Long Term – September 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.

The stock market has decisively broken above the downtrend that started last March, ending the bear market.  The economy has been operating in an artificial state since the president shut the economy down, then began the process of re-opening.  We had a two quarter recession, but forecasts for Q3 are for positive growth.

Economics:

GDP – The second estimate (8/27) of Q2 GDP is -31.7% as an annualized rate. 

That number is horrible, but it is an ANNUALIZED number.  The number is always annualized, we just may not have realized it.  So, the economy really contracted by about 8% in Q2. 

The current GDPNow forecast for Q3 is +22%, which is annualized, so the quarter over quarter growth should come in about +5%.  The recession is projected to have ended in Q2.

The economy is at the mercy of the virus.  If we get an effective treatment that will keep people from dying, or if we get a vaccine to prevent people from getting COVID19, that will be good.  Absent a treatment or vaccine, the economic performance will hinge on how well we manage the population to keep the virus under control, through social distancing, hand washing, staying at home, wearing masks, etc.  The seven day average new case count in the US has come down from 46K to 35K, an improvement.  The seven day average death toll in the US is 800 per day, down from 1,000 per day.  This may pick back up with kids returning to school and we are entering the flu season.

There is no deal in congress on a Covid 19 Relief package #5, and they adjourn in two weeks to go home and campaign.  I suspect something will get done since it appears it is needed.  These things usually get done in the final hour.

The airline industry appears ready to do a major layoff in early October, as government money to carry employees expires.

With GDP projected to be positive for Q3, we are exiting the recession levels of Q1 and Q2.  This is bullish for the stock market.  Confirmation will not come in official data until late October.

YearQuarterGDP %
2020Q2-32
2020Q1-5.0
2019Year2.3
2019Q42.1
2019Q32.1
2019Q22.0
2019Q13.1
2018Year2.9
2018Q42.2
2018Q33.4
2018Q24.2
2018Q12.0
2017Year2.6
2016Year2.0

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

This is in response to the corona virus and the two quarter recession that the lockdown caused.  In addition to dropping interest rates to the floor, the Fed announced two asset purchase programs that totaled $3 trillion.  Congress had provided significant fiscal support to businesses and individuals to help them get through this abnormal period, but that ended July 31.  The president extended most of the federal unemployment benefit, if the states chip in part of the money.

The Fed concluded the Sept. meeting this afternoon and their dot-plot shows the Fed Funds rate at .1% for the next three years.  They also project that inflation will not reach 2% for three years.  Knowing this may (should) change your investing outlook.  Rising rates are bad for “bond proxies” like electric utilities that have minimal growth potential but pay good dividends.  We don’t have to worry about competition from bonds for a while.  Take a look at XLU, an ETF for utilities with a yield of 3.5%.  The risk is that if enough businesses fail due to COVID, with all those lights turned off, electric utility revenue could turn south.  Nothing comes without risk.

Fed policy is strongly accommodative and hence it is bullish. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
Sep 20200.2.3.71.4
Aug 20200.2.3.71.4
Jul 20200.2.3.61.3
Jun 20200.2.3.71.5
May 20200.2.4.71.4
Apr 20200.20.30.61.3
Mar 20200.20.71.01.6
Feb 20201.71.51.42.0
Jan 20201.71.61.82.3
     
2019 Q41.81.61.82.2
2019 Q32.21.51.82.3
2019 Q22.42.12.32.8
2019 Q12.42.52.73.0
     
2018 Year Avg1.82.82.93.1
2017 Year Avg1.01.92.32.9

Valuation:

S&P earnings – The Factset estimate for Q3 earnings for the S&P 500 is -22% vs. last year.

In Q2 earnings were -34% y-o-y and the market did fine.  Investors seem OK with earnings beating lowered estimates, but it leaves the market vulnerable to a correction.  We just had a sharp correction in the FANG tech stock leaders and some other high flyers.  The selling appears to have stopped, but could resume based on the high valuation of the market and continued poor earnings.

Earnings are poor and they are projected to remain poor for the next two quarters.  That is bearish.  One interpretation is that there is so much “passive money” in IRA’s and 401K’s that they believe that beating lowered earnings estimates, even significantly lowered estimates, is as good as actually growing earnings.  This will keep me cautious.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 34, the same as last month.  I used 4 quarters of earnings with the most recent being Q2 2020 (95% reported). 

This metric is dangerously 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 substantially overvalued.  Above 30 would be dangerously overvalued.

The stock market has moved up, while earnings have not.  This is not a good development.  However, it does not mean that a major downturn is near.  In 1996 Alan Greenspan (then Fed chairman) said the stock market was “irrationally exuberant”, but the major downturn was still 4 years in the future.

This indicator is dangerously overvalued and bearish in this bull market.

Age of primary move, bull or bear market – The bull market is 11.6 years old.  I have changed my view on the first half of 2020 decline, from a bear market to a steep correction in the bull market that started in March 2009.  Yes, there was a recession (two quarters of negative GDP) and a steep decline in the stock market of over 30% from peak to trough.  However, the decline was a result of artificial activity, a government imposed shutdown of the economy, and to date it has not produced a lengthy period of subdued economic activity.  The pinch is very uneven, shutting down the cruise line industry and hitting airlines and hotels hard, as well as some restaurants, but other areas of the economy have been unaffected, while some have soared such as Zoom Video, Amazon, and Netflix (the “stay at home” stocks).  It remains to be seen whether the residual effects of the Corona virus and shutdown kick us over into a real bear market.  New bull markets do not start with the PE ratio up at 34, rather that is indicative of a bull market over-valuation (Sept 2020).

Geo-Political:

COVID-19:  The northeastern states have gotten the virus under control presently.  The infections in the south and western states are stabilizing. 

COVID-19 Vaccine (July 2020):  Moderna begins Phase 3 clinical trial of their vaccine by the end of the month and it is fully populated so readouts are expected by October.  They are manufacturing and stockpiling the drug with money from the government, so if the trial is positive they can begin prioritized inoculations under an FDA Emergency Use Authorization (probably first responders first, then elderly with co-morbidity).  Broader availability would probably be in early 2021.  This is as good as could be expected if it stays on track to success.  Astrazeneca has a Phase 3 trial underway.

Oil War (March-Sept. 2020): Corona virus has curtailed activity and therefore demand for oil.  The Saudi’s, Russia, and the US have come to agreements on production cuts and the price of oil has stabilized, but at a low level of $40 per barrel (July 2020), up from the low $20 range.  This remains a negative for US oil jobs, which are a significant sector of US employment.

Trade War with China (August 2020): This has percolated up again with the US forcing a sale of TikToc to US hands (Oracle).  We can look for China to retaliate.

Central Banks Provide Liquidity: All over the world, banks are reducing interest rates and providing liquidity including bond purchases, helping to hold stock markets up.

Global geo-politics forces are so powerful that they are bearish.  The virus is still the dominant factor, but we inch closer to a vaccine.  The central banks have proven themselves effective, so the bearish forces are being neutralized.

Technical:

Technically the chart is positive.

