of inflation have also been factors, and Faranello said there are concerns that Boeing’s problems could crimp U.S. GDP growth, as it cuts back on production.

Some strategists say the Fed and other central banks may be having an even bigger impact on rates and seem to be sending investors into bonds and stocks at the same time. Stocks were lower Friday on concerns about the coronavirus, but all three major stock indices are just about 1% below their recent highs.

We’re at the low end of a recent range [on yields]. It’s a number of factors. One is the broad fundamentals that we entered the year with are more firmly entrenched,” said Mark Cabana, head of U.S. short rate strategy at BofA Securities.
You have global central banks on hold. You have a growth and inflation environment which is relatively benign. We’re not in a recession and won’t be any time soon.”

Investors have been bidding both corporate credit and stocks higher since the start of the year. “You also have an environment in which risky assets have done well,” Cabana said. “There appears to be a thirst for yield happening across asset classes. There is still a very powerful need for duration from the insurance and pension community.”

Many strategists had expected Treasury yields to move higher this year, just as stocks did, in part because of improved prospects for the economy due to the trade deal signed by the U.S. and China.

“That grind lower we’ve seen in rates so far this year, indicates there’s a little bit of a pain trade from some who thought rates were going higher,” said Jon Hill, senior rate strategist at BMO.

BMO strategists say a case can be made for the 10-year to fall back down to 1.427%, a level it reached in late August. After the current level, the next technical area lower would be 1.668%, an intraday low from the beginning of November. Then September’s low yield of 1.503% could be in play, and after that the yield could head into the 1.40s.

https://www.cnbc.com/2020/01/24/bonds-look-like-they-are-flashing-a-warning-for-global-markets.html

Technical Analysis:

The stock market set new highs during the week but sold off on Friday to end down less than 1% for the week.

Technically the market is in its most precarious position in a couple of months.  It has been overbought for weeks yet it would not correct, probably on a positive outlook for a trade deal with China and on the Fed pumping liquidity into the system.  What has bothered me is that earnings were not going up, and earnings should drive the market, primarily.  The market remains in good condition, but the question is whether Friday’s selloff is a minor event, or the start of a larger correction.  Right now, nobody knows.  RSI at the top of the chart moved down to high neutral territory at 61.  Momentum shown by MACD at the bottom of the chart has been flat, but the faster moving black line has come down to the slower moving blue line, so the possibility exists that we get more of a selloff, but the technicals do not indicate that currently.  The price action remains positive for now, but Friday’s selling took us down to the lower half of the narrow channel we have been in since October, a channel that is rising faster than the long term channel shown by the blue lines.  The faster rising and narrow channel shown by the black lines is typically not sustainable beyond a few months, when it occurs very late in the cycle.

The rapid rate of increase we see now looks like something you would see early in a bull market.  When you see it late in a bull market, it looks like investors are throwing any consideration of valuation out of the window, or what Greenspan once called “irrational exuberance”.  Add a little Fed bond buying to cover any discomfort in the repo market and the stock market does not have to worry about it, for now.  Late in bull markets, sometime they reach a “blowoff top”, where investors just throw money into the stock market under the mistaken assumption that it will only go up, because it has for so long.  But, eventually, there will be a bear market and it will go down.

If the selling continues into next week, it could just be a normal correction of 5 – 10%, or even less.  I sold most of my holdings 5 weeks ago, so I missed the rise since then.  But, I can also guarantee you that I will miss most of the correction.  The only part of the correction I could incur would be if I buy back in too early and catch a little bit of the final selling.  I don’t usually do that, as I like the market to “show me” some increases, usually for around 3 days.

2020 01 24

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

What did I do this week?  All of my covered calls expired so I evaluated whether to continue to hold the stocks or sell them.  I did some of both.  I held a little TLT (long bonds) and with the runup in price, I sold it.  Everyone else was buying bonds as a safety move, which gave me a profit, so I took it.  The yield was down near its recent low, so the bond price was up near its recent high.  I don’t think it has a lot of room left for price appreciation, so I sold out.  There is probably a bit left on the price upside, but I locked in my profit and I had collected the income for a few months.

