"All through time, people have basically acted and reacted the same way in the market as a result of fear, greed, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis". - Jesse Livermore
The S&P was off to its best start since 1991, as it posted a new high for the year on Monday. A slight pullback during this week was quickly bought, only to run into a yield curve inversion fit on Friday. For the week the index lost less than 1%. All of that leaves the S&P with a gain of 12% for the year, and 4-5% from the all-time highs.
Market levels always seem so easy and black and white in theory, but in practice are never that simple. Investors like to ponder the thoughts that if a certain level in a stock or ETF holds or breaks, you will either push the sell or buy button. Sounds easy but when actually faced with the signal, the decision to act is filled with doubt. Was that bounce really the bounce? Was that break of support really a breakdown or just a fake out? Maybe I should hold off for confirmation.
Investors are having the same conversations with themselves when it comes to the major indices as well. Every resistance point cited on the way back up off the lows was questioned. When the S&P stalled and went sideways, it seemed like eternity waiting for the index to move above the old November highs. The idea that floated around was all the index had to do was breakout above those former highs around 2,810-2,820, and that would be the green light to everyone that the correction was over.
It's never that easy, though. On Friday March 15th, the S&P 500 finally did break out above 2,820, but then it was said to have done so in a very unconvincing fashion. It was all "yeah-but" and the angst continued. Doubt creeps in, and it's more of convincing ourselves it was a fake out. That leads to the S&P is so close to the highs, maybe it's best to wait for a pullback. The constant attempt to overthink the situation.
There were no fireworks and streamers included when this higher low was put in. In fact I never heard anyone in the media say a word about it. I looked around to get a feel for what the sentiment feels like (more on that later) and didn't see it mentioned anywhere.
All of these observations should suit market participants just fine. The more doubt there is on the part of investors, the better the foundation for the sustainability of the rally. I started this segment saying that it is never easy, but in reality it is EASIER when major portfolio decisions are made with some thought rather than with some emotion. It's why analysts are now scurrying to cover their tracks as they didn't see this rally coming.
Now they are in damage control mode. In reality, many successful investors didn't see the scope and strength of this rally coming either, BUT they did see the situation clearly and the climb back to 3% of the old highs has been a very nice stress free trip.
Earnings season is over, and unless we get a market moving headline, we enter a period where there are no catalysts to move the market. Some now say that is why the market will probably pull back now, some take it a step further and tell us another serious drawdown is on the way.
What the market will have to trade on in the interim period is sentiment. As far as the bulls are concerned, that would be just fine because sentiment has been upbeat. Intra-day dips are bought, and many of the "issues" that created so much anxiety have been neutered. Well, at least in the minds of some.
The equity market may not continue to march in a straight line from here to new all-time highs, but as I have laid out here week after week, the positives still outweigh the negatives. When the S&P hit one of those resistance levels that bring anxiety and question marks earlier this month, the majority cautioned the pullback could be 5-10% or more. The prevailing view was the rally had come too far too fast. It turned out to be 1.7%. The price action has been strong, and it is being confirmed with solid breadth numbers.
Jesse Livermore's words of wisdom are as important today as they were then. Patterns do recur on a constant basis. Some believe stocks are headed back down because that is what they saw in December and nothing has changed. The view is that we are in a topping pattern. Then there are others who have watched the same pattern play out over and over for years now. The stock market moves close to new highs, the pundits cite all the reasons stocks can't go higher, then new market highs roll in.
I like to leave all options open, assess then reassess, and limit the urge to outthink the situation.
If capex growth is about to slow, it was not apparent in the Q4 GDP report. Real nonresidential fixed investment surged 6.7% y/y, its fastest pace in more than four years. Nominal capex grew at a robust 8.6% rate, led by a 12.6% jump in research & development and a 12.3% jump in software spending. The sustainability of capex momentum may be the most important factor impacting growth in 2019 and beyond.
