I am not a chartist. I use geopolitical, fundamental, and behavioral analysis that has worked well for me for 40 years or so. To these I add a dollop of common sense when reviewing the managed news bites coming out of Washington and Wall Street to draw my own conclusions.
There are many roads to success in investing. After all these years I have a number of peers and colleagues whom I highly respect, who reach similar conclusions to mine based upon their technical analysis of the market. They may think I’m a little nuts to spend all the time I do tearing into balance sheets and reading obscure journals; I can’t fathom why they would want to draw all those squiggles and lines and pennants and saucers when they could be sitting on the terrace in their backyard reading the footnotes of annual reports while listening to the birds and looking at the lake.
But I’ve recently come across a couple charts that I think even non-chartists can appreciate the simplicity and clarity of. The first is hot off the presses today from the US Census Bureau.
(Click to enlarge)
For the past few weeks, Wall Street has held a pretty marvelous rally based upon News That Isn’t Quite As Dreadful As It Could Have Been. Remember, for every buyer there must be a seller. This “good news” has given corporate insiders, Wall Street’s biggest clients, the opportunity to sell their holdings at a record pace at the top of the market. It has also allowed big banks and brokers to float astonishing amounts of new capital at prices the public wouldn’t touch just 3 months ago.
Their latest coup was to trumpet the National Association of Home Builders/Wells Fargo index of builder confidence. This index measures, on a scale of 0 to 100, the percent of builders who believed current sales are “fair” or “good” rather than “poor” and that buyer traffic is picking up or isn’t. That percentage rose from 14% all the way to 16%. And housing starts, as shown above, do not justify even this "margin of error" increase in alleged confidence.
Rather than just accept Wall Street’s dictum that this is news worthy of a 238-point rally, let’s examine what this really means. It means that last month 86% of home builders rated their current sales and future prospects as “poor.” This month "only" 84% of home builders believe their current sales and future prospects are “poor.” This is better than a poke in the eye with a sharp stick but worthy of a powerful rally? Only if you are a Wall Street firm floating stock or feathering the nest of your best clients…
I was actually quite surprised the confidence level didn’t rise far more. After all, the recovery is being engineered by Washington and trumpeted by Wall Street. Forcing interest rates down and providing an $8,000 check for first time home buyers, combined with record low prices, should have people flocking to buy homes, especially in the heavy springtime buying season. Really, now. If you ran for public office two times and the other candidate got 86% of the votes the first time but only 84% the second time, would you trumpet your “victory?”
I’m indebted to Tom Fitzpatrick and Shyam Devani of CitiFX Technicals for the next chart, which depicts a long-term view of the DJ Transportation Averages.
(Click to enlarge)
To me, the stocks that comprise this index (AMR (AMR), FedEx (FDX), Union Pacific (UNP), UPS (UPS) et al) are the harbingers of U.S. economic activity. Randy Travis sang, "Since my phone still ain't ringing I assume it still ain't you." Well, since these companies still aren’t moving goods and people around the country, I'll assume the economy still isn’t recovering... I’m hoping we don’t see a repeat of the two earlier instances with a similarly steep decline in this indicator – but I’m prepared for it if we do.
This last chart comes courtesy of Chart of the Day (www.chartoftheday.com) and is pretty self-explanatory:
(Click to enlarge)
Never before have we seen corporate earnings fall off a cliff like we have this year. But the news has been managed to perfection: “Earnings Not Down As Far As Analysts Expected,” and, yesterday, “Lowes Q1 Net Beats Estimates”! (Followed, if you actually read the article, by “The Mooresville, North Carolina-based company reported first quarter net income of $476 million, or 32 cents per share, down 22% [emphasis mine] from $607 million, or 41 cents per share, in the year-ago period. Sales fell 2% to $11.83 billion from $12.01 billion.” Remember when home improvement firms were trumpeted as havens from the storm because, with fewer home sales, more people would be fixing up their places?
I cannot discern or claim, from my non-chartist view of all the above, what the next move for each will be. Each “could” be at the bottom of a V-shaped recovery. But the devastation wrought in these three areas, combined with my read of the 3-sigma likelihood of a V-shaped recovery in housing, corporate earnings, or the transporters, leads me to believe this will not happen. This kind of devastation does not turn on a dime. That doesn’t mean the market, ex the transports, “could” not do so. But again, even a non-chartist looking at these, applying a bit of experience, common sense and healthy skepticism for the way in which news and earnings are being managed/manipulated, might draw the conclusions I have: It’s likely to be a long, hot summer.
Disclosure: Mostly in boring, safe cash equivalents, with some income, gold and inverse ETFs like EUM, SH, SEF, REW, and PSQ.