Big Bank Earnings are in

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 this past Wednesday, so it is just below this post.

Economy:

The Consumer Price Index increased 0.6 percent in June on a seasonally adjusted basis after falling 0.1 percent in May.  It was led by the increase in oil prices.  Initial jobless claims in the prior week were 1.3 million, higher than the worst week of the 2008 crisis, reflecting the continuing problem with the economy.  Retail sales rose 7% in June after the 18% increase in May, but these numbers are just coming off the low lockdown levels of April.   Consumer sentiment flash for July from U. of Michigan is at a current level of 73.20, down from 78.10 last month and down from 98.40 one year ago.

The initial jobless claims are very high and show an economy under stress.  The fall in consumer confidence reflects concerns on main street about the COVID hot spots in Fla., Tx., California and Arizona.  Those 4 states represent 20% of the US economy.

The stock market looks good, but that is the large publicly traded companies that can weather big storms.  The unemployment stems from the smaller private economy, restaurants, bars, gyms, retail stores, and things are bad in that segment.

Geo-Political:

The virus is raging in the south and southwest.  We’re getting mandatory facemask orders, bars are being shut in areas, in general state and local government are passing new restrictions to slow transmission of the virus.

On the positive virus front, it appears progress in being made on the vaccine front with the possibility of broad availability during the first half of 2021.

Consumer sentiment as well as stock market sentiment are driven by COVID news.

We are close enough to the presidential election that some thought is being given to what a democrat administration would mean to business.  Some worry about regulation if Elizabeth Warren became Treasury Secretary, or what the democrats may do to regulate drug prices.  The US pays the highest drug prices in the world, which proves we don’t have a free market for drug prices.  But with all the big pharma lobbyists in DC, I don’t think the drug companies have too much to be worried about.  The stock market did fine under the last two democrat presidents, Obama and Clinton.  Biden is a moderate also.

Technical Analysis:

The S&P was up 2% on the week.

Technically the chart is like last week, neutral with a slight upward bias.  RSI at the top remains neutral at 60 and moving sideways.  Momentum shown by MACD at the bottom is neutral and moving sideways.  The price action is mildly positive but mostly moving sideways.  It is noteworthy that the price action has moved up above the down-sloping purple line, the current trend.  But, it has not done so decisively, yet.

JP Morgan reported Tuesday and EPS was $1.24, down 51% from the same quarter last year, but up 77% from Q1.  They took a $10 billion reserve for bad debts, up from $8 billion in Q1.  But for JPM and the other big banks, the story going forward gets worse.  Consumers who sought forbearance on their loans actually continued to make payments, due to the $1,200 per adult gift to most adults from Congress, and the extra $600 per week from Congress paid to the newly unemployed.  These payments from the government will be cut back after July 30.  Things will probably get worse going into the fall (the airlines are preparing for major furloughs and layoffs) and not improve until the vaccine is widely available.

2020 07 17

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

What am I doing?  Not much.  I sold some covered calls to add to my cash flow.  On 7/17 I had a ton of covered calls expire and only a few were exercised, PFE, CAT, and JNJ.  All were called within $1 of their current price, so I will put buy orders in to buy them back at a lower price.  I had an INTC 55 Put expire.  Sometimes I sell a Put instead of entering a buy order.  Let the market pay me to hang a buy out there.  The problem with that plan is sometimes the stock will sink below the Put strike price, then recover above it, and you didn’t actually buy the stock, where with a straight buy order, you would have bought the stock.  Alas, there is no perfect way to make money in the stock market, or we’d all be rich!!!

My biggest position is JPM and I have a 110 call that expires on 7/24.  Right now it looks like I will keep the stock, which is my objective.  I sold the call 3 weeks ago, I usually go 4 weeks out, and got 1/3 of a percent for the option premium.  Last month I sold the covered call and got 1%, so we see that volatility has come down and that has brought down option premiums in the banks.  When this option expires, if I keep the stock and JPM is selling around $100, my next option trade would be an 8/21 $120 call.  I want to keep the stock, so as it rises, I have to move the strike price higher which means the option will sell at a lower premium and it limits my income.  If the stock price is moving up, that is a good thing, better than capturing a relatively small option premium.

———————–   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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

 

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 – July 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.

We saw a change in the primary trend in March 2020, from bull market to bear market, in my opinion.   This bear market is rather unique, brought on by a biological event rather than economic or geo-political event.  There was little foresight into this.  With the internet and computer trading, the ability exists today to move huge sums of money very rapidly, so even if you want to get out “relatively soon after a bear market begins”, a whole lot of damage can be done before you get out.  Welcome to modern times.

Economics:

GDP –  The third estimate of Q1 GDP was unchanged at -5%.

The following quote is directly from the current Atlanta Fed GDPNow page: “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2020 is -35.5 percent on July 9.”

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 virus is accelerating in Florida, Texas and Arizona, so those states are not doing a good job managing their populations.

With GDP being negative for Q1 and assured to be negative for Q2, we are in a recession.  This is negative for the bear market.

Year Quarter GDP %
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 drastic decline in the stock market.  Most think it will not do anything to help business and the stock market since the problem is human health related and not originated in the economy.

In addition to dropping interest rates to the floor, the Fed announced two asset purchase programs, the first of $1 trillion, and the second of $2 trillion.  There is no tax to cover this, they are just printing money and putting this on the Fed’s balance sheet.  They are buying anything, including corporate bonds and corporate junk bonds.  This is supporting the stock market currently.  Fed Chairman Powell indicated following the June Fed meeting that the road to recovery will be slower than most seem to be expecting.

Congress has provided significant fiscal support to businesses and individuals to help them get through this abnormal period.

Fed policy is strongly accommodative and hence it is bullish. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
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 – Factset estimates that Q2 earnings for the S&P500 will be 44% BELOW Q2 of 2019.

That is very bad, the worst since Q4 2008 in the last financial crisis.  The question will be, how do investors react to these bad numbers?  Some on CNBC say it is known the earnings will be bad, and the market keeps going up as investors look ahead to better times in Q3.  I don’t believe that will happen.  Bad earnings numbers in my experience produce falling stock prices, immediately, like that day, within minutes of the announcement.  Some companies will put up earnings beats, like perhaps Google, Amazon, Facebook, Netflix, Microsoft.  These companies have not been negatively impacted by the Corona virus.  Most other companies have been negatively impacted.  I’m cautious.

