S&P 500 Weekly Update: No Need To Out-Think The Stock Market; The Earnings Beat Continues, Follow The Trend

Summary

• Corporate earnings continue to be very positive, forward guidance is also strong. That trumps all of the market noise.
• It is a global economic recovery that is being confirmed, with equity markets across the globe setting new highs.
• Crude oil has broken above resistance; the energy sector may now be a tailwind instead of a headwind for S&P earnings.
• The path of least resistance for equities is up. No need to conjure up why stocks can’t go higher, stay the course.

If you walk peacefully on the beach; our feet sink a bit before we can take the next step forward, rinse and repeat. So goes the market at times.”

- Rose Nose

At some point, even this bull market will tire, but as long as the internals keep holding up, earnings continue to show steady growth, or historical trends suggest otherwise, it won’t be profitable to keep doubting this bull market. That has been the message now for not months, but years.

This year has been no different from the past. There have been any number of well reasoned arguments about why the market should pull back. Whether it was the chaos in Washington, likely war with North Korea, a run of weak economic data, a potentially more hawkish Fed, excessive valuations, being overdue for a pullback, weak seasonal patterns, or something else. The reasoning behind the cautious arguments has sounded good in theory.

They always sound smarter to the human mind because they dovetail with our own worries. Sounding smarter doesn't necessarily produce the desired results. Investors always have to be ever mindful of letting emotion creep into the equation. All of these issues and many others that have come before them have been shattered. Most of the time they never even surfaced. It is why when an issue arises, it needs to be listened to, then assigned a probability of it actually happening. It should never just be accepted as a black and white, has to happen event.

The fine line then becomes we can also never be complacent, and with that the thought of what to do when the market does change course. First, let me be clear that this is not a call that the market has topped. Nor is it a time to believe that we are about to see a reversal of the long-term trend anytime soon.

The fact of the matter is many are asking questions on how they should proceed when that day eventually comes. Ironically, I put my thoughts in writing on this topic back in July of 2013 when I was repeatedly asked the same question. Yes, many believed the market had topped back then when the index broke above the 2007 high. Those queries came way too early and it is my opinion these recent concerns are also premature.

For someone that has stayed invested in the last few years, it’s human nature to have the fear of losing the lion's share of the gains achieved. The best way to control that emotion is to gain the confidence that you will first, have a plan, and then calmly execute that strategy.

The key to my strategy is the long-term trend, and taking action only when it is changing. Any change of strategy before that occurs is premature. Those that we have seen calling a top before then is simply guessing, despite whatever evidence they throw at investors.

The monthly chart of the S&P clearly points out what I am referring to. Look at the long-term chart below. Market tops could have been called anywhere from 1995 all the way to 2000. And each one was wrong. Move to the time period of 2003 to 2007. Many predictions for a market top were made in 2004, 2005, and 2006, and anyone selling during any of those calls was dead wrong. What has to stand out in each case is that the primary long-term trend in those examples was never broken.

Chart courtesy of FreeStockCharts.com

The picture also shows that the trend line remained firmly in place from 2009 to August of 2015. The reason that all of the calls for a market top in that 6-year time frame turned out to bad advice. It is also why it was necessary to stay invested in equities.

The yellow arrows show when the trend (green line) was broken back in 2000 and in 2007. Those events signaled caution. The time to start being defensive and outright bearish comes when the index fails to retake that moving average (red arrows) in short order. This concept is clearly illustrated when we look at the last two bear markets.

Note in the insert below, there was a failure (red arrows) when the index tried to recapture the long-term support line. It became obvious that trend was broken decisively after those failures.

Chart courtesy of FreeStockCharts.com

Please do not lose sight of the fact that the chart displays all of the action contained in a month’s time frame. Plenty will occur to sway an investor in that amount of time. We saw that play out recently in January/February 2016. One has to exercise patience and wait for the process to unfold.

So the first myth that needs to be abolished is that one won’t have the time to get out before the next crash. Not true, the 2007/2008 financial crisis is the first example showing that to be the case. Anyone care to point out a more dire time in equity market history?

In October 2007, the S&P closed at 1,549. The first break in trend (green line) occurs in January 2008 (yellow arrow) with a close that month of 1,378, an 11% drop. Caution flags were raised to stop buying and sit tight. The retest and failure came in May 2008, with a close of 1,400, some 10% from the highs, a time to get defensive, raise cash and start to hedge, all dependent on an investor's risk tolerance. A market participant had 4 months to start taking some defensive and contemplate material changes to portfolio positioning.

