Dick Fosbeck noted back in the 80’s that “…it may be stated categorically that a reduction in the reserve requirement of on demand deposits for large banks is the single most bullish event in the world of stock price behavior.” He also noted that the converse is true and backed it up with analysis The average decline in stock prices 15-months after increases in reserve requirements was -13%.
We have recently seen considerable evidence of this and as John Hussman,
PhD, noted, the Federal Reserve elimination of mark-to-market accounting had
the effect of lowering reserve requirements and has been responsible for the
much of the recent stock rally. That’s because it allowed the banks to value
poor performing assets at a higher level, thereby giving banks a de-facto
increase in their reserves. While
main-street credited QE with the resurgence in stock prices, John Hussman has
argued it was much more likely due to eliminating mark-to-market accounting
rules. The tide may be turning in the
other direction.
There was an analyst on CNBC on 6 Feb 2014 who said QE Taper along with
new banking regulations will force Banks to hold more reserves. (I caught the last of his interview. Alas, I haven’t found it to share a link
here.) Additionally, ending QE will
allow long-term rates to rise. That must
have a tightening effect too. I don’t
see any way around it – These changes may have a profound long-term negative
impact on stock prices.
As I’ve noted before, the three-steps-and-a-stumble rule says that after
3-Fed tightenings, expect negative impacts on stocks. So far, there have been 2- reductions in
QE. The next FED meeting is in
March. Whether further QE tapering will
be considered by stock participants as “tightening” I am not sure. My guess is it will. In addition, unwinding QE decreases reserves
too.
The above is a long term problem and could take months to play out.
EARNINGS
Other than some misses by a few big companies, earnings and revenues seem to be holding up this quarter, but forward guidance has been poor, as it was last quarter. See the information from FactSet below.
FACTSET EARNINGS INSIGHT (FactSet)
-“Percentage of
Companies Beating EPS Estimates (72%) is In-Line with Recent Averages”
-“The percentage
of companies reporting sales above estimates is well above the average
percentage recorded over the last four quarters (54%), and well above the
average percentage recorded over the previous four years (59%).”
-“At this point in time,
71 companies in the index have issued EPS guidance for the first quarter. Of
these 71 companies, 57 have issued negative EPS guidance and 14 have issued
positive EPS guidance. Thus, the percentage of companies issuing negative EPS
guidance to date for the first quarter is 80% (57 out of 71). This percentage
is above the 5-year average of 64%, but slightly below the percentage at this
same point in time for Q4 2013 (86%).”
Full report available at...
TRADER BOARD REPORT
Trader Comment: “…my gut says
short, short, short, but the pattern says buy, buy, buy. So am not doing
anything for now.”
MARKET REPORT – CORRECTION OVER?
Tuesday, the S&P 500 was up 1.1% to 1820 (rounded).
VIX was down about 5% to 14.51.
The 10-year Treasury Note yield rose to 2.72%. A rising
bond at this point indicates bond selling and that usually means investors are
buying stocks as they did today. The bond market is suggesting “correction
over.”
Market Internals are all positive for the 10-day averages
I follow, so internals are suggesting “correction over” or at least that the correction
will be extended for a while and take longer to play out.
The market internals, VIX action, price action and
falling sentiment (now 65%-bulls) all suggest that this correction is over.
There are only 2-indicators that make one question this
move up: (1) Low volume and (2) today’s late-day selloff. Low volume is not surprising. While it’s
always cited as a reason not believe in a bottom, low volume is typical after a
bottom since most investors don’t believe the bottom is really in, i.e., low
volume is true after all corrections.
Today’s late day sell-off is a little disconcerting, but it wasn’t
particularly extreme and only amounted to 1-1/2 points down on the S&P 500
in the last hour of trading.
So I plan to up my percentage invested in stocks to 40%
tomorrow unless price action in the S&P 500 is unusual (too big or too
small). It looks like the low of 1742
should be retested so this purchase at this time may be too soon and I may
regret it. But, for all of 2013 there
were no retests of small corrections and that’s really is another unknown now. That’s the problem with a very small down
move – they are very hard to read. That’s
why I’m only putting 10% more in. If we
get a decent retest of the 1742 low, I’ll up the invested percentage even more.
(If indicators deteriorate, I may just get whipsawed and sell again soon, but
that’s always a possibility.)
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of stocks advancing remained 55%
at the close. (A number above 50% for
the 10-day average is generally good news for the market.) New-highs outpaced new-lows Tuesday, leaving
the spread (new-hi minus new-low) at +73. (It was +47 Monday). The 10-day moving average
of change in the spread was +9. In other words, over the last 10-days, on
average, the spread has increased by 9 each day.
All of the short term internals indicators are positive.
Market Internals are a decent trend-following analysis of
current market action, but should not be used alone for short term trading. In
2013, using these internals alone would have made a 16% return vs. 30% for the
S&P 500 (in on Positive out on Negative – no shorting). Of course, few trend-following systems will
do well in an extreme low-volatility, straight-up year.
NTSM
The NTSM system remained HOLD today, Tuesday. The first Sell signal of this cycle was just
over 2-weeks ago on 24 January.
Sentiment, Price, Volume and VIX indicators are all
neutral.
MY INVESTED POSITION
I am about 30% invested in stocks as of 20 December
(S&P 500-1540) because I upped my stock holdings by 10% on the 20th
of December. 30% is a reasonable level
of stock holdings for a correction, so I don’t need to reduce holdings since I
don’t think this will be a major crash.
Even if a surprise collapse did take the stock market down by 50%, I’d
only lose 15% in the stock portfolio. On
the other hand, if I am wrong, leaving 30% invested in stocks hedges the bet
since no system is perfect.
Tomorrow I will make a final decision before 12 noon on
whether to put more into stocks. Unless
tomorrow is a big down day (that looks like a reversal down or a big up-day
that would also signal a reversal down) I will increase my invested percentage
to 40% to follow through with my plan to income average into the market. Time permitting, I'll post my final decision before noon.
