S&P 500 Weekly Update: Secular Bull Market Continues Despite Indecision On Short-Term Outlook

Summary

• Financials rebound sharply and could help stabilize, then lead the major indices higher. Sector rotation keeps the long-term trend in place.
• Both the Russell 2000 and the Dow Transports look ready to join the new high list as sector rotation continues.
• U.S. economy remains in the sweet spot, not too hot and not too cold.
• Global stock markets continue to break out as what only can be called a synchronized global recovery.

"Stability is everything. Being it emotional or physical. You need a solid ground to build anything on." - Anonymous

This past week marked the month end, quarter end, and the end of the first half. The bulls ruled in that time frame, and now the focus turns to what comes next.

The latest stats on the bull market reveal that it is now over 3,000 days old, up over 260%, and the second longest and second strongest since WWII. That's great but what does that do for us now. It's always the same when it comes to investing, what have you done for me lately? The consensus view is that investors are too complacent, and it's a sign that this may mark the end of the run.

Complacent? As far as I am concerned, that is a buzzword used by many that don't seem to have their eye on the ball. Can someone step up and show us the so-called hoards of market participants that are not worried if not downright scared of the ongoing political situation. Every client conversation about the stock market starts with that issue. Then, there are the concerns about the flattening yield curve and the Fed's recent interest rate increase. Oil prices have spiraled lower with concerns now that they may be related to global growth.

Then, we hear the commentary that there has been no corrective activity for so long, and this economic recovery is way overdue for recession. The list of client worries goes on and on with the summary ending that the VIX is too low, concluding that something has to be terribly wrong with this entire picture. Again I say, complacent? I guess I am looking at a different stock market than most pundits.

It then comes down to what is really happening; the wall of worry has been, and still is, firmly in place.

Ned Davis Research is a well-respected firm that has earned that reputation by correctly assessing the markets over time. Mr. Davis has been quoted stating that All successful investors share four basic traits:

• They use objective indicators.

• They are disciplined.

• They have flexibility.

• They are risk averse.

While it may be implied, please allow me to humbly add one more to the list. Successful investors use ALL of the data that is being presented.

While that wall of worry and all of the short-term concerns that are thrown at investors, Chris Ciovacco takes us up for another look at the situation from 30,000 feet.

Chart courtesy of Chris Ciovacco

Keeping it very simple, when a market trades sideways and forms a base, then breaks out of a trading range, the results are often quite dramatic. Mr. Ciovacco goes on to explain in detail what we can learn from secular market trends. After observing a long base building period, it is why I, along with many others, labeled the breakout in 2013 as the start of a secular bull market. The opening quote comes into play here as well. Stability in anything needs a solid foundation in which to build, and we have that in place as the chart above illustrates.

Some may look at that graphic and get giddy over this, and some may dismiss it as voodoo. Whatever your choice, one thing that also stands out on the journey depicted in the graphic above are the dips, corrections that occur along the way.

It continues to be a good idea to revisit this concept over and over, because I believe it is extremely important for all market participants to grasp. The secular bull backdrop is THE trend in place; it is the wind at investors' backs. The second part of this overall view is just as important to keep in mind. Corrective activity that comes along washes out the weak hands and often includes a dip into bear territory. It is how the market functions over long periods of time.

For those that dismiss all of this as magic and wizardry, I apologize for taking up your time. The participants that embrace this concept and have a long time horizon to build wealth will NOT be disappointed if it is followed. Following includes the use of the simple rules that Ned Davis laid out for us as the story unfolds.

That's wonderful, but what about the investor that looks at their situation and simply doesn't see an extended time frame in the picture they are viewing. It is a question I am asked repeatedly from current retirees. Here it comes down to each individual's situation.

How much need be used to celebrate life, and how much need be left for an estate, if so desired. In essence what I am trying to say is that retirees have many more decisions to make than they may realize. It used to be the time in life to shun growth altogether and hunker down with income only investments. Maybe not. People are living longer. Many in their 60s today could easily see two more decades.

Recent research says a 65-year old has a 50-50 chance of living another 17 years. If one makes it to 65 today, they have a 25% chance of seeing 95. The ladies out there should be smiling; if they make it to 65, they have a 33% chance of seeing 90. That's about 30 years worth of living that needs to be accounted for. Please don't forget the probability is great for us to expect that percentage will increase with time. By 2029, a 65-year old will have a 50% chance to see 90.

In essence, the long-term view on the chart presented may apply to a lot more people than we think. Food for some reasonable thought.

