The equity market continues the choppy trading pattern in the
process of what I believe will be a ‘W’ bottom.
Conflicting data continues to leave stock market participants in
a quandary.
Investing is a process. It’s never too late for investors to
review and re-position their holdings.
September comes to an end; we get closer to the end of Q3 and
the beginning of Q3 earnings season.
Some readers may remember my use of the following quote
regarding investing in an earlier missive. It fits so well in this
time of market confusion.
"It never can be easy because the rule of the market is that you
have to act before you know enough. Because it is a process, there
is no one moment, or single point, at which one can make an obvious
'sure' decision."
While it applies to our everyday actions in the markets, I
thought it even more appropriate now given the market reaction to
the Fed decision last week. The market, for the most part, acted
deeply confused. If one steps back and looks at the situation, it
does make perfect sense. As I pointed out last week:
"The dovishness is without doubt a positive for most stocks,
bonds, and FX, but the lack of confidence in the US economy and the
confusion around what the committee is now targeting justifies
selling for some."
Bottom line, the investing landscape just got more difficult
with this added uncertainty. Now there is no reason to obsess over
something investors can't control, so let's go back to what we can
control, ourselves.
First and foremost for me in the short term, the Fed decision
doesn't make any difference. However, how the market interprets
these signals surely does affect the short term. All one has to do
is look at what transpired this past Monday as a 20 point S&P
rally was wiped out when
this mid-day headline showed
up:
"Fed's Lockhart Says Rate Rise in 2015 Still on the Table"
Ms. Yellen added more color to the bizarre interest rate
scenario, when she announced on Thursday, that there would likely
be an
interest rate hike in 2015. The
market now seemed to like the fact that rates will rise, signaling
that the economy is on firm ground, and the world will not end.
After Ms. Yellen's comments, the market rallied, as the S&P
initially rose by as much as 20 points, only to finish lower on the
day, as the tug of war on this issue continues.
Over the past couple of weeks, the message has been to avoid
being swayed by the market's whipsaw reactions to every headline.
The past 7 to 10 trading days are a clear sign of what I was
referring to.
The current economic crosscurrents and the technical issues
swirling around the market are sending mixed signals at every turn.
It is a perfect time to re-evaluate how one should be positioned in
the uncertain environment.
I like to ask myself the question. Am I being a disciplined
investor or am I just being stubborn about the way things really
are? "I'm going to be proven right eventually", can turn into
famous last words.
Now that could be the mark of a true contrarian who is confident
in their analysis. I always say that you must have a high level of
conviction in your positions, especially when the tide is going
against them. OR, it could be the mark of an investor who is
unwilling or unable to be flexible in their approach and admit when
they're wrong. There's a fine line between a disciplined process
and overconfidence. It dovetails with the Justin Mamis quote
perfectly, as we rarely have that precise signal to be "sure".
That brings me to the point that the financial markets are
constantly forcing people to call into question their own process
and strategy. It is never ending, and at the moment, it is
magnified due to the volatility that is present. This is probably
the best and worst part about investing. The markets either keep
you honest and humble or they can drive you crazy and cause mistake
after mistake. Avoiding that trap is difficult.
The process of investing isn't easy, and I like to always keep
in mind that it is a "process". That is why I think it important to
not bury your head in the sand, but remain focused and diligent in
whatever "plan" is in place.
We often hear the words "overweight, "underweight" and "equal
weight" when it comes to sector allocation in a portfolio. I often
sit back, write the different sectors down and look at the current
allocation models that are available from any number of sources.
Then start to evaluate how my holdings stack up to some of these
models.
In my view, most investors should seek diversity to balance risk
versus reward. For this reason, even the least favored sectors may
be appropriate now for portfolios seeking a more balanced equity
allocation. There are gems out there, given the price reductions
that investors have seen in these sectors. Each investor has to
decide for themselves given their unique position, whether they
should seek a more aggressive investment style by choosing to
overweight the preferred sectors and entirely avoid the
least-favored sectors. I am not a big fan of that approach, nor
would I recommend that.