RSI at the top of the chart is neutral at 63 and moving sideways.  MACD at the bottom is positive with the faster moving black line crossing above the slower moving line, and they are moving up.  The price action is clearly positive, up for 5 months since the crash in March.  The price action is up near the top of the range and that is a bit of a concern and bears watching.

Click on this LINK to open the chart in a larger separate window.

This is bullish for stocks.

Conclusion:

Following a two quarter recession, projections point to GDP returning to growth in Q3, so that is bullish.  The Fed has short term rates near zero and plans to hold them there through 2023, plus they are buying bonds to keep longer term rates low, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q2 were 34% below Q2 last year and they are projected to be below last years level again in Q3, which is bearish.   The PE valuation of the S&P based on the 12 month trailing GAAP number is 34, which is bearish.   The geo-political factors (COVID19 virus and downturn in US oil jobs) are bearish.   Technically the chart looks bullish.

By that way of looking at it, the market is neutral, three factors bullish and three bearish.  A successful vaccine in the near term would brighten that outlook considerably, both short and long term. 

My conclusion is that short term I am remaining cautious based on the position of the large indicators I follow, particularly the high valuation.  I have been buying some index ETFs like SPY and I keep a “trailing stop loss %” order under them, like 4% down. Even the airline stocks have come up a bit, anticipating a vaccine in the first half of 2021. The outlook should brighten as long as the good news on the vaccine continues to come in.

Long Term Issues to Keep in Mind:

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

(Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), 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

Correction, Week Two

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 16th.

Economy:

Initial jobless claims for the prior week were 884K, the same as the previous report.  Continuing jobless claims ticked up from 13.3 million to 13.4 million, so more people got laid off than returned to work.  The CPI for August was up .4%, and the year over year CPI in August was up 1.3% (the Fed target is 2%).  If the .4% increase in CPI is annualized, that is 4.8% annual inflation.  That probably won’t happen, but it bears watching.

I have thought that many of the recent economic numbers that appeared good were not actually that good, because it was simply a reverse action of having shut down the economy last April, and then re-opening it.  I have thought that at some point the easy gains would be made and further progress would get harder.  You can’t say that is happening with one monthly observation, but at this point in the “recovery” it would not be surprising.  Keep watching.  

Geo-Political:

I’ll take this space this week for some rambling comments about the budget deficit, the national debt (total US debt, including “intra-governmental transfers, i.e. the money we still owe to social security), and possible consequences for the US.

First some history on the US national debt and deficits.  In 2000 at the conclusion of Clinton’s term, the debt stood and $5 trillion and he turned over essentially a balanced budget to Bush, and a mild recession. 

Under Bush, the repub congress delivered two income tax cuts (2001 of $110 billion per year, and 2003 of $60 billion per year) but the recovery from recession was tepid.  The Fed cut rates to 1% in 2003 and the economy improved a bit, so Bush won re-election.  In 2003 we invaded Iraq, and with the troops in Afghanistan, military spending increased by about $300 billion per year by the end of Bush’s term in 2008, with the annual deficit totaling $500 billion per year.  To make matters worse, the housing mortgage crisis hit and income tax revenue fell dramatically in Bush’s final year, sending his last deficit to about $1 trillion.  Bush signed the $700 billion TARP bank bailout in early October 2008, which put that on Obama’s first year deficit, so Bush’s final annual deficit was really $1.7 trillion.  So really, Bush increased the total national debt by $6 trillion to $11 trillion.

Obama took Bush’s $1 trillion budget deficit run rate, and the dems passed the financial crisis stimulus, $300 billion per year for 3 years.  Income tax revenue continued down for at least a year, but did not recover to 2006 level for another couple of years.  So, Obama’s first annual deficit was about $1.5 trillion, which was Bush’s $1 trillion run rate deficit, with a crisis-caused drop of $200 billion in income tax revenue and the $300 billion stimulus expense.  As the economy recovered, income tax revenue began to rise, and after 3 years the stimulus expense of $300 billion fell off.  By 2016, Obama worked the annual deficit down to $500 billion per year, and the national debt stood at $19.5 trillion, an increase of $8 trillion in 8 years, beginning with the worst economic recession since the great depression in 2009.

Trump took office in 2017 and the repubs passed a tax cut bill that took effect in 2018.  The congress passed a bill to end the deficit reduction “sequestration” that had been put into effect under Obama to restrain spending.  With the combination of lower tax revenue and higher spending, the annual deficit doubled in 3 years to $1 trillion, during “the best economy in the history of the US”.  The pandemic has made it worse with at least $2 trillion in emergency spending, so the total US debt now stands at nearly $26.5 trillion. So, where Obama added $8 trillion to the total debt in 8 years, Trump has added $7 trillion to the debt in only 4 years.

So, does the US being $27 trillion is debt mean anything?  That is the question.  We have been running up the debt for years, and folks say it will lead to dollar weakness, which leads to inflation.  But it has not happened in the last three decades.

Washington has apparently adopted “Modern Monetary Theory” (MMT), which holds that deficits don’t matter as long as inflation is in check.  If inflation kicks in, then you need to worry.  It was Dick Cheney who first said “deficits don’t matter”, so this started back around year 2000.  Remember this is just a theory, and I can’t think of one responsible nation that has conducted their finances this way over a long period of time, with success.  Most of the nations who behaved that way end up with runaway inflation and have been called banana republics.

Conventional thinking has been that printing huge sums of money is inflationary with more dollars chasing the same amount of goods.  But it has not worked out that way.  Why?

The US has exploited low wages around the world, laying off US workers and moving their jobs to Japan, China, S. Korea, India, Eastern Europe, and the Pacific Rim nations.  Don’t blame the dems or the repubs, it is the CEO’s that are doing this.  And if you think that capitalism is the best economic system, that is what the CEO’s are using to justify laying off US workers and sending their jobs overseas.  The CEO’s are optimizing profits of their companies by using cheaper labor.  That is what good capitalists do.  Hold revenue constant while you cut cost, and profits rise.  If you think we are tearing down our own country, maybe we need some regulations put in place.

While excessive money printing should be inflationary, we are importing deflation in the form of lower wages from around the world.  Technologies like robots are also used to lower costs and offset the effects of inflationary fiscal policy.

Slowly the vast US middle class has been hollowed out.  Particularly blue collar workers who used to have high paying union jobs with good benefits are not able to replace that level of pay when their job gets shipped overseas.  You can drive an Uber, but your income goes down, and you don’t have health insurance or a retirement plan from your company; you are just “a contractor”.  That’s what the “gig economy” is. 

This situation has led to anger in the middle class.

Most of the former well-compensated blue collar workers make less, so where they used to have discretionary income, now they struggle to make ends meet.  A surprise large expense hurts real badly.  A serious illness often leads to bankruptcy.

As discretionary spending levels go down at middle class homes, manufacturers are under pressure to keep prices low to keep sales moving.  That helps to keep inflation low.  It doesn’t matter how many dollars the government prints, if a person is not confident in his ability to keep his job and steady income, they will constrain purchases.  CEO’s don’t have to give US workers good raises because they know for most blue collar workers, there is no better paying job out there for them to move to.

So, workers constrain their spending, and manufacturers don’t feel that they have “pricing power”.

