Labor Day

Well now we head into the Labor Day weekend.  Trading on Wall Street will be light.  Investors are quietly amazed that in the midst of the situation in Korea and the aftermaths of hurricane Harvey that the stock market has basically held its own.  Some of these factors may weigh in more heavily when the investment world gets back to work next week, or perhaps markets continue to ignore events and things continue as they have been.  The economy is doing pretty well right now and corporate earnings have been excellent.  Perhaps these things matter more than external events.  Only time will tell.

So far if we've been having a correction it has been by time and not price.  By that I mean stock prices have been largely locked in a trading range since early June.  Right now we seem to be testing the upper reaches of that range across a broad number of indices.  Stocks are overbought by our work but none of that seems to matter right now. 

Whatever issues await us in the coming months will have to wait now until after the holiday.  Nobody will care until next week.  We're going to say adios now for awhile as well.  There's a beach with my name on as well and a drive back to Chicago over the holiday.  The next two weeks are hectic ones for me.  I have some business travel coming up and a few client meetings as well.  We'll try to post next Wednesday and Thursday and keep to that same schedule the week after.  Then, hopefully, we'll be back to a more or less regular schedule.

Happy Labor Day everybody and enjoy the last rose of summer!

P.S.  Go Irish!

In The Things Are Getting Better Department

From ZeroHedge:

"In a surprise for traders - and the Fed - moments ago the BEA {Bureau of Economic Analysis} reported that after its first revision of Q2 GDP (a quarter which ended two months ago), the initial estimate of 2.6% was revised to 3.0%, beating expectations of a 2.7% print, and the highest annualized growth rate since Q1 2015. The annualized Q2 GDP was more than double the first quarter number which as a reminder printed at 1.2%....while most components were revised higher in the latest release....the biggest contributor to the upward revision was Personal Spending which surged 3.3% in Q2, after rising 1.9% in Q1, and contributing 2.28% of the bottom GDP line."

My comment:  Looks like the consumer is finally opening his wallet.  Strong economies beget stronger confidence and consumer spending.  Of course I've long thought that the consumer has been spending money, they've just not been doing it in ways that could be measured by using traditional metrics.  Those pundits that keep screeching gloom and doom are simply not looking at the numbers or talking to the man on the street as he's spending money at the checkout counter.

Link: ZeroHedge: "Us 2nd Quarter GDP Revised Sharply Higher to 3%, Best In Two Years"

In The Short Run....

In the short run I am wrong!  Market's have rallied hard into the noon hour to be up to flattish across the board.  We'll have to see what the rest of the day and the next few weeks bring.  Remember folks I am not a trader.

Thoughts {08.29.17}

So I thought I would have some time this week to put together a longer piece regarding the state of the markets.  Events have conspired to make that unlikely for now but I wanted to share in brief some of what I'm thinking and seeing.

First off, stocks are going to open down today by a minimum of at least half a percent.  Yesterday the North Korean's fired a missile over Japan.  That event has already notched up the tensions in a region that doesn't need any more provocative acts.  {For my analysis of the Korean situation see here.} Second, we are just beginning get a better picture of the potential economic damage that hurricane Harvey is causing in Texas.  The short answer there is while the event looks to be more localized than what transpired after hurricane Katrina, the damage is still going to be extensive.  The good news from an economic perspective is that we aren't hearing about extensive damage to the region's oil and gas industries, but the flooding is biblical as the rain continues unabated.  Some areas in Texas have received nearly 40 inches of rain since the storm made landfall over the weekend.    Either one of these events would have given stocks a reason to pause.  Both are a headwind to much to ignore in the short run. 

Probability would seem to indicate at a minimum here that stocks have a greater potential to remain range bound for some time or perhaps give back some of this summer's gains as we not only digest these events or at least wait and see what the response is to each.  Being the last week of the summer doesn't help and September is statistically one of the weakest months of the year for markets to advance.

I am not attempting to make a longer term call on stocks and for all I know we could see a turn around and markets could head higher.  That sort of thing would truly confound most of us that watch the markets for a living!  It would also say something about the staying power of the current bull market if it were to occur.  However, I am saying that from my perch, the short-term headwinds give markets enough of a reason to at a minimum suggest a pause is in order.  If I had to make a guess on the length of this period, then I would say we could mark time or even decline a bit between now and sometime in September.  That's assuming the news doesn't get worse and remember this is only a guess.

Markets need a pause now to regroup.  Hopefully, if it occurs at all, we will be able to find value in ETFs we find attractive for our clients.  

