Archive for the ‘Stocks - U.S.’ Category

What Can We Learn From Asset Class Behavior?

Friday, November 17th, 2017

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Tech Stocks: 2017 Looks Nothing Like 2000

Monday, November 13th, 2017

Bubbles Speak To Unsustainable Trends

It may be surprising to some the NASDAQ made zero progress over a 6,083 calendar-day period between March 10, 2000 and November 3, 2016. The NASDAQ closed at 5,048 when the dot-com bubble peaked in 2000. Fast-forward 16.66 years and we find the NASDAQ closed at 5,046 (two points below the 2000 peak) on November 3, 2016.

An index that makes no progress over a 6,083-day period does not sound like an index in a bubble.

How Do The Last 16.66 Years Of The 2000 Bubble Compare?

The 0% gain that occurred between 2000 and 2016 does not sound like an unsustainable bullish trend or euphoric gains. In fact, a 0% gain is quite a bit different from the “this time is different” 1,513% gain that occurred during the 16.66 years leading up to the bursting of the dot-com bubble.

This Signal Has Only Occurred Two Times In The Last 60 Years

If we examine annual charts for the S&P 500 dating back to the 1950s, will we find what appears to be a major topping process or will we find something much more constructive? The answer can be found in this week’s stock market video.

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Tech 2017: Impressive Earnings Growth

During the latter stages of the dot-com bubble, actual earnings took a back seat to hype about the “this changes everything” Internet. The Internet has ushered in numerous economic shifts, but companies still need to see some real revenue along the way. The 2017-18 stats below were compiled by Goldman Sachs and appeared in a recent Bloomberg story:

  1. The FAAMG group [Facebook(FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Google (GOOGL)] saw collective sales expanding 21 percent in the third quarter, the fastest pace in more than five years and three times the growth rate in S&P 500 revenue.
  2. Tech strength is not limited to just FAAMG. Overall industry profit grew 22%, beating all other sectors except for energy.
  3. More than 80 percent of tech firms beat earnings estimates by more than one standard deviation, the best performance in at least 19 years; Apple, Microsoft, Facebook and Google accounted for half of the S&P 500’s index-level surprise.
  4. Tech profit margins expanded by 72 basis points, countering a decline expected by analysts.
  5. FAAMG growth supremacy will continue in 2018, with sales seen increasing 20 percent, versus 11 percent for S&P 500.
  6. Thanks to solid earnings, FAAMG valuations aren’t particularly out of whack with history, even with their outsize returns. The group’s enterprise value sits at 4.9 times sales, versus 2.3 for the S&P 500, in line with the 10-year average, data from Goldman showed.

This Signal Has Only Occurred Two Times In Last 60 Years

Friday, November 10th, 2017

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This Indicator Had A Divergence In Both 2000 And 2007; How Does It Look Today?

Tuesday, November 7th, 2017

Bad Breadth Can Foreshadow Bear Markets

Market breadth speaks to the number of stocks participating in an advance. Strong market breadth means a high percentage of stocks are making new highs as the major indexes make new highs. Strong breadth also aligns with widespread confidence in stocks and the economy.

Bearish Divergence In 2000

The chart below tracks the number of NYSE stocks making new highs minus the number making new lows. A bearish divergence was clearly evident well before the bull market peaked in March 2000.

Bearish Divergence In 2007

NYSE New Highs - New Lows ($NYHL) also failed to confirm the S&P 500’s new high in October 2007, telling us many stocks were already showing signs of weakness before the major averages peaked.

Quite A Bit Better In November 2017

How does breadth look as of November 7, 2017? Instead of a bearish divergence, $NYHL has been confirming the recent new highs in the major indexes.

Is The Bigger Picture Also Leaning Bullish?

This week’s video explores annual charts to better understand the long-term outlook for stocks.

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How Does Breadth Help Us?

Like any chart or indicator, $NYHL helps us assess the probability of good things happening relative to the probability of bad things happening. The probability of bad things happening never drops to zero. Market breadth in 2017 leans toward the “good things happening” end of the spectrum.

Stock Ownership Figures Look Nothing Like A Bubble

Monday, November 6th, 2017

A Euphoric, All In Bubble?

Once a year, Gallup conducts a poll that provides some insight into the sustainability of the bull market in stocks. The concept of an investment bubble implies irrational investor confidence. If skepticism and fear were near all-time, bubble-like lows, we would expect a very high percentage of U.S. households to be in the stock market, as was the case near the euphoric 2007 stock market peak (see graph below).

Are We Back To Bubble Territory In 2017?

Therefore, it would be helpful to know if stock ownership figures are back near the bubble-like 2007 levels in 2017. From Gallup:

“Before the 2008 financial crisis, 62% of U.S. adults, on average, said they owned stocks. Since then, the average has been 54%, including lows of 52% in 2013 and 2016. In Gallup’s April 2017 update, 54% of Americans report having money invested in stocks.”

Household Figures Align With 2017 Annual Charts

If the stock market had a chance to go on a surprising multiple-year run from present levels, we would expect a healthy dose of skepticism and a significant amount of people not yet participating, which is exactly what the Gallup numbers tell us. We would also expect long-term set-ups in the market to be similar to multiple-year bullish set-ups in the past. This week’s video explores annual charts to better understand the long-term outlook for stocks.