Factory orders rose 0.1% in January after December's 0.1% gain. Durable orders were revised to a 0.3% gain versus the 0.4% increase in the Advance report. Transportation orders increased another 1.2% versus the prior 3.2% jump.
Philly Fed index bounced 17.8 points to 13.7 in March, much stronger than expected, after falling a surprising 21.1 points to -4.1 in February. That was the lowest print since May 2016. The 37.8 cycle high was hit in February 2017.
The seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index fell in March to 54.3, which was down from last month's report of 55.5.
Chris Williamson, Chief Business Economist at IHS Markit:
"US businesses reported a softer end to the first quarter, with output growth easing to the second lowest recorded over the last year. The PMI survey data nevertheless remain encouragingly resilient, indicative of the economy growing at an annualized rate in excess of 2% in the first quarter, suggesting some potential upside to many current growth forecasts."
"A gap has opened up between the manufacturing and service sectors, however, with goods-producers and exporters struggling amid a deteriorating external environment and concerns regarding the impact of trade wars. The survey is consistent with the official measure of manufacturing production falling at an increased rate in March and hence acting as a drag on the economy in the first quarter."
"At the moment, the service sector appears to be holding up relatively well. But the worry is that manufacturing woes are spreading to service providers, via reduced demand for services such as transport and storage as well as deteriorating business optimism about the outlook - which fell to the lowest for nearly three years in March - and a cooling of the labor market. The survey showed hiring across both manufacturing and services hit the weakest for just under two years in March."
A recent Twitter post from LPL Research:
Has housing turned the corner? While the monthly sales rate slipped in January, big upward revisions to prior months put new homes sales on a rising trend, adding to evidence (builder confidence, starts, etc.) that housing may be accretive to growth this year. Builders were unable to keep up with demand as the stock of unsold homes fell, a function of improving affordability on rising incomes and moderating mortgage rates and home prices.
As shown in the chart below, recent home builder sentiment data has improved versus the slide it felt through the end of the year. We've already seen a rapid improvement in single family starts per the January residential construction data; that improvement is likely to be sustained albeit maybe not so dramatically.
NAHB housing market index was unchanged at 62 in March after jumping 4 points to 62 in February. It was at 70 a year ago, and compares to the cycle high of 74 from December 2017 and an all-time high of 78 from 1998. The recent low was 52 in March 2015.
Existing home sales surged 11.8% to 5.51 M in February, much stronger than expected, after tumbling 1.4% to 4.93 M in January. It's the biggest jump since 2015 and the bounce breaks a string of three monthly declines. Lawrence Yun, NAR's chief economist, credited a number of aspects to the jump in February sales.
"A powerful combination of lower mortgage rates, more inventory, rising income and higher consumer confidence is driving the sales rebound. It is very welcoming to see more inventory showing up in the market. Consumer foot traffic consequently is rising as measured by the opening rate of SentriLock key boxes."
"For sustained growth, significant construction of moderately priced-homes is still needed. More construction will help boost local economies and more home sales will help lessen wealth inequality as more households can enjoy in housing wealth gains."
Mr. Bill Ehrman nailed it when he penned this piece on the prospects of the global Economy, it is a must read. The global stock markets have been signaling the rebound that is forecast in that informative article.
According to the preliminary "flash" estimate, IHS Markit Eurozone Composite PMI fell from 51.9 in February to 51.3 in March. Chris Williamson, Chief Business Economist at IHS Markit:
"The eurozone economy ended the first quarter on a soft note, with the flash PMI running at one of the lowest levels seen since 2014. The survey indicates that GDP likely rose by a modest 0.2% in the opening quarter, with a decline in manufacturing output in the region of 0.5% being offset by an expansion of service sector output of approximately 0.3%."
"A rebound in February from one-off factors such as the yellow vest protests in France appears to have already lost momentum. Most worrying is the plight of the manufacturing sector, which is now in its deepest downturn since 2013 as trade flows contracted at the sharpest rate since the debt crisis ridden days of 2012. The service sector is showing more resilience, notably in Germany, but remains in one of its worst growth patches since 2016."