Chart Talk {08.24.17-Canary In A Coal Mine?}

So while other indices are close to new highs the iShares Russell 2000 ETF {symbol IWM} is down about 6% as of yesterday's close.  Investors watch this index because it represents small-cap stocks that typically do most of their business in the US, thus some see it as a gauge of economic health.  Some also view it as a tell for possible future market direction as often the Russell starts to weaken before the rest of the market.

If that's the case and if the Russell is currently acting as a canary in the coal mine then it's not saying anything great.  It has totally failed to participate in this year's rally as it's mostly traded in the range I've highlighted on the chart above.  It's also currently down about 6% for the year as of this writing.  Also a bit worrisome is that it's currently trading below it's 150 day moving average.  Trading below that average often is indicative of a change in trend.

Now in today's more globally integrated economy perhaps the Russell is less of a tell than it once was.  It also seems to be rallying this week as other indices have been weak.  Finally there's a theory going around that the Russell is a proxy for tax reform and it's fortunes right now are tied more to that possibility than its relationship to the overall economy.  However,  it is something to watch and one more worrisome tally to currently mark as we go forward into the fall.

Next week will be slow in the markets.  It's the last rose of summer.  Wall Streeters will be doing one final fling at the beach.  It will therefore be a good time to try and tie together the pieces of the charts we've shown this week into something more comprehensive in the days before Labor Day.  I'll be taking some time off next week as well so look for that post about mid-week.  Then we'll be back after Labor Day with a more normal schedule.

Chart is from Tradingview.com.  The annotations are mine.

*Long a small legacy position of IWM in certain client accounts and in a few family accounts. 

Chart Talk {08.23.17}

From "Abnormal Returns" via "The Atlas Investor".  People that track the internals of the market like me love rallies where there is a broad participation of stocks.  By that I mean where many stocks comprising an average or index are going up along with the market.  By contrast, it is a worrying sign when fewer and fewer stocks participate in a rally.  We are seeing fewer stocks helping the averages along right now.  That is something for us to keep watching and some could see it as a clue that the rally we've seen the past year or so is perhaps getting long in the tooth.

More on this soon.

Chart Talk {08.22.17)

I wrote the other day about how far back in trading history you had to go to find a decline of greater than 10%.  I put this chart up today to give you some perspective of how far back you have to go to have seen the markets go through that sort of pain.  I've circled the relevant periods on the chart of the S&P 500's ETF SPY for reference.  Blue circles show the decline, the red ones show our current advance through our most recent high.  Chart comes to us from Tradingview.com, although the annotations are mine.  You can also double-click on the chart to expand it if you have trouble seeing what's on this page.

Folks we're working now on our 20th month where we've seen basically only a few bumps on the road to higher prices.  The "Brexit" shock in July of last year was only a bit over 6% before we whooshed straight higher.  The uncertainty around our elections last November knocked us back only a little over 5%.  

But that's the past and we as investors care about what's ahead even if we use past trading history as reference.  We'll take a deeper dive into what the charts might be saying in the next few days.  Today though is a day to see where we've been, and, where we've been has been marvelous. 

*Long ETFs related to the S&P 500 in both clients and personal accounts.  Currently short SPY and ETFs related to the S&P 500 in a personal account related to an options strategy not employed in client accounts.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

How Might North Korea Affect Your Investments?

North Korea. It seems to be on everyone’s mind these days and more than a few people are concerned about where the situation is going. Recently, North Korea has been ramping up their missile tests, and bragging about their nuclear program. What else has been going on with North Korea and what could it potentially mean for your investments? Given the level of client questions and investor concerns, I decided to spend some time on what's going on over there and how different situations could impact your investments in the markets.

North Korea, In Brief

North Korea’s missile muscle flexing and provocative language are making a tense situation on the Korean peninsula worse. The United Nations has slapped extreme sanctions on North Korea that could drastically affect their economy. Much of the current goings on are centered around verbal sparring between President Trump and North Korea. As just one example, North Korea has declared that they are considering an attack on the U.S. territory of Guam and Trump has promised “fire and fury like the world has never seen”^[1] if North Korea threatens the U.S. again.

The recent events have yet to fall into a full bore crisis, but things are tense enough that any further deterioration has the potential to impact the markets. The timing doesn’t help, as we are right in the middle of the August vacation season for Wall Street. This means the main decision makers on Wall Street trading desks could possibly be away at the beach should a political or military event occur between now and Labor Day. While any event in Korea could possibly result in negative volatility for stocks, it could be magnified if some of the primary investment traders are away from their posts between now and then. However, regardless of the timing, stocks would face a higher probability of declining during such a crisis and how markets would ultimately fare would likely depend on the outcome.

