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

Capturing Gains Within The Context Of Normal Market Volatility

Monday, August 29th, 2016

Staying Invested Is Not Easy

A recent analysis of a rare bullish signal may have given the impression trend following is relatively easy to implement in the real world. Volatility tells us nothing is easy in the markets.

Volatility Is A Fact Of Life In The Markets

Would it be easy to stay with the trend during the bouts of volatility below?

Examples Above Occurred Within A Bullish Trend

All four examples of S&P 500 volatility above took place between points A and B below, demonstrating that capturing long-term gains requires emotional stability and a high degree of discipline. Point A is in 1995 and Point B is in 1999.

Four More “Give Back” Examples

Notice the dates on the four charts below; they all fall between 1995 and 1999.

2016: Why Are Stocks Holding Up After Talk Of Rate Hikes?

While it is too early to declare the stock market is going to be able to shake off renewed talk of rate hikes, the early returns fall into the “better than expected” category. The Wall Street Journal headline below aligns with our analysis of Jackson Hole, which can be found at the 25:48 mark of the video below.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Why Can’t We Just Buy And Hold?

There is nothing wrong with long-term buy and hold. However, due to the inevitable large drawdowns that a buy-and-hold investor must endure, buy and hold is not easy to implement and it can be emotionally draining.

Stocks Always Come Back

The two charts below show in the long run buy and hold has proved to be an effective strategy; the question is what happens if the 17-year or 26-year periods below occur during your retirement? Many investors cannot afford to wait 17 to 26 years for buy and hold to make it back to break even.

Some may counter with “those are extremely rare periods”. That may be the case, however, the S&P 500 hit 1,576 in March 2000….the S&P was at 1,576 in 2007….and again in 2013. The same can be said for the three “the market has gone nowhere” visits to 800 in 1997, 2002, and 2009 (see 1576s and 800s in the chart below).

What About Dividend Stocks, Utilities, And Diversification?

While it is true under certain conditions diversification, dividend-paying stocks, and utilities can help soften the blow during bear markets, the factual cases below highlight the need to have realistic expectations about what has happened to investors historically:

  1. Will Dividend Stocks Save You In A Bear Market?
  2. Are Utility Stocks Safe In A Bear Market?
  3. The Downside Of Diversified Buy-And-Hold Investing

Toning Down The Talk Of Rate Hikes

All things being equal, risk markets tend to frown upon rate hikes. After a rate-hike-induced reversal during the August 26, 2016 trading session, two statements were made that were a bit more market friendly. From The Wall Street Journal:

“Two Fed officials have played down the likelihood of two rate increases this year beginning as soon as next month, after the U.S. central bank’s second-in-command floated the idea on the sidelines of the Kansas City Fed’s research conference. Vice Chairman Stanley Fischer told CNBC on Friday that Fed Chairwoman Janet Yellen’s Jackson Hole speech, in which she said the case for a rate increase has strengthened, was consistent with the central bank potentially raising rates at its meeting next month and again before the end of the year, if data shows the economy performing well.”

Both Approaches Can Work; Neither Are Easy To Implement

Buy and hold has worked very well historically, assuming investors stayed invested during the gigantic drawdowns and periods of “going nowhere” for well over ten years. Managing risk with trends has worked well historically, but like buy and hold, it is very difficult to implement properly during countertrend moves.

The key to both approaches is having realistic expectations with regard to drawdowns, volatility, and discipline. Both methods can work; neither are easy to implement in the real world and in the context of human emotions. The moral of the story is:

It is nearly impossible to invest successfully without allowing our account balances to swing from time to time due to normal and expected market volatility.

Under our approach, the market model helps us discern between volatility to ignore and volatility to respect.

Is Dow Theory Telling Us The Stock Rally Is Going To Fail?

Friday, August 26th, 2016

This week’s CCM video can be found in this post.

Dow Theory Non-Confirmation

The charts below show the Dow Jones Transportation Average has failed to print a new high above the previous high made in 2015. Given the Dow has made a new high, a Dow Theory non-confirmation remains in effect.

What Can We Learn From History?

This post will review some historical cases to help answer the question:

How concerned should we be about Dow Theory?

