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While there are thousands of opinions on the various markets, stocks, commodities, private equity, etc., the real “trick” is to decide whose opinions are worth listening to.
Two quotes from one of the best with his ability to communicate his market message.
"There are no relationships or equations that always work"
"Know thyself and know thy foibles" and make sure your facts are right”
Regarding that second quote, he went on to further say:
“At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of ‘the crowd’ are tremendously important psychological influences on you. It takes a strong, self-confident, emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming that you are both mad and wrong.”
I like to keep thoughts like that in mind when my theory and market strategy is being tested by the headlines, media and market pundits.
Secular Bull Market - A look back
There are times when I go back and take a look at my older blog posts, and articles to see where I have been right and where I have been wrong to help make me a better investor.
While I have given many examples of why we are in a secular bull market, my initial message was and is a simple one.
Every time the stock market has broken decisively above the top side of a 10+ years "range-bound" market, it has ALWAYS been the dawn of a new secular bull market. I maintain that this time is no different.
Take note of the mid cycle low in 1974 during that base building pattern in the '66 to '82 time frame.
Fast forward to the present, and it is easy to see what I have mentioned and displayed in other missives during the last 3+ years. The market once again has decisively broken out of a long trading range. The DJIA and the S & P was range bound from 2000 to 2012 until that March 2013 breakout.
In addition, both the DJIA (16302.77) and the DJ Transports (7515.18) traded to new all-time highs. This was accompanied by the index I refer to most often, the S & P 500, which broke and closed at 1570, above the 1550 level which had capped that index for 13 years.
Now, take a look at the mid cycle low that was put in during 2008, before the breakout in 2013 occurred, and where we are today. The similarities between the earlier "base" period of '66-82 and the latest one are profound.
After the 1982 breakout the market went on a journey over an 18 year period that took the S & P from 138 to 1550. If the market responds in the same fashion as the last secular bull, we are in the early stages of a large percentage move that has plenty of room to run. I remember the doubters in 1982, and I hear the same cries from the crowd that continues to disbelieve the present market action now. Instead of reacting to the price action, many are still clinging on to their arguments for disaster. So just as we saw in 1982 and beyond, many are still on the sidelines in denial or outright bearish.
Those that refused to acknowledge the “breakout” in U.S Equities as powerful as it was, refusing to look at history, are undeniably the folks that are suggesting that “this time is different”.
Back in July 2014 I penned a Secular Bull Story Update which took a look at where the market stood then and where I thought the S & P would be at the end of 2014 and mid 2015.
The chart from that missive
Those thoughts played out pretty well as I concluded that the earnings growth would continue and the PE ratio would remain around 17-18. In fact that is what happened and the “bull case” played out . The S & P ended last year at 2058, above the base case (2006), and just below the Bull case (2124) scenarios that were laid out.
The 2015 2nd Qtr target of 2142 using the bullish view, was fairly close to
where the S & P traded here in mid July at 2129. As they say, “good enough for government work”.
I’m not taking any bows for that, it’s nice, but as they say, that is “history”. All of us now want to try and put together thoughts and ideas of where the market may be headed to formulate a strategy going forward.
Secular Bull Market - A look ahead
As we have witnessed, energy earnings, or lack thereof, have been discussed ad nauseum. Back in January, I noted that all market participants would have to reconcile what impact that would have on the earnings picture to formulate their strategy going forward. Now the strength of the USD has entered the earnings picture as well. In my case it has made me pause, reflect on all of the conflicting issues and wrestle with the possible outcomes. I did just that before I could decide on a confident outline to allow me to put forth a 6 month (end of ‘15), and 12 month (mid ‘16) projections.
The “Base”, “Bull” and Bear cases for YE 2015 and Mid 2016
I’ll start with an explanation of the “base case” scenario.
The resulting wider range from just under 1900 to 2140 is appropriate as higher market volatility would be anticipated, along with an abundance of “headlines”. To reach this base case range, the U.S. economy grows about 2-3% for the year, earnings barely increase and headline risks (geopolitical, global economy, and anxious moments over the path of the Fed) are plentiful. The underlying strength of the economy and positive market trend should allow the market to hold near a 16x P/E level during the sharp over reaction periods and expand somewhat in saner moments.
