“Trade what you see; not what you think.” – The Old Fool,
Richard McCranie, trader extraordinaire.
STOCK RISING – EARNINGS FALLING / VALUATION (MarketWatch)
“Using earnings estimates looking out over the next 12
months (NTM), the current S&P 500 NTM P/E ratio stands at 20.61, according
to FactSet. That is the highest level seen for that measure since March 2002,
when the stock market and economy was still suffering from the popping of
the dot-com bubble…Caxide [Chief Investment Officer, Tony Caxide at
Hamilton Capital] said that even with an expected “sizable” bump in earnings
over the rest of the year, boosted by the large fiscal stimulus recently
enacted by Congress and the gradual reopening of businesses, he believes stocks
are still “quite expensive” relative to earnings out to 2021.” Story at…
I’m repeating this from an earlier 21 April post, because
it made a lot of sense:
TO “V” OR NOT TO “V” – EXCERPT (TCW GROUP)
“…to assume a return to “normalcy” unconsciously assumes
that the January 2020 economy was “normal.” It was not. A
good thought experiment might be this: what percent of the labor force is
likely to be impacted by the combination of factors that will necessarily mean
a different “normal” on the other side of this? If you are still an optimist,
you might posit that perhaps only 5% of the labor force might be so impacted.
Were that so, then we might suppose that unemployment might semi-permanently
seek out a level of January’s 3.5% level plus the additional 5% virus impacted
such that we arrive at an 8.5% unemployment rate on the “other side.” High, but
the U.S. economy could likely work that number down to a few points over a few
years. What it won’t do is work 8.5% unemployment down to January’s
“normalized” 3.5% figure by the end of the summer! We’ll eat our hats if it
does!” – Tad Rivelle, CIO, TCW Group. Commentary at…
WATERFALL HISTORY LESSON (MarketWatch)
“Many analysts think markets are
likely to try to find a fresh low as the reality of
pandemic-scarred economic and corporate data starts to hit home. A new analysis
from Ned Davis Research offers some historical context for understanding how likely
that is in our current situation…Past waterfalls show that “the bigger the
retracement, the less severe the retest,” the analysts wrote. “Five of the six
most severe retests happened after below-average retracement rallies. Three of the
four mildest retests occurred when the retracement was above average.”
My cmt: Currently,
the retracement is 61%. This is above
the average of 57% value, though perhaps not appreciably. At this point, this analysis doesn’t tell us
much about whether the Index will retest or not. Going back to WWII, every
waterfall decline greater than 15% has either retested the low, or experienced
a lower-low. That is, until the 2018,
20% correction. The 2018 correction is
the only one that didn’t retest.
STOCK VS REAL LIFE (SeekingAlpha)
“The dramatic underperformance of the SPDR Financial
Select Sector SPDR (NYSEARCA:XLF)
relative to the S&P 500 SPDR Trust (NYSEARCA:SPY) here in 2020 bears a
strong resemblance to the fallout in 2008…In the meantime, many of our moderate
growth and income clients continue to benefit from our tactical shift in
February. For the time being, rather than a 60-65 stock target/30-35 income
target, our allocation remains protective. The 33% equity component may be
split between large-cap domestic ETFs and select individual securities.” -Gary
Gordon, MS, CFP, President of Pacific Park Financial, Inc. Commentary at…
My cmt: I am registered at Seeking Alpha, but if you’d
rather not register, you may have to trick the system to get full access to the
article as follows: Click the link above. The article appears and then a pop-up
says you need to register to read the full article. Click the “sign-in” button
at the bottom; a sign-in, pop-up window appears…click the “x” in the upper
right-hand corner of the sign-in window.
You should then have temporary access to the article.
CORONAVIRUS (NTSM)
I’ve seen a number of articles touting Sweden’s method of
handling the virus. They had few
closures and and only voluntary restrictions. They are counting on herd-immunity. Eventually, enough of the herd will have
gotten the virus so that transmission is limited. The catch is their death rate
is 3 to 4 times higher than surrounding countries according to the WSJ.
Here’s the latest from the COVID19 Johns Hopkins website
as of 6 PM. Nationwide, there were about 15,000 new-cases today, about 8,000 less
than yesterday. (I sometimes up-date the data later in the evening and that may
make some of today’s stats seem odd compared to what I may have written
yesterday.) Growth is slowing as indicated by the curve diverging from the red
line. The 10-day growth factor was about 1 today. If that holds, it indicates that the number
of new cases is not growing.
These numbers are based on U.S. totals; local data will
be different.
MARKET REPORT / ANALYSIS
-Monday the S&P 500 was unchanged at 2930.
-VIX dropped about 1% to 27.57.
-The yield on the 10-year Treasury rose to 0.715 (I had a
typo here Friday.)
RESISTANCE POINTS:
61.8% Fibonacci Retracement: 2947
200-dMA: about 3002
The Prior all-time High: 3386
The above piece by Garry Gordon, “Stocks vs. real Life”,
pointed to the XLF [Financials-ETF] underperformance and noted that it “bears a
strong resemblance to the fallout in 2008.” We also note that he is advising
clients to have only 33% of the portfolio in stocks.
