Friday, October 19, 2018

Break In

I thought I'd briefly comment on the market action yesterday, which was not a good day for stocks.  Basically we've given back about 50% of the rally from earlier in the week.  That is not all that surprising as those gains came so quickly that there were always going to be people that bought and sold some of those short-term profits.  It looks like we've been getting a retest of the recent gains and it will be important to see if those hold.

Markets are looking to be up on the open about a third to a half of a percent.  It would be positive if stocks could hold on to or even advance those gains today, especially since it's Friday.  

None of this volatility should be surprising given what we've seen in the current environment.  It's important to note that while the average index is down between 5-8% there are many individual stocks that are down considerably more than that.  We are also getting oversold enough by our work that there's a higher probability of a more sustainable advance in the coming weeks.

Back early next week. 

Thursday, October 18, 2018

Chart Talk {10.18.18}

I promised to update the chart I posted on 10.09.2018.  Here it is.  Stocks are right now digesting that monster move higher from a couple of days ago.  So far that lower horizontal green line is resistance. The thing to note is that something here is going to break in the next few weeks.  Either we're going to break through resistance or the 200 day moving average {blue line in the middle of the chart} and then that trendline {pink line} dating back to November 2016 is going to be violated.  We are becoming over sold in multiple timeframes by our work but haven't yet reached a level that normally generates a longer term buy signal yet.

Back early next week.

Chart is from although the annotations are mine.   

*Long ETFs related to the S&P 500 in client and personal accounts.

PS.  If  I had to guess {and it is only a guess} I'd think the higher probability in the coming weeks would be for the next move in the index to be resolved higher into the end of the year and maybe early into next year.  However that trendline and the moving average will keep moving higher and that has the potential to be a problem on a money flow basis for markets in 2019.  

Wednesday, October 17, 2018

Thoughts 10.17.18

Big rally yesterday.  Nobody should be surprised that we are giving some of that back on the open.  Right now there are a lot of trapped holders of stock that bought into the market these last six months  at much higher prices.  Some of these holders will be looking to get out at any opportunity they have as they get close to being even on those purchases.  This could take more than one day to work through.  

Still fact that we found support over the last couple of days and then bounced is encouraging.  Will we get a retest of last week's lows?  Only time will tell.

Good economic news:  The Job Openings and Labor Turnover Survey {JOLTS} showed a record 7.14 million job opening in August.  That is the highest number ever recorded for this survey who's data goes back to the early 2000s.

Concerning economic news:  Mortgage applications collapse to a 19-year low.  This should surprise nobody as the double whammy of higher interest rates and the further recognition by homeowners that not all of their mortgage interest and property taxes may be deductible is really taking a bite out of the housing industry.  The multiplier effect of housing shouldn't be underestimated and this is something we need to watch carefully going forward.    

So far in early going the major indices have given up on average about a third of a percent.  If this holds today call this a win.  Long way to go though.

Back tomorrow.

Monday, October 15, 2018

Thoughts 10.15.18

Markets have opened flattish today.  There's probably some relief in that they didn't give back all of Friday's gains at the open.  Still, the day is young and it wouldn't surprise me if you see some folks lock in those short-term profits .  That could especially be the case, and any selling could pick up steam today, if early weakness persists.

Probability suggest a better environment for stabilization mid-week.  We are still short-term over sold by our work.  I think there is a higher probability of rallying once the market's have factored in the election results.

No, I do not think we are at the beginning of a bear market.  I think there are some headwinds to stock trading but I don't see right now signs of a recession.  That could change and we should get a better idea of how things are doing as earnings season progresses.  I do think right now long-term interest rates above 3.3% {and possibly heading to 4%} is sucking some of the energy out of equities.    I think markets are adjusting to higher rates right now and at some level these will be discounted.  Higher rates are something that now has to be factored into portfolio's asset allocation and investment strategies.  I will have more to speak about this at a later date.

