Rally Off Oversold

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

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

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

Economy:

New home sales in March ticked up nicely to 693K units annualized from 637K in Feb.  We saw existing home sales down in March, and what is happening is that the new home builders are buying points on the loan out of their profits.  You can get a 5% loan through the builder on a new home, but only a 7% loan for an existing home from a mortgage company.

Durable goods orders for March were up 2.6%, healthy.  The first read on Q1 GDP was +1.6%, which is OK.  Core PCE Y-o-Y was +2.8%, the same as last month. 

The U. of Michigan consumer sentiment index for April was 77.2, down a tad from 77.9 last month.  This has shown nice improvement since the bear market of 2022 ended and inflation has come down since hitting the high of 9%.  The job market has held up remarkably well in light of the shallow recession in 2022 and the rapid increase in the Fed Funds rate from zero to 5.5%.  I think consumers see that inflation is stuck at 3%, so consumer sentiment is stuck here also, for the time being.

The economy is doing OK.  When you have to bring down inflation from a high level like 9%, you would ideally like to do it without bringing on a deep hard recession.  The Fed increased rates 5% faster than any Fed in memory, but they were starting from the absurdly low level of zero interest rate, or as the Fed calls it “the lower bound”.  That is why the rapid increase in rates did not crater the economy, because the starting level was so low.  We shut the economy down during covid in 2020, had rapid GDP growth after opening the economy back up in 2021, then had to cool it back down.

GDP at +1.6%, unemployment at 4%, inflation at 3% and good corporate profits, that is a good economy, given where we have come from the last couple of years.  Most economists think the long term natural growth rate of the economy is 2%.  You can juice it up with stimulus, but you can’t stimulate forever, and when the stimulus stops, you will have a slowdown, either mild or deep.  I will take a nice natural growth rate that is sustainable over a faster artificially stimulated economy that will falter when the stimulus is removed.  When you hit a recession, the govt. must stimulate unless you want to run the risk of seeing how low “low” can go, which is not a fun game.  When we are not in recession, the govt. should not be stimulating the economy. 

Geo-Political:

The Middle East stabilized a bit, which is good for stocks.

Antony Blinken, our Sec. of State, met with Xi Jinping in China regarding trade.  The US expressed concern over China shipping resources used by Russia to make war materials, along with other issues.  Biden met with Xi in San Francisco last year, Janet Yellen has met with her counterparts.  So far, few concessions have been made to the US and the US has put restrictions on the most powerful computer chips to China.  It is better to see these two big economies talking regularly than not talking at all.  Perhaps a big mistake can be avoided.

Technical Analysis:

For the week ending 4/26/2024, the S&P 500 was up about 2.5%.

Technically (see chart below) the market looks fair.  RSI at the top of the chart is neutral at 50 and climbing.  Momentum shown by MACD at the bottom of the chart is neutral, but looks like it is trying hard to turn up.  The price action is neutral near term.

Just looking at the short term indicators, it looks good.  But if you include the long term indicators in the monthly Long Term post last week, it looks less good.  There are a couple of concerns on that report.  First is the backup in interest rates, which the market does not like.  Second, the Fed has been scaled back from six interest rate cuts to two, and by some estimates, just one or even no rate cuts.  The stock market would not like that.  Third, when you look at the Factset estimate for earnings for Q1, they are down from 6% as of the Dec. estimate to +0.5% as of mid-April.  That is discouraging.  They dramatically cut the earnings estimate for Q1, but somehow feel justified in raising the estimates for Q2, Q3, and Q4, so the estimate for the calendar year just barely comes down to +10.7%….  Hmmmm.  Is it distinguishable from outright guessing???  Leave us a comment about this; I’d love to hear what you think.

I haven’t even mentioned valuation, so fourth, the trailing 12 month GAAP PE on the S&P is 26.1,  significantly overvalued on a PE basis.

So my scenario is that we are in a bull market, we got way overbought and needed a correction.  We corrected down 5% and got to oversold.  In a bull market, it does not usually stay oversold for long, so we were due to rally, and we did this week.  Now comes the hard part, what comes next?  Forecasting the future is always hard.  But in light of the challenges the market faces above, I’m guessing that we don’t enjoy a V-shaped recovery to a new high right now.  We can rally a bit more; I certainly have no idea when a market turn will occur.  But I think we will see some more corrective action.  Let’s see.

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

What am I doing?  I did some buying last week, some fallen angels like META which got clobbered.  I bought some SPY and some more PLTR.  I bought some IBM, and MSFT.  If these pop way up in the rally, they could be “trades” and I would sell them and hope I got the top of the rally, and try to buy them back lower.  SPY could be a “hold”, buy a little and if it falls, add to it.  If the bull market continues hopefully that would work.

———————–  

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

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

There are currently 3 Classic topics posted:

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

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

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

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

Rich Comeau, Rich Investing

Long Term – April 2024

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

Economics:

GDP – The first estimate of 2024 Q1 GDP is +1.6%, following Q4’s +3.4%. 

The March Atlanta Fed GDPNow estimate for Q1 GDP was +2.1%, so they got close.

This is neutral for the stock market, just below the long term trend of +2%.

Year	Quarter	GDP %
2024	Q1	1.6
2023	Q4	3.4
2023	Q3	4.9
2023	Q2	2.1
2023	Q1	2.0
2022	Year	1.0
2021	Year	5.5
2020 – Covid	Year	0.1
2019	Year	2.3
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – At the March meeting, the Fed left the Fed Funds rate unchanged at 5.5%.

You can see in the chart below that interest rates other than Fed Funds all ticked up over the month, about one half of a percent.  We got a few more statistics that were not friendly for inflation, so the bond market is pricing fewer rate cuts this year so yields “backed up” and existing bond principal values fell.  The longer the bond’s duration, the more the principal value will fall in the open market.

After being balanced in the Fall meetings, the Fed indicated that future hikes are likely over.  Powell said they will be cautious about timing the first rate cut.  The bond market pushed out its timing of the first rate cut to July, with 2 cuts in 2024.  The CPI and PCE monthly data has ticked up slightly the last three months and if it does not head back down, the Fed might have to cut its outlook for rate cuts down to two for 2024.

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  The Fed continues to reduce its balance sheet by $90 billion per month, but they indicated they are thinking about slowing the pace of QT, my guess is they would cut it in half to $45 billion per month. 

Local and regional banks have tightened lending standards making it harder for small and medium businesses to get loans to expand.  That will slow the economy down somewhat.

The latest CPI was +3.2% versus a year ago.  The commodity complex is moving up in price, not good for inflation.  Oil, gold, copper, and agricultural products are all rising in price.  That could defer the Fed’s first rate cut.