Uncertainty And The Markets

Markets hate uncertainty. War or any sort of hostile military action ranks just as high as a financial crisis as the most uncertain type of event investors could face. While we can only guess at how the North Korea situation will play out, here are some possible scenarios and what the market’s reaction could be. Here they are, in order of what I think could likely occur:

1. Status Quo Reigns

The first and most likely scenario is that we stay in a status quo period where nothing of significance happens and North Korea’s provocations are not sufficient to provoke an American military response. If this is where things stay, stocks will probably return to continue taking their cues from domestic economic and political issues.

I've noted in the past that U.S. economic data is currently quite positive and corporate earnings are growing at some of their best rates in years. Also while many worry that the President's economic agenda may have stalled, his Administration is still seen as business-friendly. All of these factors are a positive anchor for stocks. Should this international problem be diffused or put on the back burner, then stocks will continue on a trajectory influenced by these positive elements.

However, stocks have already had quite a run this year and the markets are currently overbought. Stocks could easily enter the summer doldrums and do nothing until later in the year, completely independent of the Korean issue. August through early October are statistically and traditionally weak periods for equities.

2. We Experience a Military Event

Possible situation number two is that things in Korea escalate and military action from the U.S. and our allies is required. Wars or military action tend to historically show two distinct responses from the markets.

First, there is a period of tension as the crisis escalates to the point where military action is provoked.  This has historically resulted in a negative reaction from stocks and a market decline. It is possible that we could experience a 5-20% correction in stocks depending on the severity and length of the crisis. This decline could be swift, similar to what we experienced after the September 11th events, or it could take months to pan out, akin to what occurred after Iraq invaded Kuwait back in 1990.

Second, the markets could experience a violent counter-rally to the upside once the likely outcome of the military action is recognized. In both the 1990 and 2001 events, stocks experienced double-digit rallies after the results of both events became known. This type of response assumes that the military action is short-term with a positive outcome for our side.   Anything that suggests a longer military campaign or the possibility of events leaching out geographically further than North Korea would change this prediction.

3.  North Korea Lashes Out

In this low-probability scenario, North Korea attacks South Korea, an ally, or some territory or part of the United States. The reason it’s unlikely to occur is because these types of actions would sign the death warrant for the North Korean ruling establishment. Regardless of its probability, we should not discount the possibility, however low the likelihood of this sort of event might be. 

Any of these actions would likely be bad for stocks initially. A nuclear attack by North Korea on the U.S. or one of our allies would lead to a really bad day for stocks. There is no way to find the silver lining in the case of such a bombing because the devastation would be biblical and the economic fallout dramatic.  Stocks would likely rally once the results from a non-nuclear, contained attack become known, especially if the loss of life was low and the current North Korean regime was removed.

I want to stress again that the probability of North Korea launching a nuclear missile is low and the probability of them accurately hitting a target would probably be even lower given what we know of their technology and likely military defenses against such an event.  I mention it here only because a low probability does not equate to zero probability.  Our approach to investing means that it is prudent to weigh the results and likelihood of the unthinkable even if we believe the chances of the unthinkable happen are statistically very low.

Control What You Can

Unfortunately, we could make predictions all day long and still have no idea where we will be in the future. There are no tea leaves or magic eight balls that will tell us if this is just more blustering from the North Koreans or something with the potential to become significantly worse. Should this just be more of the same then the market will likely keep focusing on domestic economic issues, the same things we've been looking at for months. Stocks may rise or fall depending on how the market feels about the economy,  but that is different than a sudden military escalation. In short, North Korea could become a major crisis tomorrow or never.

What should investors do? Investors need to be comfortable with their asset allocation and investment positioning. Being comfortable with how you are invested and understanding that a certain amount of volatility is a part of the normal process should help investors ride out any short-term declines that might arise out of a crisis. This is especially true if the crisis is relatively short-lived and ultimately has little economic impact. If you are concerned about your portfolio and how it will fare in the event of a crisis or if you are new to our process and want to set up a game plan for your money, you are welcome to call my office at 708.488.0115 or email us at lumencapital@hotmail.com.

About Chris

Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters.   We also manage a private partnership currently closed to outside investors.   Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing him at lumencapital@hotmail.com.

Back early next week.