Of course, no one can make guarantees about how the market will react the next time. However, allow me to post more evidence for the non-believers. The same scenario played out in 2000. The S&P had a closing high of 1,517 in August of 2000. The first break of that trend was in October at 1,392, an 8% pullback. Then in December of 2000, the index rallied back and closed at 1,320 (13% lower), but failed to retake the trend line. Caution flag at 8%, failed rally and warnings flashed at 13%. One could have acted cautiously, then prepare to roll into their bearish strategy during that 4-month period.

Chart courtesy of FreeStockCharts.com

The second myth is that an investor will get crushed if they sit around waiting for signals. Of course, that depends on the definition of getting crushed. In both cases (2000 & 2008), an investor was cautioned that it was time to lighten up and raise considerable cash anywhere between 8 and 14% of THE TOP. So unless one firmly believes they can make material strategic portfolio changes at the exact top, they need not have a strategy when the trend changes. This refutes the theories that defensive action can’t be deployed, investors will be trapped, and all the gains will disappear. Caution flags were raised. Following some simple signals, deploying the proper strategy would have saved a lot of pain.

Another part of this investment strategy that cannot be dismissed revolves around the ensuing bear market. Anyone who lived through the last two bear markets realizes that stocks went down, and went down hard. Investors not only need to protect their portfolios, they need to profit from the new trend that is now established. Once that becomes part of an investor's toolbox, riding a bull market, then getting defensive when conditions warrant is only the first part.

Profiting from a bear market trend has to also be a goal of a market participant. This isn’t being presented in hindsight, please look at the chart again. Once a trend is established, up or down, it will run until broken. There is no law that says a once bullish investor can’t purchase an index ETF that profits from a market decline. There are plenty of instruments at an investor's disposal today that simplifies what was once a difficult task of shorting, etc.

It is patience and the ability to control emotion and remove the noise that is required while a down market tugs at our minds. Let’s fast forward to the late 2015 and early 2016 time frame, and review why so many analysts and pundits got the story wrong. The trend was broken in August 2015, and again in January 2016 (yellow arrows).

A break in the trend, first sign to get cautious and somewhat defensive depending on your risk tolerance. I will add that the word defensive means different things to different people. But it does not mean sell and hide. That is THE takeaway. Those that played some defense when the caution flag was raised are far ahead of those who prematurely sold in 2016. Patience was rewarded in both cases when the retest of the trend line resulted in a quick retake of the moving average just two months later.

Chart courtesy of FreeStockCharts.com

That rebound negated any sell signal and the reason to make material changes to equity posturing. It was at that time when many were calling for the end of the bull market, the headlines were terrible, a new bear market was about to begin. I simply stated to stay the course. I’m not clairvoyant, the index recaptured the long-term trend and in doing so remained in play.

It was simple, there was NO change in trend. No sell signal. Now anyone believing that this is all done in hindsight to make a point should reconsider their argument. Here are the articles that defined that moment. In February 2016, it was a time to be concerned but not panic. When the S&P rallied back in March, my view when speaking to the trend line signal was:

"A failure there would suggest a "possible" replay of the 2000 and 2007 market "tops." A successful retake of the MA and the probability for new highs increase dramatically.”

The rest is history, many sold their stocks when it was evident the trend was still in play and new highs would come next. By the end of March, the S&P recaptured the 20-month moving average, and all indices had made new uptrend highs off the lows with strong breadth.

Coincidence, voodoo, magic? Not really. It is following what drives markets over time, and that is trends. There is no absolute tool, no holy Grail. There is no single technical approach that works every time. It is always a process that needs to be refined. However, following technical analysis of long-term trends is a necessity, and should not be dismissed as some would have us believe. Adding indicators such as market breadth and others can only enhance the process. For me, it's best to keep it simple, what was just described is the way I approach identifying potential market tops.

Now that I have laid out the strategy, the specifics for my personal situation are as follows. A yellow caution with a break in trend, no new market positions, possibly take some profits in overextended positions. A red flag, raise more cash, buy hedges on core positions I may wish to hold. As the downtrend becomes firm, use index ETFs that take advantage of a falling market. That includes the leveraged ETFs which will offer more protection for less invested.