Fed policy is restrictive for the economy, and bearish for the stock market.  But we are probably at the peak of interest rates, we have been on pause, and the next move appears to be down.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Apr 2024	5.5	4.7	4.7	4.8
Mar 2024	5.5	4.2	4.2	4.4
Feb 2024	5.5	4.3	4.3	4.4
Jan 2024	5.5	4.0	4.1	4.4
2023 Q4	5.5	4.4	4.4	4.5
2023 Q3	5.5	4.4	4.3	4.4
2023 Q2	5.1	3.8	3.6	3.9
2023 Q1	4.7	3.8	3.6	3.8
2022 Year	2.8	3.1	3.1	3.2
2021 Year	0.2	0.8	1.4	2.0
2020 Year	0.4	0.6	0.9	1.6 – Covid
2019 Year	2.2	1.9	2.2	2.6
2018 Year	1.8	2.8	2.9	3.1 – Tax Cut
2017 Year	1.0	1.9	2.3	2.9

Valuation:

S&P 500 earnings – Factset shows that as of April 19, for Q1 of 2024, the blended year-over-year earnings increase for the S&P 500 is +0.5% (the blend is 14% actual earnings and 86% estimated).  That is terrible.  You can see in the chart I started keeping below of Factset estimated earnings growth that last month in March they estimated earnings growth for Q1 to be +3.4%, in December they estimated it at +6.2%.  The judge recently told Trump’s lawyer “you are losing credibility with this court”, and Factset is losing credibility with me. 

The forward PE for the S&P is 19.9 (down from 20.9 last month) compared to the ten year average of 17.8, but remember, the forward PE is just a guess.  Stock prices came down over the last month, so the PE came down.

The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $250, up $10 from last month.

I have been thinking about how Factset keeps changing the earnings estimates through the year.  This is a number the pros look at, but most of us amateurs do not.  The question is, if earnings estimates keep coming down, do stock prices eventually come down?  They should, or the PE ratio will continue to climb, making stocks expensive on a PE basis.  I’m not going to keep much history, only about 12 months of data.  The number that Factset should have the most confidence in is the current quarter, Q1, and it has almost been cut in half from Dec.  Tracking this should be fun, at least I think so.  Old Rich attempts a new trick.

MONTH	Q1 Estimate	Q2 Estimate	Q3 Estimate	Q4 Estimate	CY Estimate
Apr	0.5%	9.6%	8.7%	17.7%	10.7%
Mar	3.4%	9.3%	8.4%	17.4%	10.9%
Feb	3.9%	9.0%	8.0%	17.6%	10.9%
Jan	5.4%	10.0%	8.2%	22.1%	12.0%
Dec	6.2%	8.5%	10.7%	18.1%	11.5%

S&P 500 Earnings Estimates, by Month

Telling the future is hard.  Why do I even bother to report future estimates of earnings?  Earnings (profits) drive the stock market.  I look to the pro’s for their estimates, then I take them with a grain of salt.  Even if the estimates turn out to be wrong, that is the data that the stock market is trading on today.  It’s the best we have, and it may be wrong by a little, or sometimes a lot.

It is interesting that the Q1 estimate which includes 14% actuals came down a full 3%, yet every other quarter went UP, and the CY estimate only went down 0.2%.  It is hard to imagine how the stock market will make much progress this year if the year-end estimate for earnings growth keeps falling.  But, the Fab Five stocks report this week and things might change if they are very good.  Stay tuned.

The outlook for earnings is neutral at +0.5% for Q1.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 26.1, down a bit from 27.2 last month.  I used 4 quarters of earnings with the most recent being Q4 2023.  The S&P dropped over the last month, so the valuation fell. 

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

This indicator is bearish.

Age of primary move, bull or bear market – This bull market is 19 months old, started in Oct. 2022.  The age is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political: (One addition this month in Middle East Conflict)

Presidential Election: (added March 2024) – On Nov. 5^th we will elect a new president.  Joe Biden and Donald Trump are the two primary candidates, and Robert Kennedy Jr. is the main third party candidate.  Kennedy cannot win, but he may prevent one of the other two from winning.  It depends who he takes more votes away from, and right now we don’t know.  Based on forward looking policies, and who the projected winner is, the stock market will start to favor better positioned companies, based on the assumed victorious candidate’s policy priorities.  It’s too early to tell, but keep your eyes peeled.

Liquidity:  Central banks globally raised rates to fight inflation, but most are pausing their interest rates.  Inflation appears to be coming under control, but it is not where the central banks want it.  They appear to be on pause to see if the hikes already in place will slow inflation to the target without additional hikes.

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

The economy in China is slowing more than their government would like.  Trade tension with the US contributes to the distress since US corporations are expanding outside of China, notably in Vietnam and India.  The Chinese govt. has been hostile to free market activity by their own corporations such as Alibaba and Ten Cent.  Their real estate sector was over leveraged and is in trouble.

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

Middle East Conflict:  Hamas launched a violent attack on Israel on Oct. 7, 2023 using missiles and ground forces and Israel has responded with bombings inside Gaza.  It’s a mess, but impact to the US economy is not noticeable.  The Houthi rebels in Yemen are firing missiles at shipping in the Red Sea, causing many ships to go around Africa to Europe instead of using the shorter Suez Canal.  That will increase wait times and raise transportation costs.  Israel bombed an Iranian embassy in Syria, killing 2 Iranian Generals, Iran sent 300 drones and missiles into Israel (which were mostly shot down), and Israel retaliated with a strike inside Iran on a military installation.  The stock market sold off in April 2024, down 5%.

US National Debt:  (added Sept. 2023)  The US national debt is very large at over $34 trillion and it is growing too rapidly.  I have been concerned about it since early in this century.  If there is too much new debt and investors don’t want to buy the bonds that the US issues to fund the deficit, they may have to keep the interest rates high, particularly longer term interest rates, high enough to attract bond investors.  Companies will then have to pay higher rates to fund long term projects and that will cut into their profits.  Consumers facing high interest rates will slow purchases.  It is not a good situation for the economy.

Geo-politics is currently bearish, mainly due to the wars in Ukraine, global central banks restrictive policy, and the Israeli conflict with Hamas and Iran.

Technical:

Technically the chart below is neutral near term (months), and still positive longer term (year).  It is important to note this is on a “long term” basis, and is not the same verdict as you would see on the weekly report which is a 12 month basis instead of this 10 year view.

RSI at the top of the chart is neutral at 63 and falling.  Momentum shown by MACD at the bottom of the chart is positive and rising, but the most recent histogram shrunk a little.  The price action is neutral near term and positive longer term.  

The price action is neutral near term as it has come down and sits right on the upper bound of the long term up-channel.