This week’s video starts with a look at two historical periods when the Transportation Average failed to confirm highs made by other major indexes, including the Dow Jones Industrial Average. The video also updates the trends covered on August 19, along with a analysis of Janet Yellen’s Jackson Hole speech.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Charts Monitor, Rather Than Dismiss Fundamental Data

Critics of technical analysis often mistakenly believe that using charts discounts the importance of fundamental data, such as earnings, employment, and economic growth. Charts allow investors to monitor the aggregate investor interpretation of all the fundamental data. Said another way, charts are efficient tools used to monitor vast amounts of fundamental data, which is important since fundamentals ultimately determine which assets classes will perform best. When the economy is healthy, stocks tend to beat bonds. When economic fear dominates, bonds tend to beat stocks.

Dow Theory Is Based On Economic Common Sense

Dow Theory is based on a series of Wall Street Journal articles written by Charles Dow. The basic tenets of Dow Theory are easy to understand. Charles Dow believed that:

  1. In order for industrial companies to increase their earnings, they had to produce and sell more goods.
  2. If industrial companies are selling more goods, then transportation companies must be delivering more goods to retailers and wholesalers.
  3. Therefore, in a healthy economy, both industrial companies and transportation companies should be experiencing revenue growth.
  4. If industrial and transportation companies are growing their revenues, then the industrial and transportation stocks should be attractive to investors.
  5. If industrial and transportation companies are doing well and are attractive to investors, both the Dow Jones Industrial Average and the Dow Jones Transportation Average should be making new highs in unison, serving to confirm a healthy economy.
  6. From a bearish perspective, signals are generated when the two indexes make important new closing lows, which is indicative of a weakening economy.

Behind The Averages

After reviewing the companies in the industrial and transportation averages, it is easy to see why they represent logical vehicles to monitor the pulse of the U.S. economy. In the present day, our economy is driven by more than just industrial or manufacturing companies. The Dow Jones Industrial Average contains traditional producers, such as IBM (IBM), 3M (MMM), Boeing (BA), Chevron (CVX), and Johnson & Johnson (JNJ). However, the Dow (DIA) also contains Visa (V), Goldman Sachs (GS), and American Express (AXP), since the present day economy relies heavily on the financial sector. The Dow Jones Transportation Average (IYT) still has railroads, such as Union Pacific (UNP) and Norfolk Southern (NSC), but it also contains more modern logistics companies, such as United Parcel Service (UPS), Fed-Ex (FDX), and J.B. Hunt (JBHT).

Is This Long-Term Volume Signal A Warning Flare For Stocks?

Wednesday, August 24th, 2016

Does Volume Complement or Contradict Bullish Analysis?

An August 19 analysis outlined a long-term bullish signal for stocks that has occurred only ten other times in the last thirty-five years. Have we seen any other long-term signals in recent weeks? The answer is yes.

A Trend Change in Up/Down Volume?

The chart below shows up/down volume (1996-2010) for the NYSE Composite Stock Index, along with its 50-week moving average (thick blue line).

Notice how all-things-being equal, the probability of bad things happening increases when the 50-week moving average is flat or negative (see orange and red arrows below). Conversely, the probability of good things happening increases when the 50-week moving average turns back up in a bullish manner (see green arrows below). The S&P 500 is shown at the bottom of the image below for reference purposes.

Has The Line Turned Back Up In A Bullish Manner?

The answer to the question above is yes. In simplified terms, it appears as if volume patterns have shifted from favoring declining issues earlier in 2016 to favoring rising issues currently.

A Foolproof Signal?

Since there is no such thing as a foolproof indicator or signal in the financial markets, the recent bullish shift in up/down volume assists us with probabilities. As long as the slope of the 50-week remains positive, the odds of good things happening will be higher. With Yellen’s Jackson Hole speech coming Friday, the market will be processing some important new information in the coming days.

Long-Term Means Long-Term

Both the moving average analysis covered in a recent video and the analysis above relate to longer-term outcomes, meaning weeks, months, and years. Therefore, even if the bullish signals prove to be helpful, stocks could experience a fairly significant pullback before resuming the current bullish trend. Said another way, for these signals to be used effectively we must have realistic expectations about normal volatility within the context of a rising trend.

Will Yellen Stick To The New Normal Script?