It is all about confidence. I do not fear a downturn, therefore I can attempt to remain in control when the issue gets murky like it did in all three examples posted today. If a market participant fears an issue, they will not be in control. Instead, the situation will be in control of them. A recipe for mistakes and portfolio losses.

Economy

Dallas Fed's Manufacturing Index surged 6.3 points to 27.6 in October after climbing 4.3 points to 21.3 in September, which followed a 0.2 point gain to 17.0 in August. This is the highest reading since March 2006.

October Chicago PMI Business Barometer Index rolls in at 66.2 versus consensus of 62, the highest level since March 2011. Jamie Satchi, Economist at MNI Indicators:

“Firms kicked off Q4 in a buoyant mood with only 12% expecting activity to decline between now and the close of the year. Despite the MNI Chicago Business Barometer hitting a six-and a-half year high, and output and demand in seemingly strong health, concerns remain over firm’s inability to attract and retain skilled workers.”

Consumer Confidence for October was reported at 125.9 versus consensus of 121, the highest level in almost 17 years. Lynn Franco, Director of Economic Indicators at The Conference Board:

“Consumer’s assessment of current conditions improved, boosted by the job market which had not received such favorable ratings since the summer of 2001. Consumers were also considerably more upbeat about the short term outlook, with the prospect of improving business conditions as the primary driver. Confidence remains high among consumers, and their expectations suggest the economy will continue expanding at a solid pace for the remainder of the year.”

The latest ISM Manufacturing report for the month of October registered a reading of 54.2, that is up from the 53.1 result reported in September. Chris Williamson, Chief Business Economist at IHS Markit:

“US manufacturing stepped up a gear at the start of the fourth quarter, boding well for higher factory production to support robust economic growth in the closing months of 2017.”

More solid economic data as ISM Non-Manufacturing report blew away estimates with a reading of 60.1, above the September reading of 59.8.

ISM Services remained robust while unchanged from the prior month’s reading of 55.3.

Global Economy

The JPMorgan Global Manufacturing PMI continues to signal the synchronized global recovery in progress. The index resides at a 78-month high with a reading of 53.5. That is up from the September report of 53.3. David Hensley, Director of Global Economic Coordination at JPMorgan:

“The global manufacturing PMI points to continued robust gains in production. The output PMI was little changed at an elevated level while the index of new orders moved up. Furthermore, the PMI indicates that output growth remains broad-based across the consumer, intermediate and investment goods sectors.”

Eurozone economic confidence rolled in at a 16-year high. The economic sentiment index improved more than expected to 114.0 in October from 113.1 in September. Unemployment data for the Eurozone was stronger than expected in September, dropping 0.1 percentage point to a new post crisis low of 8.9% and getting a 0.1 percentage point revision to August data.

GDP in the Eurozone beat expectations coming in at 2.5%, the fastest pace since 2011. The headlines also noted that in the same time period the United Kingdom grew at a 1.5% pace.

Manufacturing PMI is now at an 80-month high with a reading of 58.6. Chris Williamson, Chief Business Economist at IHS Markit:

“Eurozone factories started the fourth quarter with increased vigour, with the sector’s growth spurt showing no sign of abating. October’s PMI was the highest since February 2011 and the second highest in over 17 years. The overall performance of the manufacturing sector so far this year has been the strongest since 2000.”

Caixin China Manufacturing PMI remained in a sideways trend. Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group:

“The Caixin China General Manufacturing PMI was 51 in October, unchanged from September and remaining in expansionary territory.”

Chinese Services PMI rose to 51.2, rebounding from the disappointing September lows of 50.6.

A key takeaway from both the Apple (AAPL) and Starbucks (SBUX) earnings reports were their strong sales results in China.

Japan retail sales spending data rose 2.2% in September, indicating the strong run for consumption in that country continues. Consumer Confidence continues to show solid results with a reading of 43.9, the highest level since March. That is more than likely supporting the spending growth.

Manufacturing PMI remained steady, dropping to 52.8 from the prior month reading of 52.9.

Positive economic data has been difficult to achieve out of the United Kingdom lately. Here is one report that bucked the trend. Services PMI rebounded nicely to post the strongest growth in six months. The index was reported at 55.6, up from the September read of 53.6.