The ZEW research institute said its monthly survey showed economic sentiment among investors in Germany rose to -3.6 from -13.4 in February. Economists had expected an increase to -11.0. The survey offers additional evidence that stabilization instead of further deterioration may be on tap.
Nikkei Flash Japan Manufacturing PMI signals further downturn, with figure unchanged at 48.9. Joe Hayes, Economist at IHS Markit:
"Further struggles for Japanese manufacturers were apparent at the end of Q1, with latest flash PMI data showing a sustained downturn. Slack demand from domestic and international markets prompted the sharpest cutback in output volumes for almost three years. With input purchasing falling, firms appear to be anticipating further troubles in the short-term. Indeed, concern of weaker growth in China and prolonged global trade frictions kept business confidence well below its historical average in March."
The European Union decided to give the United Kingdom an extension on negotiating an exit from the EU, but it won't be a long reprieve if UK Prime Minister Theresa May can't get a win in Parliament. European Council President Donald Tusk said Article 50 would be extended to May 22 if Parliament can reach a withdrawal agreement next week, but failing that, the deadline is extended only to April 12. In the meantime, the EU is continuing preparation for a no-deal Brexit. The drama continues to unfold.
Despite the uncertainty, the UK consumer continues to surprise to the upside, with retail sales volumes ex auto and fuel beating estimates four out of the last five months.
Are earnings estimates too low? One wonders based on the revenue projections. The latest Thomson Reuters consensus estimates currently show a Q1 earnings decline of 1.4% year-over-year; its estimates show a 5.2% y/y revenue gain for the quarter.
The remainder of the year is forecast as follows:
- For Q2 2019, earnings growth of 0.1% and revenue growth of 4.6%.
- Q3 2019, earnings growth of 1.8% and revenue growth of 4.4%.
- Q4 2019, earnings growth of 8.1% and revenue growth of 4.8%.
- CY 2019, earnings growth of 3.8% and revenue growth of 4.9%.
For over a month now, the year-over-year growth rate of the forward estimate has tracked in the 3% area. Perhaps an indication that earnings estimates are starting to bottom. If we view the latest move by the Fed as being a headwind for the U.S. dollar, then multinational company earnings just picked up a big tailwind.
The forward 12-month P/E ratio is 16.3. This P/E ratio is below the five-year average of 16.4, but above the 10-year average of 14.7. When I look at present valuations, they don't offer a definitive catalyst for a large rally or a large selloff.
FactSet Research weekly update:
The estimated earnings decline for the S&P 500 is -3.7%. If -3.7% is the actual decline for the quarter, it will mark the first year-over-year decline in earnings for the index since Q2 2016.
With 11 companies in the S&P 500 reporting actual results for the quarter, 10 S&P 500 companies have reported a positive EPS surprise and 7 have reported a positive revenue surprise.
The forward 12-month P/E ratio for the S&P 500 is 16.6. This P/E ratio is above the 5-year average (16.4) and above the 10-year average (14.7).
When I look at present valuations, they don't offer a definitive catalyst for a large rally or a large selloff.
The Political Scene
A proposed summit between President Trump and China's Xi Jinping to end the ongoing trade war may be pushed back to June, according to the South China Morning News.
The proposed meeting to sign a trade agreement at Trump's Mar-a-Lago club had originally been targeted for March, then pushed back to April, but they reportedly won't be able to finalize a deal before then.
Here are more examples of the ineffective journalism investors have to sift through these days. Within a two-hour period investors were treated to these two headlines:
- Bloomberg - US officials see China walking back from trade offers
- Dow Jones - US and China in final stages of trade talks
A new Chinese law billed as an expansion of intellectual property protections and equal treatment for foreign firms along with tentative agreement on enforcement mechanisms are the latest signs of positive progress in U.S.-China trade talks. These developments which are viewed as critical to the completion of ongoing negotiations come, as the goal of a Trump-Xi summit has seemingly shifted from a meeting to finalize key points to a joint signing of an already-agreed framework.