The following is probably what many investors have seen from
various sources regarding allocations. A reminder, these weightings
are not "gospel", but rather a template.
Overweight- Information Tech, Financials, Consumer
Discretionary, Industrials
Equal Weight- Health Care, Consumer Staples
Underweight- Energy, Materials, Utilities,
Telecom
No big surprises here. It is what we hear on a daily basis from
analysts and the media, with their views on the most loved, and
most hated sectors. If you are taking a long term view however, the
most hated "underweight" areas, may be worth a look.
Respecting what the market may or may not be telling us with
this volatile trading pattern, I suspect that many here may want to
be positioning portfolios more conservatively with a greater
emphasis on capital preservation and income generation. Then again,
for those that are still in their portfolio growth phase, they need
to react differently to the short term market gyrations.
Before I get chastised for leading investors down a merry path
of highlighting sectors and stocks in times of uncertainty, I add
this important note.
The thoughts, ideas, that I put forth here regarding portfolio
management, should not be taken as an all clear to buy equities
now. To the contrary, with all of the unknowns swirling around, it
is my way of suggesting a review of how portfolios are positioned
to take advantage of what may occur. That is correct, take
advantage.
During times of uncertainty, take control of the situation,
instead of the situation taking control of you.
As the market situation unfolds it is never too late to review
and possibly reposition, if necessary. The reason, if you are in
the "need to protect and generate income" crowd, a strategy to do
just that should be "at the ready", in case this market does break
down.
For those in the growth phase, a plan should be set up to be
ready for what could become a golden opportunity. Employ that
strategy that best fits your own goals and needs, centered around
your personal risk tolerance.
In my own portfolios, I have moved money from my under
performers, to more dividend payers. Other than the mini "flash
crash" morning, the net result of my adjustments saw no net adds to
my equity exposure at this time. The first step in my strategy as
market developments unfold.
Continuing my thoughts from last week, it is also a good idea to
review the thought process that goes into that portfolio
review.
"Many times we all get caught up in looking for that "diamond in
the rough" that is mired in a downtrend. I have some thoughts on
changing that mindset. Start taking a look into stocks that are not
broken and continue to move higher."
Starting with that as a backdrop,
the leading sectors and stocks in those sectors are prime
candidates for review. Any discussion has to start with
Apple (NASDAQ:
AAPL), and then proceed from there.
There are many stocks that fit the description of presenting a
good technical picture while delivering strong fundamentals. Search
those stocks out and put them on a list.
Looking at the "out of favor" sectors reveals an interesting
combination of high dividend, low beta names. It may not be such a
bad idea to research a
VZor
Tin the Telecom sector paying 5+% yields in
this zero interest rate environment. They may hold up better if
this paranoid market decides to test downside levels.
The same applies to the energy sector. Stocks with good yields
and a record of dividend growth are out there for review. Anyone
with a long term time horizon may look back at this 'fear" in the
energy patch with prices at these levels, and utter the words,
"what was I thinking".
It is currently best to let the stock market "speak". Listen to
the message of Mr. Market, and then put "the plan" to work.
In keeping with the idea that investors are constantly
challenged, I would be remiss if I didn't bring up the possibility
of new "issues" the market may face. I would normally classify the
following issues as "noise", toss them aside, and proceed as usual,
amidst the silliness that prevails.
I highlight them now because of the fragile state the market
finds itself in. The bulls will look for saner heads to prevail, to
avoid more technical damage to the market, and perhaps a complete
breakdown.
While market participants have been focused on the Fed, another
concern has been growing in recent weeks. The federal fiscal year
ends on September 30th. Congress has yet to come up with the
appropriation bills or a Continuing Resolution that would fund the
government into October. Without that, a partial government
shutdown looms. Notices were sent out last week to government
agencies to prepare for a possible shutdown. While there is still
time, the odds appear to be better than even that we will see a
shutdown.
Even if Congress manages to fund the government in the near
term, there is a possibility of a government shutdown over the debt
ceiling. Treasury has already reached the debt ceiling, but it can
dodge that constraint for a while through some creative accounting.