IHS Markit Canada Manufacturing Purchasing Managers’ Index dipped to 54.3 in October from 55.0 in September. Tim Moore, Associate Director at survey compilers IHS Markit:

“Business conditions improved at a slower pace in the manufacturing sector at the start of the fourth quarter, as softer rises in output and new order volumes dragged down the headline PMI figure. Weaker growth in manufacturing workloads in part reflected a dip in export sales for the first time since October 2016.”

Earnings Observations

Earnings headlines continue to impress. Overall, the growth rate for Q3 is roughly 5.9%, which is a nice pickup compared to the 1.7% estimate for the quarter going into this earnings season.

For what it is worth, Strategas Research sees no evidence that tax reform has been priced into the market. They note as the S&P has been rising, the company's most levered to tax reform have been under performing, suggesting the equity market is being driven by other factors such as stronger global growth, higher earnings and possibly less regulation.

As shown below, the spread now between the % of companies raising guidance versus those lowering guidance is at +3 points, which is slightly higher than we saw last season.

Source: Bespoke

That is a big positive. Not many CEOs will go and stick their neck out on an earnings forecast if they don't have to.

Utilities lead the way in terms of surpassing earnings forecasts. Technology earnings continue to confirm why prices have appreciated to the level they are at.

Source: Bespoke

FactSet Research weekly report:

• For Q3 2017, with 81% of the companies in the S&P 500 reporting actual results for the quarter, 74% of S&P 500 companies have reported positive EPS surprises and 66% have reported positive sales surprises.

• For Q3 2017, the blended earnings growth rate for the S&P 500 is 5.9%. Six sectors are reporting earnings growth for the quarter, led by the Energy sector.

• The forward 12-month P/E ratio for the S&P 500 is 18.0. This P/E ratio is above the 5 year average (15.7) and above the 10-year average (14.1).

The Fed

Ned Davis Research reports:

“Growth finally reached its cyclical potential but is not enough to suggest high inflationary pressures and a need for the Fed to tighten. It notes core PCE inflation remains well below the Fed’s target."

The Fed released its FOMC statement this past week, and there were no surprises in the report. It was also no surprise to hear that Jerome Powell was announced as the next Fed chair. The announcement was telegraphed all week and the stock market took the news in stride.

Sentiment

Bullish sentiment on the part of individual investors is currently at its highest level since the start of the year. In this week’s sentiment survey from AAII, bullish sentiment increased from 39.6% up to 45.1%. That’s the first 40%+ reading in six weeks and the highest level since the first week of January. Even with the increase, though, bullish sentiment has now still been below 50% for a record 148 straight weeks.

Have we entered into the acceptance stage as I mentioned in October? We’ll know in the next few weeks.

Crude Oil

The latest inventory report showed a slight draw in inventories of 2.4 million barrels. Gasoline stockpiles decreased for the second straight week, this time it was a 4 million barrel draw down.

WTI finally broke above the $52-$53 resistance level this week, trading at an eight-month high. The price of WTI closed Friday at $55.70, up $1.80 for the week. Perhaps traders are buying into the global growth story which should bring demand in focus.

The Technical Picture

A notable divergence last week that deserves to be watched. Both the Russell 2000 and Dow Transports turned in weak performances relative to how the Nasdaq, Dow 30 and S&P traded all week. Both the Nasdaq and the Dow industrial posted new closing highs. In the meantime, the S&P tagged a new intraday high at 2,588. It’s a divergence in its early stages that needs to be watched.

The S&P rides along the very short-term 20-day moving average (green line). No change from what was reported last week. There can be no discussion of a pullback until that initial support breaks. This relentless move higher continues.

Chart courtesy of FreeStockCharts.com

Short-term support is at the 2,575 pivot and SPX 2,544, with resistance at the 2,594 pivot. For those that are interested where the 20-month moving average is today, it sits at 2,309. That of course will continue to rise until we do get a material pullback. Based on what was presented earlier, one can now see why I don't fear a bear market starting in the near term.

Market Skeptics

It’s all about the Fed, or is it? Plenty of people still around that believe that.

Source: Bespoke

Anyone still hanging on to that idea to form an investment strategy has been left behind. For those that were telling us the bull market was over as the Fed balance sheet wasn’t increasing and the market sold off in early 2016, forgot that energy earnings were the real culprit for that decline.

Worse yet for those that continued to believe it was all about the Fed, convinced that stocks would drop amid the lack of QE, found themselves trapped. So while the balance sheet remained stable, the bull market in equities has seen a new leg higher and rallied over 35% from its early 2016 lows.

