US Stocks on a Precipice?

September 19, 2016

After skidding the prior week, the S&P500 inched back up about 0.5% the last week….on slightly higher volume. Volatility, as usual during a week when prices rise, crept back down. But the VIX index has not returned back down anywhere close to the lows seen during the summer months. Investors are much less complacent now.

Most of the US economic reports were released at the end of the week, and most of them were bad. Initial jobless claims rose instead of falling as expected. Retail sales were a disaster—both the headline number and the ex-autos number came in well below expectations. The Empire State manufacturing survey missed. Industrial production also missed. Business inventories missed. And consumer sentiment… guessed it…..missed. By all accounts, the US economy is not doing very well.

A very interesting technical picture is emerging for the S&P500. Over the last two years, a long-term topping formation has been forming, but this formation has been challenged lately, especially as earlier this year, the S&P rose above 2,100.

But more recently, the S&P500 has begun forming a short-term topping formation. After dropping for a couple of days in June after the Brexit vote, the S&P recovered all those losses and rose almost all the way up to 2,200 in July. But since then, the index has gone nowhere. More importantly, several key momentum indicators have turned down notably. MACD, for example, had turned bearish since late July. RSI has been deteriorating since mid July. And many others have done the same.

A week ago, the price of the index dropped below the 50 day moving average and has not recovered. Unless, this happens, a very reasonable downside target—and test—will be the 200 day moving average. This lies at around 2,058 or 4% below current prices.

Sure, a 4% drop would not be a huge loss  in the context of the massive run up over the last several years, but the S&& has not seen any type of similar losses since Brexit in late June and since the somewhat larger losses in late January.

So a 4% loss, in today’s world, would be noteworthy.

US Stocks Skid

September 12, 2016

After going almost nowhere for several weeks, the S&P500 slipped badly last week. The index lost 2.5%, with most of that loss coming on Friday alone. Volume for the week was light, but that’s mostly because of the Labor Day holiday. Volume on Friday, when the market sold off badly, was stronger. And volatility also spiked on Friday, but with the VIX reaching only the mid-teens, this “fear index” never reached the levels associated with panic sell-offs in the past.

There wasn’t much in the way of economic reports last week. PMI services missed expectations slightly. ISM services was the biggest story of the week—it missed badly. And this miss echoes the big miss in ISM manufacturing. Together, the two poor ISM results strongly suggest that the US economy is in a soft patch…..again. On the brighter side, initial jobless claims were a bit stronger than expected.

The technical picture changed dramatically. As discussed here last week, the S&P was poised to take a turn, up or down. And with the big sell-off in the books, it’s looking like the turn will be for the worse. That said, it will take much more than a one-day 2.5% drop to change the longer-term direction of the US equity markets. While prices did close below the 50 day moving average, this average is still well above the 200 day moving average. So the “golden cross” is still in effect. And therefore the short-term outlook has not really turned bearish….at least not yet.

Finally, well-known money manager and PhD economist John Hussman noted in his weekly newsletter that it takes a lot of discipline to sit out and miss the temporary gains that come with a bubble in equity markets. And he suggested that this is a lot easier to do, when one understands the consequences of participating in a bubble, falsely believing that this time is different, or just as badly, mistakenly believing that one will be able to sell at high prices when the bubble does in fact burst. He reminded readers that must:

Understand that valuation levels similar to the present have never been observed without the stock market losing half of its value, or more, over the completion of the market cycle.

So unless one is willing to endure such a huge setback in portfolio values, one must be willing to sit out the bubble and protect one’s assets from huge drops by investing more in cash and near-cash securities.

Unfortunately, most investors, amateur and professional, will not be so wise.



US Equities Still Hovering

September 6, 2016

After the prior week’s drop, last week the S&P500 reversed course and gained 0.5%. But once again, this gain—as have most gains in this index lately—was accomplished with very little volume, and therefore very little conviction. Volatility as measured by the VIX index, dipped  back down, but not all the way back down the lows reached in August.

US economic news was particularly poor last week. While personal income and personal spending met expectations, almost all the other reports for the week missed consensus expectations. The Dallas Fed manufacturing survey fell deeper into negative territory. The Case Shiller home price index missed badly. The Chicago PMI report was a disaster. Productivity continued plunging—which leads to soaring unit labor costs for corporations. The ISM manufacturing index crashed into contraction levels, well below expectations. Construction spending also missed badly. Factory orders also missed. And the big number of the week, payrolls for August, was a disappointment. In addition, the headline unemployment rate ticked higher (not good). And both average hourly earnings and the average workweek missed expectations. Many of these major economic indicators are now solidly at levels associated with recessions in the past; we’re going to have to wait and see if the same situation is occurring today as well.