Hence, there is very little inflation, despite a high rate of money printing out of thin air.

The system is in some form of monetary equilibrium, but the people in the system, the middle class, are unhappy, they are under stress, they have trouble making ends meet and they don’t think they have job security, so their whole future is suspect.  That is a far cry from the 1960’s and 1970’s when assembly line workers in Detroit at the auto makers earned excellent salaries with excellent benefits and excellent job security.

Those days are gone, not to return.  The middle class folks are angry, and they are looking for someone to blame.  They correctly blame the CEO       ‘s, but there is nothing they can really do to them.  Then the politicians come in and tell them they can solve their problem.  They elect a politician and things don’t get better.  The people can throw out a politician, so they do, and the next politician fails to make things better.

So, if the dollar ever falls significantly, if MMT turns out to be a bad theory, then things will get really screwed up.  Maybe MMT as a theory is OK, but the politicians and central bankers implementation of MMT was not as the theory intended (which I think is a frequent problem).

I’ve gone on enough.  That is what I think is going on with our fiscal and monetary policy and how it comes in, mingled with capitalism, to affect us.  Is that a perfect description of our system, of course not; it is an over-simplification.  I think you have to over simplify to describe an extremely large complex system over a long period of time, in order to arrive at some basic analysis of what is going on.

As an investor, I think it is beneficial to understand the economy in which we invest, and what drives it in certain directions.  I sure hope somebody got something beneficial out of that.  It is hard to write it, you have to put in enough so the ideas hang together, but not so much that it gets unclear.

If you have feedback, I’d like to hear from you at sharplet@gmail.com .

Technical Analysis:

The S&P was down another 3% last week.  The declines are still centered in the high flying tech stocks.

You will notice I extended the two blue lines that represent the old channel that the stock market ran in during 2019, all the way to the right.  It is interesting that after six wild months, the market price has returned to the old channel.  That might be “normal” action.  Where we go from here will depend on economic data, congressional stimulus, Fed accommodation, earnings, a vaccine, and our ability to control the virus until a vaccine appears.  If you want the economy to improve, get control of the virus spread.

Technically the market remains in correction mode.  RSI at the top of the chart is at a neutral reading of 45 and moving sideways.  Momentum shown by MACD at the bottom is turned down and negative for the short term.  The price action is negative.  The correction is on, and we have not sunk to an oversold level.

Anything can happen, but it appears to me the bottom is not in yet.  Are we close to the bottom or is there much farther to fall?  Nobody knows, but if congress passes the next stimulus bill, the correction could end quickly.  So, just tell me if congress will pass a compromise stimulus bill.

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

What am I doing?  Not much.  I sold covered calls.  I have a number of covered calls that expire 9/18 and a few puts.  I sold a few covered calls out on Oct 16.  

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

Tech Correction Started

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 August ISM manufacturing index registered 56 percent, up 1.8 percentage points from the July reading of 54.2 percent, indicating expansion in the manufacturing sector for the fourth month in a row.  The ISM services index was 56.9 in Aug., down from 58.1 in July.  Motor vehicle sales for August were 15.2 million annualized, up from July but below the January level.  Factory orders for July were up 6.4%.  Initial jobless claims were 881K, down from 1.1 million on the prior report; 881K is a big decline, but it is still higher than the worst week in the 2008 financial crisis.  Continuing jobless claims are 13.2 million, down from 14.4 million in the prior weekly report.  Non-farm payrolls added 1.4 million jobs in Aug., down from 1.7 million in July, and the unemployment rate was 8.4%.

The numbers look good for the recovery, but the unemployment rate of 8.4% show there is still a long way to go to get back to normal.  About 300K of the new jobs were temporary jobs to take the census.

Geo-Political:

This space intentionally left blank this week.  I want to write more than usual just below.

Technical Analysis:

The S&P was down 5% on the week.  The decline was centered in the previous high flying tech sector, where valuations had soared to unreasonable levels on hot stocks like TSLA, ZM, and AMZN.

Technically the market looks suspect.  RSI at the top of the chart came down from overbought to neutral at 53, but falling.  Momentum shown by MACD at the bottom of the chart has barely turned down, but that is a poor direction.  The price action is clearly poor.  A correction has begun and right now we don’t know how deep it will be.  Not all sectors were affected; I own some of the big banks and they were up a little on the week.    

I am bothered and I want to ramble a little.  I hope it is of benefit to my readers.

Bull markets end on the last record high before a long downturn ensues.  Bear markets end at the final low of the move before a long sustained uptrend emerges.  You cannot tell exactly when a bull market has ended, nor a bear market, until some time has passed.  Things that will occur to tell you that the primary trend has changed are a change in the direction of the channel on a chart, from up to the right to down, or visa versa.  This is traced out by a series of higher highs and higher lows (rising to the right), or a series of lower lows and lower highs (falling to the right).  But at the last high of the move, or the last low, you don’t know if it is the last.  Valuations are also indicators that assist in calling a change in the primary trend, bull markets in the later stage usually see P/E ratios in the 30+ range, while bear market lows usually see P/Es in the low teens or even single digits.  The rate of change of the Gross Domestic Product (GDP) is also telltale.

There are changes in the economy and stock market that make me question whether the old rules of thumb still apply.  The shift from a manufacturing economy to the information age, the rapid change in technology, the engagement of so many people in the stock market today through IRA’s and 401k’s, the ability of individuals to move large sums on money at the click of a mouse button, and the rapid dissemination of information via the internet.  It is a vastly different landscape financially versus even 40 years ago.

One of the most important things to know in investing is whether we are in a bull market or a bear market, and the factors mentioned above make it harder to determine.  There are long term moves in the market called secular bull or secular bear markets, that run anywhere from 10 to 20 years.  They are typically interrupted temporarily by short counter trend moves, for instance in a secular bull market there may be 2 or 3 shorter cyclical bear markets and also 2 or 3 cyclical bull markets, all in the context of a secular bull market.

When a long term move has been in force for a while, people usually get it, and align themselves with the primary trend.  But, they seldom see a major change coming and get properly aligned early in the move, costing themselves significant return.  When the primary trend changes from bull to bear, or from bear to bull, most people are unaware of the change because nobody expects it to occur.  The average investor only seems to forecast a continuance of the current trend.

Things that bother me:

  1. The valuation on the S&P is dangerously high at 34:1 PE.  That is bull market peak territory.
  2. The level of Fed intervention is very high.  We have not had zero interest rate policy (ZIRP) prior to 2008.  There is no longer a risk free return to speak of.  We are forced into the stock market, which has helped to elevate the valuation.
  3. The annual deficit of the US has been too high since 2006 at least, maybe a little earlier.  With the level of debt the nation has, the ZIRP is advantageous to the government, but not to the citizens.
  4. The initial stage of the virus has been weathered with government intervention, but will we see a second stage of economic impact when we have a vaccine, but the economy does not return to its pre-pandemic state quickly.

So, where are we in the stock market cycle?  I think we are still in the secular (long term) bull market that began in March of 2009 at the last bear market low of 660 on the S&P.  Some say we have started a new bull market, but if we have it is no more than a cyclical (short term) one, since we have not had a real bear market since 2009.  The March quick crash was artificial, not a real bear market.  In hind sight, it is probably more appropriate to call it a violent correction since peak to trough was only one month long.  That is not a real bear market.

