S&P500 Jumps….Prospective Returns Plunge

May 31, 2016

On dismally low volume, the S&P500 jumped almost 2.3% last week. The dismally low volume means only one thing—investors were not rushing back into the US stock market to drive, and benefit from, this notable upward move in price. Instead, almost all of this move can be explained by short covering and by corporations using increased borrowing and operating cash flow to buy back their own stock, which is not exactly a good sign for future corporate growth and financial soundness. At the same time as the index moved higher, the VIX index dipped down to set 2016 lows. Investor complacency has fully returned to the US stock markets, as it often does during the summer months.

On Main Street, the uninspiring economic “recovery” continues to disappoint. The week started with a miss from the PMI manufacturing flash index. The Richmond Fed manufacturing index also missed badly. PMI flash services also disappointed. Headline durable goods orders beat estimates, but that was only due to volatile car sales (themselves lately fueled by unsustainable subprime loans promoted by the US government) which jumped; durable goods orders excluding autos, only met expectations. The latest estimate of US GDP growth missed consensus estimates and consumer sentiment also disappointed. On the positive side, new home sales beat estimates. And the pending home sales index also beat expectations.

The technical picture has suddenly become more cloudy. By jumping back so strongly last week, the recent negative momentum trends have been arrested. But because the S&P has not yet returned to the former highs set last year…..and because the volume during price rises is so weak…..the burden is still on the bulls to prove that the massive 18 month rolling top formation is no longer in effect.

And remember, that as the S&P500 has approached the former highs, aggregate corporate profits have been falling for over a year now. As a result, the index’s price to earnings ratio is soaring……making the index far more expensive (relative to profits) than it was in 2015 when it set all time highs.

All this brings us to a theme that professional investor John Hussman has been pounding the table about for many years—-that as US stock market indices become extremely overvalued, they become less attractive investments for savers.  Simply put, he points out that extreme overvaluation NEVER remains in place perpetually. Valuations always correct back down to long-term levels (and usually over correct) eventually. So anyone who’s owned stocks over the last five years has benefited on paper tremendously, anyone who remains in the stock market (or even worse, anyone who decides to enter the stock market now) will not enjoy the same rates of returns (say over the next 10 years) that stock market investors have enjoyed over the prior five years. Why? Because the Fed’s monetary policies have front-loaded future returns, and the remaining, prospective returns are paltry. How paltry? Using 100 years of data, Hussman estimates that annual US equity returns over the next 12 years will range from 0-2%…..and that’s including dividends!

But wait, there’s more. During these next 12 years, Hussman confidently expects intermediate draw-downs of 40-55% in the S&P500. So to realize the estimated prospective annual returns of 0-2%, investors would have to ride out the massive, temporary set backs.

So what can someone who wants to beat the paltry 0-2% total returns do?  Simple:  wait, patiently, for the intermediate draw downs of 40-55% before buying US equities. But when these meltdowns occur, then one must be bold and buy……when most everyone else will be selling. By going against the crowd, prospective annual returns will be raised to approximately 10-15%.

Now that’s worth waiting for.

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Massive Rolling Top Formation on the S&P500

May 23, 2016

Due to a sudden burst on Friday, the last trading day of the week, the S&P500 managed to avoid recording another losing week, but just barely—it gained a mere 0.28% on light volume. Volatility ticked up, however, just slightly; but the VIX index remains in the super complacent zone based on long-term historical ranges.

On the US economic front, the week got off to a poor start with the Empire State Manufacturing Survey registering a disastrous reading of -9, when instead it was expected to come in at a positive 7 reading. The housing market index also disappointed. Consumer prices, the headline figure, came in slightly hotter than expected. Initial jobless claims also notched a disappointing result.  The Philly Fed business outlook survey recorded a negative print, when instead it was supposed to come in with a positive result. There were a few better than expected reports—industrial production beat consensus estimates, and existing home sales were also slightly stronger than economists predicted.

In the short-term, technical analysis of the daily charts continue to point to a stock market that’s poised to drop meaningfully. Last week’s tiny gain did nothing to change this view.

More troubling is the longer term picture. When the S&P500 is viewed over say 10 years using weekly bars, a very distinct topping formation comes into clear view. This formation began to take shape at the beginning of 2015, so it’s now almost one and a half years old. But based on long-term historical analysis, longer duration patterns tend to be more reliable than similar patterns that occur on shorter time frames, say daily or hourly intervals.

So we not only see a massive rolling top continue to develop, but we also see this top advancing in age. In other words, for this rolling top pattern to stay in effect, a meaningful drop in the markets must occur sometime this year. If it doesn’t, then this topping pattern will have failed. That means that just in the next several months (given that June is around the corner), we will be able to see if this huge topping formation was in fact accurately foreshadowing a drop in the US stock markets.

Will the “sell in May and go away” mantra uses by many Wall Street experts turn out to be especially meaningful in 2016?


US Equity Pullback Continues

May 16, 2016

After jumping higher the on Monday, the S&P500 spent the rest of the week giving it all back and more—the S&P closed down about 0.5% by Friday’s close. Volume, while not very high, was higher than it usually is during weeks when the index climbs in price. And as one would expect, volatility inched higher—the VIX index rose back up to the mid-teens.