The market is highly unbalanced.  You have huge losers like airlines, malls, cruise lines, hotels and energy stocks, and huge winners like the FANG names (Facebook, Amazon, Netflix, and Google) plus Microsoft and some of the stay at home names like Zoom and Docusign.  The concern is that the winners may  have been pushed to dangerously overvalued levels, like Tesla.

Many companies have pulled guidance so I am not sure how Factset has arrived at their estimate.  Let’s take this number with a grain of salt, it could be off by a bit.  Anywhere close to the estimate however would be a bearish view.

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 31, up from 27 last month.  I used 4 quarters of earnings with the most recent being Q2 2020 (4% 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 egregiously or dangerously overvalued.

I am doing something unusual for me this month, I am using Q2 estimated earnings (only 4% reported so far), which is not exactly the full 12 month trailing GAAP PE, it’s just 9 months of trailing.  I did this because the current quarter estimated earnings of $19 knocks off a quarter of $33 earnings and substantially changes the PE.  Why?  First, we are IN Q2 reporting so S&P should have a good idea of the numbers.  Second, the difference between a nine month old number of $33 earnings is very different from the more current $19, so I think it is more relevant.

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

Age of primary move, bull or bear market – The new bear market is five months old.

Geo-Political:

COVID-19 (July 2020):  The northeastern states have gotten the virus under control presently.  The south and western states began opening their economies before they showed declining cases and they have had poor compliance with face masks and distancing.  Now the southern and western states are showing concerning increases in virus cases, particularly Florida, Texas, Arizona and California.  Those hot spots are implementing restrictions to try and avoid hospital overflows.  That will dampen Q3 GDP more than previously expected.

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.

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

Technical:

Technically the chart looks neutral with a bias to positive.

RSI at the top of the chart is neutral at 60 but slowly moving up.  MACD at the bottom is moving sideways and is neutral, but the faster moving black line has turned up.  The price action is clearly positive, up for 4 months since the crash in March.  Price action has moved up into the up-channel stocks have been in for the last decade, a good sign.

2020 07 15 Long Term

The chart looks like the bull market did not end, that the March crash was just a severe correction.

This is bullish for stocks.

Conclusion:

This is where is gets very interesting.

GDP is in a recession so it is bearish.  The Fed has short term rates near zero and plans to hold them there for the foreseeable future (2 years), plus they are buying bonds to keep longer term rates low and provide liquidity to the bond market, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q2 are projected to be -44% compared to Q2 last year, which is bearish.   The PE valuation (trailing 9 month GAAP PE  with Q2 estimated) is 31, 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 bears have it four to two.  A successful vaccine in the near term would brighten that outlook considerably.

Most expect that Q2 earnings will be the bottom for the economy.

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

Re-opening Difficulty Hangs Over the Market

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on a Wednesday soon after the 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 Wednesday the 15th.

Economy:

The ISM non-manufacturing index jumped to 57.1% in June from 45.4% in May; that’s a big jump but understandable given our artificial lockdown and restart.  Initial jobless claims fell to 1.3 million in the prior week, which is still higher than the worst week during the 2009 financial crisis and indicating that plenty of layoffs are still occurring.

The initial jobless claims number is the one that counts in this economy, and things are still bad out there.

Geo-Political:

It’s all about the virus, and cases are spiking in Florida, Texas, Arizona and California, so the governors are backing off of some of the re-opening rules and implementing new rules on facemasks, size restrictions on indoor groups, and closing down bars.  To whip corona virus, the people have to do their part, with wise rules from government.  It appears that both are failing, individuals and government, and the virus is winning at this point.  Dr. Fauci called the shot, you open up irresponsibly and you give the virus an opportunity to take off again.  It does not appear that warm weather has affected the virus like it does the flu virus, and corona continues to spread.

Congress continues to work on a Phase IV relief plan for the corona virus, but bi-partisan agreement looks a bit harder to reach this time.  That is probably just “the show” before they agree to a compromise.

Meanwhile the airlines are starting to send layoff notices to employees, giving them a union-required 60 days notice of pending job action.  The government paid all the airline workers through Sept. 30, so unless there is a provision in the Phase IV bill, there will be furloughs and layoffs starting Oct. 1.  That will be throughout the airline industry.  Bookings were picking up in May and June, but began to fall sharply in July when the case counts began to rise significantly.  If you want the economy to improve (excluding Amazon, which is doing fine), then you MUST get the virus under control.  The US is not getting the virus under control.

July 8, 2020 – United Airlines is warning 36,000 employees — nearly half its U.S. staff — they could be furloughed in October, the clearest signal yet of how deeply the virus pandemic is hurting the airline industry.

The outlook for a recovery in the airline industry has dimmed in just the past two weeks, as infection rates rise in much of the U.S. and some states impose new quarantine requirements on travelers.

Airlines say they must shrink to match falling travel demand. American Airlines executives have said they could have 20,000 more employees than the airline will need this fall.

https://www.startribune.com/united-sending-layoff-notices-to-nearly-half-of-us-employees/571675642/

Technical Analysis:

The stock market was up 1% on the week.

Technically the condition of the market remains neutral.  RSI at the top of the chart is 60, neutral and moving sideways.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  The Price action is neutral and moving sideways.  Something should give, as earnings go into high gear next week with all the big banks reporting, kicked off by JPM on Tuesday.  Notice how the S&P has snugged up to the purple downslope line.  That’s the current trend, mildly down.  If the market can decisively break above the downtrend that would bode well for further gains.  If the market fails here due to poor earnings, the bear market will continue.  Do I believe that technical analysis holds all the answers to the direction of the market?  No, that is why I lift up my head and consider what is actually going on in the economy, and what is going on geo-politically.  I use a multi-prong approach.

Earnings will generally be poor, except for businesses that have benefitted from the stay at home economy, companies like Amazon, Netflix, Zoom and a few others.  The MACH 4 will do very poorly, malls, airlines, cruise lines, and hotels.  The market should take its queue from earnings.