Here’s the real disturbing thought.  Could it be that a real bear market is still lurking out there?  Could it emerge when the secondary effects from COVID take hold and full recovery does not happen?  Could a bear market emerge when nobody expects it (they usually do)?  The market is disturbingly overvalued, and GDP is anemic.

Congress provides stimulus in the form of tax cuts or spending programs which the president signs, and the Fed drops interest rates to make it easier for the government to carry irresponsible levels of debt.  That is done to pull us up out of recession, or to try to prevent a recession.  At what point does the cure become worse than the disease?

Are we going to fall into a bear market soon?  I don’t know, and nobody wants that.  I think I would be remiss if I did not remind my readers what the possibilities are.  Think about history, think about how these things usually happen.  Then you will have to make your own decisions and conduct yourselves accordingly.

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

What am I doing?  I had a good week, I was down less than 1%.  I sold a few covered calls and a couple of puts.  I sold a few stocks I had bought to trade, that I had profits in.  Does the decline have farther to go?  Probably, mostly in the most overly extended stocks.  There will eventually be a buying opportunity, so think about what to buy when the opportunity presents itself.  I was hoping the correction would hit stocks more broadly, but for instance Merck has not come down at all.

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

Another Record High on the S&P

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:

New home sales increased 7.1% to a seasonally adjusted annual rate of 713,000 units in July.  Durable goods orders in July rose 2%.  For the week ended 8/22, initial jobless claims were 1.0 million, down from 1.1 million the prior week, but still a very large number.  The second estimate of Q2 GDP decreased at an annual rate of 31.7 percent, a slight improvement from the first estimate of -32.9%.  Consumer spending increased by 1.9% in July, the third monthly increase in a row, but the weakest of the three.  Consumer sentiment increased 2.2 points in August to 74.1, according to the U of Michigan, improving but still far below the level of 100 back in January.

All of the data shows improvement in the economy, but at a slower pace than the prior two months.  Housing is exceptionally strong, helped by low interest rates.  This is all artificial, the shutdown caused by the virus was artificial, and this “recovery” is artificial, caused by the government reopening the economy, which operates at levels well below January.  I find it hard to get excited about artificial numbers.

Geo-Political:

Fed Chairman Jerome Powell gave a talk on Thursday at the virtual Jackson Hole conference and said the Fed would focus on average inflation of 2%, instead of the traditional focus on the absolute level of 2%.  There was a slight reaction in the market, an upward bias, because they felt it meant the Fed would hold interest rates lower for longer.  I don’t see how it means much.

There is a lot of news swirling but I don’t see how much of it will impact the stock market.

There is bad news from some large corporations on the jobs front.

Coca Cola said that in order to “minimize the impact” from the structural changes,  it will offer voluntary separation packages to 4,000 employees working in the continental U.S., Canada and Puerto Rico.

American Airlines and Delta Air Lines told their respective employees that the companies plan for massive layoffs in October. American Airlines will downsize 19,000 jobs and Delta plans to lay off nearly 2,000 pilots.

In the first Corona Virus assistance bill last April, the government gave money to the airlines to keep all employees on the payroll through 9/30.  Traffic has not returned to near normal levels.  If the government does not pass a bill soon to extend the subsidy to the airlines, they will have to cut cost dramatically.  If the airlines cut cost, they will undoubtedly cut service to many smaller communities since they are losing money there.  Congress will hear howls from mayors, and CEO’s with plants in smaller towns.  This is going to be interesting.  Massive layoffs at airlines and the howls from affected cities will not be comfortable thirty days prior to the election.  I think Trump would not like to see that happen, so the democrats would appear to get a bargaining chit for a deal in congress.

Technical Analysis:

The S&P was up every day this week, about 1.5% for the week.  It was a strong week, but the technology sector is frothy in places.

Technically the chart looks good, very good in fact.  RSI at the top of the chart was 75, strongly overbought and a minor concern, but in bull market mode, the market can remain overbought for months.  Momentum shown by MACD at the bottom is turning up and positive.  The price action is positive.  I added a vertical aqua blue line on the far right of the chart, from the thin blue 50-day moving average line, up to the current price.  Notice that the price action is farther above the 50-day moving average than usual, and usually following that, at some time, there is a reversion to the mean, a correction.  Nobody know when.  Good buys for the long term tend to come after pullbacks and not at peak overbought levels.

Remember from the monthly update, the valuation of the S&P is extended to the upside, so we have an overvalued overbought market.  That is usually not a good place for making major purchases.  If you see a quality company at a fair price, you can start a position in the company, and try to add to it on pullbacks.

2020 08 28

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

What am I doing?  I started a new small position in AMD.  In a trading account I sold a small piece of JPM at 102 and put in an order to buy it back at 98.  I spent a lot of time trying to sell covered call options, as well as a few put options on stocks I would like to own at lower prices.  I also asked what I would like to outright sell at these lofty market levels, out of my trading positions.  I sold my last IBM shares (a trading stock to me) and put in a buy order at 115.  The market does not have to correct right here, but is probably will in the next month or two.  I’m just playing the odds of what I think should happen.

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

 

Creeping Up to an All-Time 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 Wednesday and follows this post, so just scroll down to read it.

Economy:

Initial jobless claims were 1.1 million in the prior week so hopes of a trend below 1 million per week failed to materialize.  Continuing jobless claims fell to 14.8 million, still a big number.  Existing home sales soared 24.7% in July from June, according to the National Association of Realtors, spurred by low interest rates.

The Conference Board Leading Economic Index (LEI) for the U.S. increased 1.4 percent in July to 104.4 (2016 = 100), following a 3.0 percent increases in June and May.

“The US LEI increased for the third consecutive month in July, albeit at a slower pace than the sharp increases in the previous two months,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Despite the recent gains in the LEI, which remain fairly broad-based, the initial post-pandemic recovery appears to be losing steam. The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020.”

The only statistic that looked good this week was existing home sales.

Geo-Political:

Below are quotes and analysis of the FOMC minutes from their July meeting.  Bottom line, there is still a lot of risk out in the economy going forward.  They said it better than I can.

August 19, 2020 – Federal Open Market Committee members expressed concern at their latest meeting over the future of the economy, saying that the coronavirus likely would continue to stunt growth and potentially pose dangers to the financial system.

At the July 28-29 session, the Federal Reserve’s policymaking arm voted to keep short-term interest rates anchored near zero, citing an economy that was falling short of its pre-pandemic levels. 

Officials at the meeting “agreed that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and was posing considerable risks to the economic outlook over the medium term,” the meeting summary said.

As Chairman Jerome Powell and Fed leaders have emphasized multiple times, the minutes noted a consensus on the need for more fiscal help from Congress, which went into recess without a deal for more rescue funding even as critical elements such as enhanced unemployment insurance remain expired.

The minutes “underscored the need for a fiscal package,” said Quincy Krosby, chief market strategist at Prudential Financial. “Chairman Powell has been adamant that we need to see another package, especially because they see the negative effects of the slowdown.”

