S&P 500 Weekly Update: The Index Is 2% Off The All-Time High. It Pays To Be Patient In A Bull Market

by: Fear & Greed Trader
Summary

The oversold rally arrives, sustainability is the key. Price consolidation may be next.

Sentiment is so bad there is a threat that we can actually “talk” ourselves into a recession.

The “primary” trend remains Bullish. Leave the guesswork on the next 5% move to others.

The pundits got it wrong "again." Discipline and common sense are two keys to investment success.

“It is impossible to produce superior performance unless you do something different from the majority.”John Templeton

Allow me to start with a bullet point that I used on April 27th:

"Pundits are scrambling now to cover their tracks on all of the incorrect calls that were made during this rally. Most continue to doubt."

Market participants should be getting weary of the constant whipsaw forecasts that so many are putting forth these days.

When you have extreme overbought and high optimism where everyone is on the same side of the boat, it sets the stage for a market correction. The increased trade tariff rhetoric has served investors a terrific reason for the most recent pullback. The opposite is true when the market has become extremely oversold and everyone has quickly shifted to the other side of the ledger. The latter was the case coming into this trading week.

Four straight weeks of declines for the S&P and six straight weekly declines for the Dow were broken. During the six-week losing streak, the DJIA was down 6.46%, which would go down as the mildest six-week losing streak for the index since June 1976 and the fifth "mildest" six week losing streak on record. Was that a message that no one picked up on?

Once again, the trading week started on a sour note as the S&P suffered a fifth straight week of losses during the first trading day of the week. Turnaround Tuesday wound up being the second best session of the year. For the week the S&P was up 4.4%, and the Dow gained 4.7%. The year in review looks like this. U.S. equities rose 4 months in a row and ended the month of April at new all-time highs. The month of May ushered in a 6% pullback, negativity became rampant, and now the S&P has embarked on a rebound rally. The index is 2.4% off the all-time high and up 14.6+% for the year. One thing, and one thing only has worked, PATIENCE. That has been the key to success.

For those that haven't figured this out yet, investing requires discipline. Shortcuts would be great. Sure, it'd be great if you could net out a 7-8% return without any volatility, but it doesn't happen that way.

If you want bigger returns, you have to take some risk. You have to develop and maintain an investment strategy that will work for the long term and you have to stick to it. An investor's discipline is constantly being challenged. We are all products of those around us. We listen to the data around us and what is absorbed by our brain affects who we are, how we view the world, how we perceive the people around us. Media consumption, social media, friends, politicians, anyone who we trust and listen to helps shape our perspective. It's been shown that people tend to only listen to people who reinforce their previous beliefs. All of these things have a profound effect on our discipline.

I subscribe to the theory that this is most dangerous when the influences around us are cynical, negative, bearish and constantly warning of coming doom, while in a primary bull market trend. No doubt this is a difficult time to be investing now and the Bears are picking up and running with any negative they can find. Thus investor discipline moves to the forefront of any strategy.

Attacks are from all sides now, and investors are wondering if they should just give it all up and move on. From the data being presented that looks to be the case. Negative investor sentiment is at extremes, and fund flows on the equity side show an outright exodus. In the meantime, those that are staying on board are rushing into utilities and other conservative sectors as if they were momentum stocks that are growing like weeds.

After all the view is the tariff situation will take us into global recession, global economies are struggling, and attacking big tech here in the U.S. will put the nail in the coffin. The latter removes incentives for innovation, making the entire country less competitive on the global scene and that has negative overtones.

It would be foolish to say that backdrop is a positive for equities, however this is why discipline and common sense have to be part of any investment strategy. The present day long-term trend in the stock market is what MUST be followed. Despite the commentary that surrounds us, that trend remains positive, because there are some positives that are being ignored. The 6% pullback in stock prices we have experienced didn't change that.

The majority of the warnings out there are based on speculation. It has become pure conjecture on the part of media pundits when they assure us how all of the issues are going to turn out. Market technicians were looking at a single price point (2800) and projecting 20-25% downside from there. Don’t look now, but that price point was violated and the S&P is now back above the level that was deemed to be so important. I repeat the words uttered last week;

“I am not of the opinion that ONE particular price level presents a point of no return.”