The poor response during the re-opening and resurgence of the virus in hot spots will cast some doubt on the robustness of the economy during Q3 and Q4.  When a vaccine shows up will also tell us something about the economy in Q3 and Q4, and many now say 2021 Q1 or Q2 is more likely for a vaccine, which will dampen enthusiasm for the fall.

There is concern among market watchers that so much of the stock market gains are in a very few stocks, Amazon, Netflix, Apple, Alphabet, Microsoft and Tesla.  Amazon sells at a PE of 140 and that is too rich for most market pros.  They have been selling these market leaders slowly into strength.  They still hold some, but at much lower entry points.

2020 07 10

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

What am I doing?  Not a lot.  I sold call options on most of my bank core positions, just like last month, and they expire on 7/17 so we’ll see.  Last month I sold 22 call options and kept every stock, and I liked that.  Some quality names are in trading ranges, so I’ve been buying VZ during pullbacks at 52-53 and selling calls at 57-58.  I’ve been raising some cash on trading positions, I mentioned I had bought IGV last month (software ETF), and I cashed out of it with a gain.  These have been small buys because I know earnings will be poor and that will leave the market in a risky spot.  I kept all my core positions although they will go down in the next correction; I just don’t expect them to get killed on the next decline.

———————–   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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

Earnings Season Knocking on the Door

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 climbed to 52.6% from 43.1% in May, a big jump but we know the economy is artificially run currently.  Non-farm payrolls increased by 4.8 million in June, but this is just furloughed workers returning to their jobs as states ended lockdowns.  The unemployment rate fell to 11.1% in June.  Initial claims for unemployment in the prior week were 1.43 million, so even as many workers are returning to their jobs, others are still losing theirs.  It’s a very uneven economy.  Factory orders were up 8% in May after being down 13% in April.

The economy is very choppy right now.

Geo-Political:

It’s mostly about the virus now, and how successful the US and the world are doing with re-opening.  Increasing case counts in Arizona, Texas, California and Florida are a significant concern.  Texas now has a mandatory statewide facemask requirement (with minor exceptions), bars were ordered closed again, and indoor dining spaces were put back to 50% occupancy.  The quick re-opening of the economy looks like it will not work without remediation efforts.  Facemasks, testing, contact tracing, social distancing are the CDC recommendations.

Trump is trailing in the polls for the Nov. election.  There is still a lot of runway, but some investors may get skittish at the prospect of a Trump loss.  Biden has said taxes will go up if he is elected with a democrat senate, and that would pinch corporate profits.  Some feel that will hurt the stock market.  On the other hand, Clinton raised taxes in the early 90’s and the stock market was red hot the second half of the decade.  Of course, it is not all about the tax rate, there are many other things going on in an economy all the time, such as the internet innovations of the 90’s.  The negative side of the Trump tax cuts is that the nation’s annual deficit has doubled without counting all the COVID stimulus.

These are all unhappy topics nationally and not good for the stock market.

Congress is working on a bill to address national needs in the wake of COVID, like compensating the states for expenses that were not in their budgets for dealing with COVID, continuing federal unemployment assistance after the initial program expires on July 30 (at a lower rate so workers have an incentive to return to work), and continuing to provide loans to small businesses to help them survive the downturn.

Technical Analysis:

The market was up about 3% for the week.  Much of that was on talk of the Phase 4 congressional stimulus.

Technically I would call the chart neutral.  RSI at the top is neutral at 57 and rising.  MACD has paused its downtrend and is moving sideways, and the histograms are moving up to the zero line, which is neutral for the short term.  The price action was positive on the week, but over the last month has been in a sideways small trading range from 3000 to 3150.  I think the key feature will be what happens at the down sloping purple line, at 3200.  Will it break through to the upside decisively on good earnings, or will poor earnings cause it to go down and keep us in the dog house longer?  Factset says earnings will be poor for Q2, so let’s see what happens.

2020 07 03

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

What am I doing?  I put orders out to sell covered calls on my holding positions and on some, I didn’t sell the call option, I just put a high ball ask price and we’ll see if it hits.  I sold some of my trading positions.  I had some XOM in two accounts, I sold the one I bought at 40 for a profit and kept the one I bought at 60 for the dividend, and I have a high ball order to sell a July 60 call on it.  I took a profit on IBM and put in an order to buy it back lower.

—————-   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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

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

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  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

Corona Concerns Send Market Down

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 occurred at a seasonally adjusted annual pace of 3.91 million, 10% below the prior month and the lowest level for existing-home sales since July 2010.  New home sales occurred at a seasonally-adjusted annual rate of 676,000 in May, a 16.6% increase from April. Initial jobless claims for the prior week were 1.48 million, lower than recent weeks, but still a very high number.  The third estimate of Q1 GDP was unchanged from the second estimate at -5.0%.  Consumer spending was up 8.2% in May as some states began to re-open their economies.  The Labor Department said its consumer price index dipped 0.1% last month after plunging 0.8% in April, which was the largest decline since December 2008.  The U of Michigan’s consumer sentiment index came in at 73.7 for May, up from 71.8 in April, but far below the January index level of 100.

The picture is still grim.  The bright spot is new home sales, spurred by very low interest rates, and some by demographics as millennials got good jobs the last few years, got married and  started families.  Everything else is bad, with initial claims for unemployment being very bad.

Geo-Political:

It’s still all about the virus.  With continuing reports about concerning level of new infections in Arizona, Florida and Texas (my residence), it appears this is unsettling the stock market.  Even in states that have re-opened, business activity is low for retailers as customers also have a decision to make whether they will go out and shop.  Seniors in particular may be reluctant to go out, and with money market rates at zero and bonds not paying much more, funds are scarce so seniors are a real drag on the economy until the Fed raises rates, in a couple of years.

Internationally things are no better, so that is another drag on the US economy.

The International Monetary Fund again cut its global economic forecast for 2020 on Wednesday, saying that the coronavirus pandemic has caused an unprecedented decline in global activity.  The IMF sees a global economic contraction of 4.9%, almost two percentage points lower than three months ago.  If realized, that would be the worst downturn since the Great Depression of the 1930s, far worse than the financial crisis of 2008-2010. In January, before COVID-19 had spread, the IMF had projected 3.3% global economic growth this year.  “We are definitely not out of the woods. We have not escaped the great lockdown,” said Gita Gopinath, the IMF’s chief economist, at a press briefing.  https://www.marketwatch.com/story/imf-slashes-world-growth-outlook-for-2020-and-sees-sluggish-turnaround-next-year-2020-06-24?mod=mw_latestnews

Technical Analysis:

The stock market was down about 3% in the week just ended.