The “bullish case”.
My thoughts remain the same as last year on a market multiple between 17 -18x. The economists and analysts that I confer with to assist with these type of forecasts suggest that the forward looking earnings picture as of July 1st comes in around $126. Then looking out to 2016 they edge higher to the $133 level. That equates to about an 6% increase.
Looking ahead, that yields a range for the S & P between 2,260 and 2,395.
My assumptions for this scenario to play out
I’ll throw the Bears a bone and suggest that if all of what I mentioned with Europe and China falls apart, and on top of that, there is an earnings recession, the S & P can trade down 20% from here and teeter on the edge of a cyclical bear market. Also, if investors fear the Fed has gotten monetary policy incorrect, they will be less willing to pay up for stock
valuations. In that scenario, P/E multiples would contract, perhaps to 15 or lower.
From these levels that would take the average down to around 1815 or so.
Remembering that this is a “bone”, it should be treated as such, pushed to the side of the plate with the thought of throwing it in the trash at some point in time.
Of course when putting together your plan and strategy, all of this has to be viewed as a “dynamic” situation. On the lookout at all times for the issues that could change that plan.
While It may be nice to to play around with these projections and “ranges”, the takeaway from all of this is that I do expect the Bull market to continue. Taking the S & P to new highs as time marches on.
So, as I sit here today, I will again lean to the bullish case, keeping some of those ‘issues “ in the back of my mind. That suggests I will be looking for a year end S & P that will fall between the Base case and Bull case zones, my guess around 2200.
I will take the same approach when looking ahead to mid 2016, S & P 2260 or so would be my target. Energy and the USD will have a say in all of this. Lets see what develops.
Please remember that my bullish scenario does not imply a call for ‘all In”. Instead it is compilation of the thoughts and ideas that sets the important “backdrop” going forward, and that will be my guide.
The bottom line; this is the plan that I have set forth. Unless an exogenous event comes along to change that “plan”, I intend to stay focused and not allow the “wind” to drift my strategy around.
Reacting to the “news du jour” is a common fault that seems to be the mantra of the naysayers that swing in the breeze with their ideas. No need to follow that script at all.
The latest Investors Intelligence survey of more than 100 independent market newsletters shows that the percentage of letter writers identifying as bullish is at a 10-month low of 43.7%. The percentage looking for a correction is at a 10-month high. The latter datapoint is in line with my unofficial survey of the articles that were posted here calling for a stock market correction. Anyone who that states that sentiment is not cautious at the moment is simply not in touch with the market. Then again many who are stating just that have been on the wrong side of the trade for quite some time.
Anyone remember “ Lehman’” ? Hedge fund managers are holding their highest cash position since that Lehman moment.
According to the survey, conducted among 149 participants with $399 billion in accounts from July 2nd through July 9th, cash levels in fund manager survey (FMS) portfolios have hit 5.5%.
Josh Brown’s take on this data point
“We’re a few days and a big rally beyond the end of the survey period. The question is, how much of this raised portfolio cash found its way back into the markets this week?”
From a Wall St Journal report
BlackRock reported earnings yesterday and shared an interesting fact about the flow of funds to their products during the second quarter.
Mr. Fink chairman and CEO of BlackRock, said 10 of BlackRock’s biggest clients have pulled more than $40 billion from institutional index equity assets this year. But the firm’s revenue has been helped as the clients reinvested into active equity and fixed income, multi asset and alternatives strategies.
In the latest quarter, BlackRock said $23.6 billion of net inflows into higher-fee active and iShares products helped drive base fee growth, in part offsetting $30.9 billion in net outflows from low-fee institutional index offerings.
Interesting data and it meshes with what I reported last week about equity outflows YTD and the cautious nature of things with money finding a home in fixed income.
Not much to say here, a picture is worth a thousand words.
Chart courtesy of the incomparable Ryan Detrick
Last week’s busy economic calendar did not allow me to highlight this important indicator. One that the Fed is watching closely to help determine If and when they might raise interest rates.