I did buy a tiny piece of VXX which goes up when the market goes down.  It is a derivative of the VIX volatility index, and as a “futures” instrument based on options, there is constant “time decay” of the options, so it should not be held for more than a couple of weeks unless it is moving up strongly.  If I am wrong on that bet, I will sell it next week.

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

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

China Deal Signed

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 15th 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 this update, so just scroll down to view it.

Economy:

The consumer-price index rose 0.2% last month, while the increase over the past 12 months rose 2.3%.  The four-week average of new jobless claims dropped to 216,250 from 224,000.  Retail sales increased 0.3% last month, and 5.8% for all of 2019, good numbers.  The U of Michigan said the preliminary reading of its U.S. consumer sentiment index in January was 99.1, down slightly from 99.3 in the prior month.

The economy looks steady, not too hot, not too cold.

Geo-Political:

The US – China trade agreement was signed on Wednesday, with little apparent market impact.  China agreed to make large agricultural purchases and respect US intellectual property, while the US relaxes some tariffs.  The enforcement mechanism right now is crude; withdrawal from the agreement.  Now we move to the real test, does China change their behavior?

We see that the Chinese economy slowed in 2019, but it has been slowing annually for over a decade.  Some of that is a natural result of growth; as the economy gets bigger it is harder for it to sustain the same percentage growth rate.  Some of the slowdown is a result of government policy that was highly stimulative to get the consumer economy going, but the government thinks it has done enough and is trying to pull back and let the consumers drive the economy.  Part of the slowdown is due to the trade war with the US.

Jan. 17, 2020 – Hong Kong (CNN Business) China’s economy grew at its slowest pace in nearly three decades in 2019.

That wasn’t unexpected, and Chinese officials insisted that the country’s economy will be stable this year. But it might be too early to say the worst has passed, according to analysts.

The 6.1% GDP growth rate for 2019 was near the bottom of Beijing’s target range, and sharply down on the previous year’s 6.6%. The country also reported that GDP grew by just 6% in the fourth quarter.

The ongoing slowdown is indicative of all the challenges facing the world’s second largest economy, which is contending with rising debt, cooling domestic demand and fallout from the trade war with the United States.

https://www.cnn.com/2020/01/16/economy/china-economy-trade/index.html

Technical Analysis:

The market rose a quarter of a percent to close at a new record high on Friday.

Technically the situation is the same as recent weeks, RSI is overbought, momentum shown by MACD is mildly positive, and the price action is positive.  The concern is the persistent overbought condition invites a correction eventually, and the price has moved to the top of this faster rising channel shown by the black lines.

Looking at fundamentals, earnings for 2019 were flat which means that the market valuation his risen.  In the monthly Long Term update that follows this post, the numbers indicate that the market is moderately overvalued.

Let me mention a couple of important words in investing.  Discipline and patience.  Discipline is how closely you adhere to the principles of YOUR investing philosophy.  There are more conservative value oriented philosophies, and more aggressive momentum driven philosophies.  You should pick the one that makes sense to you and stick with it.  I am more conservative with regard to the market valuation, although I will buy a momentum driven individual stock at times.  According to my philosophy, I am selling into this overbought and moderately overvalued market.  It is a bull market and momentum from the positive reaction to the China trade deal and liquidity being provided by the Fed in the repo market operations, is pulling the market forward for the last 4 months.  I captured 2 months of that gain, then began selling out, per my personal philosophy.  That is my market discipline.  Now I must exercise patience and wait for a correction, which could happen any time, next week, or in a few months.

I violate my philosophy at times, and when it is apparent that the market wants to go up regardless of valuation, I do make small purchases of SPY, and protect that with close trailing stops.  It is a way to make a little money, going against your philosophy.  You can also get “whipsawed” where you buy in, put a close trailing stop under your holding, and the market goes down, selling you out at a small loss.  What can I say, there is no guaranteed way to make money in the stock market.  You play the odds and take your chances, particularly on short term trades.

2020 01 18

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

What did I do this week?  Again, not much.  I had a bunch of covered call options expire, and a few got called (DUK, LMT and GLD).  The good news is they were all called with nice profits.  LMT had a big move and I left some money on the table.  When you sell a call option, you have capped your profit, so make sure if the stock gets called, you are happy with the price you got.  I’ll watch those stocks and try to buy them back in a correction.  I had sold Put options on XOM at 65 and BA at 320, and those expired with no action taken, so I pocketed the premiums.