This puts negotiations under the direction of U.S. Trade Representative (USTR) Robert Lighthizer, a dynamic that could be viewed as positive for a stronger deal outcome. Reports indicate that Lighthizer and Treasury Secretary Mnuchin will travel to Beijing next week with Chinese negotiators due back in DC the week of April 1, setting up early April as the next key moment in talks.
The FOMC meeting concluded on Wednesday. My earlier observations that the Fed will NOT be in the picture in 2019 were confirmed with the "dovish" outlook that was put forth:
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
"To ensure a smooth transition to the longer-run level of reserves consistent with efficient and effective policy implementation, the Committee intends to slow the pace of the decline in reserves over coming quarters provided that the economy and money market conditions evolve about as expected. The Committee intends to slow the reduction of its holdings of Treasury securities by reducing the cap on monthly redemptions from the current level of $30 billion to $15 billion beginning in May 2019. The Committee intends to conclude the reduction of its aggregate securities holdings in the System Open Market Account at the end of September 2019. The Committee intends to continue to allow its holdings of agency debt and agency mortgage-backed securities to decline, consistent with the aim of holding primarily Treasury securities in the longer run."
What some analysts will now tell us:
"The Fed is signaling there is something wrong with the economy. The yield curve will flatten and a recession is next."
I'd rather not buy into any of that commentary. The same folks were warning us that the Fed was out of control and there were going to be 3-4 rate hikes this year.
Market participants want Utopia, a dovish Fed and assurance the economy is OK. If someone is looking for Utopia, they should read a book this weekend.
For those obsessed with the yield curve:
Source: U.S. Dept. Of The Treasury
The 2-10 spread started the year at 16 basis points; it stands at 13 basis points today. Now the emphasis move to the 3-month Treasury versus the 10-year because that is inverted. It remains to be seen if that stays inverted and for how long.
There is a plethora of evidence that suggests stocks continue to do well 18 to 24 months after we see an actual inversion. Furthermore, there was NO panic in the credit markets on Friday. There is little reason to start making major portfolio changes now.
After falling last week down to 32.4%, bullish sentiment as seen through the AAII's survey of individual investors rebounded right back to where it was a couple of weeks ago with today's release coming in at 37.3%. This uptick is not too surprising following the bounce back from the first week of significant declines of 2019.
The Weekly Inventory report showed a decrease of 9.6 million barrels. At 439.5 million barrels, U.S. crude oil inventories are about 2% above the five-year average for this time of year. Total motor gasoline inventories decreased by 4.6 million barrels last week and are also about 2% above the five-year average for this time of year.
The price of crude oil traded this week at levels last seen in November 2018. WTI closed the week at $58.97, up $0.95.
The Technical Picture
The S&P broke through resistance levels quickly last week and with volatility back; they also immediately tested those levels as support.
Chart courtesy of FreeStockCharts.com
The rally has been impressive and is accompanied by solid internals. This entire move has been doubted, as calls for market selloffs were heard at every resistance level. The short-term trend is still very much in play as the 20-day moving average (green line) has yet to be breached since the last 1.7% dip. Investors are left to ponder what was viewed as unthinkable three months ago, whether new highs will appear. The other side of the argument says plenty of giveback will come first.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise, and will lead an investor into whipsaw action that tends to detract from overall performance.
Another bucket of cold water to dump on the "buybacks are a corporate scheme" theories.
Goldman Sachs research shows that executives whose compensation depends on EPS, a metric that would benefit from accretive share buybacks, did not allocate a higher proportion of 2018 total cash spending to buybacks than companies where management pay is not linked to EPS.
Individual Stocks and Sectors
Since the equity market peak in the third quarter of 2018, the average return of the FAANG basket of stocks - Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) - has underperformed the broader S&P 500 Index.
With the FAANG's return to the upside since the start of this year, the basket has resumed its outperformance and broken out of an inverse head and shoulders chart pattern. The charts of the individual components are shown below.