Technically the market deteriorated from its weak position last week.  RSI at the top of the chart is neutral at 47 but falling.  Momentum shown by MACD at the bottom of the chart is falling.  The price action is weak and falling.  The most stark item on the chart is the down-sloping purple line, the current trend.  I waited patiently for the upswing from the March 23 low to complete its move and I think I got it right waiting for the June 10th peak.  The lower low called for the down sloping purple line.  If we are in a bear market like I think we are, the primary trend is down, and the rise from March 23 to June 10 was a correction to the upside.  Now the primary trend has reasserted itself to the downside, which is what happens in a bear market.  My concern with making these statements is that this is an artificial bear market induced not by the business cycle, but by a biological event.  Nobody has much experience with these type of events, and normal bear market rules may not apply.  You could say “old Rich is just doing the CYA thing”, and that is one interpretation.  I would say I am trying my best to navigate a difficult situation and I am making you well aware of what I do not know, and in my opinion what nobody knows.

There was interesting news regarding Facebook, as Unilever and Verizon said they were pulling advertising off Facebook since they allowed too many hateful posts.  Facebook can say all they want about they just provide a platform and they are not responsible for the content, but if you can ban pornography, and violence, you should be able to ban hate speech.  If advertisers feel the ads are too vile and don’t want them shown next to their ad, they have a right to move elsewhere.  This one affects Facebook’s revenue, so it is going to be very interesting and affect their stock price.  FB was down 8% on Friday.

Also of note, the Fed released the results of the latest big bank stress test, and everyone passed.  The Fed did order the banks to halt share buybacks, which the banks had already done.  The Fed also capped dividend payouts by the banks at last quarters level, which is fine.  They reserved the right to restrict dividend payouts further pending the earnings reports in early July.  All this is fine, and aimed at ensuring the banks retain sufficient capital to handle bad loans resulting from COVID19 fallout.

Looking into the near future, earnings season will start the first week of July and earnings are expected to be bad.  If companies could offer guidance that things would be better in Q3 that might make up for Q2 poor earnings, but most companies have withdrawn guidance for 2020 so I don’t think many will go there.  This is probably the bottom of the recession and I am pessimistic about it and the performance of the market in July.  Valuations are stretched, and that also makes the market vulnerable.

2020 06 26

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

What am I doing?  I kept all my buy and hold positions and sold a few call options against them.  If I expect weakness over the next month, my stocks shouldn’t get called on 7/17.  I sold many of my trading positions.  I bought a little SH and IAU (a gold ETF from Blackrock with lower expenses than GLD).  I still have a lot of cash and I await the next opportunity to buy.

———————————————————————————-

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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

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

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  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

New Covid Hot Spots

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, so if you follow them it is just below this post.

Traffic at my blog has picked up in the last few months, about 150 people per week have been visiting recently!  Thanks for your show of support!  It would not be fun to keep a blog if nobody came by.

Economy:

Retail sales jumped a record 17.7% in May, following a record decline of 14.7% in April and 8.2% in March.  TV heads pointed out this was a very strong gain, but did not mention that it still leaves retail sales below the Feb. level.  Initial jobless claims for the prior week were 1.5 million.  TV heads pointed out that the weekly jobless numbers are declining, but they don’t point out that 1.5 million is about twice as bad as the worst week during the 2008 crisis, however the 2008 crisis lasted a long time.  The leading economic index rose 2.8% in May, signaling the beginning of a recovery after a record plunge in the prior two months, but this is simply per the prescription of the government.

Let’s see, if you issue “stay at home” orders the economy gets worse, and if you let people go back to work and go shopping the economy gets better.  Who would have thunk?!!!

Geo-Political:

June 17, 2020 (CNN) – Just as much of the US was improving, 10 states are seeing their highest seven-day average of new coronavirus cases per day since the pandemic started months ago, according to a CNN analysis of data from Johns Hopkins University.

The data includes new cases reported by Johns Hopkins through Tuesday. The states seeing record-high averages are Alabama, Arizona, California, Florida, Nevada, North Carolina, Oklahoma, Oregon, South Carolina and Texas.

Texas also reported a record-high number of daily Covid-19 hospitalizations on Monday, with 2,326.

https://www.cnn.com/2020/06/17/health/us-coronavirus-wednesday/index.html

If multiple states begin to record rising covid infection rates and hospitalizations, this is going to give the market some heartburn.  Apple announced on Friday that they were re-closing 11 Apple stores that had opened, in areas with rising covid cases.

My high school classmate Matt submitted a comment (thanks Matt!) in response to the Long Term update posted last week.  He felt my concern over the high PE ratio was a bit overdone, and if earnings recover in Q3 and Q4, all will be OK.  That may come to pass, but my concern is nearer term, I am considering lightening up for the July earnings cycle.  I thought a look at some actual data on the S&P 500 from Standard and Poor’s website would be interesting for all to see, and the data follows:

QUARTER AS REPORTED AS REPORTED 12 MONTH TRAILING
END S&P EARNINGS EARNINGS AS REPORTED
PRICE PER SHR P/E EARNINGS
  (ests are (ests are (ests are
bottom up bottom up bottom up)
12/31/2004 1211.92 $13.94 20.70 $58.55
9/30/2004 1114.58 $14.18 19.29 $57.77
6/30/2004 1140.84 $15.25 20.32 $56.15
3/31/2004 1126.21 $15.18 21.66 $52.00
12/31/2003 1111.92 $13.16 22.81 $48.74
9/30/2003 995.97 $12.56 25.82 $38.58
6/30/2003 974.50 $11.10 28.21 $34.55
3/31/2003 848.18 $11.92 27.97 $30.32
12/31/2002 879.82 $3.00 31.89 $27.59
9/30/2002 815.28 $8.53 27.14 $30.04
6/30/2002 989.81 $6.87 37.02 $26.74
3/31/2002 1147.39 $9.19 46.45 $24.70
12/31/2001 1148.08 $5.45 46.50 $24.69
9/30/2001 1040.94 $5.23 36.77 $28.31
6/30/2001 1224.38 $4.83 33.28 $36.79
3/31/2001 1160.33 $9.18 25.54 $45.44
12/31/2000 1320.28 $9.07 26.41 $50.00
9/30/2000 1436.51 $13.71 26.75 $53.70
6/30/2000 1454.60 $13.48 28.02 $51.92
3/31/2000 1498.58 $13.74 29.41 $50.95
12/31/1999 1469.25 $12.77 30.50 $48.17
9/30/1999 1282.71 $11.93
6/30/1999 1372.71 $12.51
3/31/1999 1286.37 $10.96