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 – January 2020

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

Economics:

GDP – The third and final estimate of Q3 GDP was unchanged at +2.1%.

With the China trade war, we are seeing some slowing of economic growth in China, Asia, and Europe.  So far, it is not a serious problem in the US, although clearly our economy has slowed and the ISM manufacturing sector purchasing managers index (PMI) is showing contraction. The much larger ISM non-manufacturing PMI continues to show growth.

The US and China have reached a Phase 1 trade deal, but the deal has still not been seen by the public so we don’t know exactly what is in it.

The latest (Jan. 10) Atlanta Fed GDPNow estimate for Q4 GDP is +2.3%, the same as last month.

Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit to 2.6% in 2017 and 2.9% in 2018.  2019 will not be as high as the two previous years if we continue as expected.

This GDP number supports the assertion that the bull market continues.  

Year Quarter GDP %
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
2016 Q4 2.1
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates –  The Fed cut the Funds rate by ¼% in October, the third cut this year to the level of 1.5 – 1.75% (I call that 1.7 in the chart below).  At the December meeting, the Fed left rates unchanged.

The Fed has managed to “un-invert” the yield curve by cutting short term interest rates.  Longer term rates rose a bit after the August global recession scare.  The Fed has indicated they will pause the interest rate cuts and observe what happens to the economy, so a few months of stability of rates is expected.

Fed policy supports the assertion that the long term bull market continues.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
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
June 19, 2019 2.4 1.8 2.0 2.5
May 15, 2019 2.4 2.2 2.4 2.8
Apr 17, 2019 2.4 2.4 2.6 3.0
Mar 20, 2019 2.4 2.4 2.6 3.0
Feb 20, 2019 2.4 2.5 2.7 3.0
Jan 16, 2019 2.4 2.6 2.7 3.1
         
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 .9 1.8 2.2 2.8
2017 Q1 .7 2.0 2.5 3.1

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 24.3, up from 23.8 last month.  I used 4 quarters of earnings with the most recent being Q3 2019.

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

The stock market rose to record highs, while Q3 earnings are down marginally from the prior year, stretching valuation.

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

S&P earnings – Factset projects that earnings for Q4 will be 2% below the year ago quarter, and that CY 2019 will have been flat on earnings.  They project that Q1 will show earnings growth of 5% and Q2 will be +6%.  Will the projected rise in earnings for Q1 and Q2 actually occur?  I don’t know, but if they do not that would be a problem for the market.

This indicator is neutral to the bull market.  2019 was a flat year for earnings, while market prices are up considerably, not a good combination.

Age of primary move, bull or bear market – The bull market is 10.8 years old, which is a long bull market by historical standards.  In and of itself, this is meaningless.  It does provide some perspective that one should keep in mind.

Geo-Political:

Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching, centered in the Yemen conflict (noted Dec. 2017).  The US has ratcheted up pressure on Iran, sending a carrier group to the region (May 2019).  Iran has begun attempts to disrupt oil shipments in the Persian Gulf and has begun to enrich uranium beyond the limits of the Nuclear Agreement that the US dropped out of, which is a destabilization to the region.

Robert Mueller has issued his report and no serious indictments came out after Roger Stone.  The report was made public on 4/18/2019.  This will be kept alive through the 2020 election in my opinion.  If the House decides to impeach, it will put a drag on the stock market.  A new threat to Trump’s presidency is the flap over Trump’s request that Ukraine investigate Hunter Biden’s board membership on a Ukrainian gas company, while withholding $400 million of military aid.  President Trump was impeached by the House on December 18, 2019.

Trade wars are in effect with China and the EU.  This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products to China.  Growth is slowing in both Europe and China.  This is already a small negative for the economy and if these are not fixed soon this can degrade and threaten the global economy.  A Phase 1 trade deal was announced December 12th, but few details have been seen.

Boris Johnson, the new British prime minister, threatens to force England out of the EU on a “hard Brexit” if necessary.  This will be temporarily disruptive to the markets until they figure out exactly what the implications of a hard Brexit really are, if it does occur (Sept. 2019).