This close to the top of the up-channel, there is the risk of a correction.  We can also go higher, above the top of the channel, like we did in 2021, but that was driven by excessive stimulus from the Covid cash infusion cycle from the govt.  I don’t see that type of stimulus now, in fact the Fed interest rates are restrictive.  What seems to be giving the market this boost is the computing revolution called Artificial Intelligence (AI).

Ten Year Chart of the S&P 500

This is neutral in the short run, and remains bullish longer term.

Conclusion:

1. GDP growth is neutral with Q1 GDP rising by 1.6%. 
2. The Fed has short term rates at 5.5%.  That is restrictive and bearish. 
3. S&P earnings for Q1 are estimated to be +0.5% above Q1 2023 which is neutral. 
4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 26.1, which is significantly overvalued and bearish.
5. The geo-political factors are bearish.  
6. Technically the chart looks neutral short term, and bullish longer term.

By that way of looking at it, the market is bearish, with three factors bearish, and three neutral.

Long Term Issues to Keep in Mind:

National Debt: 

(January 2024) – The national debt is over $34 trillion.

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

(Updated March 2020) – Covid 19 begins.  Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

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

Rich Comeau, Rich Investing

Concern in the Middle East

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

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

Economy:

The ISM manufacturing index for March was 50.3, which is significant because it is the first time in a year that it came in above 50.  Above 50 shows growth, below 50 shows contraction.  The ISM services index for March was 51.4, also good.  Factory orders rose 1.4% in Feb.  US auto sales for March were 15.5 million annualized, that’s OK.  Non-farm payrolls added 303K jobs in March, that’s strong, and the unemployment rate fell to 3.8%.

Overall, it’s a good looking economy.

Geo-Political:

Several Fed governors spoke last week and echoed Chairman Powell’s message that the Fed will not cut rates until they are comfortable they are on the path to hit their inflation target of 2% per year.  The inflation rate does not have to hit 2% for the Fed to cut, it just has to be on the path to 2%.  If the Fed cuts interest rates too soon, inflation could re-ignite and if they wait too long to cut, they could allow the economy to slip into a recession, which nobody wants to see.

The news below broke late Wednesday and played a role in the big selloff on Thursday:

“April 3, 2024 – Iranian leaders renewed their promise to hit back after an airstrike widely blamed on Israel destroyed Iran’s Consulate in Syria, killing 12 people, including two elite Iranian generals. Iran’s President Ebrahim Raisi said Wednesday the attack “will not remain without answer.”

The U.S. is concerned the deadly strike in Damascus could trigger new attacks on American troops by Iranian-backed militias in Iraq and Syria, said Lt. Gen. Alexus Grynkewich, the top U.S. Air Force commander for the Middle East.

Iran and its allies — including the Lebanese militant group Hezbollah and other armed groups in Syria, Iraq and Yemen — have repeatedly traded fire with Israel and the U.S. since the start of Israel’s war in Gaza.

https://apnews.com/article/israel-hamas-war-latest-04-03-2024-0980966d62c623bbff9e02841debee01

I expect that Iran will retaliate, when and where is the question.  If it looks like there is escalation in the Middle East that would take the market down for a while until we find out if things continue to escalate.

Below is from Michelle Caruso-Cabrera, a well connected finance reporter who is respected, regarding feedback from a CEO in the room with Xi Jinping on March 27.  It is in nine posts from “X”, formerly twitter:

“Just got off the phone with one of the American CEOs who went to the China Development Forum (CDF) this week and met with Xi Jinping on Wednesday in China. Speaking on condition of anonymity, he said “Business is still terrible,” and confidence in the economy is very low. 1/9

After spending nearly a week there speaking with the leadership and members of the business community, this CEO said there was no indication the country is is backing away from centralizing the economy. 2/9

He said wealthy Chinese are fearful and selling items that are seen as ostentatious, such as private jets, “because its dangerous to be rich in China.” He added that they are trying to get their money out of the country. 3/9

As for the CDF, there was very little reference to climate change, renewables, or decarbonization. This CEO said there were passing references to the private sector, but the focus always returned to support of the large, state-owned enterprises which dominate the economy. 4/9

The CEO told me the meeting with Xi lasted 1.5 hours; that Xi was asked tough questions by the CEOs and that Xi gave tough answers. He says in that meeting, Xi stressed the following: -that China’s economy hasn’t peaked 5/9

-every economy has difficulties and they have the capacity to address theirs -said repeatedly they know how to fix their economy, that everyone has an idea about how to fix their problems but that they know how to fix their problems 6/9

-they know they have to provide at least 10 million new jobs every year to new graduates –on semiconductors, that its not right for the US to try and constrain China’s economy -that China is not a threat to the United States 7/9

-that the US should not try to hinder China’s growth –Taiwan is a red line and that China doesn’t interfere with other countries’ borders, so other countries shouldn’t try to interfere with theirs -that nuclear war would destroy humanity and we should never go there 8/9

-Thucydides trap is not inevitable and has to be avoided at all costs –the governing system of China is not going to change -They respect other forms of government, they ask respect for theirs. 9/9”

In the US, that would be called a terrible meeting.  The economy in China is floundering, and Xi Jinping wants to see US corporations invest more in China.  Normally one would offer some incentives to the CEO’s to entice them to make more investments.  I did not hear of any enticements at all.  He says China is not a threat to the US, but if he invaded Taiwan and took control of Taiwan Semiconductor, he would have control of much of the US economy since Taiwan Semi makes 60% of the worlds computer chips and 90% of the most powerful chips.  That is a threat to the US economy and countries defend their strategic interests.  Point 9 says it all, they are not going to change anything, but they want the US CEO’s to invest more in China.  That looks like a fail to me.

The bad news for the US stock market is that with the Chinese economy stalling, their people will be buying fewer goods from the US, which will hurt the profitability of US companies that have done a lot of business in China.  The stock market runs on profits, so that can put a damper on some US companies, like Tesla, Starbucks, McDonalds, and Apple.

Technical Analysis:

For the week ending 4/5/2024, the S&P 500 was down about 1%.

Technically (see chart below) the market looks positive, but still extended to the upside.  RSI at the top of the chart is neutral at 55, but it dropped last week.  Momentum shown by MACD at the bottom of the chart is slightly negative, trending lower.  The price action is negative short term and positive longer term. 

Everyone thinks we need a correction, and one percent down does not qualify.  It may be the start of something bigger, or maybe not.  I remain cautious because the rise since November (the green parallel lines at the right of the chart) has been too rapid and does not look sustainable.  The price has dropped out of the narrow steep upward channel, so that could indicate a change in direction if we don’t get back in the channel soon.  But, we are just 1% below a record high so you can’t get too negative.