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^[1] http://www.cnn.com/2017/08/08/politics/north-korea-missile-ready-nuclear-weapons/index.html?adkey=bn

Just Sayin......

You have to go back to September-October of last year to find a period when the markets have corrected more than 5%.

You have to go back to early 2016 to find a period when the markets have corrected more than 10%.

You have to go back to 2011 to find a period when the markets have seen a correction approaching close to 20%.  

There have been no corrections worse than 20% by our analysis since we began this current bull market in 2009.  

It is August and most investors are either enjoying the last few weeks of summer, getting the kids ready to start the new school year in most places or thinking about many things other than the action of the stock market.  Optimism is high.  Complacency seems higher.  

Measures of investment concern such as the VIXX are near all time lows.

The economy is percolating along, not to hot, not to cold.  Markets, however, have been range bound and listless since mid-July.

North Korea threatens conflagration, investors yawn.

President Trump seems intent to seem as "un-Presidential" as possible via his twitter account.  The markets pay him no mind.

Stock valuations are elevated.

And did I mention that markets have been range bound and listless since mid-July.

Not making any predictions.  Just sayin........

Thoughts {08.16.17}

The President has been front and center these past few days and he has been criticized by many for his response to the riots in Charlotte over the past weekend.  The President seems intent on making as many political enemies as possible and so far stocks have so far shrugged off most of what comes out of the his mouth, but I wonder if that will be the case forever.  The Democrats would dearly love to be rid of a President Trump and I think increasingly so would many establishment Republicans.  I wouldn't be surprised if there isn't some political attempt at that once the Republicans see his political use as waning or if they become concerned about electoral fallout in next year's Congressional elections.  This could become a political crisis if resistance to the President shifts from the fringes to more institutional political elements in the Capital.  Stocks could, in that scenario, be in for a bit of a rough go.  I'm not saying this is going to happen and I'm not trying to make a political statement.  I'm simply looking at what could happen to stocks if the political blowback to the President intensifies.

More than 3,000 people default on their student loans every day.  Here's what happens if you do this.

Look for an update on my thoughts about the Korean situation coming soon!

Thoughts {08.10.17}

War of words keeps ratcheting up between the US and North Korea as that country continues to make threats against the American territory of Guam.  Everybody is now focused on this crisis which in my mind now means that the markets and investors are starting to game the probabilities into the system.  Stocks are down two days in a row now and looking to be down a third at least at the open.  However, we have not seen a serious break yet so perhaps markets see more bark than bite in the rhetoric.  The play right now belongs to the North Koreans and we'll have to see what is their next move.  

Corporate earnings continue to post very good numbers.  The year over year increase is something like 10% right now.  On average companies have been basically positive about  at least the upcoming next few quarters.  I've said this before but these sort of numbers are not indicative of a slowing economy and anybody trying to argue that things aren't looking good from an overall economic perspective isn't looking at earnings.

Go read "Three Days that Changed Modern Life".  It's about three events each that happened on different August 9ths in 1945, 1974 and 1995.  Many will get what happened on August 9, 1945.  Some maybe recall the events of 1974 but very few will understand the reference to 1995, even though it may have the most profound societal implications for the modern world.

The markets are all down on average about half a percent as I'm putting the finishing touches on this post so maybe the events in Asia are starting to have a greater impact then I initially thought.  However, I'd also note that markets have had an extremely good run of it this year.  In particular we've seen nice returns since the beginning of summer.  Markets are overbought and while the concerns over North Korea are real they could also be just an excuse for folks to take some profits off the table.  Time will tell.

Back early next week. 

North Korea

I've been asked today by more than a few people about North Korea and their nuclear program.  It has kept me on the phone more today than usual for a slow trading day in August and it kept me from updating as soon as I might have liked.  Since I'm running out of time today I'll lay out a few outline thoughts and then try and flesh this out sometime over the next few days.  I won't be posting tomorrow as I will be traveling.  Here goes in brief.

North Korean missile tests and provocative language are making a tense situation on the Korean peninsula worse.  Should this deteriorate then it would qualify as the sort of political crisis or event, seemingly coming out of nowhere that could catch markets by surprise.

A deteriorating situation has a high probability of having a negative impact on markets.  Markets hate uncertainty.  War or some sort of hostile military action ranks right up there as a so called "black swan" event.  The likelihood of a significantly negative market reaction sharply increases if in some manner, shape or form North Korea should somehow be willing and able to attack the United States.