The June CPI reported on July 17th was important for two reasons. First, it was not either strong or weak enough to yield any new insight into the likely result of the FOMC policy meeting. Fed Funds futures were unchanged through the report, pricing exactly a 50/50 chance of a hike in September. Core CPI is running at 2.32% and 2.30% on a three and six month annualized basis, respectively. That works out to almost exactly 2.00% PCE (the Fed’s preferred measure of inflation) based on their typical historical spread. Core inflation is being driven by demand for Education, Health Care (both due to the ACA aka Obamacare and an aging Baby Boomer population), and a lack of housing stock; these are long-term trends. But the oil decline and USD rally is limiting inflation at the other end while also putting cash in consumers’ pockets for discretionary purchases like eating out.. The bottom line: this CPI report was fascinating in the trends it’s highlighting, but doesn’t mean a huge amount for the Fed. However, there were definitely some investable insights to be gleaned from that report.
ON THE HOMEFRONT
This past week's June release of Existing Home Sales came in stronger than expected at 5.49 million units versus consensus expectations for 5.40 million units. This 5.49 million reading marks a new post-crash high for Existing Home Sales, and momentum is clearly to the upside.
Then just as we have seen all this year, good news followed by bad news, as an unexpected jolt was reported in the form of New Home Sales for June. They came in well below expectations at a seasonally adjusted annual rate of 482,000, a decline of 6.8%
Three positive bullet points hit the newswire on Thursday:
That last bullet data point is very meaningful. While not screaming above-average growth for Q2, with the June CFNAI in the books we can say that it’s unlikely growth in the quarter will look anything like the dismal Q1 results. The index is now positive for the first time since December and the three month average suggests 2.9% growth.
As of this past Thursday, 152 of the companies in the S&P 500 have reported earnings.
“The earnings beat rate has jumped quite a bit this week, rising from 60% at the end of last week up to 65.8% as of July 23rd. As of now companies are looking strong on bottom line numbers this season.”
While the earnings beat rate has jumped significantly this week, the top-line revenue beat rate has remained right where it was at the end of last week. 51.4% of companies have beaten sales estimates this season, continuing a trend of top-line weakness that emerged last earnings season.
In reviewing the earnings “headlines’ I took note of a few companies that beat estimates this past week, and raised their guidance as well. These stocks should command a lot of your attention.
WTI took out a support level this past week, as many technicians pegged a support level just under $50 as their first “line in the sand”.
There isn’t much room between Friday’s close of $48 and the low that was put in during March of this year. We'll have to see what the overall market reaction will be if/when WTI does take out those lows. The oil stocks continue to be decimated, how long the entire market can withstand that pressure now remains to be seen.
Last week the S & P ended in an overbought condition after the move off the lows that took the average to a close of 2126 from a low of 2044 in just 7 trading days. Last week I mentioned that I thought the market might be a bit “dicey” in the immediate short term. True to form, after new highs the averages have now reversed and are headed back into the trading range.
No surprise at all as I shared my thoughts on the onset of a seasonally weak period meeting up with “all time highs”. I have stated that Long Term investors simply can’t waver in the wind with every move of 50 - 60 points on the S & P. It's a sure fire way to lose your way. Here is an article that suggests one way to look at investing, assuming your time horizon is more than a week.
While I don’t recommend buy, hold, sit back, fat, dumb and happy as an investment strategy, the incessant calls for everyone to hide “under the covers” in the midst of a bull market, are just a waste of an investor's time.
When the trend changes, the strategy changes. Plenty of pundits have called for investors to “hide” all during the uptrend, now they wish to tell us that this is the “real” time to sell. I gather that all of the other times they felt this way, they were just joking with us. I’ll repeat, when the trend changes, the strategy changes.
While the S & P has stayed in the trading range, the Nasdaq continues to make new highs and the skeptics out there continue the theme that market participants are “chasing” a dream as prices go higher. But as I have pointed out a number of times, age and percentage gains are not the reasons bull markets come to an end.
So one would surmise that after the 4% gain that we saw the week of July 17th, it would be viewed as a near term bearish signal.
Source Stockcharts- Ryan Detrick
Perhaps not, as the chart above indicates. The average is usually higher one week and one month later as well. Chasing? Chasing indeed. Look at the chart and it’s evident that the “chasing” logic that the bulls are accused of, makes absolutely no sense. Getting involved and chasing the Nasdaq back in 2013 has resulted in a 65% gain. More frustrated bear logic at work as that gain is in the pockets of the savvy investors that did in fact “chase”. It was a great time to get involved as not only did the Nasdaq power higher at that time, the S & P broke out of a 13 year trading range.