Comments further indicated that while members are in favor of adding clarity to their expectations for when they will hike rates again, they appeared to reject the likelihood of using bond purchases to control yields on government bonds.

Stocks gave up some gains after the minutes release while yields edged lower and the U.S. dollar rose.

https://www.cnbc.com/2020/08/19/fed-minutes.html

The market may have taken news of a projection of positive GDP growth in Q3 as an all-clear sign, and the Fed reminds us there is still significant risk to the economy.

I am glad to see the Fed is not in favor of using bond purchases to control the yield curve, as there are still too many artificial props under the economy.  A strong economy does not need artificial props, but it will be some time before all of them are removed.  Today we don’t know what props Congress will choose to reinstate.

Technical Analysis:

The S&P closed up 1% for the week, and sits at an all-time record high.

Technically the market looks good, but it looks tired.  Daily moves by the S&P are small.  RSI at the top of the chart is overbought at 70.  Momentum shown by MACD at the bottom of the chart is very flat and in neutral mode.  The price action is positive, but it appears to be lethargic.

2020 08 21

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

What am I doing?  Not a lot.  With the market overvalued and overbought I thought it was time to lighten up on my trading positions, which have all been small.  I sold SMH, XLK and the SPY I bought recently.  All had small profits.  I had sold covered call options on 26 of my stocks that expired 8/21, no stocks called.  The “closest call” was on VZ, I had sold a 59 call and VZ closed at 58.99 on Friday.  Yeah!  I continue to hold all of my core positions.  I continue to hold some CTL for the dividend, but it has been under water for months and it finally is showing a sign of life and recovered a little (but still under water).  I sold a little GLD recently near the high and it has corrected from 192 to 182, so I’ll watch it next week, may pick a little back up.

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

 

Long Term – August 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.

The stock market has decisively broken above the downtrend that started last March, ending the bear market.  The economy has been operating in an artificial state since the president shut the economy down, then began the process of re-opening.  We had a two quarter recession, but forecasts for Q3 are for positive growth.

Economics:

GDP The first estimate of Q2 GDP is -32.9%.

That number is horrible, but it is an ANNUALIZED number.  The number is always annualized, we just may not have realized it.  So, the economy really contracted by about 8% in Q2.  The final GDPNow estimate for Q2 was -35%, so they came pretty close, a good job by the Atlanta Fed.  My observation is that GDPNow can be far off early in the quarter, but it is revised frequently and by the end of the quarter their forecast is pretty good.

The current GDPNow forecast for Q3 is +19%, which is annualized, so the quarter over quarter growth should come in about +5%.  The recession is projected to have ended in Q2.  If this projection comes true, it will be good news indeed.  Just remember it is only a projection, not a fact.

The economy is at the mercy of the virus.  If we get an effective treatment that will keep people from dying, or if we get a vaccine to prevent people from getting COVID19, that will be good.  Absent a treatment or vaccine, the economic performance will hinge on how well we manage the population to keep the virus under control, through social distancing, hand washing, staying at home, wearing masks, etc.  Last month’s virus hot spots are getting the virus under better control, but still not great.  The nation looks better in terms of new cases per day, but the level is still high at around 46,000 new cases per day nationally.  The medical community is making progress in treating the disease with dexamethasone and remdesivir and preventing more patients from requiring ventilators.

With GDP projected to be positive for Q3, we are exiting the recession levels of Q1 and Q2.  This is bullish for the stock market.  Confirmation will not come in official data until late October.

Year Quarter GDP %
2020 Q2 -33
2020 Q1 -5.0
2019 Year 2.3
2019 Q4 2.1
2019 Q3 2.1
2019 Q2 2.0
2019 Q1 3.1
2018 Year 2.9
2018 Q4 2.2
2018 Q3 3.4
2018 Q2 4.2
2018 Q1 2.0
2017 Year 2.6
2016 Year 2.0

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

This is in response to the corona virus and the two quarter recession that the lockdown caused.  In addition to dropping interest rates to the floor, the Fed announced two asset purchase programs that totaled $3 trillion.  Congress had provided significant fiscal support to businesses and individuals to help them get through this abnormal period, but that ended July 31.  The president extended most of the federal unemployment benefit, if the states chip in part of the money.

Notice the small uptick in the yield on the long end of the yield curve, the 10 year and 30 year bonds both increased a tenth of a percent.  It’s not much, but it could be an indication that traders believe in the positive outlook for Q3, and there are signs of an uptick in inflation.  We have been below the Fed target for inflation of 2%, so that is welcome news.  One month does not a trend make, so keep an eye on this.

Fed policy is strongly accommodative and hence it is bullish. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Aug 2020 0.2 .3 .7 1.4
Jul 2020 0.2 .3 .6 1.3
Jun 2020 0.2 .3 .7 1.5
May 2020 0.2 .4 .7 1.4
Apr 2020 0.2 0.3 0.6 1.3
Mar 2020 0.2 0.7 1.0 1.6
Feb 2020 1.7 1.5 1.4 2.0
Jan 2020 1.7 1.6 1.8 2.3
         
2019 Q4 1.8 1.6 1.8 2.2
2019 Q3 2.2 1.5 1.8 2.3
2019 Q2 2.4 2.1 2.3 2.8
2019 Q1 2.4 2.5 2.7 3.0
         
2018 Year Avg 1.8 2.8 2.9 3.1
2017 Year Avg 1.0 1.9 2.3 2.9

 

Valuation:

S&P earnings – With 90% of the S&P having reported earnings, the blended earnings (90% reported, 10% estimated) decline is 34% versus the same quarter last year.

Last month the question was “how will investors react to such a decline in earnings year over year for Q2”.  I thought the reaction would be poor, but I was wrong.  The market has powered on up, buoyed by the prospect of a better Q3.  The focus from the stock-selling companies and the media has focused on the “good news” that most companies “beat earnings estimates”, even though those estimates were well below last year.

I know that the stock market is forward looking by as much as 6 months out.  But at some point, what really matters is earnings.  That is what you buy a stock for, its ability to deliver earnings that it can use to expand the business and produce greater earnings in the future, or to give some of the earnings back to the shareholders in the form of dividends or stock buybacks.  This will also affect the P/E ratio of the S&P, so let’s have a look just below.

I don’t like forward earnings estimates, and the farther out in time, the less I trust them.  But, with the stock market going up on future estimates of GDP, let’s take a look at earnings estimates.  Factset estimates earnings will decline on a year over year basis for Q3 by 23% and for Q4 by 13%.  Those estimates hardly inspire confidence in the stock market, at least to me.

Earnings are poor and they are projected to remain poor for the next two quarters.  That is bearish.  One interpretation is that there is so much “passive money” in IRA’s and 401K’s that they believe that beating lowered earnings estimates, even significantly lowered estimates, is as good as actually growing earnings.  This will keep me cautious.

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 34, up from 31 last month.  I used 4 quarters of earnings with the most recent being Q2 2020 (90% reported).

This metric is dangerously 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 substantially overvalued.  Above 30 would be dangerously overvalued.