Economy

The advance report on Durable Goods Orders started the week's economic news off on a disappointing note, as they declined by 1.1% in May.

The up and down data continues. Last month, the Chicago Fed's National Activity Index delivered its strongest showing since April of 2014, reading 0.57 on a revised basis. This month, it gave most of that back, with huge declines in the contribution of production and income category driving the results, but an overall weak showing from every category except Sales, Orders, and Inventories. Keeping everything in context, the reading from the CFNAI on average across the first two months of Q2 is the strongest since Q3 of 2014.

Chicago PMI surged in June with a reading of 65.7, its highest level since 2014. This report represents the fifth consecutive month of improvement.

Dallas Fed Manufacturing joined the up and down parade as the total production index fell to a reading of 12.3 in June. It must be noted that this report is coming off a recent high of 23.3 recorded in May.

Richmond Fed Index increased to a reading of 7 in June from the prior month read of 1.

Conference Board's Consumer Confidence Index for June exceeded expectations at 118.9. The final read on Michigan Sentiment remained favorable at 95.1 despite slipping to its lowest level since late last year.

Final read on first-quarter GDP came in slightly above the initial readings at 1.4%. The conclusion, not much has changed. The economy remains on a slow but sustainable growth path with a "middle road" of stability.

Pending home sales down for the third consecutive month as they fell 0.8% in May. Lawrence Yun, NAR chief economist:

"It's clear the critically low inventory levels in much of the country somewhat sidetracked the housing market this spring. Monthly closings have recently been oscillating back and forth, but this third consecutive decline in contract activity implies a possible topping off in sales. Buyer interest is solid, but there is just not enough supply to satisfy demand. Prospective buyers are being sidelined by both limited choices and home prices that are climbing too fast."

Global Economy

The Composite Leading Indicator for OECD countries plus nonmember economies rose a 14th straight month in May to a two-year high, the Sentix Global Economic Conditions Index has stabilized at a seven-year high and U.S. leading indicators have now risen six straight months.

The IMF isn't as optimistic on its view of the global economy:

"President Donald Trump's struggle to deliver a fiscal stimulus this year has prompted the International Monetary Fund to cut back its growth forecasts for the US economy just months after it boosted its outlook on hopes of a policy overhaul."

Investors can now sit back and wait for the members to change their socks to receive the next update on global growth.

German IFO data beat expectations across the board this past week, and that helped lift European markets when announced.

Another positive development lifting Euro stocks was a deal to wind up two failed banks in Italy.

Mario Draghi continued with the upbeat outlook as he delivered a speech at a conference in Portugal this week. Investors interpreted his statement that inflationary forces were now replacing deflationary forces in Europe as hawkish, causing the euro and eurozone bond yields to rally as a result.

The comments, which were initially over interpreted by a skittish market, are now being understood to have not signaled a change in thinking or policy. Traders had more to think about after some hawkish remarks from BoE Governor Carney were received.

French consumer confidence rose to its highest level in 10 years, but couldn't outdo Germany, where consumer confidence rose to a level not seen in 16 years. How much all of this means to more eurozone growth is anyone's guess, but it's sure a solid improvement from the recession days.

Brexit minister David Davis is "pretty sure" he could negotiate a good deal to leave the EU, throwing his support behind Prime Minister Theresa May.

UK retail sales activity as reported by the Council of British Industry showed stabilization and modest growth in its latest report.

Earnings Observations and Valuations.

RBC Capital Market responds to the thoughts that valuations are a big problem now and a pullback is imminent. It reports:

"The majority of the market's upside in 2017 has actually come from earnings, not higher stock multiples, and in their view elevated valuations are a weak near-term indicator for the direction of the market."

Leuthold Group adds to the commentary on valuations in a recent report:

"Compared to the entire 137-year history of the popular Shiller CAPE P/E ratio, stock market valuations have been extraordinarily high most of the time the past quarter century. It has been above average 98% of the time, above the 70th percentile 96% of the time, above the 80th percentile 74% of the time and amazingly, above the 90th percentile (i.e., higher than 90% of the monthly P/E multiples since 1880) more than half the time."

In my view, far too many get obsessed in what the PE multiple looks like at this very minute. As stated above, valuations appear high the majority of the time.

Jeff Saut, Raymond James research analyst, noted in a recent article:

"The stock market's P/E has proven to be not a good predictor of the market future direction. For example, a bear market began in 1980 when the P/E ratio on the S&P 500 was 9.5"

If one has to be so focused on a PE ratio, it should be slanted to what the earnings picture will look like down the road. Far too many have sat out the advance because of their overvaluation fears.