An update to the chart on Apple. The resistance at the 200-day moving average was taken out on Thursday.
The process of gathering information for the article each week allows me to get a sense of how others are viewing the present market backdrop. It can be entertaining to watch the pundits shift their views almost daily trying to stay one step ahead of the market and everyone else. The latest swoon followed by the robust rebound has shown all of that to be a recipe for failure. If not outright failure, frustration and flat out anguish.
Recent observations as I toured the landscape this past week:
"Things aren't perfect in the economy, there are "cracks" that are showing up".
Really? When are things "perfect'? Seems to me when they are rosy and perfect, that is when the economy and the stock market have reached peaks and will then start to decline.
Analysts are still skeptical of the "Goldilocks Economy".
"The problem of suggesting that we have once again evolved into a 'Goldilocks economy' is that such an environment of slower growth is not conducive to supporting corporate profit growth at a level to justify high valuations."
I'm not in high valuation camp with the market trading with a forward P/E of 16.5 and 10-year Treasuries yielding 2.4%. The actual risk-reward profile of the market is favorable.
With the S&P closing in on the old highs, the talk quickly shifts to a topping pattern. Top hunting has been an exercise in futility for years now, but some continue to strive to be the first on their block to make that bold call. Funny how many are the same folks that called for lower lows back in December. So the gurus step up, try to simultaneously pull a rabbit out of their hats and predict just how far the index will drop. Some of the calls have the S&P back in Bear territory.
Anyone that has been around a while knows that we cannot totally rule out any scenario, but we can assign probabilities to all market events. The Savvy investor looks at the data and does just that. At this point in time, we can move the bear market calls into the "low" portion of our lists. We assess, then reassess before making bold and sometimes silly predictions.
These calls are good for the pundit, but not so good for the average investor. They tend to leave the door open with a wishy-washy prediction that leaves the average Joe and Mary asking a lot of questions. Do I position for that now? Do I play that downside? After all that could be a 500 point drop for the S&P index.
Then there is the group of players that are solidly entrenched in the Bear camp. They agree with the previous group of folks that see a topping out of what they are calling a classic Bear market rally. However, the rhetoric goes one step further. Their conviction remains that this entire rebound has been propelled by no convincing fundamentals. The obsession with central banks remains key as only central bank jawboning/easing and continued massive buyback programs are the reason for stocks moving higher. They see an extremely overbought market, with stocks ready to break down to new lows for the year. That leaves them reciting these type of comments:
"Which is why I'm moving a percentage of my "dry powder" cash savings into a new short position at this time, one larger than I placed last year."
So here we are, it never seems to end. Many pundits are out again reciting the litany of negative "issues" now. However, when we complete a quick review of the comments just posted, they are not what is seen at market tops. With the S&P off to its best start since 1991, it is reasonable to expect a pause in the upward trajectory. But there is no change in strategy now.
I realize stocks may see resistance as we near the old S&P highs resulting in ensuing price weakness. After all, we know that pattern ALWAYS occurs. Yet every so often market participants forget the obvious. So far every resistance level in this rally is now in the rear-view mirror. It may be better to wait and see how the situation plays out before a topping pattern is declared.
Yes I know, it's the same wait-and-see approach that was called foolhardy back in December, and it worked to perfection. The same way it did in 2016.
The strategy I employ won't get investors out of stocks at the TOP, but it also won't get an investor out of stocks before they should be, and that is EXACTLY what happened to many. Instead of believing the incredulous notions that all got out at the top and then magically were buying at the December lows, this is what I hear on a consistent basis now.
"I exited the market around S&P 2,650. Would you recommend putting any money in at the current level or waiting for a pullback?"
My job is to take the data provided and formulate a view that you all hopefully find helpful in your own investment process.
Stay the course.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to All!
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Disclosure: I am/we are long EVERY STOCK/ETF IN ALL OF THE SAVVY PORTFOLIOS. 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.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as 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.