Since the beginning of July, the S&P500 has gone essentially nowhere. While it dipped back down to about 2,000 in late June, it spiked back up to around 2,175 immediately afterwards and has not moved far from this level ever since. So this important large cap index continues to hover waiting for a catalyst to set its next course—up or down. Meanwhile, the price level is converging with the 50 day moving average, which will set up a test (ie. will prices bounce up from the 50 day or will they slide below?). But on the downside, the hovering over the last two months has virtually killed all upward momentum, and indicated for example by a declining set of MACD lines.

The bottom line is that the S&P500 is poised to take a turn—-upward or downward—very soon. It’s very unusual for this equity index to just sit at a price level for an extended period of time. And after two months of doing just that, it’s very likely that some sort of break out….or break down… around the corner.

Another US Equity Bubble is Blown

August 29, 2016

After hovering, or essentially going nowhere, for two straight weeks, the S&P500 dropped 0.7% last week on light volume. Volatility, meanwhile, crawled back up, which is perfectly normal in a week in which the price index declined. That said, the VIX index is still near the lows of the year, meaning that investors are far from being overly worried.

Last week’s economic news was mixed. The Chicago Fed National Activity Index inched up, improving slightly over the prior month’s reading. New home sales beat expectations. Durable goods orders also beat expectations, and initial jobless claims were slightly lower (or better) than predicted. On the down side, existing home sales missed consensus estimates. The Richmond Fed manufacturing survey also disappointed. PMI manufacturing flash fell, instead of rising as expected. The Kansas City manufacturing index contracted again. The FHFA house price index disappointed. And finally, consumer sentiment missed badly—instead of rising as expected, it fell from the prior month’s reading.

The slight decline in the S&P500 last week did little to change the technical picture. On both the daily and the weekly charts, the S&P is still extremely overbought. But on the daily charts, a slight topping formation is beginning to take shape. This suggests that at least in the short term, some sort of correction may be in the cards. But on the longer term weekly charts, prices still look like they’re simply stretched to the upside. And since prices have moved well above the 200 day moving average (which itself has turned upward in terms of slope), many technicians will switch to trading the index from a bull market perspective—they’ll buy the dips towards the 200 day moving average, and they’ll sell the rips, or big surges well above the 200 day moving average.

So not, over seven years after the S&P500 bottomed (March 2009), the US Federal Reserve has succeeded in blowing another major bubble in the US stock markets. This is the third major bubble in the last 16 years: the first one peaked in 2000 and the second one in 2007.

As always, this doesn’t mean that this market is about to crash. But it does mean that when it does finally correct….in a meaningful way….that the downside will probably be far more severe than it would have been if another bubble had not been engineered.

This also means that for anyone who’s invested in US stocks to actually benefit from this bubble, they will have to sell out of the markets well before any bear market arrives. And unfortunately, any simply study of investor behavior—in the run up to bubble peaks and in the subsequent declines—shows that almost all investors fail at this last, but crucial, step. Almost everyone who enjoys the ride up will ultimately suffer on the way down, because they invariably fail to exit at, or near, the peak.


August 22, 2016

Another week has gone by and once again, the S&P500 has gone pretty much nowhere. Last week, the large cap index closed virtually unchanged. Volume was extremely light, in large part due to the end-of-August vacation season. And volatility also barely budged; it continued to hold near the lows of 2016.

To mirror the lack of direction in the US equity markets, the economic news flow was also very slow. The Empire State Manufacturing Index missed badly, relative to expectations. Consumer prices met expectations; although consumer prices excluding food and energy rose slightly less than expected. Industrial production came in stronger than expected. Jobless claims were slightly better as well. The Philly Fed business outlook only met expectations and leading indicators beat consensus estimates.

In terms of technical analysis, the picture is as follows—upward price momentum is stalling (a reasonable conclusion after two straight weeks of going nowhere) but prices remained pinned up against or near all-time highs. As mentioned last week, from these lofty, overbought levels, it’s normal to see some sort of modest pullback. But in a world where central banks have pushed short term interest rates down to below zero around the world, what’s been normal over the last 100 years may not be so normal today.

But what remains true, despite the massively overbought and overvalued US equity markets is this simple fact—the more equity markets rise today, the lower the remaining returns will be in the future for anyone who remains in these markets. What this means is that the huge appreciation in equity markets over the last several years has reduced the prospective returns for everyone who invests in equities today.