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Many Investors Remain On The Sidelines

Fear of losses is a powerful factor in the financial markets. History tells us after a major financial crisis it can take years before fear of losses is overtaken by the fear of missing gains. From Gallup:

“The stock market lost more than half of its value during the bear market that coincided with the Great Recession and 2008 financial crisis, with many investors responding by taking their money out of the market.”

The chart below shows the trend of household stock ownership between 2007 and 2016; it was not screaming “bubble” in 2016, and it remains that way in 2017.

The Long-Term Outlook For Stocks

Friday, November 3rd, 2017

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Nobel Prize Winner: Are You Too Close To The Markets?

Monday, October 30th, 2017

The University of Chicago’s Richard Thaler was awarded the Nobel Prize for his pioneering work in behavioral economics. His work aligns with many of the common investor missteps covered in CCM videos in recent months. Morningstar/MarketWatch pointed out how Professor Thaler’s work can assist us in a world where new information is available 24/7/365:

“Unfortunately, our increasing sophistication has brought with it an additional unfortunate consequence: a tendency to be too conservative. This is where Professor Thaler’s research has been so revealing. He showed that investors become increasingly risk-averse the more closely they follow the market and their portfolios’ value. I need not point out how easy it now is to track the daily — if not hourly — gyrations in both the overall market and our individual portfolios as well. Unless we’re careful, therefore, one effect will be that we have become more conservative — not just when we think a bear market is imminent, but on average over time. And that would be costly, since it means we’ll earn a far lower rate of return than we would have otherwise.”

ETFs And Algorithms Contribute To Short-Term Fears

If you follow the financial markets, at some point you have come across these common and fear-inducing statements:

  1. Passive investing and ETFs have changed the market’s risk profile.
  2. Algorithms and computer-based trading have changed the market’s risk profile.

This week’s video water tests the statements above by exploring the history of computerized trading and passive investing.

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The Perils Of Myopic Loss Aversion

Watching the market tick-by-tick and/or checking our account balances frequently brings our natural defense mechanisms to the forefront, which can lead to placing a high priority on avoiding short-term market volatility. From Morningstar/MarketWatch:

“The reason for this is a behavior pattern that Professor Thaler called “myopic loss aversion,” which is in turn a combination of two personality traits that almost all of us possess: We hate losses more than we love gains, and, given the chance, we can’t resist looking to see how our investments are doing. As a result, frequently checking our portfolio’s gains or losses is not a benign act; it instead tends to exaggerate our subjective perceptions of risk.”

Below is the abstract from a 1997 Thaler paper The Effect Of Myopia and Loss Aversion on Risk Taking:

“Myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently. Two implications of myopic loss aversion are tested experimentally. 1. Investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often. 2. If all payoffs are increased enough to eliminate losses, investors will accept more risk. In a task in which investors learn from experience, both predictions are supported. The investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.”

Taking A Long-Term View Can Help

Investors are constantly bombarded with scary warnings about impending gloom and doom, providing fuel for a short-term, avoid-volatility focus. If we monitor and understand longer-term trends, it becomes easier to focus on the possibility of substantial and satisfying gains occurring over several years. For example, we have all seen the scary 1987 “Black Monday” stock market crash chart, but few of us have seen the two charts below, which show the gains in the S&P 500 before and after the October 1987 plunge.

Are The Charts Skewed By Algos And ETFs?

Friday, October 27th, 2017

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The Mother Of All Breakouts Still In Play

Monday, October 23rd, 2017

Short-Term View

The NYSE Composite stock index traded near the bottom of the orange box shown below in 2013 and 2016. The index visited the top of the box in 2014, 2015, and again in late 2016, before breaking out. A successful retest of the breakout occurred earlier in 2017.

Fractals Are Key

Since markets move in fractals, we can apply the same principles to patterns that form on short-term charts to those that appear on long-term charts, even very long-term charts. From stockcharts.com:

Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance, bears take over and force the price lower. One group (bulls or bears) will exhaust itself and a winner will emerge when there is a breakout. Only until the price breaks above resistance or below support will it be clear which group has won the battle.

Did The 1987 Crash Come Out Of Left Field?

As the years have gone by, many have come to believe the crash that occurred on Black Monday, October 19, 1987 was a true “we had no warning at all” black swan. This week’s video looks at the facts that were in place the Friday before Black Monday, allowing us to better understand the odds of something similar happening in 2017.

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The Very Long-Term View

When we view the NYSE Composite Stock Index from 60,000 feet, we see a long-term period of indecisiveness that occurred between 1966 and 1982. After a successful break above resistance and a successful retest, stocks rallied for a very long period of time. A similar period of long-term indecisiveness took place between 1996 and late 2016. As of this writing, the bullish breakout is still in place.

Market history tells us the longer a market goes sideways, the bigger the move we can expect to get once a bullish breakout or bearish breakdown occurs. In the present day, stocks moved inside the upper orange box for 21 years. Since first covering the mother of all breakouts on January 27, 2017, stocks have followed the bullish script.

The Rational Case For Stock Market Plunges In 1987, 2011, and 2017

Friday, October 20th, 2017

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