More thoughts and another chart on the Nasdaq to quell the naysayers as they were having a field day with their Nasdaq is “topping and rolling over” stories the moment they saw weakness in AAPL shares this past week.
Lastly, I’ll add that after being dead money for the better part of 18 months, GOOG has broken out and taken off. That development occurred last week when the company reported stronger than expected earnings. Now that Google has joined the party it will bode well for the Nasdaq and Nasdaq related stocks going forward.
SHORT TERM MARKET OUTLOOK
Some data points to consider as we look out to early August.
The VIX currently sits at the 12-13 level. Well, that was my original comment, until the VIX spiked 16% on Friday to and intraday high of 14.7. A lower VIX implies a “Trading Top” (not THE top). In the past these low levels have often signaled a reversal, and that is precisely what happened on Friday. Now, with the S & P just 3% from the highs, the setup is for the VIX to head higher and the SPX to head lower.
I fully expect that to take place.
The reversal has already begun and if one plots the S & P highs you will find the corresponding lows in the VIX. This time is no different.
I’ll also note that the market ended the week of July 17th in a short term overbought condition with all of the upside energy dissipated. After eight days of higher highs/lows, we have now had four straight days of lower highs/lows
As the S&P 500 has made a run towards fresh all-time highs a week ago, breadth has turned increasingly stale. During the march to present levels breadth had improved dramatically on that time period. However, it wasn’t enough to push the A/D line to more comfortable levels. By itself, weak breadth doesn’t necessarily mean that the market is due for a huge fall. There have been plenty of times in the past where breadth weakened for months even as the market rallied. It just means that as the rally narrows, the tide lifts less boats. It isn’t yet in the category of something to worry about now, but instead, something to watch, if and when the market breaks out of its trading range.
Should these signals prove to be correct, and they certainly look to be that way, I expect the S & P to trade back down into the “range”. It has already tested and failed at the first minor support levels at 2105-2110. With Friday’s close on the S & P at 2079, the second support levels of 2070 - 2080 have already come into play. All of this action happened this past week as the S & P has taken the “elevator” down. Further weakness may see the average retest the 2040 -2050 support zone. One step at a time, and lets see what develops next week.
Since Greece has been in the headlines recently, I thought it might be appropriate to look into some Greek Mythology. Now in accordance with that, Sisyphus the King of Corinth, was punished by the Gods for chronic deceitfulness.
While we have witnessed one of the strongest bull markets in history, there are still doubters. One might suggest that this name be given then to some of the market pundits that ply their trade, selling a story that has been proven to be wrong for quite some time.. I usually refer to these folks as morally bankrupt individuals. They seemingly wish to prey on the fear of others selling the same story over and over, while being shown by the markets to be incorrect, time after time. Yet they continue, with seemingly no morals, to push their wrong footed strategies. When those strategies don’t materialize, they simply come back again and fill our webpages with more of the same.
Some may have seen this article in Jeff Miller's (He is one of the best here on SA) market update last week. I thought it important to post the link to that article regarding market pundits which depicts a visual history of market crash predictions. As Josh Brown states in the article:
“The constant correction call is noisy in bull markets, dangerous in bear markets and of little value to the majority of people in either case.”
I’ll add that this same criticism from Josh applies to many participants of investment related venues. If it's not the overall market, it's a “sector” or an ‘average”, or a country, that is the “new” Achilles heel. When the “target” that they have singled out doesn't work then they simply move to another to ply the ‘fear” trade.
I am often criticized of being too harsh with those that have had the story on the equity market wrong for well over 3 years now.
Perhaps I am just relating to all the “history” of what has transpired. An example of what I am referring to.
Just 2 months after the S & P broke out of the 13 year trading range in 2013 and embarked on one of the strongest bull markets on record, the market skeptics were calling that a “top” as well. Here is an article that demonstrates what I am referring to;
The S & P was at 1630 that day in May 2013 when that was written and according to this author, it was the worst time to be invested. Think that was a “one time” bad call ? Think again, a comment from a blog post from the same author on June 12, 2015.