Global geo-politics have degraded from supporting of the bull market to neutral.

Technical:

The market has been slowly rising to near daily record highs based on optimism for a Phase 1 trade deal with China, and the deal reportedly defers the new tariffs that were set to take effect on Dec. 15.

Technically, the long term market condition appears sound.  RSI at the top of the chart is overbought at 70 and rising, but in a long term bull market we can remain overbought for months.  Momentum shown by MACD at the bottom of the chart is rising, a positive.  The price action is positive in a five month upswing.  The long term chart looks very good.

Currently there is nothing to overturn the thesis that the long term bull market remains in effect.  The price remains in the channel this bull market has been in for the last 10 years.

Long Term 2020 01

The market’s technical indicators support the thesis that the long term bull market remains in force.

Conclusion:

The stock market remains in a long term bull market technically, and there is nothing in the general economy, market valuation, in Fed policy, or in the global geo-political realm to overturn that conclusion. 

Two of the long term indicators, earnings and geo-political, have been downgraded from “supportive” of the long term bull market to “neutral”.  The long term bull market continues, but it is no longer the vibrant and almost risk free market of a few years ago. 

 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  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

New Record High, But Overbought

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 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update will be posted on Wed. the 15th.

Economy:

The ISM non-manufacturing index rose to a four-month high of 55% in December, significantly larger than the manufacturing side of the economy, and showing growth.  U.S. factory orders fell 0.7% in November to mark the third decline in four months. The 4-week average of new unemployment claims dropped by 9,500 to 224,000.  December nonfarm payrolls increased by 145,000 while the unemployment rate held steady at 3.5%.

The economy is still in slow growth mode, with uneven performance by sector.  Manufacturing is contracting, while the larger service sector is still expanding.  The persistent drop in factory orders is concerning, but some could be driven by Boeing’s decision to halt production of the 737Max.  That is going to back into many other companies that make parts for the Max.

Geo-Political:

Phase 1 of the trade deal with China is expected to be signed on Wednesday.  Then we should find out what is in the deal.

Let’s look over at Europe as see what is going on in their economy.

Nov. 7, 2019 – On Wednesday, the International Monetary Fund warned that Europe needed “contingency plans” to avoid a protracted decline. Today, the European Commission itself went one step further, cutting its eurozone growth target all the way through 2021.

The EU’s 2019 growth outlook started the year with some optimism. In the spring, it saw continuing growth, though at a “moderate pace.” By the summer, that growth was “clouded.” Now, in the autumn report, published today, it’s warned of “a protracted period of subdued growth and low inflation in the context of high uncertainty,” as bruising trade wars, a slowing global economy and a looming Brexit have combined to hit nearly every sector of the economy.

The EU now sees real GDP growth of 1.1 percent (down from 1.2 percent) and inflation of 1.2 percent this year. In contrast, the U.S. economy, while also slowing, is expected to grow at twice that rate, at 2.2 percent.

For Europe, the outlook stays nearly as bad over the next two years with forecasted GDP growth running at 1.2 percent in both 2020 and 2021. Inflation won’t nudge up again until 2021, reaching 1.3 percent, still far below the bloc’s target of closer to 2 percent or higher.

https://fortune.com/2019/11/07/trade-wars-brexit-eu-cuts-growth-outlook/

Europe has slowed and is expected to remain slow over the next couple of years.  This is not helpful to the US economy.

Technical Analysis:

The market continues its melt-up, up about 1.5% last week.

Technically the market remains in the same condition that it has been for the last several weeks, generally positive, but overbought.  RSI at the top of the chart is near overbought at 69, but momentum shown by MACD at the bottom of the chart has ever so slightly begun to fade.  Price action is positive, shown by the new black line channel I added.  Since early October we see the market accelerating at a rate much faster than it has over the last year.