Looking at earnings revisions, FactSet Research reports:

"In terms of EPS estimate revisions, 38 of the 65 companies (58%) in the S&P 500 Financials sector have seen an increase in their mean EPS estimate for 2017 since December 31. The largest percentage gain coming from the financial sector. Two that stand out in the Investment Banking & Brokerage sub-group are Raymond James Financial (to $5.03 from $4.35) and Morgan Stanley (to $3.46 from $3.21)."

"In the Global Banks group the most notable changes come from Bank of America (to 1.80 from $1.64) and JPMorgan Chase (JPM) (to $6.64 from $6.46). The Regional banks are led by Comerica (CMA) (to $4.42 from $3.87) and Citizens Financial Group (CFG) (to $2.45 from $2.19). All of these are worth a look."

The Political Scene

This week I will preface any news on the political front with the personal motto of Senator Amy Klobuchar:

"Courage doesn't mean standing on opposite sides of the boxing ring and throwing punches. It means standing next to someone you don't always agree with for the betterment of our country."

Up until I read that I had no clue who Ms. Klobuchar was. It is probably because that type of sentiment gets drowned out. The airwaves are always filled with members of Congress who simply want to get their five minutes of air time to tell us that the other side's plan is worthless.

Healthcare and tax legislation once again took center stage this week. Is there room for compromise? That depends on who one is listening to. As a starting point, maybe it best for Ms. Klobuchar's motto to be heard loud and clear.

The announcement that any vote on Healthcare would be delayed until after the July 4th recess was not what traders wanted to hear. In another case of sell and ask questions later, the S&P fell 19 points on the afternoon of the news release.

The Fed

St. Louis Fed President James Bullard doesn't see the need to hike interest rates any further given that the economy seems stuck in "low growth, low inflation" mode.

Other Fed officials weighed in with their views as well, and at this point in time, not all agree with Mr. Bullard. I will remain with my one more and done scenario when it comes to future rate increases.

Fed Chair Ms. Yellen spoke at a conference in London this past week on a variety of economic issues. Her commentary on the banking system in the U.S. as it exists today:

"I think the system is much safer and much sounder. We are doing a lot more to try to look for financial stability risks that may not be immediately apparent but to look in corners of the financial system that are not subject to regulation, outside those areas in order to try to detect threats to financial stability that may be emerging."

Sentiment

The weekly sentiment survey results from AAII reveal that bullish sentiment remains at depressed levels. Optimism declined this week falling from 32.6%, down to 29.7%. That now makes it a record 130 straight weeks where half of the investors surveyed were not bullish.

Crude Oil

Interestingly, while oil prices and the price of energy sector stocks are well off their highs, high yield spreads in the Energy sector haven't seen much of a move. Spreads in the Energy sector have widened, rising by 156 basis points off their lows from January, but at 545 basis points, we haven't seen anywhere near the panic that was rampant in late 2015/early 2016.

One possible explanation for the relative calm this time around is that the riskier companies who were part of the high yield sector in the last downturn have been downgraded to distressed and are no longer part of high yield. With the weakest players out of the group, the remaining companies would therefore collectively have stronger financials and be able to withstand the weaker prices.

A notable event this past week. Crude oil prices held steady during the day and closed higher after the announcement of a surprise build in crude inventories. Analysts expected a big draw down, so the bearish report was a rather large miss on expectations.

WTI closed at $46.19, up $3.15 for the week, ending the streak of five straight weekly declines.

The Technical Picture

The S&P 500 rallied 17% from November 4, 2016, to its all-time high on June 19, 2017. However, it's worth noting that net advancing issues peaked on June 1st at 393 and have continued to contract as the market has moved sideways. Nothing to be overly concerned about just yet; the action suggests consolidation is taking place now.

Chart courtesy of FreeStockCharts.com

A break and close below the very short-term 20-day moving average (green line) on turnaround Tuesday sparked a decline that ended the day right at a short-term support level. Back and forth trading followed in a pre-holiday setting that made it hard to gauge exactly what direction the market wants to take.

The short-term picture remains muddled as the index broke down and tested the 50-day moving average at 2,408 before rebounding. When the dust settled, the S&P found itself right between the 20-day (green line) and 50-day (blue line) moving averages.

Last week, the importance of the Nasdaq and the tech rally was a key highlight:

"The Tech composite, which has been leading the S&P/Dow higher in recent months, is showing some signs the seven-month uptrend may have recently ended."