The stock market has moved up, while earnings have not.  This is not a good development.  However, it does not mean that a major downturn is near.  In 1996 Alan Greenspan (then Fed chairman) said the stock market was “irrationally exuberant”, but the major downturn was still 4 years in the future.

This indicator is dangerously overvalued and bearish in this bull market.

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

Geo-Political:

COVID-19 (August 2020):  The northeastern states have gotten the virus under control presently.  After a surge of infections in the south and western states, they are stabilizing.

COVID-19 Vaccine (July 2020):  Moderna begins Phase 3 clinical trial of their vaccine by the end of the month and it is fully populated so readouts are expected by October.  They are manufacturing and stockpiling the drug with money from the government, so if the trial is positive they can begin prioritized inoculations under an FDA Emergency Use Authorization (probably first responders first, then elderly with co-morbidity).  Broader availability would probably be in early 2021.  This is as good as could be expected if it stays on track to success.

Oil War (March 2020): Corona virus has curtailed activity and therefore demand for oil.  The Saudi’s, Russia, and the US have come to agreements on production cuts and the price of oil has stabilized, but at a low level of $40 per barrel (July 2020), up from the low $20 range.  This remains a negative for US oil jobs, which are a significant sector of US employment.

Trade War with China (August 2020): This has peculated up again with the US trying to force a sale of TikToc to US hands.  We can look for China to retaliate.

Global geo-politics forces are so powerful that they are bearish.

Technical:

Technically the chart is positive.

RSI at the top of the chart is neutral at 64 but slowly moving up.  MACD at the bottom is positive with the faster moving black line crossing above the slower moving line, and they are moving up.  The price action is clearly positive, up for 5 months since the crash in March.  The price action is up near the top of the range and that is a bit of a concern and bears watching.

2020 08 18 Long Term

Click on this LINK to open the chart in a larger separate window.

This is bullish for stocks.

Conclusion:

Following a two quarter recession, projections point to GDP returning to growth in Q3, so that is bullish.  The Fed has short term rates near zero and plans to hold them there through 2021, plus they are buying bonds to keep longer term rates low, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q2 were 34% below Q2 last year and they are projected to be below last years level again in Q3, which is bearish.   The PE valuation of the S&P based on the 12 month trailing GAAP number is 34, which is bearish.   The geo-political factors (COVID19 virus and downturn in US oil jobs) are bearish.   Technically the chart looks bullish.

By that way of looking at it, the market is neutral, three factors bullish and three bearish.  A successful vaccine in the near term would brighten that outlook considerably.

My conclusion is that short term I am remaining cautious based on the position of the large indicators I follow.  The outlook should brighten after we get through an ugly Q2 earnings season, as long as the good news on the vaccine continues to come in.

Long Term Issues to Keep in Mind:

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

(Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $23 Trillion (late 2019), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies.

Rich Comeau, Rich Investing

It’s a Slow Grind

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 Wed. the 19th.

Economy:

The consumer price index rose 0.6% for the second month in a row; the cost of living had declined from March through May during the height of the crisis.  The increase in consumer prices over the past 12 months rose to 1% from 0.6% in June.  Initial claims for unemployment benefits declined to 963,000 last week from 1.19 million at the end of July, while continuing claims fell from 16.1 million to 15.5 million.  This could be partly due to 1) re-opening the economy, or 2) the end of the extra $600 per week of unemployment benefit, or 3) people giving up and no longer looking for a job.  Retail sales rose 1.2% for July, not too bad.

We had some terrible numbers during the lockdown and some big good numbers in the re-open, which were all artificial and rather meaningless in the long run because we know exactly why they happened.  Now we are getting back to normal and we’ll find out what the new normal is for economic activity.  The question is, now that we’ve re-opened, for some definition of “re-open”, what is the residual damage?

We know the damage (or benefit to the “stay at home” companies like Zoom and Amazon) to the public companies, but we don’t have a good feel for damage to the “Mom and Pop” companies, restaurants, hair salons, small retail shops, vacation services like rafting trips, vacation condo rentals, etc.  It will take a while to figure that out.

Geo-Political:

It seemed like a quiet week for geo-politics.  No new news on the TikToc deal, little news from China.

There was a lot of bumping of gums on the next round of virus relief, and not much accomplished.  Trump extended the federal unemployment benefit at $400 per week, via executive order.

The virus is grinding along and 8 large cities were put on notice their infection rates are accelerating.

Russia said they approved a vaccine for COVID19, which they would sell to the US, but the health professionals I heard were skeptical.  Their concern was that the testing period had been too short.

Technical Analysis:

The S&P was up less than 1% in a quiet week.

Technically the market is in good shape, with one concern.  RSI at the top is near overbought at 69.  Momentum at the bottom is neutral, moving sideways.  The price action is positive, moving up week after week.  The concern is the overbought status in a weak economy, following Q2 earnings that generally beat expectations (that were set very low), and were far below last year’s levels for most companies.  Obviously the stay at home stocks did well.

The Feb. all time high was 3386 and we are within spitting distance of that.  Will we show some vigor and power up through the old high and set new records, or will we form a double top here and move into corrective mode?  The S&P P/E valuation is very high so that’s a risk factor.  We can probably expect some dirty tricks in the election that could inject some volatility.

The market advance, while it has slowed, it has also broadened out.  Folks are expecting a small positive growth for Q3, and people are expecting that to be shared by more companies.  The big 5 tech stocks are slowing down.  That should change your philosophy a little.

2020 08 15

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

What am I doing?  I sold covered calls on many of my individual stock positions, but while most of my older covered calls will expire on 8/21, the new ones I am selling are for 9/18.  I also sold a few put options for stocks I would like to buy cheaper, like MRK.  I finally bought SPY after a long time avoiding it, because the advance is broadening out.  With risk around, I buy small lots and put a 4% trailing stop loss percent order under the SPY.  If the market holds, in a few days I buy another small lot and put a 4% trailing stop percent order under that piece.  The banks rose a little on the growth outlook for Q3, which raised longer term interest rates a tad.  That helps banks a little on their Net Interest Margin (NIM), which affects what they pay for deposits and charge for loans, so it is a major determinant of their profit margin.  When rates get very low, the NIM can’t be high.

If the market heads south I will keep my core positions, mostly in the big banks now, but lighten up on trading positions.  The SPY I bought recently is a trading position because I bought it at a very high market valuation, so it could fall a lot.

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

Near All-Time High on the S&P

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 ISM manufacturing index rose to 54.2% from 52.6% in June, marking the highest level in 15 months and the third straight month of increase, but it is off the extreme low reading of 42 for April.  The ISM services index was 58.1 in July, up from 57.1 in June.  Motor vehicle sales were at a 14.5 million annualized pace for July, up from 13.1 in June.   Factory orders were up 6.2% in June following a 7.7% rise the prior month.  Initial claims for unemployment slipped for the first time in three weeks to 1.19 million from 1.44 million the week prior, while continuing claims fell from 17 million to 16.1 million.  On first blush this looks good, but it could be that business closures have already happened in Calif., Tx. and Florida several weeks ago as more stringent regulations were reimposed to cope with the second wave of COVID19 cases.  The unemployment rate in July was 10.2%, down from 11.1%.