The drop we've seen in stock prices has moved us back into more reasonable valuation levels.  Again, that is a subject for a future post but we're now at levels where stocks have found some support during corrections in this most recent bull run.  Now of course nothing is guaranteed to work in the same manner as the past and valuations can change.  I'm just pointing that current fact out.

I have to be out tomorrow and won't be posting here unless something drastic changes.  Back Wednesday.

Saturday, October 13, 2018

Global Returns

Global returns as of 10.11.18 from Charlie Bilello's Twitter Feed.  Note the declines in markets overseas.  Also note that many of these places showed some of the best returns in 2017.  If we've been in a stealth bear market these year then on a two year basis we've come off pretty well.  Combining most of these countries two year results still in many cases shows long-term superior performance.   

*Note we are investors in many of these countries via single country or regional or world ETFs in both client and personal accounts.  We are also long ETFs related to the S&P 500 in both client and personal accounts.  

Friday, October 12, 2018


I'm writing this  a few minutes before the market opens this morning.  Consider it a bit of a postmortem on what's occurred in the markets this week.  Right now the futures are showing a higher open.  I wouldn't be surprised if that open gets sold.  If it does and if any attempt to rebound fails then I would think the higher probability would be for another bad day today and then the greater probability would be for the market to gather its footing about mid-week coming up.  

A market that can hold these gains today would likely be signaling that the worst is over for now.  A retest of these lows wouldn't be ruled out though in the coming weeks.  Understand, these scenarios are just me throwing out the highest probabilities based on data and past experience.  I've been doing this long enough to know that anything could happen.

Investors are always looking for explanations on why markets sold off and when the decline doesn't match the data there is always a level of concern.  Most would expect this type of sell-off to occur when the economy was showing signs of slowing down or slipping into a recession, not when things seem to be going along as well as we're currently seeing.  If I had to venture a guess on what's spooked the markets it would be the constant and rapid rise in interest rates since Labor Day.  I'm guessing the growing frictions with China haven't helped either as tariffs have been up at the forefront on the financial news daily.  Finally throw into the pot that we were very overbought, add a pinch of complacent sentiment amongst investors, that market breadth had narrowed. the uncertainty of the upcoming elections and finally seasonal weakness and you had the perfect potion for a decline.  Perhaps that is just a long winded way of saying it was time for markets to go down.  Oh by-the-way, investors are complacent no more.

At any rate, short of an unlooked for event that has caught market participants offsides, this kind of decline historically has not been able to be sustained at the speed we've seen and many of the indicators I follow are now historically very oversold.  As such and relying on what my systems have told me, I was in general a buyer yesterday in client accounts where cash positions justified making investments.   I did this according to client's individual mandates and based on their risk/reward profiles.  To me the markets had become too cheap not to at least try to go out and find some bargains.  Only time will tell if that positioning is correct, but I feel better about buying markets that are down 7-10% than trying to justify purchases when stocks are making all time highs.   I like to buy assets when they are on sale.  While there is no guarantee that this strategy will work in the future, it has historically worked for my clients, especially since my time horizon is 6-18 months from now and not what happens tomorrow.

I'll update some charts next week and talk somewhat on what I think the markets are trying to tell us.  Here are a few things I'm thinking stocks are trying to say.  First, as time has passed it seems more likely than not that stocks formed a blow off top back in January and have spent the last seven months  recovering from last winter's sell-off and consolidating those gains.  What we don't know yet is whether this is a consolidation based mostly on time or if at some point do we have another step downward in the economy.  Right now I'd argue time because I think the economy is doing too well but we'll have to see what the evidence shows in the coming weeks.  In this regard, this earnings season may be the most important we've seen in years.

2nd, if I'm correct and longer term interest rates are headed to the 4% range then suddenly stocks face some real competition from bonds.  Now this is something that markets can adjust to but it may take some time.  You'll see lots of people talking in the financial press about how rates at these levels are going to kill the economy.  Just remember this.  I cut my teeth in this business in years where interest rates were much higher than what we have now.  When I started you could get 8% in money markets!  The economy and stocks managed to move higher in those years and there's no reason to think we can't adjust to an environment where the cost of money has moved up.  However, it may take time for us to get there.