Every day that goes by seems to bring forth another wild speculative notion. Yet those notions all seem to gain traction as the headlines are rolled out. It begs the question, are we about to talk ourselves into a recession? For sure many investors have now talked themselves into making premature decisions.

Once an investor loses their discipline and refuses to employ common sense, that investor is LOST.

Economy

The Fed's Beige Book was a little more upbeat than the prior report, as analysts expected. The economy expanded at a "modest pace overall," and showed a slight improvement versus the prior period.

"Almost all Districts reported some growth, and a few saw moderate gains. Consumer spending was generally positive but tempered. Additionally, manufacturing reports were generally positive though there were some signs of slowing and a more uncertain outlook. Construction showed overall growth. Agricultural conditions remained weak."

"The outlook for the coming months was solidly positive but modest, with little variation among reporting Districts. Meanwhile, employment continued to increase across the nation, but tight labor markets continued to constrain. Despite some pressure from competition for workers, wages pressures remained relatively subdued. Prices continued to increase at a modest pace. There wasn't a lot of additional angst over trade seen in the Beige Book."

Atlanta Fed GDPNow forecast for real Q2 GDP growth is now at a 1.25% pace versus the end of May's 1.16% after this week's data on construction spending. Analysts now expect an upward revision to Q1 GDP growth back to 3.2% (as it was in the advance report) from 3.1%.

Many firms continue to forecast Q2 GDP growth of 1.8%.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index posted 50.5 in May, down from 52.6 in April. The latest headline figure signalled only a slight improvement in operating conditions, with the latest reading the lowest since September 2009.

Chris Williamson, Chief Business Economist at IHS Markit:

"May saw US manufacturers endure the toughest month in nearly ten years, with the headline PMI down to its lowest since the height of the global financial crisis. New orders are falling at a rate not seen since 2009, causing increasing numbers of firms to cut production and employment. At current levels, the survey is consistent with the official measure of manufacturing output falling at an increased rate in the second quarter, meaning production is set to act as a further drag on GDP, with factory payroll numbers likewise in decline.

“While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lacklustre demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result.

“With future optimism sliding sharply lower in May, risks to nearterm growth have shifted further to the downside. While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series ten-year history.”

April construction spending was expected to rise 0.4% after a 0.9% decline last month, but instead was flat while last month got revised up to a 10 basis-point gain.

The April factory report beat estimates, with a headline factory orders drop of a smaller than expected -0.8%, and gains of 0.5% for nondurable shipments and orders, plus 0.3% for ex-transportation factory orders. Analysts saw a headline hit from transportation but a boost from defense, with a repeated of the Boeing gyrations evident in the durables report.

Final IHS Markit Services Business Activity Index registered 50.9 in May, down from 53.0 in April. The latest headline figure was the lowest since the current sequence of expansion began in February 2016, and signalled only a marginal upturn in business activity.

Chris Williamson, Chief Business Economist at IHS Markit:

“The final PMI data for May add to worrying signs about the health of the US economy. With the exception of February 2016, business reported the weakest expansion for five and a half years as a trad-led slowdown continued to widen from manufacturing to services. Inflows of new business showed the second-smallest rise seen this side of the global financial crisis as the steepest fall in demand for manufactured goods since 2009 was accompanied by a further marked slowdown in orders for services."

"The survey data indicate a deterioration of annualised GDP growth to just 1.2% in May, down from 1.9% in April, putting the second quarter on course for a 1.5% rise. Employment growth has come off the boil in line with weaker than expected sales and gloomier prospects for the year ahead, albeit still showing some resilience. The survey data are running at a level broadly consistent with around 150,000 jobs being added in May."

May ISM-Non Manufacturing Index increased to 56.9 and reversed the April drop to a 2-year low of 55.5.

Jobs.gif

Nonfarm payrolls increased 75k in May after a revised 224k jump in April (was 263k) and 153k March gain (revised from 189k). That's a net -75k in revisions. The unemployment rate was steady at 3.6%. Average hourly earnings were up 0.2%, as in April, producing a 3.1% year-over-year clip.

Anyone getting giddy the Fed will cut rates just based on this, may want to think again. IF the Fed does ease it will be based on nearly ALL the recent data weakness and lower inflation expectations.

