“The earnings surprise percentage (which reflects the aggregate amount by which companies are reporting actual earnings above estimated earnings) for Q1 stands at 6.4%, which is well above the 5-year average (5.4%). In fact, if 6.5% is the final surprise percentage for the quarter, it will mark the highest surprise percentage for a quarter since Q1 2011 (7.0%).” Factset said the reason was “…analysts lowered earnings estimates for S&P 500 companies in aggregate by 8.2% for the first quarter.” The better than expected earnings should give the markets some reason to move up, assuming they aren’t overtaken by bad news.
http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_5.8.15/view
STOCK MARKET WARNING - THE LONG FLAT STRETCH
The S&P 500 has been flat to nearly flat since late November. Since then, the Index is up about 2% in 114 trading days. To find a flat stretch that long I went back to February of 2011. From 16 Feb to 21 July the Index was up only ½% in 108 trading days. In July 2011 this flat period was followed by a 17% correction. It should be obvious that the Index needs to power up from this stall or it is likely to repeat its previous pattern. My guess is that it WILL break out to new highs. If I am wrong here, it will be very wrong. For protection, I’ll just follow the NTSM numbers.
FINANCIAL RISKS (Hussman Funds)
“It was the greatest and boldest operation ever undertaken by the Federal Reserve System, and, in my judgment, resulted in one of the most costly errors committed by it or any banking system in the last 75 years. I am inclined to think that a different policy at that time would have left us with a different condition at this time… Business could not use and was not asking for increased money at that time.” - Adolph Miller, former Federal Reserve Board Member, testifying to the U.S. Senate in 1931 about the Federal Reserve’s 1927 interest rate cuts and acceleration of open market purchases – which fueled speculation and low-quality credit expansion that culminated in the 1929 peak, collapse, and ultimately the Great Depression.
“…the most historically reliable measures, equity valuations are now more than 130% above the levels that would historically be associated with run-of-the-mill 10% equity returns (the premium is about 116% above historical norms if we use a broader though still reliable set of measures). These valuations might be reasonable on the assumption that short-term interest rates will be kept at zero for more than 30 years, but our impression is that what’s actually going on is that investors feel they have “nowhere else to go” and – as in 2000 and 2007 – are speculating without a clear recognition of the dismal long-term returns that are now priced into equities.” – John Hussman, Phd. Weekly Market Commentary at…
http://www.hussmanfunds.com/wmc/wmc150511.htm
My cmt: There was a story in the WSJ over the weekend that suggested that today’s valuations cannot be compared with past valuations because currently, companies return value to shareholders thru stock buybacks. With fewer shares, P/E will be higher. Thus comparing todays’ P/E’s or expecting P/E’s to revert to the mean is not necessarily a valid methodology. As for John Hussman’s analysis, he is right; there is a crash coming – we just don’t know when.
FED INDICATOR SUGGESTS MAJOR CRASH IN 2019
Fed Chairman Alan Greenspan uttered his now famous warning about stocks, referring to “irrational exuberance”, in December 1996. That was 4-years before the final top and beginning of the dot.com crash. Using this scientifically researched (I looked on the internet) indicator, we can predict a crash in 4-years because Janet Yellen warned that stock valuations were too high last week. This has slightly more credence than the super Bowl indicator. Since the AFC won, the market should be down in 2015. But wait, they cheated in the playoffs. That means it should be up? Stay tuned.
MARKET REPORT
-Monday, the S&P 500 was down about 0.5% to 2105 at the close. (Not unexpected since the Index was up 1.4% Friday.)
-VIX was up about 8% to 13.85.
-The yield on the 10-year Treasury Note rose to 2.28%. That’s a pretty big move for the day. Investors are selling bonds.
The S&P 500 is back in the vicinity of the lower trend line and less than 1% above the 50-day moving average. This is an area that has led to buying in the past. If not, I’ll start to worry.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) dipped to 46% at the close Monday. (A number below 50% is usually BAD news for the markets; but let’s be optimistic and see what happens tomorrow.) New-highs outpaced New-lows Monday. The spread (new-highs minus new-lows) was +32. (It was +44 Friday.) The 10-day moving average of change in the spread rose to minus-4. In other words, over the last 10-days, on average; the spread has fallen by 4 each day.
Internals remained negative on the markets.
Market Internals are a decent trend-following analysis of current market action, but should not be used alone for short term trading. They are usually right, but they are often late. They are most useful when they diverge from the Index. In 2014, using these internals alone would have made a 9% return vs. 13% 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, nearly straight-up year like 2014.
NTSM
Monday, the NTSM analysis remained HOLD. PRICE, VOLUME, VIX and SENTIMENT indicators are neutral, although (as always) sentiment remains extremely high.
MY INVESTED STOCK POSITION
I remain fully invested at 50% invested, mostly in smaller
cap-stocks in the long-term portfolio with some international stocks. 50% is
conservative, but appropriate for a conservative retired guy. The Dow Jones US Completion Index (all stocks except the S&P 500 – the “S” fund in the TSP) remains ahead of the S&P 500. Since 1 February it is 2% ahead of the S&P 500. Since 1 March the Euro-Pacific ETF (EFA) (“I”-fund) is 3% ahead of the S&P 500.
THRIFT SAVINGS PLAN (TSP) MEMBERS
My TSP Allocation: 50%-G; 10%-C; 25%-S; 15%-I. (50% cash is too high for non-retirees, however, the “G”-fund did return 2.2% over the last 12-months and that is exceptional for risk-free money.)