The economy continues to recover in some segments from very low levels plumbed during the shutdown in April.  The hardest hit companies, hotels, cruise lines, airlines and malls have not started to recover yet.

Geo-Political:

The seven day average of new Corona virus infections in the US has fallen from 66,000 in mid July to 55,000 currently.  More mask ordinances and closing of bars has helped, but the infection numbers are still very high.  Young people in particular are going to parties and not wearing masks, and while the odds of them getting a serious case of the virus is low, if they are infected they will spread it to others, keeping the virus going.  As we move into September the flu season will begin and doctors believe COVID19 could hit harder as the weather cools in the fall.

The COVID relief bill is stalled in congress and that could weigh on the market, but most market watchers think a bill will be passed eventually.

Trump is pressing the China trade war harder.  After declaring that Tik Tok cannot do business in the US any longer, raising the prospect that Microsoft will buy the US business, Trump came out today and said US companies cannot transact business with TenCent, owner of WeChat.  The full impact of that order is not understood, but it could have negative impact for some US companies like McDonalds that use WeChat to communicate with customers in China for their Chinese stores.

There is a list of US applications that are banned in China on Wikepedia.  That was done initially to allow China to catch up to the US applications, but the administration now seeks a more even playing field.

Technical Analysis:

The S&P rose 3% last week and is just a couple of percent below the all-time high from February.

Technically the market looks good, with one caution.  RSI at the top of the chart is rising at 70, which is short term overbought.  Momentum shown by MACD at the bottom of the chart is flat but is beginning to rise slightly, and that is good.  The price action is very good, up all five days last week.  The only caution is that RSI is overbought.  In a real bull market the market can get overbought and stay overbought for months, look at the period from Dec. 2019 into Jan. 2020.  In weaker market periods, when you get overbought, you tend to stay overbought for short periods of time, like the period at June 8th.  I’m cautious.

Here is the Conference Board’s take on the economy for Q3 and Q4, and they are usually apolitical.

July 8, 2020 – The Conference Board currently has three recovery scenarios for the US economy. Our base case forecast, which we call the ‘Double Dip’, includes a second quarter GDP contraction of nearly 40 percent (annualized). This large drop is driven by a fall in consumer spending of nearly 40 percent, a drop in real capital spending of just over 30 percent, and a fall in exports of more than 50 percent (all annualized). Following a large rebound of over 20 percent in Q3, we expect growth to slow to around 1 percent in Q4 which will bring the December 2020 level of economic output to about 93 percent of what it was a year earlier.

Based on our updated forecast, US GDP will contract by 7 percent for 2020 on the whole. However, upside and downside risks for the economic recovery remain. In the event that COVID-19 is rapidly brought under control, unemployment could ease further, and consumer confidence could rise, resulting in a stronger ‘Swoosh’-shaped recovery which brings the economy back to pre COVID-19 levels of output by the end of 2021. On the other hand, a large second wave of COVID-19 cases in the autumn that results in widespread economic lockdowns could yield a weaker ‘W’-shaped recovery that would hurt fourth quarter growth and extend this economic crisis into 2021.

https://conference-board.org/research/us-forecast

The market appears to be betting on the Conference Board’s base case, Q3 GDP running +5% (not annualized), following Q2’s -8% (not annualized).  The bet is that the two quarter recession (Q1 and Q2) is over and Q3 returns to growth.  That’s good.  But, remember that earnings are still far below comparable periods in 2019 and the market remains dangerously overvalued on the basis of the S&P P/E ratio.

The Conference Board does not mention the congressional stimulus bill, so they appear to have assumed it will get done without causing too much damage in the meantime.  I agree with the Conference Board on this one.  The general thinking is that the economic damage will be too great if nothing is done, and not even our politicians in Washington are that dumb.  We’ll see.

2020 08 07

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

What am I doing?  I’ve been buying small starter positions in stocks and a few ETFs.  I bought a little of KWEB, the Chinese internet stocks, which was hurt this week by the president’s action, but my trailing stop did not hit.  I worked on selling call options against stocks I hold in order to generate a little income.  If the stock is a long term hold then I put the strike price of the call option much higher than the current stock price, hoping that it does not get called.  If the stock is one I bought to trade, the option strike price is probably somewhat closer to the current stock price to capture a higher option premium as I would be happy to turn a quick small profit and try to buy the stock back at a little lower price.  On the “starter positions” I have usually sold put options on the stock in an effort to generate some income and possibly buy more shares at a lower price.  Being cooped up, it keeps me busy.  I sold my SLV since it had been overbought for a month and I will look to buy it back at a lower price.

———————–   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.

 I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

Largest Tech Stocks Post Good Earnings

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:

Durable goods orders climbed 7.3% in June.  The initial jobless claims for the week ended 7/25 was 1.43 million, a tad higher for the second week running.  Continuing jobless claims were 17.1 million, up from 16.2 million the week before.  Looks like 500,000 went back to work, but 1.4 million got laid off and the difference, 900,000 was added to continuing jobless claims, which is a move in the wrong direction.  I don’t normally report on continuing claims but the numbers are so large you have to report on them to try to understand what is going on.  The U. of Michigan consumer sentiment index for July was 72.5, down from 78.1 last month.  It appears that the news of the virus resurgence in the south and west has unsettled consumers a bit.

The first estimate of GDP for Q2 came in at -32.9%, a horrible number on the surface, but everyone has been expecting it.  I just learned that the number is actually “annualized”, so unless they do any seasonal adjustment, the real quarterly number is more like -8%, still a scary bad number.  This is not the government trying to scare anyone, it is the government reporting the number the same way they always do.  Normally the quarterly change in economic output is gradual, but in the artificial economy of the pandemic, it was rapid.  Don’t fight it, just try to understand the numbers.

There are no good numbers.  The most concerning numbers are the initial and continuing jobless claims, because they show “right now” on a weekly basis that the job situation has not gotten better for two weeks, it has gotten worse.  Two weeks may not mean much, but it definitely means “keep your eye on this space”.  We are in Q3 now, and this will have a lot to do with Q3 GDP and earnings.

Geo-Political:

The virus is continuing to stomp through the south and west.  We’re getting more “mask orders” to wear masks in public.

China reports their GDP grew by 3.2% in Q2 after shrinking by 6.8% in Q1.  The +3.2% is half their usual growth rate.

We didn’t hear anything on the China trade war last week.  We did just sign a deal in January, didn’t we?

Congress continues to haggle over what the Phase 5 corona virus relief plan will be.  If the recent pattern is followed, they will haggle until the day they leave town for the August recess, and sign a deal at the last minute.

Technical Analysis:

The S&P was up 2% last week.  The largest tech stocks reported and investors liked what they saw.  The only one that didn’t impress was GOOG.

Technically the chart is neutral.  RSI at the top is at 60 and going sideways.  Momentum shown by MACD at the bottom is going sideways so its neutral.  The price action the last few weeks is in a tight band and going sideways, so its neutral.  The one outstanding item on the chart is the market’s rise over the purple down-sloping trend line.  The rise above the trend has been sustained for 3 weeks, so technically the downtrend has been broken in both magnitude and duration.