Global Economy.jpg

Global Economy

ECB pledges to keep rates at current levels through first half of 2020. In other interest rate news, the Reserve Bank of India cut rates by 25 basis points.

The J.P.Morgan Global Manufacturing PMI, a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM, posted 49.8 in May, down from 50.4 in April, its lowest level since October 2012.

The J.P.Morgan Global Composite Output Index, which is produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM, fell to 51.2 in May, down from 52.1 in April. Although four out of the six broad sub-sectors covered by the survey, consumer goods, business services, consumer services and financial services registered growth, all saw slower rates of expansion.

Olya Borichevska, from Global Economic Research at J.P.Morgan:

“The rate of global economic expansion slowed to its weakest since June 2016, as manufacturing stagnated and services saw a marked growth slowdown. Both sectors were impacted by subdued underlying demand. Manufacturing in particular has been hurt by rising global trade tensions, leading to reduced opportunities to grow export orders. Global market conditions will need to pick-up noticeably in the coming months if economic growth is to revive.”

Eurozone.gif

IHS Markit Eurozone Manufacturing PMI posted below the crucial 50.0 no-change mark for a fourth successive month, recording a level of 47.7 (unchanged from the earlier flash reading). That was slightly down on the previous month’s 47.9 and close to March’s near 6-year low.

Chris Williamson, Chief Business Economist at IHS Markit:

“Euro area manufacturing remained in contraction during May, suggesting the sector will act as a drag on the wider economy in the second quarter. A fourth successive monthly drop in output and further steep decline in new orders underscored how the sector remains in its toughest spell since 2013. Companies are tightening their belts, cutting back on spending and hiring. Input buying, inventories and employment are all now in decline as manufacturers worry about being exposed to a further downturn in demand."

“That said, although the headline PMI fell in May, the decline masked slower rates of decline for both output and new orders. The forward-looking orders to inventory ratio also picked up for a 2nd month running to reach a six-month high, the improvement of which augurs well for the downturn to moderate in June. However, trade wars, slumping demand in the auto sector, Brexit and wider geopolitical uncertainty all remained commonly cited risks to the outlook, and all have the potential to derail any stabilisation of the manufacturing sector.”

IHS Markit Eurozone PMI Composite Output Index rose to 51.8 in May, up from April’s 51.5 and slightly better than the earlier flash reading (51.6). The latest index reading was the highest for 3 months, and extended the current period of continuous growth to just under 6 years.

Chris Williamson, Chief Business Economist at IHS Markit:

“The final eurozone PMI for May came in higher than the flash estimate, indicating the fastest growth for three months, but the overall picture remains one of weak current growth and gloomier prospects for the year ahead. While the service sector has seen business conditions improve compared to late last year, growth remains only modest, in part reflecting a spill-over from the trade-led downturn in the manufacturing sector. “Despite output at goods and service providers collectively rising at a slightly faster rate in May, the survey data are merely indicating a modest 0.2% rise in GDP in the second quarter. Furthermore, there seems little prospect of any immediate improvement: new orders barely rose in May, painting one of the gloomiest pictures of demand seen over the past six years, and companies’ expectations of growth over the coming year likewise fell to one of the lowest in six years.”

China.gif

The headline seasonally adjusted Caixin Chinese Purchasing Managers’ Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, registered 50.2 in May, unchanged from the previous month, to signal a further marginal improvement in the health of China’s manufacturing sector. The headline PMI has now posted above the neutral 50.0 level in each of the past three months.

Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group:

“Overall, China’s economy showed steady growth and resilience in May. The manufacturing sector saw demand rise from both overseas and domestic markets, and prices were stable. However, business confidence weakened, and manufacturers’ inventory levels remained low. The trade tensions between the U.S. and China are having an impact on confidence and the best way to respond to this is to boost the confidence of enterprises, residents and capital markets by carrying out favorable reforms and to undertake timely adjustments to regulations and controls.”

The Caixin China Composite PMI data (which covers both manufacturing and services) showed that business activity in China rose for the 39th month running in May. The rate of expansion was moderate overall, as signalled by the Composite Output Index edging down from 52.7 in April to a 3-month low of 51.5.

Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group:

“Overall, China’s economic growth showed some signs of slowing in May. Employment and business confidence in particular merit policy maker’s attention.”

At 52.7 in May (April: 51.8), the Nikkei India Manufacturing Purchasing Managers’ Index pointed to the strongest improvement in the health of the sector for 3 months. Moreover, the current growth sequence was stretched to 22 months.

Pollyanna De Lima, Principal Economist at IHS Markit:

“A revival in new order growth promoted a faster upturn in manufacturing production, as Indian firms sought to replenish inventories utilised in May to fulfill strengthening demand. To assist with higher output needs, and benefit from relatively muted cost inflation, companies stepped up hiring and input purchasing. Goods producers were also able to charge competitive prices due to negligible increases in their cost burdens, meaning not only higher sales in the domestic market, but also greater overseas demand."

“The results show welcoming accelerations in expansion rates across a number of key metrics. When we look at the survey’s over 14-year history, the sector is growing at a below-trend rate. Shortening the horizon to the last two years, May’s increases in output, total order books and exports all outperformed.”

Nikkei India Services Business Activity Index fell to 50.2 in May, from 51.0 in April. The latest figure highlighted the slowest growth rate in the current 12-month stretch of expansion. Some firms suggested that output rose in tandem with ongoing sales growth, while competitive pressures and the elections reportedly curbed the upturn.

Pollyanna De Lima, Principal Economist at IHS Markit:

“India’s dominant service economy again suffered the impacts of election disruptions, with growth of both new work and business activity softening for the third straight month. With this now over, upcoming releases of PMI data will be key in showing whether the sector was only hampered by the elections or is actually cooling. “Signs that we may see a revival in the service sector in the near-term were, however, evidenced by a pick-up in hiring activity and improved sentiment. Also supportive of greater client spending and investment among businesses is the evident lack of inflationary pressures."

“Taking the results released today in conjunction with manufacturing sector data published on Monday, PMI figures show that the combined private sector remains in good health. Some ground was lost so far in the first quarter of fiscal year 2019/2020 but, with a government formed and a resumed policy agenda, a recovery is expected as we head towards the second half of 2019.”

Nikkei ASEAN Manufacturing Purchasing Managers’ Index, which is compiled by IHS Markit rolled in at 50.6 in May, rising from 50.4 in April. Despite signalling only a slight improvement in the health of the manufacturing sector, it was the highest index reading since last August, driven by quicker expansions of output and new orders.

David Owen, Economist at IHS Markit:

“ASEAN manufacturing firms saw an established recovery of business conditions in May, building on the progress made after the downturn at the start of the year. Output grew more strongly as firms enjoyed the quickest increase in sales for nine months. Specifically, the PMI signalled an improved picture for the region’s export market, which remained broadly stable following an eight-month sequence of decline."

“However, given the impact of the US-China trade war last year, businesses will be downbeat on news of tariff increases in May. Export demand from China may be damaged once more, possibly leading to another period of decline in foreign sales. Luckily, domestic markets are holding up, offering hope of continued strength in new factory orders.”

Japan.gif

The headline Nikkei Japan Manufacturing Purchasing Managers’ Index, a composite single-figure indicator of manufacturing performance, edged lower to 49.8 in May, from 50.2 during April. While there was little movement in the main output and new order components, the fall to the employment sub-index was the main factor contributing to the month-on-month dip in the PMI.

Joe Hayes, Economist at IHS Markit:

“There were no signs of a let up in the recent manufacturing downturn during May, as output and new orders both slipped for 5 successive months. Weak demand from Japan’s key trade partner, China, as well as signs of an increasingly sluggish domestic economy, have impacted sales volumes. Sub-sector data also indicated the area where manufacturing softness had hit hardest, with investment goods producers leading the decline in order books. Given the importance of capital goods to Japan’s foreign trade, it would suggest further difficulties lie ahead for Japanese exporters."

“With the upcoming sales tax hike and upper house elections in July, there lies ahead potential banana skins for Japanese firms to avoid. Re-escalated trade tensions between China and the US merely add to existing concerns for manufacturers. Subsequently, businesses cast a downbeat assessment for the year ahead for the first time in six-and-a-half years.”