Such actions have limits, and the federal debt limit is now
expected to become truly binding in early December.
A short government shutdown need not be too unsettling for
investors, since we have already "been there, done that". Given all
of the other uncertainty and issues facing the market now, it's not
going to help the situation, as it will damage confidence and boost
volatility. Two issues that the bulls do not want to see more of.
The bottom line though, is that a small government shutdown is very
unlikely to create a lasting impact.
However, that this is not true of the debt ceiling, where a
misfire could result in absolute chaos in both capital markets and
the real economy. I along with the rest of the investment
community, do not want to see the economy used as a bargaining chip
in an ideological battle in Washington. A government shutdown would
only create a flesh wound of collateral damage versus a possible
mortal wound from a debt ceiling mishap later this quarter.
It is no wonder why the three non-politicians are leading the
Republican party polls. Enough already, all of this should be a
non-issue.
If that isn't enough to be concerned about, for those that
believe in history repeating, Ryan Detrick reminds everyone that
the next 3 weeks are can be very difficult.
Perhaps it is time to look at your situation and review what is
in your portfolio.
Consumers are an increasing powerful force in global economies.
In many developed countries such as the U.S., spending by consumers
accounts for two thirds of GDP. Here in the U.S., the consumer
appears to be on solid ground as noted in an article
by Scott Grannis.
U.S. Household net worth at record levels
Household debt leverage at levels last seen 30-35 years ago.
The picture that is painted in that article is far different
from what we saw in 2007-2008.
Housing continues to be a bright spot. The headline reads
"Existing home sales come in lower
than expected"
Looking at the details reveals a different picture. Drastically
reduced inventory.
Lawrence Yun, chief economist at the NAR:
"We continue to experience a tight inventory situation. Even
though real estate agents are the busiest they have been in years,
sales are unlikely to return to pre-recession highs any time soon
because of a relatively thin supply of properties for sale.
With inventories low, the median price of existing homes stood
at a relatively pricey $228,700 in August. While prices tapered off
in August, they have risen 4.7% from the same month of 2014 and
that might be squeezing some buyers out of the market. Watching the
average home price starting to increase isn't such a bad thing.
Conclusion. While the headline read negative, the details
revealed some interesting positives, and are not indicative of
market weakness. My view on the housing sector remains bullish as
new home saleshit their
strongest pace since 2008.
"Seasonally adjusted August new home sales increased 5.7% m/m to
552,000 annualized units. This was above consensus of 515,000
(+21.6% y/y) and the strongest pace since February 2008."
"Fifth District manufacturing activity slowed in September.
Order backlogs and new orders decreased, while shipments declined.
Average wages continued to increase at a moderate pace this month,
however manufacturing employment grew mildly. Prices of raw
materials and prices of finished goods rose, although at a slightly
slower pace compared to last month."
Staying with the "not so good", the
Markit services Flash PMI,
while in line with consensus estimates, fell to 55.6 - prior
reading was 56.1.
Chris Williamson, chief economist at Markit said:
"The survey data point to sustained steady expansion of the US
economy at the end of the third quarter, but various warning lights
are now flashing brighter, meaning growth may continue to weaken in
coming months."
No surprises with the release of the revised
2nd quarter GDPon Friday, as the
number now shows 3.9% growth. The same could be said for the
Michigan consumer sentiment
surveythat was released on Friday, as it came
in at 87.2 versus 87.1 expected.
This week's data on the state of the global economy mirrors the
reports that we have seen for the last few months. China continues
to show signs of slowing while the Eurozone continues to slowly
improve.
A private
Chinese manufacturing gauge slows
to a level not seen since 2009.
"The preliminary Caixin China Manufacturing Purchasing Managers'
Index, a gauge of nationwide manufacturing activity, fell to 47.0
in September, compared with a final reading of 47.3 in August. The
reading was the lowest since March 2009, when China was grappling
with the global financial crisis."