Tuesday, August 23rd, 2016

Insight Into Jackson Hole

Janet Yellen will deliver the keynote address on the market’s calendar this week when she speaks at the Fed’s Jackson Hole conference Friday at 10:00 am ET. The Wall Street Journal’s Jon Hilsenrath has been covering the Fed for years. Earlier this week, Hilsenrath reiterated the Fed’s “new normal” narrative, which may provide some insight into Yellen’s remarks later this week. From The Wall Street Journal:

For much of the post-financial-crisis era, U.S. Federal Reserve officials have held to a belief that they could get back to their old way of doing things. Growth would resume at a modest pace, annual inflation would climb to 2% and interest rates would gradually rise from near zero to a normal level near 4% or higher. As they prepare to gather at their annual retreat in Jackson Hole, Wyo., officials are grimly coming to a view that it isn’t going to happen that way.

Yellen Acknowledged New Normal In June

Fed officials have been publicly stating the U.S. central bank may not be able to get back to the “old way” of doing things, a concept covered in detail on July 16 using the kale smoothie analogy. The text below comes from a Reuters story published on June 15:

In a news conference following the Fed’s latest meeting, Chair Janet Yellen said the central bank was still coming to grips with the likelihood that the neutral rate - the point at which monetary policy is neither spurring nor restraining economic growth - is stuck at a historic low and could limit the central banks room to maneuver. But “there are long-lasting, more persistent factors that may be holding down the longer-run level of neutral rates,” Yellen said.

“It could stay low for a prolonged time… All of us are in a process of constantly reevaluating where the neutral rate is going, and what you see is a downward shift over time, that more of what is causing this to be low are factors that will not be disappearing.” There could be revisions in either direction,” Yellen said. “A low neutral rate may be closer to the new normal.”

QE Will Most Likely Be The Weapon Of Choice

The Fed traditionally combats a recession by lowering interest rates, something that will be difficult to do in the future given interest rates remain near zero. Therefore, knowing negative rates have had mixed results in Japan, the Fed will most likely print more money, via quantitative easing (QE), in an attempt to keep debt-burdened financial markets elevated during the next recession. From The Wall Street Journal:

A research paper by Fed senior economist David Reifschneider argues that bond purchases and low-rate promises ought to be enough for the Fed to manage even a “fairly severe recession” that drives the unemployment rate up to 10%. Doing so would require the Fed to expand its securities portfolio by $2 trillion, and possibly as much as $4 trillion, the analysis shows.

Talk Of One More Rate Hike

Is it possible the Fed raises rates one more time? Sure, in fact it is likely, at a minimum, the Fed strongly considers another hike over the next four to six months. In terms of the September Fed meeting, the market currently puts the odds at 82% the Fed does nothing (18% they raise rates). From The Wall Street Journal:

This isn’t to say the Fed won’t raise short-term rates again sometime this year. Many officials expect it will. The Fed boosted its benchmark federal-funds rate—a rate on overnight loans between banks—by a quarter percentage point from near zero in December. But it does mean it isn’t likely to raise them much beyond its next few moves in the months and years ahead. “We probably don’t have a lot of monetary policy tightenings to actually do over time,” William Dudley, president of the Federal Reserve Bank of New York, told Fox Business Network.

Million Dollar Question

If the Fed raises rates and also sends a message rates will remain low longer-term, will the market sell off or focus on the longer-term new normal? Ultimately, the market will decide. However, given the facts we have in hand now, asset class behavior seems to be following the lower-rates-longer script.

2016 Investor Fund Flows Nothing Like Excessively-Optimistic 2007

Monday, August 22nd, 2016

“You Can’t Lose Money On Tech Stocks”

If you have been involved with the markets for the last twenty years, you may recall hearing excessively-optimistic statements such as “you cannot lose money on internet stocks” in the late 1990s. Unfortunately, the excessive optimism was followed by painful losses in technology stocks.

“Housing Has Changed The Markets”

Between 2004 and 2007, the excessive optimism was based on the theory that ever-increasing home values would allow for endless borrowing to fuel spending and investment.