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

The big banks kick off earnings season next week and it is always interesting to see how they assess the business climate, consumer spending patterns, and loan repayment conditions.  In the monthly Long Term update, Factset projects Q1 earnings to come in +3.4% above last year’s Q1 and that is normal growth of earnings.

What am I doing?  I had a large position in JEPI called away at 57 and I was not sorry to see it go.  I had held it for over 2 years and my cost was 57.  I was under water after the bear market in 2022, and just broke even now.  JEPI paid about 7% dividend on average while I held it, so I beat CD’s and the money market.  But JEPI does go down with the market and I don’t feel that buying in up here at a record high is what I want to do.  I’d rather wait for a big correction, then start building a position back up at lower cost.  JEPI to me is a long term instrument and I may have to wait a long time before it is attractive again.  Sometimes I buy 10 shares to keep in my portfolio just so I don’t forget that I want to add some in six months or a year on a big pullback.  Lightening up on stock positions ahead of a correction is not a bad idea either, but we never know exactly when that will happen.

The other big move was that I sold MS for a nice profit, which was a large position.  I started buying it 2 years ago and bought on pullbacks several more times.  The average length of time I held was about 1 year.  I made 8% capital gain, 4% on dividends, and 4% selling covered calls and put options, for a total return of 16% in a year.  It’s not NVDA type return, but the bottom is not likely to fall out of MS and hurt you real bad.  On the chart, MS is near its 52 week high.  They say buy low and sell high.  If I see this in the mid 80’s per share, I will start building a new position.  MS will report earnings in a couple of weeks and the stock could jump up some more (or not), but I’m satisfied with the trade I made.

———————–  

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

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

There are currently 3 Classic topics posted:

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

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

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

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

Rich Comeau, Rich Investing

A Soft Patch

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

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

Economy:

The CPI was up .4% in Feb. and 3.2% over the last 12 months.  The monthly CPI for Jan. was also up .4%, which is a 4.8% annualized rate, hotter than the Fed wants to see.  The PPI rose .6% in Feb., hotter than recent numbers.  Some analysts that projected a June rate cut by the Fed think that may get pushed out to July.  If part of the recent run-up in stocks was predicated on a May or June cut, stocks could come under pressure.

Retail sales were up .6% in Feb., a good read. 

Geo-Political:

The Fed meets 3/19-20, so we’ll hear their latest thinking on the Fed Funds rate on the 20^th.  I expect that in light of the recent warm data on inflation, Powell will not sound dovish.  That could upset the market.

I listened to an interview a few weeks ago with the CEO of Stellantis, Carlos Tavares.  Stellantis was formed by the merger of Fiat (Italy) and Peugeot (France).  Fiat acquired Chrysler, Jeep, Ram after the GFC so they are part of Stellantis now.  Mr. Tavares said that over the next 20 years, he expects we will consolidate from 20 major auto brands down to 5, and Stellantis plans to be one of them.  That may happen, or he could be wrong, but some consolidation makes sense to me.  We’ve already seen a number of nameplates retired in the US, such as Plymouth, Saturn, Oldsmobile, and Pontiac.  If we do go down to 5 major players, and Stellantis is one of them, who would the other 4 be?  Toyota will survive, they operate worldwide.  The survivors will have to have scale to distribute their fixed costs over many units.  China has such a large population base and inexpensive labor, so they will have a champion survive, maybe BYD.  GM would be the likely US champion, but they have cut operations outside of the US and I wonder if they can survive without international success.  The S. Koreans have a champion in Hyundai, which also owns Kia.  Perhaps we would see Germany with a champion formed by Volkswagen, Mercedes Benz, and BMW.  So we have Stellantis (self proclaimed), Toyota, BYD, GM, Hyundai, and Germany led by Volkwagen.  Will it play out that way?  I don’t know, I thought it was fun to speculate. 

Let’s take a quick look at the German economy.  I looked at the Euro zone recently, but Germany is the engine of the Euro zone, and it does not look very good.

“March 6, 2024 – Forecast for the German Economy

The leading indicators currently available do not point to an economic turnaround at the start of 2024: a deteriorating order situation in all economic sectors, low order backlogs, high sickness rates, ongoing strikes.

All in all, economic output is likely to continue its decline in the current quarter and fall by 0.1 percent compared to the previous quarter. A noticeable overall economic recovery is not expected until the second half of the year. Overall, price-adjusted gross domestic product will increase by only 0.2 percent this year compared to the previous year. Next year, economic output will then increase by 1.5 percent. The growth forecast for the current year has thus been significantly lowered by 0.7 percentage points compared to the ifo Economic Forecast Winter 2023 and raised slightly by 0.2 percentage points for 2025. Contrary to expectations, the German economy is in recession in the winter half-year 2023/24. In particular, a recovery in industrial activity will not set in until later.

Economic weakness will slow down employment growth and initially cause unemployment to rise further. The unemployment rate will average 5.9 percent this year, 0.2 percentage points higher than in 2023. The rate is not expected to fall back to 5.6 percent until 2025.

The inflation rate will continue to fall from an average of 5.9 percent last year to 2.3 percent this year and 1.6% percent next year. Gas and electricity prices in particular will become cheaper for consumers. The energy component is therefore likely to bring down inflation in the forecast period.”

https://www.ifo.de/en/facts/2024-03-06/ifo-economic-forecast-spring-2024-german-economy-paralyzed

Germany is a nation that has paid high wages to their workers.  They sold their goods at high prices, based on high quality.  As other nations that paid lower wages have improved their product quality, it puts pressure on Germany, and on the US.

Technical Analysis:

For the week ending 3/15/2024, the S&P 500 was down a bit, but basically flat for the week.

Technically (see chart below) the market looks positive, but extended.  RSI at the top of the chart is neutral at 48 and falling.  Momentum shown by MACD at the bottom of the chart is neutral, but ever so slightly coming down.  The price action is positive, but it is beginning to live in the lower half of the narrow up-channel it has been in this year.

The up-channel shown by the two green lines on the right of the chart is too steep to be sustainable for long, so I’ve been expecting a correction.  It looks like we’re in a weak patch, but nothing big has happened to the broad market.  The highest flyer, NVDA has corrected a bit, down 10%, and a few other high flyers have been hit.  We are in the dead period in the quarter where there are almost no earnings reports to boost the market for the next 4 weeks.

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

What am I doing?  I had option contracts that expired on 3/15, so I reviewed each one.  Most I let expire and kept the premium.  I was assigned on NXPI so the stock was called at a nice profit.  I bought some SNOW at 160.  I bought PANW on its recent pullback and it rallied, so I sold it to lock in the profit in case the market corrects.  I’ve been holding KMI so long it is a long term capital gain.  The call option that I sold on KMI expired last Friday, and if it hits 18 again, I might sell it.  I would plan to buy it back later if it goes down.