Japan Services PMI recorded 51.7 during May, compared to 51.8 in April. This signalled a moderate rate of expansion in service sector output that was broadly similar to that recorded in the previous month. The average rate of growth seen so far in the second quarter is only fractionally weaker than that during the opening 3 months of the year.

Joe Hayes, Economist at IHS Markit:

“Japan’s services economy continued to tick along at a modest pace during May. Taken in conjunction with the earlier-released manufacturing PMI, private sector output in Japan is growing at a rate that’s broadly in line with the underwhelming average seen in the opening quarter. The current underlying trend in Japan’s economy is disappointing and will certainly warrant concern from Abe amid the upcoming upper house elections in July and the scheduled consumption tax hike later this year. Indeed, service sector panellists indicated a degree of concern towards the sales tax increase, which pulled sentiment to its joint-lowest level in 18 months.”

Brexit.gif

The UK manufacturing sector showed increased signs of renewed contraction in May. At 49.4, down sharply from 53.1 in April. The headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index fell below the neutral 50.0 benchmark for the first time since July 2016.

Rob Dobson, Director at IHS Markit:

“The UK manufacturing sector was buffeted by ongoing Brexit uncertainty again in May. The headline PMI posted 49.4, moving back into contraction territory for the first time since July 2016, the month directly following the EU referendum result. The trend in output weakened and, based on its relationship with official ONS data, is pointing to a renewed downturn of production."

“New order inflows declined from both domestic and overseas markets, as already high stock levels at manufacturers and their clients led to difficulties in sustaining output levels and getting agreement on new contracts. Demand was also impacted by ongoing global trade tensions, as well as by companies starting to unwind inventories built up in advance of the original Brexit date. Some EU-based clients were also reported to have shifted supply chains away from the UK.”

"IHS Markit/CIPS UK Construction Total Activity Index registered below the 50.0 no-change mark for the third time in the past 4 months. The latest reading was the lowest since the snow-related downturn in construction output during March 2018."

Tim Moore, Associate Director at IHS Markit:

“May data reveals another setback for the UK construction sector as output and new orders both declined to the greatest extent since the first quarter of 2018. Survey respondents attributed lower workloads to ongoing political and economic uncertainty, which has led to widespread delays with spending decisions and encouraged risk aversion among clients."

"Commercial building remained hardest-hit by Brexit uncertainty, with construction firms reporting the steepest fall in this category of activity since September 2017. Civil engineering work also dried up in May and a fourth consecutive monthly fall in activity marked the longest period of decline since the first half of 2013. Construction companies often commented that recent tender opportunities for civil engineering work had been insufficient to replace completed projects.”

Canada.jpg

The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers’ Index dropped from 49.7 in April to 49.1 in May, signalling a second successive monthly deterioration in business conditions. The latest PMI reading was the lowest in nearly 3 1/2 years, albeit still indicating only a slight downturn.

Christian Buhagiar, President and CEO at SCMA:

"The latest survey points to the weakest overall manufacturing sector performance since December 2015, mainly driven by sustained declines in both production levels and new order intakes. Manufacturers commented on softer underlying demand from domestic and export clients in May, which was often linked to subdued global trade volumes."

"On a more positive note, employment numbers increased slightly during the latest survey period and manufacturers indicated a rebound in their business expectations to a 13-month high. The improvement in manufacturing sector optimism reflected greater optimism in relation to domestic economic conditions, as well as planned business investment in new production capacity and hopes of a recovery in international trade conditions during the year ahead."

IHS Markit Mexico Manufacturing PMI was recorded at the 50.0 no-change mark. This followed from a fractional strengthening in the health of the sector at the start of the second quarter, and compares with improvements through most of 2018.

Pollyanna De Lima, Principal Economist at IHS Markit:

“Mexico's manufacturing industry continued to stutter in May, with the headline PMI showing no change in the health of the sector following a fractional improvement in April. Output growth was reinstated amid a renewed rise in exports and back-to-back increases in total sales, but in all three cases respective rates of expansion were lackluster.”

"Challenges in securing meaningful volumes of new work in recent months translated into further job shedding and another cutback to input purchasing, with the contractions the fastest registered since the survey started in April 2011 as some companies faced cash flow issues and focused on cost reduction measures.”