I caught much of the rally from early Oct. to mid Dec., then sold out.  I have said before, I don’t like this rally.  Earnings for 2019 have been flat.  Expectations for 2020 earnings are +8% or so, but nobody is saying why.  Are they betting on the end of the trade war with China, or at least a pause to get through the election?  Earnings season starts this coming week with the big banks reporting.  The acceleration in stock prices that started in Oct. also coincides with the Fed stepping in with liquidity in the repo market and then restarting quantitative easing.  I consider the Fed having to step in with liquidity this late in a bull market, supposedly the “greatest economy in the history of the US”, to be a warning sign.  The US deficit is too large, and the Fed is buying $40 billion a month of treasury bonds until March, but can they ever stop?  People just don’t have enough money to buy all those bonds, especially at such low yields.  The stock market looks like a better deal because interest rates are so low.  To accommodate that much debt and not force the Fed to buy the bonds and expand its balance sheet, interest rates would have to rise, but that would increase the governments “interest on the debt” and make the deficit worse, and it would put a drag on the economy by increasing companies cost of doing business.

2020 01 11

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

What am I doing?  I sold half of my GLD this week as it had spiked on the Iran missile strike, but I hope to buy it back at a lower cost.  I sold GOOG as it is strongly overbought, and hope to buy it back lower.  My few remaining stocks have call options sold against them and the options expire on Friday the 17th.  I’ll look at them on Monday the 20th and see if I want to do more selling then.  I have a little XLF and hope for good earnings from the banks next week, and then I’d sell XLF.  When the market does begin to correct, I will probably pick up a little SH, a short position against the S&P.

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

Happy New Year, Another Record High

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 15th 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 four-week average of new unemployment claims rose by 4,750 to 233,250 and hit the highest level since January 2018 (but it is still low over the last 50 years).  The Institute for Supply Management (ISM) said its manufacturing index slid to 47.2% last month from 48.1% in November, marking the fifth straight contraction and the softest reading since June 2009 (any reading below 50 shows contraction in the sector, manufacturing in this case).

The continuing slide in the ISM manufacturing index is a real concern.  Manufacturing only accounts for 11% of US GDP, but if cutbacks in this sector bleed over to the service sector, things could get ugly.  Part of this decline is caused by Boeing slowing, then halting, production of the 737-Max.  FAA is playing hardball, wanting to slow walk approval to fly the Max again, but Trump may twist their arm as other manufactures have to lay people off that made assemblies for the Max.

Geo-Political:

Today I’m just going to ramble a bit.  My last swing trade was started in early Oct. with a buy of SPY and I started cashing out in early Dec. with a nice gain.  Much of that trade was driven by optimism of reaching a Phase 1 trade deal with China, which happened, but we don’t know how good it is.  The market has since gone up maybe 5% without me, and I am OK with that.

Why am I OK with it?  I don’t like the market right now.  Earning for 2019 were flat, and earnings are what the stock market is about.  The market rocketed up 30% in 2019, but that is misleading since we started the year at the bottom of a 20% correction in the fourth quarter of 2018.  Going from the Oct. 2018 high, the market was up a more normal 10% over the last 15 months.  With the market climbing while earnings were flat, the valuation of the market has advanced from a normal level in late 2018 to a moderately overvalued level today, based on the trailing 12 month GAAP P/E.

The talking heads are optimistic about 2020, stating that the purchasing manager indices are bottoming overseas and that global growth with accelerate this year.  From flat earnings last year, to forecast 10% earnings growth this year, this should drive the market up.  What if it doesn’t happen?

But when I look at the hard economic data, I don’t get it.  US GDP fell in 2019 from 3% in 2018 to 2%.  Manufacturing as a sector is shrinking for 5 months in a row.  The Fed is having to prop up the repo market and is growing their balance sheet to do it, and the last time they started quantitative easing the economy was in horrible shape.  The Fed is saying not to worry, this is a special case, but they also said it was OK to buy a home using the exotic mortgage instruments in 2005 and 2006, leading up to the collapse of the mortgage backed security market.  The Fed tries to keep the people calm, and I find they lie going into periods of stress, sometimes into periods of extreme stress.  That does not mean we are going into extreme stress or minor stress.  It means that you cannot believe everything the Fed says.  You have to look at things and judge for yourself.  I think the US annual deficit is too large and we may be seeing the beginning of a problem caused by failure to properly manage our finances.  Dick Cheney once said that the US deficits don’t matter, but that is a gross oversimplification in my opinion.  Recently Jeff Gundlach was asked about that statement and he said “the deficit doesn’t matter, until it does”, meaning you can hit a tipping point.  I agree with Mr. Gundlach.