Clearly, the converse is also true, but for the prospective returns to jump back up even to reasonably normal levels, the equity markets would have to retreat by a meaningful percentage. And by meaningful, we don’t mean just 10% or 20%, but something much more than 30%.

Back in 1929, a nationally known economist from Yale declared that US “stock prices have reached what looks like a permanently high plateau”.  He was proven to be spectacularly wrong, after stocks crashed over the ensuing three to four years.

Nobody knows exactly when, but today’s high plateau will also not endure. And when it breaks, the downside—-as informed by history—-could be depressingly huge.

Treasury Rates vs the S&P 500

August 15, 2016

On very light volume, the S&P500 ended last week virtually unchanged from the week before. Volume was light mainly because of the calendar—peak summer vacation season. And S&P volatility also barely changed; but that’s probably more a function of the fact that the VIX index was already at the lows of the year and had very little room to fall further.

With the lack of movement in the S&P last week, the technical picture remains unchanged—the S&P500 is extremely overbought. On both the daily and weekly charts, the S&P is pushing the upper limits of many commonly followed indicators. Any sort of pullback, from these lofty levels, would be very normal and almost expected.

As far as economic news goes, last week as a big disappointment. Productivity was a total disaster; instead of rising as expected, it fell. And the continued deterioration in labor productivity is important because it will directly impact future corporate earnings….negatively. Initial jobless claims, while still very low, came in a bit higher than expected. Import prices rose instead of falling as predicted; this too will hurt corporate profits. Retail sales were a disaster—both headline and core (excluding autos) sales missed badly. And consumer sentiment also missed. Only wholesale trade and business inventories beat expectations…..and even then, only slightly.

Finally, another major divergence has developed between US Treasury rates and the S&P500. While the S&P ended the week just about at all-time record highs, the US 10 year rate finished the week with a 1.5% yield. And since the 10 year yields (as opposed to 10 year prices) usually move together with the prices on the S&P, this sets up a massive problem—the super low yields on the 10 year suggest that the prices on the S&P500 ought to be much lower. Of course, some would argue that the US Treasury market is wrong and that those yields ought to rise in order to “converge” with the all-time high prices in US equities. But one has to remember that “mom and pop” investors (ie. unsophisticated investors) do not participate in bond market trading nearly to the extent that they do in stock market trading. in other words, the dumb money is far more commonly found in stocks, not bonds. And if that’s the case, then these super low Treasury yields are suggesting that the stock market investors…..sitting on all time high prices…..are super wrong.


Crude Oil Falling …. Again

August 8, 2016

Last week the S&P500 managed to eke out a small gain, rising 0.4% on light volume. Volatility dipped back down, this time down to set new lows for the year; that said, volatility always tends to set yearly lows during the summer months when traders tend to take time off from the markets and take vacations.

So while new, yet marginal, all-time highs have been set in the S&P, the technicals still point to an extremely overbought market. On both the daily and more importantly the weekly charts, the S&P is pressing up against the upper levels of several well-followed ranges, such as the Bollinger Bands. What makes the technical situation even more risky is the fact that on a fundamental basis, the S&P500 is also extremely overvalued. For example, many price to sales and price to earnings measures now show that the S&P500 is more overvalued than at any time (other than in 1929 and 2000) in the last 100 years!

Still none of this means that it can’t rise even further.

Except for one big report, most of the economic news last week was disappointing. ISM manufacturing disappointed. Construction spending reported the weakest annual growth since 2011. Personal income missed expectations; personal spending beat expectations. ISM services also missed consensus estimates. Initial jobless claims came in worse than expected. International trade missed, and consumer credit growth also missed. The big beat of the week was the payrolls number which came in stronger than expected. But as usual, what this report does not specify is the quality of the jobs created. While more and more well-paid and benefited factory jobs continue to disappear, low-paying and unbenefited service jobs are growing. But it takes more than one job as a bartender or waitress to replace one lost factory job. Yet the BLS does not distinguish between the two.

Finally, back in January of this year, crude oil (West Texas) set a multi-year low in the upper $20’s. The problem with such a low oil price is that it virtually destroys the profits and the balance sheets of thousands of important companies in the energy space. And since this sector is so large, relative to the US economy, it’s implosion alone could adversely impact the entire economy. Yet since January, the price of oil has rebounded and in May it touched $50. Unfortunately, since then, it has turned back down, and last week oil fell back under $39.

So it will be interesting to watch what happens to this super important commodity over the next several weeks and months. Because if it drops back down into the low $30’s or worse, into the $20’s, then we will almost certainly see widespread bankruptcies in the energy space, and this could “spill over” to the rest of the US economy.