———————–  

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

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

There are currently 3 Classic topics posted:

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

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

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

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

Rich Comeau, Rich Investing

Minor Bad News Can Mean a Huge Drop in Stock Price

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

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

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

Economy:

New home sales for January were 661K, in line with last years winter level.  Durable goods orders for January were -6.1%, but excluding the lack of orders at Boeing it was only -.3%.  The Case Schiller home price index of 20 cities for Dec. was up 6.1%, way too high.  The second estimate of Q4 GDP was +3.2%, a good reading.  The core PCE Y-o-Y was +2.8%, down from 2.9% last month, and the trend remains downward.  The ISM manufacturing index for Feb. was 47.8, down from 49.1 (anything below 50 shows contraction), which is poor.  Auto sales for Feb. were 15.8 million annualized, up from the light 15.0 million in Jan.  The U. of Michigan consumer sentiment index for Feb. was 76.9, down a bit from 79 last month, but still near a 3 year high.

Overall I’d say the economy is steady state.  With Q4 GDP at +3.2%, that’s the dominant number.  I don’t like the continuing inflation in home prices, which only makes them less affordable for first time buyers.

Geo-Political:

Let’s take a look at China’s economy today; it is not doing very well.

“Feb. 2, 2024 – China’s economy is set to see growth slow to 4.6% in 2024, dragged down by the country’s subdued exports and a weak real estate sector, the International Monetary Fund said Friday.

The world’s second-largest economy, which grew around 5% last year, may only grow 3.5% in 2028, according to the IMF’s projections. 

China’s weakening economy, as well as heightened competition from homegrown firms, is already taking a toll on U.S. firms. Apple (AAPL) shares fell Friday, dragged by a slump in China sales, despite announcing higher-than-forecast quarterly results late Thursday.

The country, dubbed the world’s factory, is not just a key market but also the biggest source of imports for many large firms, including retail giant Walmart (WMT).

In a separate report, the IMF cast doubt on a recovery in the country’s embattled housing market, which makes up as much as 20% of the country’s economic activity. Investment in homes may decline as much as 60% in China over the next decade, the fund said, as the population declines.

“Sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future,” the IMF said.

A government crackdown on high debt levels and the slump in home sales has triggered the downfall of many real estate companies, including what was once one of the biggest, China Evergrande Group. Earlier this week, a Hong Kong court ordered the embattled property developer to liquidate after more than a year of talks between the company and creditors failed to deliver a debt restructuring plan.”

https://www.investopedia.com/china-s-2024-growth-to-slow-to-4-6-dragged-by-weak-exports-property-slump-says-imf-8557851

First, it is important to know what is going on inside our largest trading partner.  Second, are there valuable lessons to be learned from what we see?  Of course there are lessons to be learned.

The first lesson to be learned is how bad deflation is for an economy.  Deflation is when prices go down over time.  What made the Great Depression in the 1930’s so bad was deflation and recession at the same time.  As the recession hits, workers lose their jobs and they don’t have money to spend.  As they see prices fall, if they have money, they will not buy things because they see that if they wait, they can buy it cheaper in the future.  When the buyers stop buying, more workers get laid off and the cycle spirals downward until an absolute bottom is reached.  There is always some absolute bottom; we are not going to lay off all of the police, or school teachers, or doctors and nurses.  At the bottom, the required workers will hold the line and stop the down spiral, but the economy is in a hell of a mess.

We have seen that we can control inflation.  We can raise interest rates as high as we need to in order to slow consumer spending.  Paul Voker was the Fed chairman in the late 70’s and early 80’s and that is what he did to kill inflation.  You can stop people from spending.  The opposite is not true.  In deflation, you cannot drop interest rates low enough to make people go out and spend, if they think the price will be lower next month.  Following the Great Financial Crisis (GFC) of 2008, the Fed dropped interest rates to zero and left them near zero for a decade and the recovery was very slow.  Ben Bernanke was determined to not let deflation take hold.  In Europe and Japan, they made interest rates negative for years, hoping that people would spend their savings rather than see it eroded by the negative rate, and that did not work.  The nations with negative interest rates recovered slower than the US which never implemented the negative rate.  The message to US economists over many decades has been “do not let deflation take hold because there is nothing the central bank can do to end it”.  The central bank controls monetary policy, how much money is in circulation and how much will we charge you to borrow our money.  The congress control fiscal policy, how does the government allocate the money that is printed by the US Treasury.  The way out of the Great Depression was to print money and spend it on government programs to create jobs, like the Civilian Conservation Corp (CCC).  We still enjoy some of the hiking trails cut in the national parks by CCC workers in the 1930’s, so it was “make work”, but it has had a lasting positive impact on tourism in the US.  There is a way out of deflation, but it takes TIME and well directed spending.

China is seeing deflation.  How well will they handle it?  How will it impact American companies with substantial business operations in China?  It will be negative for those companies, like Tesla, and McDonalds in addition to Apple.

The second major observation is the negative implication of rising militarism, in this case, in China.  As long as China was not a military threat to the US in the Asia Pacific region, we were happy to see them grow.  As we have seen more of their country’s treasure allocated to the military and their threats to Taiwan, they have forced the US to respond and try to blunt further progress by China.  In the modern world you don’t have to invade, you respond economically.  The US has done that by starting a trade war in 2018 by raising tariffs on Chinese imports to the US.  China responded by raising tariffs on imports from the US.  We both suffer, but China is suffering more.  Look whose economy is suffering deflation, and whose economy is steady.  The US is denying exports of certain high technology to China, such as our most powerful computer chips, which can be used for military purposes.  The conflict is primarily economic at this point.  While there are pockets of suffering in both nations, it appears China is suffering the worst of it.  When China cut off imports of US grains, the US passed a farm bill and gave money to those farmers who missed their sales.  Then the US sought alternate markets for our grain and we have come out OK.

Xi Jinping has been the Chinese president for a decade and I am not impressed by what I see.

The Chinese stock market is suffering.  One stock I am interested in is BYD, their auto maker.  They are going after export markets now that the domestic economy has slowed and they are selling at a significantly lower price point than their competitors.  In Chile, an entry level BYD car sells for $18,000 while the comparable Toyota Corolla is at $23,000.  I don’t know if the Chinese govt. is subsidizing the price of the BYD car and dumping them on the world market.  Chile does not care since they do not have an auto manufacturer.  The US will place tariffs on Chinese auto imports to keep them from bankrupting our remaining 3 auto makers.