Flight To Safety As Markets Break Out

As outlined in detail on July 25, August 1, and August 3, the recent breakouts from long-term consolidation patterns by the three major U.S. stock indexes are typically very bullish signs. From afar, it may seem like investors are once again in excessive-optimism territory. However, given actions speak louder than words, if anything, investors may be excessively pessimistic in 2016. As shown via the @ukarlewitz tweet and Wall Street Journal graphic below, instead of piling into optimistic and growth-oriented stocks, investors have been piling into conservative and defensive-oriented bonds.

What Do The Facts Say About The Prospects For Stocks?

This week’s video examines a rare bullish occurrence that historically has marked a good time to add to equity holdings, rather than reduce them. The video is based on objective data, allowing for a rational assessment of present day odds of good things happening vs. the odds of bad things happening. The results, from a probability perspective, do not support an overly defensive portfolio allocation looking out several months, or in many cases several years.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Investment Implications - The Weight Of The Evidence

The term odds implies uncertainty. Therefore, we are always open to a shift in the weight of the evidence. Right now, the longer-term weight of the evidence remains favorable for risk-on stocks.

Rare Signal: How Have Stocks Performed In The Past?

Friday, August 19th, 2016

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

Stock Rally Is Based On More Than Just Central Banks

Thursday, August 18th, 2016

Stocks Never Move Based On One Input

Are central banks the only reason stocks have not collapsed in 2016? The Citigroup Economic Surprise Index says no. From a Wall Street Journal article dated July 12:

“Economic data is finally beating expectations. The Citi U.S. Economic Surprise Index, which gauges how data compare with economists’ forecasts, is at its highest since January 2015. Meanwhile, it’s positive for the first time since November–meaning data are topping expectations rather than missing.”

The S&P 500 Before The Data Started To Improve

On Monday, June 27, the Citigroup Economic Surprise Index was still in an indecisive range and the market was concerned about the economic impact of the recent Brexit referendum.

The S&P 500 After The Data Started To Improve

Central banks have played a big role in helping stocks get off the deck in 2016. However, the stock market has also responded to improving economic data.

Post Brexit Economic Data

Not only has the economic data in the U.S. improved, but data in the wake of Brexit in the United Kingdom is also coming in better than expected. From CNBC:

U.K. retail sales posted a strong beat on Thursday, adding to a positive picture for the country’s economy following the decision to leave the European Union. July retail sales - an indicator of post-Brexit vote sentiment - posted a monthly rise of 1.4 percent versus consensus expectations of a 0.2 percent increase. The yearly figure saw a rise of 5.9 percent, according to official data by the Office for National Statistics.

Investment Implications – The Weight Of The Evidence

As outlined in detail on August 17, the hard technical data has improved significantly since June 27. The Citigroup Economic Surprise Index tells us the economic data has also improved since June 27. The odds of success in economically-sensitive assets, such as stocks and commodities, improve when the technicals and fundamentals are singing from the same hymnal. The wisdom of the market wizards also reminds us to keep an open mind about the “whys” behind the recent push higher in equity prices.

“The second item is something that Ed Seykota taught me. When a market makes a historic high, it is telling you something. No matter how many people tell you why the market shouldn’t be that high, or why nothing has changed, the mere fact that the price is at a new high tells you something has changed.”

Larry Hite
Market Wizards

Link To Wednesday’s Post

Wednesday, August 17th, 2016

Today’s post is on See It Market.

These Four Charts Say A Lot About The Stock Market

Tuesday, August 16th, 2016

Retail Trying To Break Out

The consumer is often referred to as the lifeblood of the U.S. economy. Even though retail is in a state of Amazon-flux, the sector is trying to clear an area that has previously been dominated by sellers.

High Beta Clearing Hurdles

The High Beta ETF (SPHB) carries dominant weights in financials (XLF), energy (XLE), and technology (XLK). As shown in the chart below, this economically-sensitive investment is trying to break above an area that has acted as resistance for a year. As recently as June 28 (point C below), SPHB looked to be on the ropes.

Materials: One Hurdle Down

When investors are more confident about future market outcomes, they tend to prefer economically-sensitive materials (XLB) over defensive-oriented intermediate-term Treasury bonds (IEF). As shown in the chart below, the confident vs. concerned ratio is trying to break out in a confident manner.