Earnings Observations

FactSet Research weekly update:

For Q2 2019:

The estimated earnings decline for the S&P 500 is -2.3%. If -2.3% is the actual decline for the quarter, it will mark the first time the index has reported two straight quarters of year over year declines in earnings since Q1 2016 and Q2 2016. The trailing PE ratio for the S&P was 24 back then. Today it stands at 21.

The forward 12-month P/E ratio for the S&P 500 is 16.2. This P/E ratio is below the 5-year average (16.5) but above the 10-year average (14.8).

One of the most bullish cases for equities now is the fact that the S&P 500's dividend yield and the yield on the 10-Year Treasury Note have fully converged.

Source: Bespoke

In early Q4 2018, "risk-free" yields on the 10 Year were at 3.23% versus a dividend yield of just 1.9% for the S&P 500. With the yield on the 10 year falling more than 110 basis points since its peak in early November 2018, it makes the stock market significantly more attractive relative to risk-free rates at this juncture.

Political scene.gif

The Political Scene

The back and forth commentary on tariffs has reached a point of being absurd. It is all sheer speculation, void of common sense. In typical pundit fashion, every word is parsed, the meaning of every word is questioned. The consensus appears to be every tariff that is in place or proposed is irreversible.

There is literally no thought given to any alternative, as no other alternatives are even discussed. The minds of traders and the "jump to conclusion investors" have spoken.

If one is managing money, following that mindset represents a potential HUGE mistake.

Federal reserve 2.jpg

The Fed

Those that are hell bent on cutting rates now might wish to make note of the fact that the last time the Fed went into a rate-cutting cycle they had 20 attempts to eventually get to zero. This time around they have nine. The Fed has limited ammunition to fight inflation if and when it does show up.

Finally, since the economy isn’t suffering due to these high rates how much good can rate cuts do?

Fedspeak

There were four Fed speakers on Tuesday, all were voting members. Evans, Williams, Powell, and Clarida. None of the four explicitly indicated they would favor a cut at forthcoming meetings or that they were considering a cut. Evans cited “solid” economic fundamentals and “near” 2% inflation. Williams did not discuss the economic outlook.

Fed Chair Powell said the Fed will "act appropriately" amid various trade issues, in his comments at a Fed Listens event. Following that acknowledgment, he added his comments will mostly focus on the longer run. He did note the economy is growing, unemployment is low, and inflation is stable. But he added that the Fed is taking seriously the risks posed by inflation shortfalls. That suggests a bit of a dovish lean and a possible shift to an insurance rate cut down the road as the Fed might look to achieve an average 2% target.

If one listened closely, a common theme was repeated. No, it’s not the notion of a rate cut that investors have dancing around in their heads. It is the fact that the Fed is not seeing any material effect on the economy or growth due to the tariffs.

The 3-month/10-year Treasury curve inverted two weeks ago and that curve remains inverted. Take the following for what it is worth. Historically an inversion in the curve has an 18 to 24-month lead time before recession. Furthermore in that period of time, stocks have done quite well.

The 2-year/10-year has yet to invert.

Source: U.S. Dept. Of The Treasury

The 2-10 spread started the year at 16 basis points; it stands at 24 basis points today.

Sentiment negative.jpg

Sentiment

The Ned Davis Research Crowd Sentiment Poll.

As you can see, it has recently plunged, moving from the “extreme optimism” zone which accompanied the late-April highs to the “extreme pessimism” zone just recently. This is relatively good news based on history, though not yet in the “best” zone.

Sentiment on the part of individual investors in the weekly survey from AAII turned bearish in May when stocks sold off. That sentiment continues as bullish sentiment dropped from 24.8% last week down to 22.5%. At this level bullish sentiment remains at an extreme low by historical standards, and is now at its lowest since December 13th of last year when it was at 20.9%.

Respondents who reported that they expect a correction also rose sharply by 5.1% to 38.8%. The last time respondents turned this negative was in the final weeks of December when it rose by the same amount to 39.3%.

