September 24, 2018
Very little has changed for the US stock markets in the last week. As expected, again the S&P500 crept higher. This time it rose 0.85%, on moderate volume. Volatility eased back down–the VIX index dropped back into the 11 range. Interestingly, while the S&P 500 has now fully recovered its losses from the February sell-off, the VIX index has not returned all the way back down to the super-complacent levels it reached during much of 2017. So investors remain a bit more worried than the index prices may suggest.
In terms of recent US macro news, last week was a mixed bag. Housing starts, initial jobless claims and the Philly Fed business outlook survey were all better than expected. But the Empire State manufacturing survey, existing home sales, leading indicators and PMI composite flash all missed. So the US economy….especially with help from the recent Trump tax….continues to grind forward at moderate rates of growth. Most importantly for risk-asset investors, all the data are showing that the US economy is not in….or about to fall into….a recession, at least anytime soon.
And until a recession becomes a greater threat, most technical indicators—indicators that admittedly continue to show an overbought and overstretched S&P500—cannot be trusted to predict a major pullback in the near future. Instead, these indicators are likely to continue to remain stretched—or become even more stretched than they are today—as long as US economic growth does not grind to a halt.
Interestingly, the reduction in the Fed’s balance sheet has now (almost 12 months after it started in October 2017) has now hit $250 billion. And the greatest impact of this “quantitative tightening” has arguably affected emerging markets and other developed markets far more than it has affected US investment markets. Of course this may change since $250 billion is still only a small fraction of the total balance sheet expansion that the Fed engineered starting 10 years ago. But as of now, the tightening to date has not hurt US stock markets—or even the US high yield markets—very much, if at all. At least so far.
So our Simple Rule…..clearly in accordance with everything described above….continues to generate a bullish signal. And once again, this applies NOT to any individual stock in the S&P500, but to the total S&P500 index.
September 17, 2018
As fully expected in our post last week, the US equity market resumed their bullish trend. The S&P500 moved up almost 1.2% last week; this point increase more than erased the previous week’s decline. Volatility declined as would be expected during a week when stock prices rose. But volume did not jump notably; this suggests that once again, markets are melting up rather than benefiting from any surge in new investor money.
Also supporting the current bullish bias was the release of several key economic reports. For example, retail sales—while disappointing on a month to month basis—are still registering solid year over year growth. The same applies to industrial production, which is also solidly positive on an annual basis. Until the key US economic trends turn down, it’s difficult to support a bearish argument for US stock markets.
That said, the rest of the world is suffering. Many major equity indices, in both developed and emerging markets, have turned south. China’s stock market, for example, has entered a bear market. The same applies to the currencies and to the corporate bonds of many of these same developed and emerging markets. Brazil’s Real has dropped to a multi-year low against the US dollar.
So it’s becoming more and more obvious that the US securities markets are staying strong in a global environment where many other markets are dropping significantly. The reason this is important is because divergences like this usually don’t last for long. This suggests that either the rest of the world’s markets should recover to join the already strong US markets……or that the US markets will start to fall and join the rest of the world’s weakening markets.
It’s almost certain that one or the other will happen….sometime over the next six to twelve months.
September 10, 2018
The S&P500 eased back just a bit last week. The large cap index fell just over one percent. Trading volume was very light, but that had more to do with the Labor Day holiday than anything else. And in line with a market that declines in price, volatility inched upward—the VIX index closed at its highest levels since mid-August.
On the weekly charts, last week’s one percent decline is barely even visible. So there is virtually no technical damage to speak of on the weekly charts. On the daily charts, the pullback is more pronounced, and as expected, it occurred after prices had reached extremely overbought levels. Going forward, a decline to the 50 day moving average would not be surprising.
All that said, the technicals are still bullish in the longer term, using a weekly or even monthly analysis.
The big economic story of the week was the August payrolls report. While the total number of jobs created beat expectations by a small amount, the headline unemployment rate disappointed—instead of dropping to 3.8%, it came in at 3.9%. Average hourly earnings also beat expectations; they came in at 2.9% on a year-over-year basis. The problem is that headline consumer price inflation last month was also 2.9% on an annualized basis. That means that REAL wage growth is a disappointing zero (2.9% – 2.9% = 0%).
Finally, our Simple Rule is still bullish. With the latest unemployment rate now reported, our system is telling investors to remain long the S&P500 index. We have yet to see the required breakdown of US economic growth needed to change this bullish outcome to a cautionary one. And while we’re not very far away from triggering several of these key economic alarms, for now the alarms are not yet ringing.
September 4, 2018
As expected here, the S&P500 has continued to climb higher. In the short term, most key signs led to a bullish outlook….an outlook that has continued to be achieved. Last week the S&P climbed another 0.9%, and in the process it established another new all-time high. This means that all of the damage suffered in late January and early February has been fully repaired. And while volumes remained light to moderate, and therefore did not contradict the price movement higher, volatility did contradict the price move higher. Instead of dropping as it would in a normal up week, the VIX index climbed higher, suggesting that investors are spending more money to insure (or protect) this recent move upward in prices.
Among the many economic reports released last week, just about the only ones that surprised to the upside were two consumer confidence results. Just about all the rest missed—Chicago Fed national activity index, international trade in goods, Case-Shiller home price index, pending home sales, initial jobless claims, and Chicago PMI. While this does not mean that a recession is around the corner—as we discussed last week—it does mean that the US economy is probably not growing as robustly as it did earlier this year when the Trump tax stimulus provided a larger boost to growth.
While the bullish bias in US stock markets remains in effect, the S&P500 is a bit over bought in the short term. Prices have risen above the upper Bollinger band on the daily and the weekly charts. This suggests that even a modest pullback of say 5% or so would be normal to expect in the next month or two. Again, the bigger picture is still bullish—all the longer term technical indicators are still suggesting that the bull market is alive and well. And of course, in sync with this conclusion, our Simple Rule is also still bullish.
So while we remain long the S&P500 equity index, we are also very aware that we may be in the very late stages of this bull market cycle, and as a result, we remain on the lookout for early warning signs that this bull market may be coming to an end.