The problem right now is that we have no idea where the future is going to lead us in this situation.  There are no current tea leaves that will tell us if this is just more blustering from the North Koreans or something with the potential to become significantly worse.  Should this just be more of the same then the market will likely continue focusing more on domestic economic issues, the same things we've been looking at for months.  Stocks may rise or fall depending on how it is viewing the economy but that is different than a sudden military escalation.  In short, North Korea could become a major crisis tomorrow or never.

Investors need to be comfortable with their asset allocation and investment positioning.  If they are ok with how they are invested then they should be able to ride out any increase in volatility coming out of any crisis.  This is especially true if the crisis is relatively short-lived and ultimately has little economic impact.  Underlying economic conditions are quite positive right now as we've detailed in the past.

Investors concerned with their portfolio's positioning should we see this situation deteriorate need to think about changing their asset allocation or putting in place perhaps a more defensive posture towards the markets.

Back Thursday.

Something Fun

So it's a Monday in the middle of August with little news out there to comment on so it's time for something fun.  Well, something fun if you into history.  Here from the website Visual Capitalist {Posted from Sasha Trubetskoy's original work} is a map of the ancient Roman road system in transit form.  That is when you're looking at this, you're reading a roadmap just like you would the subway system in New York or Chicago though hopefully with less graffiti.  Why is this interesting you say?  Read below:

"At the height of the Roman Empire, there were approximately 250,000 miles (400,000 km) of roads, stretching from Northern England to Egypt and beyond. This impressive network is what allowed Rome to exercise control and communicate effectively over such a large territory.....

.....London, Paris, Barcelona, and countless other major cities sprang from Roman settlements along the road network, and even as Europe descended into the Dark Ages (476-800 CE), Roman roads remained as one of few functioning modes of movement and communication. A recent study even points out that proximity to that foundational network of roads even has a strong correlation with economic activity today.

Beyond mere curiosity or entertainment, looking back at Roman ingenuity allows us to see the impact their road network had on today’s world. That enduring influence is one of the reasons ancient Rome still fascinates us to this day.}

None of this will make you any money today but I thought we needed a break from the usual routine here.  Besides I thought this was cool and frankly wanted to keep the map for future review.  We often think of people in earlier times as superstitious, cruel and lacking in technology, but when you look back on ancient civilizations like Rome or China you can tell they were pretty ingenious in using what they had and taking their technologies to the absolute limits based on what they knew.

Back tomorrow.  Also you can double-click on the map to make it larger.

Link:  Visual Capitalist:  "The Roman Empire's Roads in Transit Map Form."

August Is Not A Great Month For Stocks

We have entered now traditionally the weakest season for stocks.  August through early October has often seen stocks behave at their worst.  Most investors, if they were asked, would probably say that October is the worst month.  Data points to September actually been the bleakest time for equities.  However,  Jeff Hirsch over at the Almanac Trader points out that August is the worst month in post election years. 

Hirsch goes on to list some of the reasons that has made August so bad.  He notes economic turmoil in 1987 and  Iraq's invasion of Kuwait in 1990 as another example of events that sent stocks down.  We could point to others but I think a major factor has to be that in August the financial world retires to wherever their little spit of vacation nirvana happens to be, and the "A" team is usually not manning the trading desks when things turn sour.  Since often these events appear out of the blue, the first reaction of those manning the battle stations is likely to be to try and sell.  

Now of course nobody knows what's going to happen this month in regards to something arriving unexpected.  However, there's a list of things that could turn ugly quickly this month if events took a wrong turn.  Korea and Venezuela come out on top of the list and there's always the possibility of a slip-up in the mid-east.  

Again, that's not to say something like this is about to occur and there are plenty of Augusts where stocks did nothing or actually went up.  But I have always been a big believer in market seasonality and I think it is vital to understand where we are in the yearly cycle in order to put some context on an event should it occur.  That may be even more important in a market like we're seeing now that has rallied hard in the past few months and is currently overbought.

Back Monday

Link:  Almanac Trader-"August, Worst Month of Post-Election Year"

Chart Talk {08.01.17}

Here's a chart of the Nasdaq composite index via it's ETF ONEQ.  Again, we often focus on an index's ETF because that is something we can actually trade.  The Nasdaq had a bit of a sell-off last week and that sort of thing can be worrisome.  However, right now the index is trending higher, although it is overbought by our work.  

Nasdaq is one of the best performing indices this year, up currently about 18% in 2017 and up nearly 50% since it's lows back in February of 2016.

Chart is from Tradingview.com.

*Long ETFs related to the Nasdaq in both client and personal accounts. We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.