Beyond auto exporters in China, I am not interested in investing there.  I think their government is making too many mistakes.

Technical Analysis:

For the week ending 3/01/2024, the S&P 500 was up 1%.

Technically (see chart below) the market looks positive, but extended.  RSI at the top of the chart is overbought at 70.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  The price action is positive, but rising at a rate that won’t be sustained in the long run.  I think a correction could start at any time, but nobody knows when.

One of the more interesting stories of the week was the great fall of Snowflake stock (SNOW).  They are a rapidly growing data analysis company and the stock has been surging more on future expectations and speculation than on actual performance.  They reported in-line earnings but guidance was light.  The stock fell by nearly a quarter of its over-inflated value, from 235 down to 185 in one day.  That is the danger in these trendy stocks; if they disappoint just a little they will get killed overnight.  I did buy a little SNOW on the pullback.

If the whole market corrects, SNOW will fall ever further.  That is why I only bought a little.  I want to have some dry powder in case the whole market corrects.  As we saw in the monthly Long Term report, the valuation of the market on a PE basis is significantly overvalued, which invites a correction, but the correction could be weeks or months away.  We just don’t know.

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

What am I doing?  I’ve done some short term trading with small amounts of money.  I don’t want to get heavily invested in an overbought market that appears to be rising at a rate that is not sustainable long term.  I am looking at what to sell and when to sell it into strength.  They say buy low and sell high, and things are high.  We’re in a ripping bull market so it certainly can go higher, but that comes with an increasing risk of a correction.  We could also see a small clearing correction of 3-5% and then see the rise resume.  In a bull market, when things get overbought, then they can get more overbought.

———————–  

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

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

There are currently 3 Classic topics posted:

Is it a bull market or a bear market?

Why does healthcare cost so much?

Implications of a large national debt. (posted August 2022)

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

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

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

Rich Comeau, Rich Investing

Long Term – February 2024

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

Economics:

GDP – The second estimate of 2023 Q4 GDP is +3.2%, following Q3’s +4.9%. 

That is a warm read, well above the long term 2.0% trend.  By itself, it would not prompt the Fed to hike the Funds rate, but it would push out the estimated time for the first easing.

This is bullish for the stock market.

Year	Quarter	GDP %
2023	Q4	3.2
2023	Q3	4.9
2023	Q2	2.1
2023	Q1	2.0
2022	Year	1.0
2021	Year	5.5
2020 – Covid	Year	0.1
2019	Year	2.3
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – At the January meeting, the Fed left the Fed Funds rate unchanged at 5.5%.

After being balanced in the Fall meetings, the Fed indicated that future hikes are likely over.  Powell said they will be cautious about timing the first rate cut.  The bond market pushed out its timing of the first rate cut to June, with 3 cuts in 2024. 

The other thing the Fed is doing is Quantitative Tightening (QT), which means they are not buying bonds to replace those that they hold when they mature, and outright selling bonds into the secondary market.  The Fed continues to reduce its balance sheet by $90 billion per month and they have not indicated that they will end QT anytime soon.  This provides a constant supply of bonds in the marketplace and the market may have to offer higher interest rates to entice people to buy those bonds.  Are we seeing that in action right now, with rates backing up?  The treasury also sends a constant stream of bonds to the marketplace to finance our obscene deficit.

Local and regional banks have tightened lending standards making it harder for small and medium businesses to get loans to expand.  That will slow the economy down somewhat.

The latest CPI was +3.1% versus a year ago.  The 30 year fixed mortgage has ticked back up to 7.4% as the whole interest rate complex moved up a little, since the Fed indicated a slower pace of rate cuts this year.

Fed policy is restrictive for the economy, and bearish for the stock market.  But we are probably at the peak of interest rates, we have been on pause, and the next move appears to be down.  That will eventually be good.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Feb 2024	5.5	4.3	4.3	4.4
Jan 2024	5.5	4.0	4.1	4.4
2023 Q4	5.5	4.4	4.4	4.5
2023 Q3	5.5	4.4	4.3	4.4
2023 Q2	5.1	3.8	3.6	3.9
2023 Q1	4.7	3.8	3.6	3.8
2022 Year	2.8	3.1	3.1	3.2
2021 Year	0.2	0.8	1.4	2.0
2020 Year	0.4	0.6	0.9	1.6 – Covid
2019 Year	2.2	1.9	2.2	2.6
2018 Year	1.8	2.8	2.9	3.1 – Tax Cut
2017 Year	1.0	1.9	2.3	2.9

Valuation:

S&P 500 earnings – Factset shows that as of Feb. 16, for Q4 of 2023, the blended (79% actual, 21% estimated) year-over-year earnings increase for the S&P 500 is +3.2%.  It appears we have exited the “earnings recession” of 2023.

The forward PE for the S&P is 20.4 (up from 19.5 last month) compared to the ten year average of 17.7, but remember, the forward PE is just a guess. 

The 12 month forward “operating earnings” estimate on the S&P 500 from the Standard and Poor’s company is $240, unchanged from last month.

The Factset earnings estimate for 2024 Q1 is +3.9% (down from +5.4% a month ago) and their estimate for calendar year (CY) 2024 is +11% (down from 12% last month).  Earnings estimates in 2024 will have an easy comparison of year over year since the 2023 numbers were negative in Q1 and Q2 of 2023.

I made a point to contrast what future earnings estimates from Factset are compared to last month, and there is quite a big difference.  Telling the future is hard.  Why do I even bother to report future estimates of earnings?  Earnings (profits) drive the stock market.  I look to the pro’s for their estimates, then I take them with a grain of salt.  Even if the estimates turn out to be wrong, that is the data that the stock market is trading on today.  It’s the best we have, and it may be wrong by a little, or sometimes a lot.

The outlook for earnings is bullish at +3.2% for Q4.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 26.8, up a bit from 25.7 last month.  I used 4 quarters of earnings with the most recent being Q4 2023.  The S&P rallied upward since Nov. 2023, faster than earnings growth, so the valuation rose. 

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

This indicator is bearish.

Age of primary move, bull or bear market – This bull market is 17 months old, started in Oct. 2022.  The age is neither bullish nor bearish, but it is worthwhile to keep it in mind. 

Geo-Political: (No change this month)

Liquidity:  Central banks globally raised rates to fight inflation, but most are pausing their interest rates.  Inflation appears to be coming under control, but it is not where the central banks want it.  They appear to be on pause to see if the hikes already in place will slow inflation to the target without additional hikes.

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

The economy in China is slowing more than their government would like.  Trade tension with the US contributes to the distress since US corporations are expanding outside of China, notably in Vietnam and India.  The Chinese govt. has been hostile to free market activity by their own corporations such as Alibaba and Ten Cent.  Their real estate sector was over leveraged and is in trouble.