The word that is never mentioned in any bearish article recently, Earnings.

Source: Bespoke

It isn't mentioned because it doesn't fit the bearish stories being told to investors. Urban Carmel posted this comment and chart last week:

“This has been a mostly fundamentals driven bull market: 69% of the change in the S&P is explained by EPS growth.

Chart courtesy of Urban Carmel

Individual Stocks and Sectors

Apple hasn’t been mentioned here in awhile. Share owners have been treated to the usual rhetoric in the last two weeks. How many of these units will they sell? What is next? Can there be any innovation? Should investors sell the stock before earnings? After earnings? And on and on. The ONLY point that mattered was the new high put in by the stock on Monday. Investors apparently sniffed out a positive earnings result reported later in the week and the company reported a great quarter. The numbers being reported by this company are in one word, astonishing.

Facebook (FB) and Alibaba (BABA) both pegged new highs as well. Facebook's earnings were a thing of beauty as revenues are still growing at a phenomenal rate of 47%. Operating margins at 50%. The shares did not react on that news. Instead, traders reacted to the increased expense of providing better security on their platform, and hit the sell button. In my view, the aggressive expense guidance also signals confidence in Facebook's 2018 revenue growth.

Alibaba did not disappoint, reporting a 63% increase in core commerce revenue. This growth machine continues to produce phenomenal results. The entire FAANG group and Alibaba are a buy on any weakness. Maybe it now needs to be called FAAANG. My view that these stocks will outperform in this quarter appears to be on track as the fundamental story on all of these companies continues to improve. It is very simple, in each case, the respective stock price is following a strong fundamental story.

October is in the books and it was a good month for the bulls. Another 2.2% gain for the S&P, while the Dow tacked on 4.3% and the Nasdaq added 3.5%. Of those three, the Nasdaq posted a new high. Plenty of investors are wondering what can this market possibly do for an encore. Earnings are leading the way, no need to question or ponder that issue, continue to go with the flow.

Stock markets around the globe have broken out of multi-year trading ranges confirming the global growth story. Japan has been strong so far this quarter, with a gain of well over 4%. Not only have returns been positive, but they have been extremely consistent. In the latter part of October, the Nikkei ended a run of 16 straight trading days without a decline.

Chinese equities have also been very strong as the Shanghai Composite keeps marching higher. After a nearly two-month period of consolidation, this week’s rally served as a continuation of the late August breakout.

Source: Bespoke

It’s not just these two countries, major indexes all across the eurozone have broken above multi-year trading highs. Ask yourself, is everyone in the world euphoric? Are all in the investment world in an ecstatic state with the global issues that confront them? Or is it the change that the equity markets can see taking place after years of poor growth that is propelling prices higher? It is also a fact that these higher prices are justified as the fundamental story improves.

What the markets are telling us is that the solid growth of global trade and output is likely to continue in Q4 as indicated by strong economic reports. The global economic cycle has not started to moderate and mean revert yet.

Looking ahead, the month of November isn't the chart buster for the bulls that many perceive it to be.

Source: Bespoke

Over the years, the S&P has eked out a small gain during November. Given the robust gains in October, that may come to pass this year as well while the gains are consolidated. Based on the chart, Technology stocks may also take a well deserved breather as well. Then again, it is entirely possible that the strength continues. Better not to try and outguess the markets.

Ryan Detrick comes up with data that indicates we are entering into one of the strongest periods for market gains, the November to April time frame.

Back in September, the commentary suggested concentrating on things that could go right instead of what could go wrong. The S&P is higher on the back of something that is going right; earnings. Active investors can use any weakness to add to the companies where growth is expanding. Anyone wanting to be a hero and predict this is a market top can be my guest. History shows that heroes take a lot of arrows. Other than minor tweaks here and there it is best to just stay the course.

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

Best of Luck to All!

Analyst’s Disclosure: I am/we are long AAPL, FB, BABA. 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.

This article contain my views of the equity market and what positioning is comfortable for me. Of course, it can’t be for everyone, there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control. The opinions rendered here, are just that – opinions – and along with positions can change at any time. As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.

Comments

[Fear & Greed Trader]

JC

thanks for the update and sharing it here..

[JC ROCHESTER]

Fear & Greed Trader,

Just a quick update on the Small-caps sector, which is getting close to flashing a short-term cycle buy signal very shortly after drifting lower the past 5 weeks to its EMA50days support, which is expected to hold on account of its MACD still being in positive territory.