According to Lipper Fund Research, investors pulled $12.2b from equity Mutual funds and ETF's this week. $58 billion in the past 6 weeks, exceeding all 6-week periods in 17 years, except for last December. Those numbers are frightening to any money manager that employs a common sense approach to the stock market. They suggest unadulterated fear on the part of market participants. Keep in mind the S&P 500 was at the worst, 6% from an all time high. I repeat what I mentioned last week.

The issue that I see, most don't want to sit through ANY pullback, not to mention a very normal correction. Between a new high and a 6% drawdown, they see the need to raise a lot of cash, start hedging and so on, yet by definition this is not even a correction! The Fear of Not Getting Out has taken over."

In summary, we are witnessing the signs of a ramping of pessimism tied to the latest market weakness and concerns about recession. Ask yourself, is this crowd going to be correct?

Oil.jpg

Crude Oil

The Weekly inventory report showed a larger than expected build of 6.8 million barrels. At 483.3 million barrels, U.S. crude oil inventories are now about 6% above the 5-year average for this time of year. Total motor gasoline inventories also increased by 3.2 million barrels last week and are 2% above the 5-year average for this time of year.

Global demand fears remain in the forefront of traders' minds. WTI closed the week at $54.04, up $0.81 for the week. The commodity started the year at $45.41, rallied to $66.30 (46% gain), and at the recent low, gave back 22% of that move. Investors can decide if this is reversion to the mean, or fears of a global recession. Perhaps a little bit of both. It is also possible the approximate 50% retracement is now complete.

Technical view.gif

The Technical Picture

When the market broke the losing streak and rallied on Tuesday it was accomplished with decent advance/decline volume, as advancing volume was 88%. The advance/decline lines for both the S&P and the Dow, look strong. New highs versus new lows improved on Friday.

What I heard all during this rebound rally was "it's not to be trusted", and the consensus view from many technical analysts called for a pullback taking the index to 2650. There is a good case to be made for that level, but with an extremely oversold condition being rectified and the index back at 2800+, let's not get ahead of ourselves. Leave that for others to contemplate.

Chart courtesy of FreeStockCharts.com

There is a possibility that the index has already found a bottom and will consolidate around these levels. The sustainability of any rebound will be key and needs to be watched closely. Another indicator to watch is the breadth volume mentioned earlier.

Step one in the rebound was accomplished when the index recaptured the 200-day moving average (red line). Next step was also completed as the index took back the 2800 level that everyone was focused on. Step three was achieved in short order, when the 20-day moving average at 2826 was surpassed on Thursday.

That left the 50 day (blue line) moving average (2870) as the next obstacle. That was eclipsed on Friday. Bottom line, a trading range would be a good scenario for the Bulls, with sideways consolidation above the support levels. Remember these are all short term scenarios and at present this remains a very difficult short term environment to forecast.

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.

Buy-Sell logo.jpg

Individual Stocks And Sectors

Tech giants Alphabet (GOOG) (NASDAQ:GOOGL), Facebook (FB), and Apple (AAPL) are all under the subject of regulatory probes. The House will be opening an anti-trust investigation into Alphabet., Facebook is the subject of an FTC investigation into whether its practices harm consumers, and during a developer conference event it was reported a possible investigation into Apple will be next. Amazon (AMZN) hasn’t faced any specific challenge but has been weak in sympathy.

One of the better reports on the entire matter comes from Baird Capital management:

“Risk of large-cap tech breakups 'fairly low,' following the multiple media reports that antitrust regulators were laying out their lines of responsibility if they choose to pursue investigations of Google (GOOGL), Amazon (AMZN), Facebook (FB) and Apple (AAPL), Baird analyst Colin Sebastian said he views the odds of "nuclear options," such as forced breakups of Google, Facebook or Amazon, as "fairly low." However, we see the chances of anti-trust action short of breakups as "moderate" and thinks the odds of regulation around privacy and security are "relatively high." We believe Amazon and Alibaba (BABA)could outperform other large-cap tech stocks amid the "specter of government intervention," though they also think positive revenue trends at Facebook could lead to a rebound after investors digest the current news.”

A very slippery slope indeed. Attacking big tech giants who are employing thousands of skilled workers and are leaders in technology while we are in a spat with China is foolhardy. We might as well hand the baton to China and allow them to be THE world leader in technology. This absurdity appears to be the government exercising its power to get in the game, procure their piece of the pie. It's similar to legal marijuana, legal gambling, all organized so the government gets their share. Now it’s big tech. They make billions, and in the minds of some the government gets little. None of that sits well well with politicians.