 

We entered a recession in March 2001 and exited the recession in November 2001.  The recovery was very slow, and the bear market started in Q1 of 2000 and ended in Q1 of 2003.  Several big things were going on, including the bursting of the Dot Com bubble, 9/11, war in Afghanistan and Iraq, and the offshoring of jobs to India (call center), China (manufacturing), and the Pacific Rim (textiles and furniture).

If you look at the quarters ended 12/31/1999 and the next quarter, just before the bear market started (not the start of the recession), we saw a PE of 30 when times were supposedly good.  The stock market is a forward looking entity, and stocks started going down the following quarter.  We saw stocks falling for a few quarters while earnings held up, and the PE ratio contracted.  Then earnings began to fall hard at the start of the recession showing up in the 6/30/2001 quarter.  At that point, earnings fell faster than stock prices, and the PE ratio climbed to the mid 40’s.  If the E shrinks faster than stock prices, the PE will rise, perhaps to unreasonable levels.  That is why in my Long Term update when I talk about valuation, I always use my “trimmed 30 year average of 19”.  I drop out the recessionary quarters where the PE is unreasonably large, caused by sharply lower earnings.  The objective is to know what NORMAL is, not to know what the precise arithmetic average is.  As the recovery took hold in 2004, we can see earnings return faster than stock prices were running up, and we returned to the mean PE ratio of 19, on the trimmed 12 month trailing GAAP (as reported) earnings (9/30/2004).

The first thing I would say about the exercise is that the PE ratio is not the only thing you should be looking at.  That is why I look at the economic statistics, what is going on in the world and Washington DC (the Geo-Politics), and the technical indicators on the stock charts.

Abnormally high PE’s are not sell signals on their own, but when PE’s are at the long term average of 19, or below, I am more comfortable.  I view really high PE’s like traffic lights on yellow, caution.

Technical Analysis:

The S&P was up 2% on the week.

Technically the chart is mildly negative.  RSI at the top is neutral at 54.  Momentum shown by MACD at the bottom of the chart is negative, trending down now.  The price action was neutral last week, trading in a tight range.  The concern now is the purple down-sloping line.  If the June 10th peak was the conclusion of the move up from the March 23 low, then we have a real “lower high” and the market will be in a downtrend for a while.  I’m cautious because the economy is poor, the market valuation is rich, and the chart is mildly negative.  The earnings that begin July 10 will tell the tale.

I will hold my core positions and look to lighten up some trading positions where the stocks have been on a tear.  What would change my short term view is if the market rose up and decisively broke through the purple line.  We are close to the all-time and setting a new all-time high would end the bear market.

2020 06 19

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

What am I doing?  Not much.  I had bought a little GOOG and it looked extended so I took a profit.  I added a little to IGV and XBI.  I was glad that my option trade, a JPM Jun 19 110 call expired and was not exercised, as JPM fell to 98 and well below the strike price.  My objective on the JPM option trade is to keep the stock and just generate a small amount of income by selling the call option (I collected 1.5% for the 30 day option).  With options on all of my JPM shares, I didn’t have the flexibility to sell any shares when the stock popped over 115 a couple of weeks ago.  I may sell options on 80% of my shares and keep my flexibility on 20% of the position, especially going into earnings report month.  All of my other option contracts expired with no action, so I had a good month collecting call option premiums.  With JPM moving up in price from 92 to 98, my next call would be at the 120 strike in 30 days, since I would like to keep the stock.  Picking the strike price, you balance how willing you are to let the shares go at a fair price, vs how much you want to keep the stock and are willing to accept a lower option premium to get a higher strike price.

———————————————————————————-

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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

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

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Long Term – June 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.

We saw a change in the primary trend in March 2020, from bull market to bear market, in my opinion.   This bear market is rather unique, brought on by a biological event rather than economic or geo-political event.  There was little foresight into this.  With the internet and computer trading, the ability exists today to move huge sums of money very rapidly, so even if you want to get out “relatively soon after a bear market begins”, a whole lot of damage can be done before you get out.  Welcome to modern times.

Economics:

GDP –  The second estimate of Q1 GDP is -5%.  It’s bad, and it was expected to be bad.  Jan. and Feb. were normal months, and only March was negatively affected by the shutdown of the economy for Coronavirus.  Q2 should be much worse, as we were shut down for April and half of May, and the opening of the economy will be slow in June.  The Atlanta Fed estimate of GDPNow for Q2 is -35%, which is what happens when you shut down much of the economy.  Most expect Q2 to be the bottom of the economic recession.

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 virus is accelerating in Florida, Texas and Arizona, so those states are not doing a good job managing their populations.

With GDP being negative for Q1 and assured to be negative for Q2, we are in a recession.  This is negative for the bear market.

Year Quarter GDP %
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 drastic decline in the stock market.  Most think it will not do anything to help business and the stock market since the problem is human health related and not originated in the economy.

In addition to dropping interest rates to the floor, the Fed announced two asset purchase programs, the first of $1 trillion, and the second of $2 trillion.  There is no tax to cover this, they are just printing money and putting this on the Fed’s balance sheet.  They are buying anything, including corporate bonds and corporate junk bonds.  This is supporting the stock market currently.  Fed Chairman Powell indicated following the June Fed meeting that the road to recovery will be slower than most seem to be expecting.

Fed policy is strongly accommodative and hence it is bullish.  Right now, Mother Nature looks stronger than the Fed. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
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:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 26.7, up from 24.4 last month.  I used 4 quarters of earnings with the most recent being Q1 2020 (98% reported).

This metric is substantially 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 egregiously or dangerously overvalued.