Eurozone Flash PMI
indicates their slow recovery is still on track. This report on
the eurozone data showed few signs the slowdown in China's economy
was significantly undercutting growth throughout Europe.
Timo Del Carpio, an economist at RBC Europe in London;
"In a word, resilience. We're still seeing survey indicators
coming through that are pointing to fairly robust momentum in the
third quarter, despite lingering uncertainty over both the domestic
and external demand backdrop."
"New orders grew at the fastest rate in five months and a gauge
for the amount of raw materials bought by manufacturers stood at a
19-month high, signaling increasing production in the coming
months."
"The German economy is expanding at its strongest pace since
2011, and the domestic demand will benefit from growing incomes and
receding energy prices. The outlook for exports is less certain as
emerging markets such as China struggle to rein in a weakening of
growth."
"Extremely strong domestic demand pushes domestically focused
parts of the economy like trade and services to thrive. Domestic
demand is so strong that it compensates for a slowdown in
manufacturing."
Here we are again faced with conflicting data and headlines,
leaving investors in a quandary regarding equities.
As September comes closer to an end, we get closer to the end of
the third quarter and the beginning of the Q3 earnings season.
History reveals that major market declines occur after business
cycle peaks, sparked by severely declining earnings.
The forecasts reveal that while we will see a slowdown in
earnings, I don't see enough evidence to believe that we will
experience the extremes that coincide with a bear market.
FactSet'slatest earnings insight discusses the rising dollar's
effects on U.S. companies heading into earnings. According to its
analysis, companies with more global exposure are expected to
report weaker sales and earnings growth in Q3.
The EPS estimates;
Ex-energy, S&P 500 EPS is expected to grow 3%.
For companies with more than 50% of sales in the U.S., estimated
earnings growth is 8.8%.
However, for companies that generate less than 50% of sales
inside the U.S., earnings are expected to decline 4.9%.
The Revenue estimates;
Ex-energy, estimated S&P 500 revenue growth is 3%.
For companies with more than 50% of sales in U.S., revenues are
expected to increase 5.3%.
However, for companies with less than 50% of sales in U.S.,
revenues are expected to decline 3.9%.
The USD creeps into the conversation on a daily basis, reminding
investors how much of an impact it has had, and will have, on
corporate earnings.
Food for thought, a quick look at the chart of the USD shows
that it has been flat for 6 months. For now, the impact that we
have seen from the quick rise in the USD in 2014 may have crested,
leaving me to wonder if next quarter's earnings might not be as bad
as analysts forecasts.
The week after the Fed's inaction saw investors leave stocks in
droves.
For those with a contrarian bone in their body, this is
encouraging.
WTI started off the week on a positive note, and when the stock
market turned lower on Tuesday it took crude oil prices with it.
That correlation seemed to fade on Thursday as I watched the
S&P drop another 20 points early in the day,
but WTI was up during that same time.
I read the
latest missive from Scott
Grannisthis past week and my attention was focused on the
presentation regarding credit and swap spreads.
"We continue to see the notable disconnect between credit and
swap spreads. This suggests that the underlying fundamentals of the
economy and the financial markets are still quite healthy, and that
the distress in the energy sector is not spreading to other
sectors."
I have agreed with that assessment for quite some time. I'll
have more thoughts and data on the banks and their loan exposure to
the energy sector next week to prove that point.
WTI closed at $45.70, and once again has held what I believe is
the critical $43-44 support level. A small victory this week for
the bulls.
Readers should be reminded that when I speak to the "technical"
side of the market, I am attempting to illustrate "probabilities"
that may unfold.
Anything that assists investors in slanting the odds in their
favor, should be at the very least taken into consideration. In my
work I use technical analysis extensively, but not exclusively.
Rest assured, the computerized program trading models and the
associated "algos" have a huge impact on trading these days.
Simply ignoring the technicals that are also employed in these
trading models may be very unwise. While all of this is short term
oriented in nature, it can be somewhat predictive of where the long
term outlook is headed.
Example, my discussion given the recent break in the 20 month MA
for the S&P. That isn't voodoo, it is real. One look at the
long term chart below, and the consequences of ignoring that fact,
speaks for itself.