Now, lest everyone break out the Champaign, the chart is not the economy, nor is it the sole arbiter of the stock market.  It is one tool among many.  When we look at the economy in the first section of this report, it is weak, and unemployment is slowly headed back in the wrong direction as a result of virus resurgence.

We have an unprecedented in our lifetime pandemic and we have unprecedented stimulus from congress and the Fed.  So far, congress and the Fed have at least held their own.  What will happen as the virus grinds on?  The brunt of the virus has been felt in airlines (but the govt. gave them money to pay employees through Sept. 30), hotels, cruise lines, malls and retailers, restaurants and the oil industry.  We’ll see a new round of layoffs in Oct. by the airlines.  As consumers hunker down, this will eventually work its way into the broader economy and congress and the Fed may not be able to hold the line against the virus.  This would start to show up in Q3 and Q4.  Is that going to happen?  I don’t know, tell me the size of the Phase 5 relief package.

All of the money printing is having an impact on the value of the dollar, knocking it down 5% since January, which is a big move down for half a year.  The price of imports will rise, and we have seen a run-up in gold.

2020 07 31

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

What am I doing?  Again, not much.  I started a position in MRK with a small buy.  I’ll try to sell a put to add to it, and hang a lowball buy for some to try and catch it on a pullback.  Two weeks ago I sold a little JPM at 101, and replaced it last week at 97.  I sold an INTC put at a 45 strike.

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing

Largest Tech Stocks Correct a Little

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 surged 21% in June over May to a seasonally adjusted annual rate of 4.72 million,  but it is 18% lower than in February and down 11.3% from a year ago.  New home sales surged 13.8% in June to a seasonally adjusted annual rate of 776,000.  Initial jobless claims for the week ending July 18 increased to 1.42 million, which is the 18th straight week they have exceeded one million.  The Leading Economic Index increased 2.0% in June following a 3.2% increase in May.  At 102.0, the index level is 8.8% below the level it hit in February.

New home sales are a bright spot, spurred by low interest rates.  The market was spooked by the increase in initial claims for unemployment in a supposed recovering economy.  The LEI is moving in the right direction, but from a very low base so it is not as good as it seems.

Geo-Political:

The virus situation is unchanged for most of July, with a resurgence in the South and West, and relatively good news on a vaccine sometime in early 2021.  Opening the schools is the thorniest issue at present, with very mixed messages coming from the administration, but generally urging re-opening of the schools, and concerns from teachers, parents, and state and local public health officials urging caution.  I think the main teaching method will be online at first.  Most experts agree, you cannot fix the economy unless you get the virus under control.  We have failed to get the virus under control.

Tension is rising with China again.  The US has closed their consulate in Houston and China retaliated by closing one of ours.  There are three months to the election and Trump will want to dictate the events that the news covers and may want to do this to take the focus away from the COVID19 situation and poor economy.  He could have closed their consulate any time after starting the trade war two years ago.

In Congress, the extra unemployment benefit of $600 per week expires the end of July.  I think it will come back at a lower level, but the dems and repubs will feel they need to put on a show, so there will be some acting for TV folks and then a compromise in my opinion.  The dems want money for the states to offset higher expenses they incurred due to COVID19.  Let the show begin.  Meanwhile in the stock market there is a little concern that if a compromise is not reached and individuals can’t pay their rent, a wave of evictions could ensue, and homeowners may not be able to make payments on homes and auto loans.  That would hurt the banks, so I think Congress will act.

It has been a while since I looked overseas, but let’s look at Europe today.  The ECB met last week and held interest rates at zero, no surprise.  Also in the EU:

July 21, 2020 – EU leaders reached a landmark €1.82 trillion budget and COVID-19 recovery package early Tuesday morning.

It comes after days of sometimes bitter discussions over the seven-year budget and recovery package which includes jointly borrowing a €750 billion recovery fund to be shared as grants and loans.

Speaking to reporters, European Council president Charles Michel called it a “good deal”, stating that “Europe is solid”.

European Commission President Ursula von der Leyen, meanwhile, underlined important concessions made in the search for a compromise, saying she regretted the cuts to “modern policies” in research and innovation.

The recovery plan includes €390 billion worth of grants and €360 billion worth of loans due to a compromise with the so-called frugal four, now five, countries — Netherlands, Austria, Finland, Sweden and Denmark.

https://www.euronews.com/2020/07/21/eu-summit-deadlock-see-talks-stretch-into-sunday

Everyone is trying to prop up their economies that have been damaged by COVID19.

Technical Analysis:

The S&P was down 1% for the week, a well deserved rest.  The high flying tech stocks that have led the market since the March low, had reached nose-bleed levels and finally came back in a little.

Technically it looks like the market wants to correct here.  RSI at the top is neutral at 56, but it in a slight downtrend the last week.  MACD at the bottom of the chart is neutral in a sideways trend, but the faster moving black line has come down to touch the slower moving line.  The price action was down for the week.

Earnings have been coming in as poorly as expected.  Factset had projected earnings to be down 45% vs. a year ago, and the latest I saw is that so far they are down 35% with a lot of reporting to go.  Next week the big tech stocks will report and that will be very important.  The talking heads seem to talk up many earnings as “they beat expectations” like that is such a big deal, but the expectations were 40% below last year.

The narrative has been that stocks don’t need to fall because they are “looking through Q2” to the second half of the year where they expect to see a recovery beginning.  The problem with that narrative is that the vaccine will not be widely available until first half of 2021, and the virus is surging is three large states (Fl., TX. and Calif.) plus much of the south and west.  Stocks remain vulnerable in my opinion.

2020 07 24

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

What am I doing?  Not much.  I had three call options expire on 7/24 and no stock was called, so I just collected the option premium.  For a stock that does not pay a dividend, this is a way to generate some income, but if you do not select a strike price that is high enough, you can have your stock called away.  That could be bad if you wanted to keep the stock, but it could be good if you sold at a nice high price and can them buy the stock back on a pullback.

My latest call option on JPM expired so in the coming week, I will try to sell an 8/21 $120 call.  My last call was at 110, but the stock moved up from 93 to 98 and briefly went to 101, so at 110 there is a higher possibility that it may get called than I am comfortable with.

I had a low ball buy order (29.50) for a small position in T that hit last week.  I sold a VZ 8/21 $59 call that is covered by my shares.  Most of my option deals are 30 days so I collect a decent “time value” of an option contract.  Then as time goes by, the time value decays toward zero.  If the stock happens to drop, occasionally I will buy the option back after a week or two at a very low price, then sell a new 30 day option with a bigger “time value”.  That only occurs on one out of about 20 option trades.

I look at bonds occasionally, but the yield is so low that I don’t see any value in buying them.  I have some shares of our Houston utility, CNP, purchased around the current price.  I don’t want to load up on utilities because the PE ratios have been pushed up above historical norms by people looking for steady yield.  I think they should be safe while the Fed keeps the Fed Funds rate near the zero bound, but in a couple of years utility prices could fall when the Fed raises interest rates to be more competitive.

———————–   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.

I will do trading in my IRA account.  I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains.  JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples.  At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a 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.

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.

Rich Comeau, Rich Investing