In bull markets valuation can remain moderately or substantially overvalued for years.  Market commentators say we can sustain this valuation because the Fed has short term interest rates pinned to zero, and with lower rates, stocks can carry a higher PE.  Obviously this is true for a while, the question is how long.  The other question is, what is the nature of the recovery; do we go back to the prior level of economic activity once a vaccine is available, or has the economy been pinched so hard that it will take a long time to recover?  Jerome Powell at the Fed has said the recovery will take a long time.

In a bear market, the PE should go down as stock prices fall over time.  So, the price action begs the question, did we enter a bear market in March as I have suspected, or was this a super big correction due to the shock of the virus, in an on-going long term bull market?  That’s the $64,000 question.

Normal bear markets usually end with the S&P P/E valuation somewhere in the range from 6 to 14.  What makes this so hard to figure is this is not a normal bear market; it was artificially induced.

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

S&P earnings – Factset estimates that Q2 earnings for the S&P500 will be 43% BELOW Q2 of 2019.

That is very bad, the worst since Q4 2008 in the last financial crisis.  The question will be, how do investors react to these bad numbers?  Some of CNBC say it is known the earnings will be bad, and the market keeps going up as investors look ahead to better times in Q3.  I don’t believe that will happen.  Bad earnings numbers in my experience produce falling stock prices, immediately, like that day, within minutes of the announcement.  Some companies will put up earnings beats, like perhaps Google, Amazon, Facebook, Netflix, Microsoft.  These companies have not been negatively impacted by the Corona virus.  Most other companies have been negatively impacted.  I’m cautious.

Many companies have pulled guidance so I am not sure how Factset has arrived at their estimate.  Let’s take this number with a grain of salt, it could be off by a bit.  Anywhere close to the estimate however would be a bearish view.

Age of primary move, bull or bear market – The new bear market is four months old.

Geo-Political:

COVID-19 (March 2020): Corona virus is expanding in the US and we are implementing wide scale social distancing which is ripping a hole in much of US commerce.  The virus is coming down in New York, which had so many infections that if New York is included in the national case count it appears the virus count is shrinking nationwide.  When New York is excluded from the national case count, we see the virus case count is expanding nationally.  All states are beginning slow openings of commerce.

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 $33 per barrel (June 2020), up from the low $20 range.  This remains a negative for US oil jobs, which are a significant sector of US employment.

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

Technical:

Technically the long term chart has held up well following the swoon in March.  RSI at the top of the chart is neutral at 58 and rising.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  Both of those indicators are on a LONG TERM basis because this is a monthly chart and not the daily chart you see on my Saturday updates, which is an important distinction to be aware of.

The PRICE ACTION looks bullish.  It has risen for 3 months off the March low, and it has risen higher than most market watchers anticipated.  We are back in the middle of the uptrend bullish channel we have been in for a decade.  It is not where I think we should be, but it is what it is.  The market does not care what I think.  I have been saying for four months we are in a bear market.  Am I wrong?  Possibly.  The price action is the most important thing, except for the question, where is the price going?

July will tell the tale.  I expect the earnings to be real bad because Factset says they will be bad.  We are in a recession, albeit an artificially induced one.  GDP will be horrible.  The market is overvalued with the PE on the S&P at 27 currently.  On the positive side, we have had and continue to have unprecedented levels of cash supporting the market for congress and the Fed.

I don’t expect the market to zoom up from here.  Even the “work from home” stocks have already zoomed up and those valuations are in the nose bleed section.  We could correct down.  Or, the market could stagnate in a trading range and “correct over time” while earnings recover but stock prices don’t rise, which would return PE levels to more normal readings.  My guess is that we correct in July, but it’s just a guess.

2020 06 17 Long Term

The market’s technical indicators show that a primary bear market has most likely begun, but the price action has improved enough to throw that assessment into question.

Conclusion:

The problem is this artificially induced recession, induced by a pandemic and government mandated shutdown.  It is not a normal business cycle recession / bear market.  Things we know about how business cycle recessions / bear markets may not hold true this time.  Congress passed a $2 trillion rescue package, the Fed announced two asset purchase programs totaling $3 trillion, we ran a $1 trillion annual deficit and income tax receipts will be down .5 trillion, so our total stimulus and deficit spending will total $6.5 trillion.  That is an unprecedented artificial response to the artificially induced recession.  How is that all going to work out?  I don’t know, we’ve never been here before.

The snapback rally is the largest off a huge selloff in a hundred years, since the Great Depression.  Will it hold?  I think recovery from the shutdown will not be immediate and the market is ignoring the bad news on estimates of Q2 GDP and poor earnings.

It’s still a bear market in my opinion.  Some small companies have closed and will not come back at all.  When we do fully restart the economy I think unemployment will remain high for an extended time.

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

5% Correction

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 17th.

Economy:

The CPI for May was -.1% and core CPI was the same.  Initial jobless claims slowed to 1.54 million in the seven days ended June 6 from a revised 1.9 million at the end of May.  The U. of Michigan preliminary reading of the consumer-sentiment survey rose to 78.9 in June from 72.3 in May, marking the second straight increase, but remains well below readings near 100 early in the year.

Economic data is poor.

Geo-Political:

Nationally the Corona virus picture looks stable, but in states that have reopened the earliest like Florida and Texas, case counts and hospitalizations are rising.  That has weighted on the stock market last week.

Fed Chairman Powell on Wednesday left rates unchanged near zero, as expected, and said he thinks they will remain at these levels for a couple of years.  He said they expect to continue monthly asset purchases (QE) at the current rate and that the Fed remains committed to doing all they can to help the economy recover.  However, he stated that employment will take years to fully recover.  He indicated the Fed cannot do it all, indicating without stating it directly that congress and the president must act on fiscal policy.

In an almost hour-long virtual press conference Wednesday after the Fed left interest rates pinned near zero, Powell repeatedly played down the surprise, welcome news of a pick-up in jobs growth in May that Trump hailed last week as the “greatest comeback in American history.”

Instead the Fed chairman spotlighted the many millions of American still out of work and suggested it would take years for a return to anything like the strong labor market that the U.S. enjoyed before the coronavirus pandemic.