Finally we may be in an environment where what has worked for the last few years may not be what takes us forward into the future.  2019 may also be a bit more economically challenging than Wall Street thinks right now.  I want to think about these last two points for a bit and we'll revisit them at a later date.


Sleep Well Dad

Richard Joseph English 

Born: April 8, 1934

Graduate of Indiana University School of Law and admitted to practice before the Indiana Bar Circa 1958.

Admitted to practice before the Ultimate Supreme Bar, October 12, 2008.

Sleep well Dad and God Bless.

Thursday, October 11, 2018

Best Quote I've Seen In A Long Time!

Best overall quote I've seen in a long time comes from JC. Parets

What could go wrong? EVERYTHING.
How low can it go? Way lower than you think.
Where is the bottom? I have no idea and no one else does either.

If You're Worried.

If the markets have you a bit more worried right now then I'm going to reprint part of of what I wrote in two posts earlier this year.  The 1st excerpt is from "What Do We Need to Accept About the Market in 2018":

Accept that things may have changed.  Accept that there's a higher probability that stocks are not going to go straight up like we saw last year.  Accept that there's a higher probability of more volatility and that stocks may have seen there highs if not for the year then at least for some period of time back in January.  Accept that consolidation of gains is part of the process and just because we are not going up right now doesn't necessarily mean the bull market is over for stocks.  Learn to live with days where the major indices can drop 2-3%.  Again understand this is part of the process and the press will play this up.  A 500 point drop or even a 1,000 point drop today in the Dow Jones Industrial Average* gets a lot of headlines but doesn't mean what it once did in terms of percentage gains or losses.

Accept that you could take a look at your portfolio some time this year and see it down 10-15% or perhaps even more.  A 10-15% decline is historically what has been considered normal volatility for stocks.  It's been so long since we've seen that sort of drop that investors could easily be spooked if it should return or if we see something worse.  A decline of that magnitude would not necessarily mean the bull market is over or that we are necessarily going to see a larger drop in stocks.  Like everything else it would need to be viewed in the context of how it occurred.  Just know this is possible and a much more probable event given the current trading environment.

Accept that things may be changing in terms of market leadership.  We may not know if that's the case for many months.  If so then there should be time to address such a change unless we get some unexpected event over the transom.

Use market volatility to your advantage to either rebalance or reposition your portfolio if necessary.

Know what you own or how your portfolio is set up.  If the current volatility and more corrective conditions are keeping you up at night then you need to review your current risk/reward criteria.  If you're one of my clients then we need to discuss this.  If not, then talk to your financial advisor.  If you don't use one then honestly look yourself in the mirror or hire me!

Finally I would also say that you should take care that you're comfortable with where you have money invested that you might need in the next 6-18 months.  Choppy markets have a habit of seeing the most volatility when you might need the money the most.  For example, if you have a child entering college this fall and you've been able to save enough to pay for your share of the bill, then you might want to make sure that at least the first semester's tuition is invested in something right now that won't necessarily be subject to a market correction.  Of course this is an example and the situation will vary according to each person's needs.  An easy way to evaluate this is ask yourself in terms of money you might need in the short term what hurts more.  Would it bother you more to miss a 10% move up with money you might need soon or would the opposite hurt most?  If losing that 10% stings the most then think about getting more defensive with that money.

The 2nd is from something I wrote back at the beginning of the year as part of my winter letter to clients:

Given how far we’ve come it’s reasonable to ask clients if anything has changed. The easiest way to start is with this exercise:  Open your end of year account statements, or your January statements assuming this rally holds into the end of the month.  Take that account value and lop off 10%.  Assume that is the minimum amount you could see your assets decline at some point in the next 12-18 months.  If your account is worth $200,000 assume it could be worth $180,000.  If it’s worth a million then assume at some point you see at a minimum $900,000.  Remember again, this is what is considered normal in even a bull market!  These may be hard numbers to look at for some if these could cause you to have trouble sleeping at night then we should talk.  I of course do not know when the next decline might occur.  Perhaps it has already started or we may still need to see much more of this advance before prices move lower, just know that it will come just like winter is a season, and then it will likely pass into spring.