“It’s no secret I’ve been bearish but in the spirit of seeing the other side of the trade, I’ve been looking for a compelling bull case for equities for some time now. “
Is this an isolated case ? Please take a moment and look through the “history” on that blog as it displays “frustrated bear rhetoric“ at it’s finest.
I am here to tell you that this that author wasn’t alone, and in no way am I singling him out. I can cite a half dozen of these examples. There are scores of individuals (I refer to them as parrots) that continue to follow that doctrine on blogs and public investing forums. They too have been wrong all the way from the breakout level back in 2013. Take a moment and look around, it is quite evident what their “history” reveals.
I’ll repeat what I have stated before regarding these individuals
“It is one thing to make a bad call and be wrong, we all are guilty of that. However the individuals that ply their trade spinning and pounding their ill fated messages and strategy over and over, despite what is actually taking place, are in fact, morally bankrupt individuals.”
I continue to suggest that investors take a closer look at of the information being put forth by these “Sisyphus” characters.
INDIVIDUAL STOCKS and MARKET STRATEGY
So far this year, If you’ve been overweight Industrials, Energy and Materials, you’re underperforming badly. If you’ve been concentrated in Consumer Discretionary, Healthcare and Financials, you’re more than likely having an outstanding year. Financials as measured by the XLF made a new high last week and are among the market leaders. In other words , it’s a clear signal that tells us all that it is important to diversify. It also tells us that no matter how difficult it seems, Long Term investors need to start looking at at some of these underperforming sectors. Portfolio managers add names in these sectors during times of weakness, as that is where the good long term opportunities may lie.
Put together a list of solid companies that will at some point be good candidates to add to your portfolio. The earnings reports from this past week reveal some hidden strength in consumer discretionary and tech as I already mentioned that a few companies raised their guidance. This is a great starting point for your watchlist. If we put this in perspective, by factoring in how tepid the economy has been, these stocks are standouts.
Take note of the price action this past Thursday in the semiconductor space, as many names posted nice gains while the S & P was down 11 points. This is a sector that has plenty of negative sentiment now and a target that the skeptics have latched on to as being their “tell” for market weakness. Perhaps they will be wrong once again. I do know one thing, the weakness in this sector won’t be with us forever. I do expect a pickup in GDP in the second half of the year and many of these names just raised Guidance. As they say, “do the math”
I have spent an inordinate amount of time lately looking at the energy sector. I question, like everyone else, exactly when the selling will abate. Here is a mid year update on the sector that I put together, to use as a starting point in the process of identifying names that I feel will be candidates for purchase at the proper time.
One simple rule to keep in mind when looking at these under performers. WAIT until they show some signs of strength and break their downtrends, then review your list for potential candidates to add.
Covered Calls are the most popular option strategy, and for good reason.
From time to time during the course of this bull market I have employed this strategy to bring in additional income. Covered call writing, is an excellent way to add to your income stream and works exceptionally well in a ‘sideways” market like we are experiencing this year. For those not familiar with the process, check out this article on the basics of this strategy.
Another strategy that is “universal” when it comes to investing is having a solid dividend strategy as a core for ANY portfolio at ANY age. Many make the mistake of looking at a 401k and saying "Why would I want a dividend strategy in place now when I don't need the money or the income now ? The simple answer, for "total return".
Holding a dividend-paying stock, gets you the growth of that dividend. And since 1926, dividend yield plus dividend growth have accounted for 89% of the total return generated by the S&P. The remaining 11% can be attributed to valuation changes, what we in the business call P/E multiple expansion or contraction.
If an investor does nothing else, believes the market will go up, down or sideways, is at a market top, bottom, or a middle.
He/she needs to employ this strategy.
I like to keep things simple.
With no U.S. recession in sight, Europe appearing set to move past Greece and China acting to avoid a hard landing, it’s difficult to envision a global recession at this juncture. There is likely to be continued choppiness as the markets now await to sort out the earnings picture amidst the impact of lower Crude Oil and the Stronger dollar.
There exists the possibly for a pullback of 5% or more. If so, it should be viewed as an opportunity, not a concern. The secular bull market is still the driving force. Given that, using the long term trend as my backdrop, I stay invested with dry powder. When the trend changes the strategy changes.
Best of Luck to all.