Accordingly, I entered my 1st batch (water-testing) of TNA @ $62.5 during after-hours session (2017-11-07), and will follow up with more aggressive deployment upon confirmation the next day or 2.

There is a 50/50 chance that it wants to droop a smidgeon further to EMA50days on the closing basis, or marginally below worst-case.

[LTTFTrader]

JC,

I hope you're right. I've noted the drop in R2k but it still has a ways to go (much more than "a smidgeon") before my method would give a sell signal.

Congratulations on AAOI! Great trade!

[JC ROCHESTER]

LTTFTrader,

My post refers to a BUY signal in Small-caps (on 2017-11-07), not SELL as in yours, LOL.

[LTTFTrader]

JC,

Sorry, but I don't understand. Are you saying that your small cap buy signal would be a signal for me to sell all my R2k?

[Fear & Greed Trader]

E+

if that is the same Richard Bernstein, from Bernstein advisers, he has been absolutely correct in his assessment of the entire bull market now for year and he is a must read for me.

this entire bull market has been one defined by fear of the next "event"

[E+Lee]

There's an article in today's NY Times titled "A Bull Market Should Make Investors Happy. This One Isn’t." which echoed some of the themes discussed here every week.
From the article:

Mr. Bernstein argued that investors should care (about) the economic and corporate fundamentals — not the remote chance that a calamity will strike.

“You cannot invest successfully,” he said, “when you are crouched under your desk in a fetal position.”

[Fear & Greed Trader]

RJ

i have a small position in QCOM that i have held for a while.. I haven't added simply because i saw other opportunities that interested me.

thanks for sharing you positioning

[Robert Jacobson]

Steve - thanks for using Rose’s words at the beginning of your article. She is one of the best investors and, more importantly, people I’ve met thru SA.

Oct 1987, Mar 2000, Aug 2007. Take your pick but if you had invested just before any of these dates, you’d still be up significantly now.

I have been investing on a riskier basis lately it seems. Still adding to ETP, WFC and this week addd to OHI as I like them long term. How about QCOM this week? Have continued to buy (part of my “risky purchases of late). Official offer expected tomorrow.

Best,
RJ

[KURTKAMM]

Great write-up as usual, but the first charts are all but illegible

[Fear & Greed Trader]

Kurt

I know ,

one of the drawback to the SA format that we have to use.. then again maybe I can find the reason why these charts cant be expanded..

[Retirement4Me]

Great article as always. I was keenly interested in your report on investor sentiment as I saw am article earlier in the week that reported II were now 68% bullish vs 14% bearish. I thought that was quite the jump from last month and gave me a moment of pause. If I can find it I'll put it up here.

Thanks again

[Fear & Greed Trader]

Retirement

ok, but keep in mind, sentiment can stay well elevated before any market top.

the change, IF it truly is a change has just begun..

[Fear & Greed Trader]

NKe

you are welcome

[NKE1]

Hi FGT
thanks again for your weekly column and careful analysis of the onset of a bear market
much appreciated

[fujilomi]

I used to think technical analysis was voodoo magic, 'just pay attention to the fundamentals' my dad said. I learned the hard way to use both. Some fundamental analysis can be based on wrong assumptions like 'peak oil', not taking into account potential advances like fracking and other improved extraction techniques. As well as a shift to electric vehicles. Why else would the Saudis want to sell a piece of their action if everything was roses.

[Fear & Greed Trader]

fuji

""""I used to think technical analysis was voodoo magic,"""

you are not alone , many still do, bottom line we need to marry the technical picture to the fundamental side to see the entire story.

[flysafer]

F&G,

This weeks article was the bomb! You’re perspective is always appreciated, but this week was a gem! Thanks for the info and the education!

Please keep em coming! Thanks!!!

[Fear & Greed Trader]

fly

thanks for stopping by and reading

[Fear & Greed Trader]

Richard

Welcome

Thanks for the kind words

[Gelston]

Mr fear and greed,
thanks for being here and thanks for your excellent articles.
this is now a weekly stop for me.
You are a great teacher.

[Pogo321]

F&G Trader,

Thanks again for these weekly articles; they're very informative. When I started reading them in Jan 16 I barely understood them; now I'm starting to get it a bit. Thanks for the detailed explanation of the stock prices crossing below the 20 Mo? (even though chart says 20 day; I think I got that from the comments) MA and then the retest. It was interesting to watch that week by week in 2016, and appreciate the refresher course.