If you're worried give us a call.  If you're not a client give us a call anyway.  Sometimes a 2nd opinion can't hurt.  Hope all of this helps if you're feeling a little anxious about things.  

*Long ETFs related to the S&P 500 in client and personal accounts.

Wednesday, October 10, 2018

A Final Note On Today's Decline

The S&P 500 closed down about 3.5% today and other major market indices have seen similar or even larger declines.   The S&P is now down a bit over 5% from its most recent highs.  Remember those mirage like characteristics of the underlying components in this index we've recently discussed.  Here's some numbers on that from CNBC today.  60% of the S&P are down over 10% right now and 20% of the index are down over 20%.  

All that being said, it's important to keep the big picture in perspective.  The S&P is still up about 7% for the year, even if there's been an underlying decline in the various components that make it up.  So far what we've done is knock off the run up we saw in August and September.  Also The S&P 500 is still up over 50% in price since it's early 2016 lows.  

Something to think about while we lick our wounds from today's action.

*Long ETFs related to the S&P 500 in client and personal accounts.

Levels {Note: This Post Has Been Updated!}

I was asked yesterday what percentage declines the levels that I showed on that chart of the S&P 500's ETF SPY equated to.  Here goes.

If we see a decline to that next level of resistance {horizontal green line} then you would see a further decline of about 2.5% from yesterday and a decline of abut 4.25% from our most recent highs.  {Updated as of today's close:  We broke through this level this afternoon.}

If we see a decline to the 200 day moving average {the blue trend line running across about the middle of the chart} then you would have a decline of about 4.25% from yesterday and about a 6% decline from our most recent highs.   {Updated as of today's close:  We closed about 3 points from this level today.

A decline to the longer term trend line going back to early 2016 {pink line} would be a loss of about 5.3% and a decline of just slightly over 7% from the most recent highs. {Updated as of today's close" We closed about 6 points from this level today.}

Finally while I didn't highlight it yesterday that horizontal red line across the very bottom of the chart represents the lows we saw last winter.  If we were to see a decline down to that level then you would see a decline of approximately 11% from yesterday and about 13% from the most recent highs.

Not saying any of this is going to occur, just letting you know what the losses would represent on a percentage basis.  None of this would be anything more than a run of the mill correction by market standards.

*Long ETFs related to the S&P 500 in client and personal accounts.

**Charts updated at the end of trading today to reflect today's decline.

Tuesday, October 09, 2018

Chart Talk {10.09.18}

So rising interest rates have given the stock market a bit of a rough ride in the past week or so.  Above we've tried to lay out the different reference points we will be watching if this market sell off morphs into something a bit more dramatic.  You can double-click on the chart to make it larger if you want to get a better view of things.  Here are a few thoughts on what we've been seeing.

I discussed months ago in a post called "The Highest Probability Scenario For the Rest of the Year" that I felt there was a very high likelihood that stocks would more or less stall in place.  This is what I said back then:

"Under this scenario we think you could see something like this.  Stocks spend much of the year consolidating their gains from the past two years.  The positives of underlying economic growth we are seeing and gains from the tax cuts runs into the worries of higher stock valuations, higher interest rates and higher inflation.  Also as the year ages we start adding political risk into the equation from the upcoming mid-term congressional elections.  In this scenario, stocks spend a better part of the spring finding a level of equilibrium from which they can again start to advance.  Markets then manage a stair step rally into early summer that potentially takes us back to the old highs set in January.  From there markets proceed to give most or all of that rally back, potentially retesting the spring lows.  Once we get into the fall and once the outcome of the elections are priced into stocks there is a possibility we again attack the old highs from January.  Under this scenario we see stocks showing price appreciation of 7-10% this year.  Now obviously it is unlikely the year will pan out exactly as I've drawn the lines.  They are a hypothetical general illustration.  Still it seems there is a very high probability that a scenario similar to what we've shown above is what we'll have seen once 2018 winds down."   