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

Middle East Conflict:  Hamas launched a violent attack on Israel on Oct. 7, 2023 using missiles and ground forces and Israel has responded with bombings inside Gaza.  It’s a mess, but impact to the US economy is not noticeable.  The Houthi rebels in Yemen are firing missiles at shipping in the Red Sea, causing many ships to go around Africa to Europe instead of using the shorter Suez Canal.  That will increase wait times and raise transportation costs.

US National Debt:  (added Sept. 2023)  The US national debt is very large at over $34 trillion and it is growing too rapidly.  I have been concerned about it since early in this century.  If there is too much new debt and investors don’t want to buy the bonds that the US issues to fund the deficit, they may have to keep the interest rates high, particularly longer term interest rates, high enough to attract bond investors.  Companies will then have to pay higher rates to fund long term projects and that will cut into their profits.  Consumers facing high interest rates will slow purchases.  It is not a good situation for the economy.

Geo-politics is currently bearish, mainly due to the war in Ukraine and global central banks restrictive policy.

Technical:

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

RSI at the top of the chart is positive at 67 and rising.  Momentum shown by MACD at the bottom of the chart is positive and rising.  The price action is positive near term and positive longer term.  

The price action is near the top of the long term up-channel, which will limit the upside probability from here.  Resistance comes in when we hit the top of the channel (we don’t have to go that high) around the 5,000 level.

This close to the top of the up-channel, there is the risk of a correction.  We can also go higher, above the top of the channel, like we did in 2021, but that was driven by excessive stimulus from the Covid cash infusion cycle from the govt.  I don’t see that type of stimulus now, in fact the Fed interest rates are restrictive.

Ten Year Chart of the S&P 500

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

Conclusion:

1. GDP growth is bullish with Q4 GDP rising by 3.3%. 
2. The Fed has short term rates at 5.5%.  That is restrictive and bearish. 
3. S&P earnings for Q4 are +3.2% above Q4 2022 which is bullish. 
4. The PE valuation of the S&P based on the 12 month trailing GAAP number is 26.8, which is significantly overvalued and bearish.
5. The geo-political factors are bearish.  
6. Technically the chart looks bullish short term, and bullish longer term.

By that way of looking at it, the market is neutral, with three factors bearish, and three bullish.

Long Term Issues to Keep in Mind:

National Debt: 

(January 2024) – The national debt is over $34 trillion.

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

(Updated March 2020) – Covid 19 begins.  Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

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

Rich Comeau, Rich Investing

The “No Bad News” Melt Up

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

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

Happy Holidays to all of my readers!

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

Economy:

Existing home sales in Nov. were 3.8 million units annualized, which is low, but home sales slow going into winter.  New home sales for Nov. were 590K annualized, also a light number.  Durable goods orders were strong in Nov. at +5.4%.  Core PCE Y-o-Y was +3.2%, down from 3.3% last month, so inflation continues its downward path.  The U. of Michigan consumer sentiment index for Dec. was 69.7, up from 69.4 last month and continuing its monthly climb.

The leading economic indicators for Dec. were -.5%, marking over a year with a negative monthly reading.  Usually that would mean we would be in a recession now, but we are not.  One possible reason why the economy is not acting like we would expect it to is the huge cash infusion cycle we experienced during Covid in 2020 and 2021.  Much of that cash is still in the system, and the Fed is trying to take it out with Quantitative Tightening.

The economy is performing well.  Inflation continues to come down, GDP is generally normal except for the unusually strong Q3 at +4.9%, and initial jobless claims remain low so workers are confident about keeping their job.  That is why consumer sentiment is climbing.  We just had the best quarter of earnings growth in over a year, matching what one would expect in a normal economy.  The Fed bias is no longer to raising interest rates and cuts are expected in 2024.  The backdrop is positive for stocks.  The wildcard would be if the lag effect of the interest rate hikes in the system tip us into a recession in 2024.  Most analysts seem to think it will not tip into recession, but a few believe that we will.

Geo-Political:

Let’s take a look at Germany, Europe’s largest economy.

“BERLIN, Dec 15 (Reuters) – Germany’s economic downturn worsened this month with both manufacturing and services activity contracting, a preliminary survey showed on Friday, pointing to a recession in Europe’s biggest economy at the end of the year.

The HCOB German Flash Composite Purchasing Managers’ Index (PMI), compiled by S&P Global, fell for the sixth consecutive month, declining to 46.7 in December from November’s 47.8, below the 48.2 forecast by economists.

A reading below the 50 level points to a contraction in business activity.

The composite PMI index tracks the services and manufacturing sectors that together account for more than two-thirds of the German economy.

“If you are on the hunt for gifts right now, you will not strike gold in the latest PMI survey for Germany,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “This confirms our view of a second consecutive quarter of negative growth by the year’s close.”

The German economy contracted in the third quarter of the year. Two consecutive quarters of decline are defined as a technical recession.

Business activity in the services sector fell for the third consecutive month, to a reading of 48.4 in December from 49.6 in the previous month, below analysts’ forecast of 49.8.

“In the realm of services, the economic landscape is still dominated by the gloomy hues of stagflation,” de la Rubia said. Output contracted, while input prices rose.

The manufacturing PMI rose to 43.1 from 42.6 in November, slightly below analysts’ expectations of 43.2 and still in contraction territory. New orders continue to contract rapidly, the survey showed.

Inflationary pressures meanwhile increased at the end of the fourth quarter, with firms reporting the steepest rise in output prices for seven months amid a more marked uptick in average costs.”

https://www.reuters.com/markets/europe/german-economic-activity-deteriorates-dec-pmi-2023-12-15/

Our economy is driven by domestic consumption, but trade accounts for a significant share.  If our trading partners are sluggish, that can back into our economy.  While we appear to be taming our inflation beast, Germany is not.  This is not cause for major concern right now in the US, but it is something to keep an eye on.

Technical Analysis:

For the week ending 12/22/2023, the S&P 500 was up about 1%.

The chart below is a two year view so you can see the old market high from Jan. 2022 and we are within spitting distance of that old high, which is a resistance level.  The difference is that at the old high, the market was dangerously overvalued with a trailing 12 month GAAP PE of 31, while today the market is significantly overvalued (not as bad) at a trailing PE of 25.5.  Earning growth over the past two years means that on a valuation basis, the market now is much closer to a normal valuation than it was two years ago.

Technically (see chart below) the market looks positive, but stretched.  RSI at the top of the chart is overbought at 70.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  The price action is strongly positive, but we have moved above the top of the channel which usually limits near term further gains.  The market has come a long way since late Oct. and a small pullback would not be a surprise.  This week will be a low volume week with most pro’s on vacation, so if there are any big moves up or down, they are not to be trusted until after Jan. 1 when all the participants are back at work.