Technical Analysis:

The market ended the week flat, after setting a record high on Thursday.

Technically the story remains the same as the last four weeks.  RSI at the top of the chart is near overbought at 68, while momentum shown by MACD at the bottom of the chart has leveled out to a flat neutral level.  The price action is positive, but it has moved above the top of the channel it has been in for 8 months and that can be a warning sign, especially if the economy does not accelerate.

2020 01 04

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

What did I do last week?  Not much, but I did add a little GLD to the buy that I made a month ago.  With the deficit so large and the Fed starting QE again, the dollar could weaken and that is usually good for gold.  When gold changes direction, it is usually a multi-year thing, see the twenty year gold chart below.

2020 01 04 Gold 20 year

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

Low Volume Week, New Record High

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 15th 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:

Orders for durable goods sank 2% in November, the biggest decline since May (what happens to durable goods orders eventually happens to sales).  New home sales increased 1.3% on a monthly basis in November to a seasonally-adjusted annual rate of 719,000.

The stock market is hitting record highs, but the economy is uneven and sluggish.

Geo-Political:

Let’s take a look at what is going on in the “repo market” and the Fed’s response, which has been to add liquidity to the banking system.

According to Bankrate’s December Federal Reserve Forecast survey, experts noted in their written responses that they’re continuing to watch the repo market mess because it has a great deal of impact on the Fed right now.

Should market rates again rise above the Fed’s target range upper limit, it will mean that the Fed’s existing strategy hasn’t proven capable of making its operating system function as it is supposed to,” says George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute.

Some experts have already outlined what that might look like, with the most drastic call coming from Credit Suisse. Zoltan Pozsar, Credit Suissee’s managing director for investment strategy and research, suggested that the Fed wouldn’t be able to fix the repo market turmoil simply by injecting cash into the marketplace. Instead, they’d need to reinstate another round of “QE” because reserves are still insufficient, he said.

Of course, that hasn’t been confirmed, while other Fed watchers are predicting that the Fed will take a different, less-drastic step. One such alternative is the creation of an even-more wonky financing program known as a “standing repo facility.” This facility would likely be a permanent program at the Fed, allowing participants to exchange bonds for cash at a set interest rate.

Many details still need to be hammered out — such as who would be eligible — but it’s something that “many” Fed participants see as needed, according to records of the Fed’s October meeting.

What next steps should consumers take?

All of this volatility and uncertainty underscores the importance of building an emergency savings fund, Hamrick says. Investors, meanwhile, should brace for more market choppiness as the Fed figures out this process.

“Some of the volatility that we saw in financial markets toward the end of 2018 is an indication of what can go wrong if the Fed makes a policy mistake,” Hamrick says. “The worst of that may be behind. But whether anticipating an economic slowdown or market volatility, think about your long-term plans, including retirement and emergency savings.

 “Consumers, investors, savers and borrowers should think about this (quantitative easing) as one of the two main tools in the central bank’s toolbox to help adjust the strength of the U.S. economy,” Hamrick says. “It remains to be seen how the Fed will learn how best to employ it and whether there are unintended negative consequences from having invented and deployed it.”

https://www.bankrate.com/banking/federal-reserve/federal-reserve-balance-sheet/

From 2000 – 2002 (the dot com bust) we had three consecutive down years in the stock market after the terrific gains in the 1990’s, that took the stock market down 50%.  Then in 2008 we had a 50% decline in the S&P is just over one year following the mortgage backed securities bust.

The big question remains, is there another “bust” out there, a really big problem?  If there is, and I believe that there is another crisis out there, it will start in the bond market and the crisis will be one of DEBT.  Can the US carry $23 trillion of total debt, and add to it at a rate of over $1 trillion per year when the economy is in good shape, and do that over a long period of time, without a serious detrimental effect on the economy?  I think the answer is no.  Why is there insufficient liquidity in the banking system to operate the repo market?  Could it be that the US trillion dollar annual deficit is sucking all the liquidity out of the world to fund its deficit?  Is that why the Fed is expanding its balance sheet again like it did in the 2008 financial crisis, because the rest of the world lacks the cash to finance the US deficit?  If that is the case, eventually interest rates will rise to attract more cash to the bond market.  That would have a slowing effect on the US economy.  Think about a slowing economy in a rising rate environment, that’s not good.  What are the unintended negative consequences of having invented quantitative easing and having deployed it to finance huge on-going US deficits?  Once you have gone down that road, can you get off?

