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.
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.
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.
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.
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.
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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