In my view, nothing will ever come of the "attack" except multi millions collected in fines. This is all about extorting money from large corporations. Nothing more nothing less.

Interesting that the Baird analyst mentioned Alibaba (BABA) as an entity that won’t have this overhang. I agree. Despite what one may think of China, they support their businesses. If one wants to believe the breakup up scenario, owning these stocks should bring a smile to their faces. A breakup of any of these tech giants would be a windfall. The sum of the parts is far greater than what these stocks are selling for today. However, I don't see that happening.

My opinion has nothing to do with owning the stocks. Attack, weaken big tech, corporate America, and you weaken America. The problem isn't with big tech, it is with big government.

Nothing is ever perfect, these platforms are FREE. No one is being ripped off or scammed, they serve a purpose. The respective companies are not forcing anyone to participate. People do have choices. At the end of the day users aren't fleeing, neither are advertisers. Bottom line, the majority seem fine with the platforms. As we have seen in other examples lately, there is a minority (numbers not race) faction that wants to control what the majority wants. That is something investors need be concerned about instead of watching the 10-year treasury note every hour of the day.

I just added more Amazon (1700) and will be a buyer of the entire group as opportunities arise.

The majority of investors need a reality check. The average drawdown in the past 40 years has been 14%. When the S&P pulled back 6%, it could have fallen another 8% and 2019 would still be nothing more than a typical year.

Final Thoughts.jpg

The “inconvenient truth” of equity market pullbacks is that investors tend to want them in order to invest at more favorable prices, but when they actually occur, investors get nervous, question their conviction and postpone their purchases. During the selling stampede, most market participants were doing one of two things. Sitting on their hands, or preparing for the next move down by raising cash, and hedging their portfolios. That action overwhelmed what little buying was present, and prices plummeted. The other action that was obviously left out was buying equities.

When we arrive at these situations where the mindset becomes so overwhelmingly negative (or overwhelmingly positive), speculation is rampant. Conclusions have been made by some based on pure unadulterated conjecture. When a successful investor arrives on the scene, they immediately leave ALL speculation out of the equation.

This is typically what we hear in times of market weakness. Far too many immediately conclude that the “market” is about ready to roll over. The negative headlines mesh with the price weakness and the picture is now set in an investor's mind. In 2016, the S&P was 1800, it is approximately 1100 points higher. Conjure up a scenario based on emotion, lose conviction in the trend, and an investor becomes roadkill. Here we are again. This is the time to observe and let the price action dictate what is coming next, and that cannot be done without PATIENCE.

We hear all of the arguments. The primary one, how much upside is left in this market? I don't have that answer, and no one else has it either. Yet investors are actually getting out of the market now because they believe the upside is capped. For the record, I didn't have that answer at S&P 1800 in 2016. However, much to the surprise of many at that time, I need not have that answer to stay invested in the market. We all saw that the primary trend was shaken but it remained in place. It’s simple, the only way to manage a trend successfully is to default to the opposite view. So I ask, tell me what the downside is while in a bull market trend?

There were plenty of remarks with headlines that called for hundreds of points being taken off the S&P, while the index was 4% off an all-time high. That may indeed happen at some point but these situations need to be taken in steps. Steps take patience. Something that many pundits do not possess. Once a market participant puts the "hundreds of points loss" idea in their head and then ACTS on that forecast, they have made another mistake. They succumbed to wild speculation that lost sight of the primary trend.

It is very simple. The primary trend is to be followed until it no longer is the primary trend. All of this speculation and conjecture that takes place is meant to attract attention to a strategy that is doomed from the start. Far too many continue to fall prey to the "short termism" that fills the investment world today.

When that primary trend is BULLISH and in your favor, the emphasis is on the naysayers to prove their case. Far too many investors look around trying to defend why they are still invested. That is a mistake. When the Bullish trend does change, it will present a totally different view and story. It is at that time when changes in investment strategy are made.

Despite what the gurus out there have told you, and continue to tell you, we aren't there yet.

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.

Thank you #2.jpg to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to All!

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.