Now it hasn't panned out exactly like we hypothesized back then.  There was no further downside to the market over the summer and we actually made new highs in the S&P 500 and other major US indices have gone higher as well.  But this rise has been something of a mirage.  Market breadth, that is the number of stocks advancing versus those declining has been retreating most of the summer.  Stock leadership has basically been confined to a small group of well known technology and health care names.  Meanwhile overseas, international markets are struggling to break even for the year.  Many, like emerging markets are down nearly double digits in 2018.  David Rosenberg over on his twitter feed recently noted that 17% of the S&P 500 is down 20% or more from their 52-week highs; fully 43% is down at least 10%.  These are the sort of statistics that have historically been found worrisome.

I have always thought that the period prior to the mid-term elections would bring about some market uncertainty.  The market's expectations as discussed last week is for the Democrats to take back control of the House.  I've thought all along that while this is likely, it may not be as dramatic as the press has hoped.  Markets, however, do not like uncertainty and there is now a higher probability for this to weigh on markets until the results are in.

Now as to those interest rates, I think what's been bothering the markets is not so much the advance but how rapidly rates have risen this fall.  Stocks are going to need to find some area of equilibrium where they can come to grips with not only where interest rates are now but where they might be a year from now.  Currently, the market's expectation is for at least three interest rate increases by the Federal Reserve next year.  Taking that data into account you can see how longer term rates could rise to around 4% next year, something we also discussed last week.  4% money is serious competition for equities.

Before you read more into this article than is intended, let me say this.  I think there is a strong possibility that major market stock indices will advance 7-10% by the end of the year on a total return basis.  Assuming we don't have something unexpected show up I think the economy is strong enough to weather higher rates and once we get beyond this period of cyclical weakness stocks could take us up a leg higher as the animal spirits get back into the game for the traditional end of the year push.  I've thought most of the summer that there was the possibility for a period of market weakness and now maybe it's here.  Stocks don't always go higher and sometimes you can get a correction by time as much as price.

Not so sure yet what to make of 2019 but that's a topic for another time.

Chart is from although the annotations are mine.

Long ETFs related to the S&P 500 in client and personal accounts.

Friday, October 05, 2018

Interest Rates

If you want to know why the markets sold off pretty hard yesterday then look above at the primary culprit.  Here I'm showing a chart representing the current interest rate on the 10-year US treasury bond. Interest rates have taken a big push higher all year but have really taken a considerable move higher in the past few weeks.  We're now back at interest rate levels we haven't seen in years.  We've gone from roughly 2.90% in early September to over 3.20% now.  Folks that's a pretty big move in a short period of time and stocks are going to notice this.  The reason this is important is that risk free money {and despite all you've heard investors still consider US debt pretty solid} now yields you north of 3% and that's competition for stocks.

Now that doesn't mean that stock prices can't go higher in the coming months.  I remember many years when rates were higher than now and stocks managed to advance.  However, it does present a headwind that wasn't in the picture a year ago.  Savers can rejoice though because they can now actually get paid something on their cash.

Here's what those two pink lines on the chart mean and both indicate a higher probability that rates will grind higher in the coming months.  The trend line that slopes downward left to right on the chart  is one that traces part of the multi-decade downward decline in rates that's been in place since the 1980s.  That trend was broken at the beginning of this year and sure enough rates have climbed through all of 2018.  The horizontal line traces out one of the next major levels of resistance for rates.  The trend of rates moving up and the likelihood of the Federal Reserve raising interest rates at least two times in 2019 means there is a higher probability that interest rates will move closer to 4% on the 10-year bond in the coming months.  Not saying that will happen, just that there's a higher probability that sort of move could occur.

Chart is from although the annotations are mine.  Also you can double-click on the chart to make it larger.

Back Tuesday.