[Fear & Greed Trader]

MPB

sometime these issues and my explanations of them are difficult to follow.. I do my best to make sure they get the point across,, but this weeks article is an example where i use these charts daily and honestly never noticed how they were mis labeled. and how confusing they are to someone that has never seen them

[Pogo321]

F&G,

It' good stuff. Also enjoying the dialog you and JC Rochester have going in the other article wrt AAOI.

[Fear & Greed Trader]

MPB

I sure hope JC shows up soon , his analysis is invaluable

[springlite1]

Fear and Greed
Thanks, you reminded me to get my short ETFs in order in the event they are needed. I have four I like to use and frankly I had forgotten one of the less volatile, so I went back through my accounting program to find it. One of my favorites without the wild 2X or 3x ride is HDGE.

[Fear & Greed Trader]

Ruff

points well taken but i believe the market can digest $60 oil and even though energy is a smaller percent of the index the benefit to overall earnings is a plus.. I guess what i am saying is that it stabilizes the sector.

[marshalltucker]

I apologize in advance to F> and other readers for this off-topic question. But it may be of interest to others. Please ignore if you are not interested.

---
Regarding the tax reform proposal:
- Are the new proposed individual brackets before or after the standard deduction?
- For example, is the married 12%-25% proposed bracket change at $90,000 based on: (1) an income of $90,000; or based on (2) $114,000 income (before the $24,000 proposed standard deduction)?

I think the proposed brackets are based on the latter (2) - incomes above the standard deduction. But it is unclear to me based on the reporting I have read (and even the actual text of the bill released Thu).

I ask because I am trying to determine if I should do a Roth conversion this year, or wait and see what happens with tax changes. Thanks in advance to anyone who knows.

[User 329415]

I wondered the same thing, especially after I saw this quote from the LA Times:

"Households with up to $24,000 in annual income will not be taxed because of a new expanded standard deduction. Income from $24,000 to $90,000 will be taxed at 12%."

I believe when they talk about income, they mean Adjusted Gross Income, which is before the standard deduction. Currently, that is the way it works, but you also get to deduct personal exemptions from AGI, something that is going away now.

Under present law, taxable income is what you get to AFTER the standard deduction or itemized deductions, and after the personal exemptions. Under the proposed law, you take your adjusted gross income, e.g. $40,000, and then deduct the new $24,000 standard deduction to arrive at $16,000 taxable income. That would be taxed at 12%, or $1,920.

Under current law for a 65 year old couple, they would have $23,300 in standard deductions and personal exemptions. Using the same example of $40,000 adjusted gross income, they would have taxable income of $16,700, taxed at 10%, or $1,673. So they are paying $247 more under the new law.

The problem with this example is that many seniors do itemize their deductions, such that those itemized deductions in addition to their now eliminated personal exemptions were greater than the new $24,000 standard deduction, especially if they have large medical deductions which are now eliminated, in addition to the r/e tax which is now limited to $10,000. Those people could be paying much more under this plan.

What this shows is that seniors are not benefiting from this tax reform bill, but are being hurt by it. They still have their social security benefits subject to taxation, too, without the benefit of an increased exemption that the Congress has generously given to estates by doubling their exemption. There have been no increases in the SS exemption in the 30+ years they have been taxing SS benefits, despite inflation.

Yet I have heard not a peep from the news media nor the senior lobby groups about this.

[marshalltucker]

The brackets do appear to be for AGI (after the standard deduction).

Here is a good analysis of the proposed tax reform by Michael Kitces.
- http://bit.ly/2j5qdRb
- Thanks to Jeff Miller for this link.

[Fear & Greed Trader]

marshall

please no apologies necessary , it adds to the conversation and is investment related.

its not like you are asking about global warming :)

[LTTFTrader]

F&G, I don't know how you do it, but every week you find at least one new and very illuminating concept to present. My favorite this week is the S&P vs. Fed Balance Sheet chart under "Market Skeptics". Thanks, and keep up the great work!

[clrodrick]

yes but he really should also include a chart of S&P vs Total central bank balance sheet

[Fear & Greed Trader]

LT

sometime these things just come to me .. and plenty of experience to draw from..