It was a quiet week in terms of US economic reports. The week kicked off with a weak Labor Market Conditions Index release—-it was negative again. Wholesale trade disappointed by registering a negative print instead of the positive one economists expected. Initial jobless claims jumped notably…..this hasn’t happened in a many months, and could perhaps be a sign that even the headline labor market (the one that ignores the millions of unemployed people who are not officially counted as “unemployed” because they stopped looking for work) is starting to weaken. Business inventories jumped; on the one hand, this provides a short-term boost to GDP, but the problem is that sales didn’t rise commensurately. This means that the inventory to sales ratio is way too high now……specifically, it signals that a production drop (ie. a recession) is imminent so that the ratio of inventory to sales can come back down to normal levels. On the positive side, job openings rose and retail sales were slightly stronger than expected.

With last week’s price drop in the S&P500, the technical picture that we’ve been sketching over the last several weeks is now becoming more clear—the S&P’s recent bounce, the one that started in mid-February, looks like it’s not only petered out, but it looks like a new short-term pullback has begun. The closest test to the downside will be the 200 day moving average, which sits at about 2,012 on the S&P. If this doesn’t hold, then a move back down to the January and February lows—around the mid-1,800’s—becomes much more likely.  Of course, if these lows of the year fail to hold, then there would be much more serious trouble to follow. But let’s examine this pullback one step at a time.  All eyes on the 200 day moving average.


Precious Metals Bull Market to Resume?

May 9, 2016

As fully expected, the S&P500 continued to erode in price last week. While not losing a whole heck of a lot, it did slip another 0.4%. Once again, volume was slightly higher than it has been on weeks when the S&P500 rose in price.  And the VIX index, while not changing by much, did also creep higher as one would expect when prices decline; that said, S&P volatility is still near the lows of the year set in April……and nowhere near the highs set in January.

The technical picture on the daily charts is becoming even more clear—-a downturn in the short-turn looks increasingly more likely to occur. The uptrend that began with the bounce in late February has been broken. Upward momentum stalled several weeks ago…as noted here. Friday’s closing price, while still above the 200 day moving average, is rapidly falling back down to this major level of support—and this will be the big test: will the 200 day hold? If so, then the short-term downtrend may be reversed, and the big February bounce may resume. But if the 200 day fails to hold, just like in November and December of 2015, then further losses will almost surely follow.

The week was busy with lots of economic reports. PMI manufacturing kicked off the week with a miss. Then ISM manufacturing also missed. Construction spending disappointed. Productivity fell a little less than expected, but unit labor costs rose much more than predicted. Obviously, fast rising labor costs will eat into future corporate profits. Initial jobless claims missed. The big number of the week, payrolls, was a disaster, missing very badly. And to add insult to injury, the unemployment rate ticked up and the labor force participation rate ticked lower. On the bright side, PMI services, factory orders and ISM services all beat expectations. But still, all in all, there is no sign that the US economy is doing anything but limping along on the verge of suffering another, long overdue recession.

Finally, let’s revisit the precious metals markets, specifically gold and silver. For the first time since 2009, the price of gold has soared above its 200 day moving average. More importantly, the 200 day moving average has started to slope upwards….also for the first time since 2009. Something similar is happening in the silver market.

The reason this is notable is because back when this happened last time in 2009, gold went on to rise by more than 100%, peaking in late 2011. And silver went on to rise by about 500%.

If something similar were to repeat in near future, then gold could rise from about $1,000 to over $2,000.  Silver could rise from about $14 to $85.

Of course this is not an actual prediction…..but it is an indication of how much these prices have fallen since 2011 and how much potential upside could lie ahead for investors who start buying now, rather than when gold and silver prices have already taken off and registered most of their upside moves.


S&P 500 Turns Down

May 2, 2016

As expected, the S&P 500 did move from a phase of fading momentum into a downturn. Last week, the S&P dropped 1.3%, which is not a huge loss, but a loss than confirms the momentum shift (downwards) and a loss that portends further losses ahead. More on this below.

As one would expect, volatility in the S&P rose as prices fell, and volume crept higher which adds some validity to the loss in price (if volume fell during a down price week, then the lower volume would contradict the price drop).

As usual, the US macro reports were mostly bad. New home sales missed expectations. The Dallas Fed manufacturing survey also missed. Durable goods orders—both headline and ex-autos—missed badly. Consumer confidence missed. First quarter GDP growth missed. The Kansas City Fed manufacturing survey missed. Personal spending missed. Chicago PMI missed badly. And consumer confidence also missed. On the bright side, international trade beat expectations, and so did pending home sales. PMI flash services also beat estimates. And finally, personal income was a bit higher than expected. But all in all, the sum of all the reports over the last several months continue to suggest one thing—that the US economy is slowing further, and that there is nothing on the horizon to suggest that it will get stronger.

So the technical picture is what really changed after last week’s drop on the S&P. The week before, we could only discern a slowdown in momentum and the stronger possibility of a price drop ahead. But after last week’s 1.3% drop, the momentum loss has been confirmed, and the S&P500 looks poised to lose more points, and possibly in a meaningful way. On the daily charts, the uptrend line that began in late February has been broken, so there will be many technical traders looking to lighten up their long positions before more severe selling can begin—but this act by itself my actually deepen any impending sell-off. Working in the bulls favor is the fact that the 50 day moving average has crossed back above the 200 day; that said, the same thing happened in late December, and this “golden cross” turned out to be a false bull signal, because shortly afterwards, the S&P went on to lose over 300 points.

The next two weeks will be critical to confirming whether this recent turn down will have legs…..as it did in August of 2015 and January 2016.