Materials: One Hurdle To Go

Materials have some work to do relative to longer-term Treasury bonds (TLT). Both XLB and TLT are in positive trends when viewed in isolation. The ratio below helps us monitor the market’s tolerance for risk; it also gives us some insight into longer-term interest rate expectations. The market believes one more Fed hike could be coming in the next six months, but has doubts about a third hike ever seeing the light of day.

While risk tolerance has picked up since the June 28 Brexit reversal, the last time materials made a new high relative to long-term bonds was back in late April (point A above); the last new low was made in June (point B).

How Can We Use All This?

The charts above show an increasing tolerance for risk, which improves the odds of the S&P 500’s recent bullish break to new highs being sustainable. These charts can also be used to monitor any shifts in investor expectations about the markets, economy, and central bank policy.

It should also be noted the recent bullish pops higher on the charts of XRT (retail), SPHB (high beta), and XLB (materials) vs. IEF (bonds) are still near areas of prior resistance, meaning those breakouts still need to prove they can be sustained. The longer a breakout holds the more meaningful it becomes. The current bullish slant of the charts above aligns with the recent comparison of the market peaks in 2000 and 2007 to the present day.

How Does 2016 Compare To Stock Market Peaks In 2000 And 2007?

Monday, August 15th, 2016

2000 Dot-Com Peak: 200-Day Was Helpful

“As a trader who has seen a great deal and been in a lot of markets, there is nothing disconcerting to me about a price move out of a trading range that nobody understands.”

Bruce Kovner
Market Wizards

A market’s 200-day moving average can assist in monitoring investors’ net aggregate tolerance for risk. Notice in the first chart below the S&P 500 was unable to recapture its 200-day after dropping below it in October 2000. Compare and contrast the top chart to the bottom chart; notice how unlike 2000, the S&P 500 was able to recapture its 200-day after the Brexit bottom was made on June 27, 2016.

How Can Trends And These Charts Help Us?

If Michael Phelps was open to providing some insight into how to swim faster, most swimmers would be happy to listen. In a similar way, we can learn from the best money managers of our time. This week’s video covers many basic tenets of the “market wizards” and provides a clear example of how moving averages can be helpful in managing risk and reward.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Video

2007-08 Financial Crisis Peak: 200-Day Was Helpful

The situation was similar in 2007-08. Notice in the first chart below the S&P 500 was unable to recapture its 200-day after dropping below it in December 2007. Compare and contrast the top chart to the bottom chart; notice how unlike 2008, the S&P 500 was able to recapture its 200-day after the Brexit bottom was made on June 27, 2016.

Removing Price Allows Us To Focus On Trends

The concept of trends is easier to see if we remove the day-to-day fluctuations in price from the equation. Notice how during the dot-com bust bear market, the S&P 500’s 50-day moving average (blue) was never able to recapture the 200-day moving average (red). Compare and contrast the present day look (second chart below) of the 50-day and 200-day to the look in 2000-2002.

In the 2016 chart above, two favorable things from a trend perspective have happened recently that never occurred during the dot-com bear market: (1) the slope of the S&P 500’s 200-day turned back up in a positive manner, and (2) the 50-day crossed back above the 200-day.

Similar Concepts 2007-08 vs. 2016

Notice how during the financial crisis bear market (top chart below), the S&P 500’s 50-day moving average (blue) was never able to recapture the 200-day moving average (red). Compare and contrast the present day look (second chart below) of the 50-day and 200-day to the look in 2007-2008.

In the 2016 chart above, two favorable things from a trend perspective have happened recently that never occurred during the financial crisis bear market: (1) the slope of the S&P 500’s 200-day turned back up in a positive manner, and (2) the 50-day crossed back above the 200-day.

How Can These Charts Help Us?

No chart from any period, including 2016, can predict the future. However, charts and moving averages can help us better understand the “probability of bad things happening” vs. “the probability of good things happening”.

Right now, given the look of the 2016 charts above, the probability of good things happening today is much higher than it was in early 2001 and early 2008. Nothing says the 2016 cannot breakdown and morph into a look similar to 2001 or 2008. However, that has not happened yet. Therefore, we will continue to hold positions in markets with positive trends, including U.S. stocks. The three charts below summarize the concepts presented above.