"That leaves me with two short-term scenarios to watch for. Should this be the case, the downside pressure created might eventually pull the general market down as well. So far that scenario has not materialized, but the tech selloff may not be over just yet."

While the initial bout of selling in the Nasdaq stopped right at the 50-day moving average, weakness later in the week dropped the index to close below that short-term support. It appears the latter scenario is here now as the selloff in Technology did have a spillover effect on the overall market.

We need only to go back to last week's commentary to see what could be next as far as the Nasdaq Composite:

"The Nasdaq 100 has closed above its 50 day moving average for 137 consecutive trading days. That's the third longest streak in the index's history going back to 1985."

"However, when these long streaks of closes above the 50 day MA are broken, the index has performed very poorly in the near term. So while the index is still above that support level now, if and when it does break below it, expect continued weakness over the next few weeks."

Limited upside for the tech sector as a whole is more than likely in the cards in the near term. A long period of outperformance is usually followed by a period of underperformance, and is not unusual. New leadership may need to emerge for the overall markets to stabilize or move higher.

Two other indices caught my attention this past week. The Dow Transports cleared short-term resistance, with its next major resistance point its previous high, while the Russell closed within a point of an all-time high. However, both indices did not escape the selling pressure at the end of the week, leaving market participants with more to ponder in the short term. The first takeaway from both indices; they did NOT break any short-term support levels on the pullback.

Short-term support moves lower and settles in at the 2,411 and 2,385 pivots, with resistance at the 2,428 and 2,444 levels. I am not convinced we have a downtrend in place yet, but the likelihood of one developing near term has increased. Any downside appears limited at this point, investors need be reminded that a 5% downdraft can occur at any time, often when we least expect it.

Market Skeptics

More evidence that corporate buybacks aren't propping up the equity market. New equity price highs achieved while amount apportioned to stock buybacks is dropping.

Chart courtesy of Bianco Research. Data source: Standard & Poor's

Nice to see money flowing into dividend payments which continue to increase.

Individual Stocks and Sectors

With the first half of 2017 in the books, it is time to share the results of the 2017 playbook assembled at the end of last year. So far so good, as the portfolio is outperforming the S&P. A special thanks to author Alexander J. Poulos who twisted my arm and told me I had to buy Edwards Lifesciences (EW). My arm feels a lot better given the nifty 25% gain this year.

There are two companies that are often used as proxies for the economy.

Caterpillar (CAT) is the first that comes to mind. Throughout the market turmoil that was created over the global economy issues, sales and earnings at Caterpillar were cited as major tells. The company gives a great read on the overall health of a major sector of the global economy.

Sales for the company have been staging a turnaround after years of declining growth. Four straight years of negative year-over-year growth produced a decline of over 40%. The chart below shows that has now changed.

Source: Bespoke

The year-over-year change finally ticked back into the green in March with a 1% gain and now an 8% increase May. North America showed a small improvement, but the highlight comes from sales in the Asia region. They have gone parabolic, rising 49% year over year to their highest level since April 2011.

FedEx (FDX) recently crushed sales and earnings estimates. Apparently consumers and businesses worldwide are shipping packages in a big way. Connect the dots and it says the economy can't be as weak as some say, and it shouts Amazon (AMZN).

Bespoke Investment Group reports:

"In the last year alone, the Energy sector has under performed the S&P 500 by more than 23 percentage points. If the Energy sector under performs the S&P 500 by 25 percentage points or more it will be just the eighth time since 1980 than the sector under performed by that much."

In the prior periods where this has occurred, crude oil has been up over the following 12 months all seven times for an average gain of 20.2%.

While it may be time to dip back into some of the E&P names in the sector, one energy sub group has some appeal now. The oil services industry. Halliburton (HAL) comes to mind. Clearly the recent rig count data at a three-year high indicates that E&P companies are still operating at a decent pace with land-based drilling here in the U.S. In its recent earnings report, Halliburton indicated that its international exposure reached an absolute bottom in 1Q17.

It stands to reason that service companies' earnings should not crater while the price of crude oil has come down. This sub-sector's performance lately appears to be a case of an overshoot to the downside, and may present value here. On the technical side of the picture, Halliburton appears to be a solid long-term support in the $41-42 range. I already own the stock and added more at $42 this week.

The financials continued their rebound this week. The rhetoric that the fixed income market is telling us something as the 10-year fell to 2.12 intraday on June 26th, went softly into the night as the 10-year rose to 2.30 just four days later. A level last seen in May. A bounce off the lows and now a test of the trading range highs around 2.60 could be next.