“We have to be honest that it’s a long road,” Powell said. “It’s — depending on how you count it — well more than 20 million people displaced in the labor market.”

https://www.investmentnews.com/fed-chairman-predicts-slow-jobs-recovery-193927

Powell’s cautious tone, “we have to be honest that it’s a long road”, rattled the market and combined with the nervous situation with COVID-19 cases rising in 9 states, led to the market selloff on Thursday.  Most market observers thought the market rise was too-far too-fast and welcomed the pullback.

Technical Analysis:

The market was down 5% on the week, a strong correction from the fully overbought level of last week.

Technically, the chart is concerning.  The market was overvalued on a PE basis, and overbought on the basis of the RSI at 70 two weeks ago.  The correction last week cleared the overbought condition with the RSI falling to neutral at 50.  But the correction was not enough to clear the overvalued condition.  Momentum shown by MACD at the bottom of the chart appears to be rolling over to a falling and negative position, but it could change this week.  The price action is poor.

I added a new line to the chart, and this could be an important one to watch.  It is the purple declining line from the Feb. 18 peak to the June 10 peak.  A major component of technical analysis is “channels”, which are ranges of price action, either rising (bullish) or falling (bearish).  A bull market is a series of higher highs and higher lows, and a bear market is the opposite, lower highs and lower lows.  For the “peak” of a move to be set, you need to believe that the “move is over”.  I think this move, the rally from the March 23 low to the June 10 high, is over, but I could be wrong about that.  If I’m right and the rally has ended, we have our first “lower high”, and that would confirm at least a significant correction or possibly a primary bear market.  I have already stated that I think it is a bear market because of the magnitude of the decline, two quarters of negative GDP meaning we are in a recession, the moderate overvaluation level at entry to the big decline, and the Factset forecast of significantly lower earnings for Q2 than in the same quarter last year, and the economy shed 40 million jobs in two months.  But I have also said this is not a normal business cycle recession, rather it is an artificially induced recession by a biological element that we do not normally see.  We’ve also seen unprecedented government intervention to support the economy.  It has been difficult to judge the effects of all the cross currents, and it will continue to be difficult.

Earnings season begins July 10th and they are expected to be bad; Factset was estimating that earnings for the S&P will be 40% below last year’s level.  I don’t see how the market will climb in the face of that news, but I could be wrong.  The market watchers keep talking about investors “looking through” second quarter earnings to better earnings in Q3.  That may happen, but I don’t recall such poor earnings being ignored.  With Jerome Powell’s statement that “it is a long road back”, I agree with him and this correction could continue.

I think now is the decision time, do you want to hold your stocks going into what is expected to be a poor earnings season?  They say in hockey, you don’t skate to where the puck is, you skate to where the puck will be.  You have to anticipate the future and act.  The future is hard to predict, but that is the game we play.  I will hold all my long term holdings unless they get called.  I will probably sell off stocks from my trading accounts if they have nice profits.  So after the 19th I will have work to do.  If you are not constrained by option contracts then you can act now.  This is a not obvious problem with selling covered call options is that you must keep the stock until the contract expires so you have that constraint on your decisions, or you could buy the option back (at a profit or a loss), eliminate the constraint, and sell the stock if you so chose.  2020 06 12

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

What am I doing?  Not much.  The time to make a big move was the buying opportunity after March 23.  Since then I generally bought as a slower rate, but last week I sold Citigroup as it was running up too fast, and I bought it back Friday 20% below where I sold it.  I bought a small starter position in the ETF IGV which has software companies like Microsoft, Adobe, Salesforce.com.  I expect to add to it during a correction but I like putting small placeholders in my portfolio so I will be sure to watch the price action daily.

Next Friday all of my option positions will expire.  Holding option positions for a month is sort of frustrating; we want to know how the deal will end, now!  Alas, you just have to wait it out.  I have shares of JPM and sold covered calls on them, Jun 19 110 calls.  Last week I was shocked that JPM jumped up from 92 to 115 and I was in danger of having my stock called, admittedly at a nice profit.  But, there were two weeks to go on the contract and JPM could pull back.  Last week in the selloff, JPM fell to 97 and closed the week at 100.  Will JPM rise over 10% and see Rich lose his shares, or will it languish below 110 and Rich keep his stock and the option premium (my preferred case)?  Stay tuned to this bat-channel!  I’m going through this option trade to show those who are interested in using options as a way to enhance your return, how I use them safely.  I hope someone enjoys this exercise.

———————————————————————————-

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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

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

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

Rich Comeau, Rich Investing

Overvalued and Overbought

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

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

Economy:

The Institute for Supply Management (ISM) manufacturing index climbed to 43.1% last month from an 11-year low of 41.5% in April, a slight improvement but anything below 50 shows contraction.  The ISM non-manufacturing index was 45.4% in May, up from 41.8% in April.  Motor Vehicle Sales came in at an annualized rate of 12.2 million units in May, up from 8.7 million in April, an improvement but well below 2019’s rate of 17 million.  Factory orders fell 13% in April, a slightly larger drop than the 11% decline in the prior month.  Initial jobless claims were 1.88 million in the last week of May, a bad number, but not as bad as the previous 7 weeks.

The U.S. regained 2.5 million jobs in May and the unemployment rate fell to 13.3%, confounding Wall Street expectations for another big wave of layoffs and signaling the economy began to revive last month.

Mostly bad news, but at least some workers are being recalled and that’s good.

Geo-Political:

The national trend of COVID19 cases declined slightly at the national level, but NYC is so large it can move the national numbers and NYC is getting better.  Nine states are showing increases in case counts.  With all the protests over the George Floyd death, it will be interesting to see if COVID19 case counts start to rise in two weeks.

I grabbed the following from a UN report in the past week:

After more than a month of plateauing numbers of confirmed new cases, the past two weeks has seen rising numbers of new cases worldwide, with an average of more than 100,000 daily confirmed cases over the past week. At the same time as the number of confirmed new cases are rising, the number of confirmed daily deaths has steadily declined. Though these numbers are the official counts, the lack of available testing in many countries and differences in methods for counting deaths leaves some doubt as to their accuracy.

The rise in new cases over the previous month is primarily concentrated in the new COVID-19 hotspots of Brazil, Russia, Peru and India.

https://reliefweb.int/report/world/covid-19-situation-report-18-june-3-2020

 

Technical Analysis:

The market was up 5% (I eyeball the estimate from the graph each week), mostly on good news on the employment front.