Technical Analysis:

The market was up another percent this week, closing at another record high.

Technically we are in the same shape as last week.  The market is strongly overbought with the RSI at the top of the chart up at 79.  Momentum shown by MACD at the bottom of the chart is still rising, a positive.  The price action is still rising.  That is all positive, but the strongly overbought reading is a caution sign, and the price is extended far above the 50-day moving average (blue line).  A reversion to the mean (correction) can come at any time.

The economic statistics do not warrant this type of record setting gains in the stock market.  For all of Trump’s complaints about the Obama 2% GDP economy, that is what we have now as 2019 will go down as a 2% GDP year.  Earnings for 2019 were flat compared to last year.  With flat earnings and a substantial gain in the S&P, the market valuation has moved from neutral to moderately overvalued.  Color me cautious.

2019 12 28

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

What did I do last week?  Not much, but as I had sold most of my SPY, and my call options on stocks that I held had expired, I began to sell overvalued stocks that no longer had call options covering them, BIIB for one.  Then I sold a BIIB Jan 280 Put to buy it back if it goes down in a correction.  I have a lowball buy order to pick up CTL on a pullback, for the dividend and hopefully a pop on a market rebound.  The little SPY that I have left has a trailing stop loss percent order under it, close at 1% down.

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

Impeachment, and a New Record High

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 15th 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 on Wed. and is just below this post, so just keep scrolling down to see it.

Let me also wish all of my readers a happy holiday season! 

Economy:

The four-week average of new unemployment claims rose by 1,500 to 225,000, a generally low number.  The Leading Economic Index was unchanged in November, breaking a string of three straight declines.  The LEI being unchanged after 3 straight months of decline is no victory since it is so close to being the 4th straight month of declines.  Three straight months of decline often (not always) is a predictor of a slowdown in the economy six months in the future.  The third estimate of Q3 GDP was unchanged at +2.1%, an average reading.

Existing home sales decreased 1.7% in November thanks in large part to the constrained inventory of homes for sale.  Nevertheless, the pace of existing-home sales was higher than a year ago when the rate came in at 5.21 million.  The median sales price for existing homes in November was $271,300, which was 5.4% higher than a year ago.

Everything points to slow steady growth, except the poor performance of the Leading Economic Index over the last 4 months, which often foreshadows a slowdown in the economy six months in the future.

Geo-Political:

The president was impeached but the market did not react since everyone knows the Senate will not convict the president.

We still await details of the China trade deal.

Technical Analysis:

The stock market was up about 1%, closing at yet another all-time high.

Technically the market looks good, except for being overbought.  RSI at the top of the chart is at 75, clearly overbought.  In bull markets, the market can stay overbought for months, but I am skeptical of this one since earnings have been flat all year.  The market looks powerful since it has managed to rise above the top trendline of the channel we have been in for most of 2019.  That type of action is usually seen early and the middle of bull market cycles, or in late cycle blowoff tops.  Momentum shown by MACD at the bottom of the chart is positive in a rising mode.  The price action is positive, strong enough to get above the top of the rising channel.

I remain skeptical given the rising P/E multiple of the market riding on the back of flat earnings for 2019.  I captured most of the rise from the October lows, and I’m willing to forego the rest of the rise and wait for a correction to buy back in.

2019 12 21

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

What am I doing?  Not much since I sold out a month ago.  I placed some lowball buy orders waiting for a correction.  It appears the market wants to continue up in the short run, technicals and poor earnings aside for now, so I am making some small daily buys in SPY, and protecting them with a trailing stop loss % order at 1%.  The next two weeks will be low volume weeks as the professionals will be taking vacation, so I won’t believe much of what I see go on until after the first of the year when everyone gets back.  Low trading volume can exacerbate market moves.

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