The CCAR results measuring a bank's capital return plans for the coming year were released during the week. A bevy of dividend increases and share buybacks dominated the headlines after the Fed cleared the capital plans for all 34 banks that were involved. The question becomes which banks should an investor be looking at now, large center money banks or regional banks? My preference, take the guess work out and have exposure to both. Not only does this bode well for the sector but also for those who rely on the old adage that Financials have to lead the market higher; well, here we are.

It is noteworthy that during the days the market saw selling pressure during the week, Energy and Financials received a bid and moved higher.

A lot of discussion on the recent announcement that Amazon will purchase Whole Foods (WFM) lately, and it brings the state of the brick and mortar retail sector to the forefront once again. For the time being, I have shied away from other major retailers while this sea change is taking place.

One company that still appears very solid in this space is Wal-Mart (WMT). I do think it is a definite survivor and probably much more than just a survivor. The company presents solid management, and the most important factor of all, its online sales are growing.

This company gets it on using the internet to boost sales, and of course, there will always be foot traffic at its stores. Its sheer size basically took out all of the mom and pop retail outlets that were its initial competition. That was the first sea change in retailing; now, the next sea change is here. I believe other retailers will need to do the same regarding the use of the internet, and they will also need to start cutting their brick and mortar locations. This sector is now a contraction model instead of one of expansion.

In researching any retailer now, it would have to demonstrate its willingness to do just that for me to put money in any one of the big names that can remain standing. As an example of what I am referring to, Target (TGT) fires back with its version of home delivery services, a feature Amazon offers its Prime members.

Market participants are not complacent; this isn't 1999, there are no bubbles about to burst. The S&P is fairly valued given the interest rate backdrop and the forward-looking earnings forecasts. The growth laden Nasdaq 100 sells at a forward PE of 21. There is headline risk given the political situation here in the U.S., but there is always headline risk. So far, the markets have decided to let things play out before jumping to negative conclusions, and that speaks volumes to the strength being displayed in the price action during the first half of 2017.

With a gain of just 10 S&P points, the month of June was flat, but didn't turn out to be the bust many thought it would be. The first half of 2017 is the best first half for stocks since 2013. After consolidating the gains recorded after the 2013 break-out, the first half of this year provided bulls with another breakout to new highs. If July can hold to form, it could be good news for the bulls.

Source: Bespoke

Looking ahead, it becomes a question of whether the stock market meanders around these levels while the political agenda and earnings picture are clarified. It isn't rocket science. A positive resolution on both should keep the uptrend firmly in place to year end. The opposite will be true if one, and especially if both, becomes a disappointing event.

Earlier we looked at the secular bull market trend that is currently in place. There is compelling evidence being displayed all around us that this view warrants a high probability outcome. Not only have we seen the S&P break out in 2013, but also the Nasdaq Composite has joined in after going absolutely going nowhere for 17 years.

History tell us that this expression of strength won't end in a month or two, but it is feasible to believe that markets may be likely years away from topping again. The South Korean Exchange (KOSPI), the London Exchange (FTSE), and Germany's DAX are all at multi-year highs after long periods of consolidation. The markets are sending a signal, the synchronized global growth story is here.

Of course, nothing comes with a guarantee, either with life or our investments. Just as we apply percentages and probabilities to statistics of how much we will need to fuel our retirements, we also need apply probabilities to what can occur in the investment world.

In my view, the odds that this is indeed a secular bull market are very high, and I continue with that concept in mind today. Some believe we are on the cusp of what is a generational opportunity being presented to investors. I'm not here to argue, I am just following what the market is telling us.

My call on owning equities remains the same. Add stocks that are selling off due to profit taking after big runs. Technology, which now deserves a breather after a HUGE run. Watch support levels and add or initiate. The upward moves we have seen are very strong and won't be derailed overnight.

Preview stocks that have broken out of long base periods, Healthcare and Biotech. Research companies that no one wants. The banks were in that category for a long while, energy is there today. It will take fortitude and patience.

I remind all, patience with the financials has paid off big time. The sector is still inexpensive and under-owned. Years of underperformance will lead to a period of overperformance before the move is over.

This market is loaded with opportunity despite what the short term may look like.

to all of the readers that contribute to this forum to make these articles a better experience for all.

Happy and safe July 4th holiday to everyone !!

Best of Luck to All!

Disclosure: I am/we are long AMZN, JPM, EW, HAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.