Technically the chart looks good.  RSI at the top is fully overbought at 70.  In a bull market that could get stronger for weeks or even months.  In a bear market things do not usually stay overbought for an extended period.  In an artificial bear market, there are no rules and nobody knows.  Momentum shown by MACD at the bottom is rising, a short term positive.  The price action is strongly positive, the only question is “is it too strong”?

I don’t think the market should be rising so strongly in a recession (two quarters of negative GDP, Q1 and Q2), with an overvalued (PE of 24 on the trailing GAAP PE), overbought (RSI at 70) market.  Alas, the market does not dance to my tune, it does what it wants.  The out of favor stocks have begun to rise, the airlines, hotels, casinos, autos, energy, banks, you name it and all the laggards are playing catch up.  They are up huge percentages in a couple of weeks.

In general I am not buying heavily into this market.  The time to buy was at the low in March and into early April.  Despite all information and appearances, it just seems the market wants to go higher.  The Fed and Congress have provided tons of support and there are several trillion dollars in money markets to fuel the rally.  I am buying very small amounts of index ETFs and keeping close stop loss sell orders under them.  I lighten up slightly by putting high ball sell orders for small amounts of stock that I bought at much lower levels in early April.

It is decision time, what are you going to do in this big rally?  There is some good news out there, but there are also some significant unknowns, such as will there be a second wave of COVID19?  If there is, it would be bad for the market.  Nobody knows that answer.  How will you deal with the risk?

2020 06 05

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

What am I doing?  I mentioned that I piled into the big banks in early April and recently sold my second 30 day covered call.  Let’s just take JPM; it was at 92 when I sold a Jun 19 110 call.  Today JPM closed at 111, so if the market holds up at these levels or climbs from here, I will have to deliver my shares at 110.  That would be a 20% gain in three months, not bad on a low PE stock and a quality national brand.  I have two weeks to go on this transaction, and it could be viewed as selling into strength, if the shares get called.  Regarding the big banks, the view is that with workers returning, rents and mortgages will be paid and the banks have less to the downside than previously thought.  I sold an INTC Jun 19 55 Put so I collected a little premium and may get to buy some INTC if it falls from 63 down to 55 in the next two weeks.  I bought a little WORK at 32, the day after I sold it at 38.  If we get a pullback and I see WORK in the high 20’s, I would buy more.

———————————————————————————-

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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

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

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

Rich Comeau, Rich Investing

Rising on Expectation of Poor 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:

New home sales came in at a seasonally-adjusted annual rate of 623,000, up 1% from March and down 6.2% compared to the year-ago level (low interest rates help home sales).  Initial jobless claims came in at 2.1 million for last week (still ugly).  GDP for Q1 at the second estimate was -5%.  Personal income rose 10.5 % in April boosted by government coronavirus relief payments but consumer spending fell 13.6% in April after a 6.9% drop in March.  Consumer sentiment rose to a final May reading of 72.3 from a final April level of 71.8, according to reports on the University of Michigan, but it is down from 101 in February.

Things are generally bad for business, except for those that benefit from the “stay at home” economy, like Zoom video, Netflix for entertainment, Docusign to facilitate business transactions without having to physically gather.  I think those stocks have run up too far to be good buys at these levels.  The PE on Zoom is 1,992, too rich for me.

Geo-Political:

We are in a recession, Q1 GDP was -5% and Q2 is projected to be to be much worse, maybe -20 to -30%.  The stock market crashed down 30% in March.  Forty million people have lost their jobs.  The states are slowly re-opening but restaurants can’t make much of a profit at 25% capacity.  As we re-open, we don’t know how much contagion there will be during the summer.  Corporate profitability is dropping versus last year and is expected to remain below 2019 levels all year.  The PE ratio on the S&P is 24, on the high end of moderately overvalued.  Despite the bad news, the stock market continues its rise, one of the best bear market rallies ever, supported by stimulus spending from congress and financial support from the Fed.

Much of the Nasdaq rise is concentrated in Amazon, Facebook, Alphabet (google), Netflix, and Microsoft.  These are stocks without “walk up” customers and they are not hurt by the stay at home economy.  Drug stocks have done well as has health care in general.  There are certainly some winners.

After signing a trade deal with China in January, the stock market continued the rally it began in October on prospects for a deal.  Tariffs came down on both sides and China was supposed to buy more from the US, but it appears they are not buying.

After initially praising the Chinese president, Trump is threatening to restart the trade war.  That would not be good for the stock market.  But, Trump trails Biden in the polls, and they feel Trump will not fare well on his response to the Corona virus.  Trump would like to change the discussion to China to try and make Americans forget about the Corona problem.  It’s a risky move, because the stock market did not react well the last time there were heated words and rising tariffs.

The overall picture warrants caution.

Technical Analysis:

Following the small double top in early May we had a brief 6% correction and the market has moved higher since then on good news on the vaccine front from multiple companies, and the re-opening of the states.  The key question for the summer will be whether we see a second wave of infections with the states re-opening?

Technically the chart looks good.  RSI at the top neutral at 62 and rising.  Momentum shown by MACD at the bottom is rising slightly.  The price action is rising and positive.  The main concern is the market is getting into overbought territory for a bear market.  On the other hand, this is an artificial virus induced bear market and rules that apply in normal bear markets may not work well in this one.

2020 05 29

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

What am I doing?  My activity remains low.  I bought heavily in late March, quality stocks with low or normal PE’s and decent to good dividends.  I had several call options on those stocks expire on 5/22 so I was selling call options on the same stocks.  I also sold a put option on INTC at $55 expiring 6/19.  INTC is a quality company with a reasonable PE and decent dividend.  I bought a little IBB (biotech ETF) and put a “trailing stop loss %” order under it at 3% trail.

I don’t like the high valuation level of the market nor the poor earnings estimates for Q2, so I remain cautious.  In the face of the market moving higher, I buy in smaller quantities now and protect the positions with trailing stops.  If I’ve sold a covered call, I don’t use a trailing stop in case I have to deliver the shares if the stock gets called.

———————————————————————————-

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.  Being retired I need to generate some income, and hopefully book a capital gain in the longer run.

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

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

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

Rich Comeau, Rich Investing