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

What am I doing?  Following the big options expiration on 12/15, with the market near an all-time high, I sold some out of the money call options on stocks I hold, such as GOOG.  It was a quiet week for market activity. 

I traveled to Victoria TX to my grandson’s Christmas play at his elementary school, which traces its origin to the 1850’s on the same grounds in rural cattle country (Ezzell community).  It reminded me of the little elementary school I attended in Louisiana.

———————–  

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

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

There are currently 3 Classic topics posted:

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

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

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

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

Rich Comeau, Rich Investing

A Lack of Negatives Currently

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

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

The monthly Long Term update for Nov. was posted on Wednesday and follows this post on the website.

Economy:

New home sales for Oct. were 679K annualized, down from 719K in Sept.  The Case Schiller home price index of 20 cities was up 3.9% in Sept. and that is bad for inflation.  Existing homes are not going on the market for sale as people hold onto their 3% mortgage, and the new home builders are keeping the supply tight, so prices go up.  With the 30 year fixed mortgage at 7%, it’s a bad time to be a home buyer.  Q3 GDP was revised up a couple of tenths to +5.2%, a hot number.  Core PCE year over year (the Fed’s favorite stat) for Oct. rose 3.5% which is slower than the 3.7% the month before, so inflation continues to come down.  The ISM (Institute for Supply Management) manufacturing index for Nov. was 46.7, where anything below 50 shows contraction.

The economy is sluggish and inflation is coming down.  That is what the Fed wants; the Fed is winning.  While the Fed was really dumb in 2021 saying that inflation was transitory, even as it rose to 9%, the Fed did not stay dumb.  They got very aggressive with the rate increases because they had to since they had kept rates near zero for way too long.  If we can avoid a much stronger slowdown next year, the Fed may have engineered the ultimate goal, a “soft landing” of the economy where is slows but does not fall into recession.  But, there are “lagging effects” to all of their tightening, they continue to pursue quantitative tightening (QT) which takes money out of circulation, and local bank lending standards are tight.  We just don’t exactly know what 2024 holds for the economy.  Some say that right now we are in a soft landing.  Will it get worse?  I don’t know, but it could.

Geo-Political:

It has been a long time since I looked over at Russia.  They are under heavy sanctions, but their trade with China and India for their oil helps Russia tremendously.  Still, the war is expensive to continue and people see it in their daily lives.

“Nov. 2 2023 – For 2022–2023, Putin has implemented a powerful budgetary maneuver by increasing military spending at the expense of civilian spending. In a democratic country, voters would have noticed this redistribution of spending and expressed their attitude toward the politicians who carried it out. This is impossible in Russia. A threefold increase in military spending cannot lead to a change of government there: elections mean nothing, and protests are severely punished.

The increase in war spending has not yet led to a fiscal imbalance or an economic downturn. However, the increase in budgetary spending, combined with a decline in export revenues, has led to a depreciation of the ruble and rising inflation. This has become the Kremlin’s main economic problem in recent months. Inflation is reducing real incomes and forcing the government to increase social payments, especially ahead of the 2024 elections.

The ruble’s depreciation has forced the economic authorities to force exporters to sell foreign currency earnings and to raise the key interest rate sharply. These steps will lead to a freeze in lending and a slowdown in economic activity. Moreover, this puts in doubt the fulfillment of the Napoleonic plan of budget revenue growth in 2024 (+22 percent compared to 2023). 

Reconciling budget revenues and expenditures in 2024 will be difficult. There are also new challenges: inflation is becoming more visible to the population, while higher borrowing costs and tax hikes are causing discontent in industry. However, the central bank cannot avoid raising interest rates: budgetary spending is fueling inflation, which the central bank can fight only by reducing credit growth.”

https://www.wilsoncenter.org/blog-post/war-tax-russia

Putin thinks the western democracies will tire of the war before he does and negotiate a peace deal giving him the land he has captured.  Many of the cities are destroyed by Russia, so I am not sure how important that is to him, but he would save face in his country.  There is a US election in one year, and maybe he thinks the US will give him better terms then, depending on who wins.

Technical Analysis:

For the week ending 12/1/2023, the S&P 500 was up 1%, with most of the gain coming on Friday after the Fed Chairman spoke.  Although Powell gave the same talk he has given in recent months, since he was no more hawkish, the financial community took it as further sign that the Fed is done hiking rates and the stock market liked that.

Technically (see chart below) the market looks positive, and a little extended to the upside.  RSI at the top of the chart is overbought at 72 and stable.  Momentum shown by MACD at the bottom of the chart is neural, going sideways, and the histograms are shrinking, so the market is losing momentum.  The price action is positive and rising.

One interesting technical factor is that the S&P is sitting at the late July peak, which now is resistance.  With the market overbought, momentum declining, and sitting at resistance, we could see a minor correction, say 3-5%, then break through the resistance and move closer to the top of the channel (purple lines).  Or we could pop above now and move closer to the top of the channel.

We are solidly in the bullish uptrend defined by the two purple lines sloping up to the right.  We broke above the bearish downtrend line (blue dashed line) with magnitude and duration, which is what you need for a trend change.  We’re in a seasonally good period because earnings estimates for 2024 are fat and people get optimistic that next year will be good.  The Fed meeting on 12/13 is expected to be a yawner.  The inflation data was good last week so that was good news.  Long term interest rates are declining from their peak a month ago.  Oil price is in the 70’s which is favorable.  I don’t see a negative catalyst to knock the stock market down in December, unless some unforeseen incident occurs, like Santa’s sleigh was to crash.  January might pose a risk when earnings season ramps back up around the 10^th.

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

What am I doing?  We burst out of the correction phase and back into bullish mode over the last two weeks.  The market is overbought (a dilemma).  I hate to buy into an overbought market, but the move appears to have conviction, so I bought a little XLK (technology ETF).  I immediately put a sell – trailing stop loss percent order under it, down 5%.  I have the opportunity to participate in the upside, if any, and I am reasonably protected on the downside capping my loss at 5%.  With this order, if XLK moves up, the sell limit moves up by the same amount, and then my loss is capped at less than 5%.  If the market moves up 6%, I would then be guaranteed a 1% profit, unless the market opens with a big loss at the open, then all bets are off and the 1% gain the day before could turn into a 2 or 3 or 4% loss.  Unusual activity at the market open is a risk, but it is not usually a problem so I accept that risk.

———————–  

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

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

There are currently 3 Classic topics posted:

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

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

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

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

Rich Comeau, Rich Investing