Friday, I noted another bearish divergence: “Cyclical
Industrials are underperforming relative to the S&P 500, by a lot.” The XLI
underperformance is also a worry for the bulls. Industrials are cyclical stocks.
When they are underperforming, it shows investors are concerned about the current
recession and it suggests that the recession will be more prolonged.
57% retracement (2890) is the average for this type of
rally; 52% is the median. The rally has lasted 34 days; the average length of a
counter-trend rally after a 15% waterfall decline is 21 days. The median is 11 days.
The daily sum of 20 Indicators declined from +9 to
+4 (a positive number is bullish; negatives are bearish). The 10-day smoothed
sum that negates the daily fluctuations declined from +65 to +62. (These
numbers sometimes change after I post the blog based on data that comes in
late.) Most of these indicators are short-term.
Today a significant sell signal developed. Breadth on the
NYSE vs the S&P 500 index is diverging from the S&P 500 index in a bearish
manner. The Index is too far ahead of breadth. (This was a surprise since this
indicator was bullish a little over a week ago.) When I looked at 5 pullbacks
going back to 2017, the sell signal was, on average, about 8-days early. The only real miss was the ongoing correction
and it was about a month early. If we
exclude the current correction and look at the remaining 4, the indicator was,
on average, 1 day early. The maximum errors were 6-days early and 6-days late.
We also note that the S&P 500 reached 2944 during the
day and that’s very close to the 61.8% Fibonacci retracement level for those
who believe in that sort of thing. Actually, I guess we have to, because so
many others believe the Fibonacci retracement levels are Gospel.
Smart Money (late-day-action) is still bearish.
Bottom line - SOLD SOME STOCKS TODAY: The Breadth vs the S&P 500 indicator is
warning that the rally may be over, or soon will be. I sold some stocks today
and cut my stock holdings back to about 30%. (Sorry, I didn't have a chance to post during trading hours.)
I sold: XLK-ETF (19% gain), XLB-ETF (1% loss), and Cisco
(1% gain).
30% invested in stocks is my crash stock-allocation level,
but I still don’t know if we’ll see a crash. (Crash for me is about a 50% drop.)
Since I don’t know what the future
holds, I am taking a conservative position.
RECENT STOCK PURCHASES
Of purchases near the recent low, I still own:
-Biotech ETF (IBB). #1 in momentum. We’re in a health
crisis so perhaps this will be a good longer-term hold too. Gilead is the
largest holding in the IBB-ETF.
TOP / BOTTOM INDICATOR SCALE OF 1 TO 10 (Zero is a
neutral reading.)
Today’s Reading: +0**
Most Recent Day with a value other than Zero: +0 on 11
May. (Non-Crash Sentiment is bullish; the Fosback Logic Indicator is
bullish; Breadth vs the S&P 500 is bearish (-1); and Smart Money is
overbought (-1).)
(1) +10 Max Bullish / -10 Max Bearish)
(2) -4 or below is a Sell sign. +4 or higher is a Buy
Sign.
MOMENTUM ANALYSIS:
TODAY’S RANKING OF
15 ETFs (Ranked Daily)
The top ranked ETF receives 100%. The rest are then
ranked based on their momentum relative to the leading ETF. The highest ranked are those closest to zero.
While momentum isn’t stock performance per se, momentum is closely related to
stock performance. For example, over the 4-months from Oct thru mid-February
2016, the number 1 ranked Financials (XLF) outperformed the S&P 500 by
nearly 20%. In 2017 Technology (XLK) was ranked in the top 3 Momentum Plays for
52% of all trading days in 2017 (if I counted correctly.) XLK was up 35% on the
year while the S&P 500 was up 18%.
*For additional background on the ETF ranking system see
NTSM Page at…
TODAY’S RANKING OF THE DOW 30 STOCKS (Ranked Daily)
The top ranked stock receives 100%. The rest are then
ranked based on their momentum relative to the leading stock.
For more details, see NTSM Page at…
MONDAY MARKET INTERNALS (NYSE DATA)
Market Internals
remained NEUTRAL on the market.
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).
Using the Short-term indicator in 2018 in SPY would have
made a 5% gain instead of a 6% loss for buy-and-hold. The methodology was Buy
on a POSITIVE indication and Sell on a NEGATIVE indication and stay out until
the next POSITIVE indication. The back-test included 13-buys and 13-sells, or a
trade every 2-weeks on average.
I cut my current stock allocation to about 30% invested in
stocks today, Monday. You may wish to have a higher or lower % invested in stocks depending
on your risk tolerance.
INTERMEDIATE / LONG-TERM INDICATOR
Monday, the SENTIMENT, PRICE, VOLUME & VIX indicators
are bullish. The long-term
indicator remained BUY. This just means conditions are good – it may be
too late to buy. In fact, I think we are close to a top.