The 20 month MA is still rising and that is positive. The best
case for the bulls is a retake of that moving average (1999) to
negate the signal.
This week's trading is an example of a market struggling to
regain price momentum. The two issues that I highlighted a while
ago, the above picture and the Dow Theory sell signal still loom in
the background.
Monday's low held above the 1953 level of last Friday, then
cratered on Tuesday, as many market participants got the
"turnaround Tuesday" memo and hit the sell button.
That action set the market up for more gap down, gap up openings
of more than 1%. In 2015 we've had seven 1%+ gaps down already and
the market has only bounced from the open to the close twice.
Another indicator that questions the market vulnerability here.
S&P 1903 was tested on Thursday as the average dropped to 1908
before rallying back, to close the week just under resistance.
The daily chart shows the potential for the "W" bottoming
process to take place.
Short term support is the same that has been in play during this
churning process, the 1929 and 1901 pivots, with resistance at the
1956 and 1973 pivots.
As I pointed out already, discarding every story that comes out
with their versions of "Fed speak" will be beneficial in the long
run. The same applies to what I call the "propaganda" stories,
meant to "sensationalize" an issue.
Example, take a look at the biotech stocks which sold off on
Monday due to
this headline from the NY
Times.Followed by a
tweet from Hillary Clinton
.
Yes, let us all listen to Ms. Clinton advise us on how to invest
in the pharmaceutical industry (sarcasm intended). Absurdity reigns
when these stories hit the airwaves, just like they did on Monday.
While I do not ignore the validity of what is implied in this
article, it hardly applies to every drug stock out there, yet all
were down significantly.
The weakness continued throughout the week right up to the close
on Friday.
Let's take a look at the prime suspect in this article, Turing
Pharmaceutical. Yes, that is correct, Turing Pharmaceutical, that
household name in the biotech industry, the core holding for many
professional money managers. The face that is THE poster child for
the entire drug industry (sarcasm intended).
This type of rhetoric has been seen before and at that time
presented a buying opportunity.
GILD,
CELGand others fit the bill for appreciation
over time. I expect the same this time around as well, as I look to
see if these two stocks will hold at these levels or go on to
challenge the mini flash crash lows on August 24th. Either way this
sector remains a prime candidate for purchase in due time.
These knee jerk reactions are opportunities to get involved in
the long term growth story in the sector. Not only were the biotech
stocks sold off, big pharma names were also hit hard. The epitome
of irrationality.
When I see the entire market react to negative company-specific
headlines (VW and
CAT), it is a clear sign that the mindset of
market participants is clearly one of bearish gloom and doom. At
the moment, that is not a great sign for the bulls. Then again the
sentiment that has embraced investors has been negative on every
front for a while now. Quite frankly the contrarian bones in me are
totally confused.
For sure the investing environment is different now than in the
past 3 plus years. However, there are indications of some positives
out there. When I see the divergences that are around, I lean to
that positive side, while respecting the negative story. I take
that approach, because the market can fool many. Many of the
soothsayers out there are saying the bull market is over. Might
they finally be right? Maybe, but in my case, I follow what has
worked for me over the years.
Don't jump to conclusions, and be patient. That is not easy when
you see the water rising around you. It is at that time that I look
for a potential lifeline.
A rational thought entered my mind. Looking ahead to 2016, the
consensus for S&P earnings is $125. Let's take those estimates
down to $120 and put a multiple of 15 on that. S&P 1800 is the
result. The S&P now stands at 1930. The recent stock market
weakness might be suggesting that scenario, thus signaling a
potential worst case that is about 7% from here. That
coincides with the "bear"
casethat was laid out this past July, where I called for a
range of 1755 to 1872 for the S&P, if things didn't go just
right.
One step at a time, as I continue to remain ready for anything,
amidst the dichotomy in the data that is being presented - mindful
of the technical "sell" signs flashed last month.
The jury is indeed still out as to what the next meaningful move
will be for the S&P.
Best of luck to all!
More