[Fear & Greed Trader]

cl

but what exactly would that prove?. would it diminish the gains bullish investors have garnered.

i told someone who brought up the fed to me in 2013 and told me I was about to get killed in the market then,,

my portfolio account does not say fed induced....... it just reveals a total like all other accounts..

Oh i can recall how i was massacred in the early stages of this bull market, when literally almost NO one believed .

[clrodrick]

Author stated, 'Anyone still hanging on to that idea to form an investment strategy has been left behind. For those that were telling us the bull market was over as the Fed balance sheet wasn’t increasing and the market sold off in early 2016, forgot that energy earnings were the real culprit for that decline.

Worse yet for those that continued to believe it was all about the Fed, convinced that stocks would drop amid the lack of QE, found themselves trapped. So while the balance sheet remained stable, the bull market in equities has seen a new leg higher and rallied over 35% from its early 2016 lows.'

I will say that this is one thing you've said again and again, and each time you neglect to mention that there are other central banks beyond the Fed, and they in fact *doubled* monthly QE starting Mar 2016. Coincidentally enough, market had a hockey stick recovery from Feb 2016 low, and it's been all roses since. As a matter of fact, total global QE today is still just about the *highest* level of monthly QE going back a full 9 years to the dark days of the depression. If global recovery is so awesome, why is this the case?

I don't mean to be argumentative, and I certainly do *not* think I am a better investor than you, no way no how. I just think you are glossing over global central banks balance sheets of close to 20 trillion as just a minor detail and not the reason why risk assets are still priced as high as they are. For me it is the #1 reason, the #2 reason, #3 reason, etc. It is all that matters anymore. I can practically guarantee that markets would crash something fierce if Fed, ECB. JCB, et all. all said in unison that they would let their 20 trillion balance sheets taper off by say 35-40% over the next 5 years. It would be a blood bath, a total massacre.

[clrodrick]

Sorry if I come off too harsh on F&G, as I do enjoy the weekly market summary. It just perplexes me why one of the biggest reasons for risk assets being where they are gets so little weekly analysis as part of the 'big picture' summary.

Also forgot to say that Fed did indeed start their balance sheet normalization. Think they showed a drop of 5-6 billion, got it in right before the end of October. I think it bears watching as well as what ECB decides to do in 2018 as their balance sheet is actually higher than Fed's at this stage. JCB seems determined to nationalize their bond/equity market, no stopping for them I guess. Swiss central bank now owns 88 billion of US equities, most all large caps. And the beat goes on...

[Comfortably Numb]

Well said.

[Fear & Greed Trader]

clrodrick

no apology necessary, you make points that are indeed facts ..

but there are other facts as well. it just depends on what an investor wants to use. now I could go into a very long dissertation on the Fed and other central bankers, but that wouldn't matter.

there is ONE thing and ONE thing only that matters and that is price action,, Period, end of story.

one can embrace that or one can do what every investor that ever bought a share of stock does.

The reason I gloss over it is part of the title and my overall view of the markets in general. I have totally given up on trying to out wit or out think the market, i did it for years and muddled thru investing.

i went thru the phase of--- what does this mean ? how will this affect that sector, what if this develops. ? what if "they' do this?
you know the drill it goes on and on.. and NEVER ends

I then realized that what really matters is how the equity market is acting , and slowly pushed these questions to the side. the results increased dramatically

now that doesn't mean we bury our heads in the sand as investors , and this is THE HARD part , because it is a fine line that we must navigate to be successful. listen ---but don't lose sight of what REALLY matters.

keeping it simple it does then come down to

am i to be concerned, worry, make excuses why the market is higher and blame the fed, or GAAP vs NON GAAP earnings , corp. buybacks , financial engineering and all of the multitude of reasons why the stock market is propped up overvalued and ready to crash ?

OR do i watch the price action, look at the economic data , and follow the trend. ?

it does come down to do I want to be RIGHT and stick to principles or do i want to make money ? that comes off smug , pompous and arrogant to some

it isn't intended to be that at all ,

because that is what HAS and IS happening..

so when i say the folks that continue to believe the central bankers are responsible (or some other reason) for all of the market gains and stayed on the sidelines are indeed way behind , they have their principle outlook that tells them one thing. but they haven't prospered.

and we can throw around the word massacre, but I will point out the 65% gain since the breakout in 2013 . (and there are plans to help navigate a massacre :) )

your commentary is always welcome here.