Financial Markets update


After a difficult day to close the week, I felt a summary post was necessary. Friday was extra difficult because interest rates rose along with declining stocks. So bonds failed to provide the diversification benefit that they have historically done over time. This is not unusual, after all anything can happen (and usually does) in the short term, especially given the fact we are probably in the mid to late cycle of this expansion.

The chart above shows the broad based declines for Friday. Stocks, both domestic and international, fell over 2% each while bonds declined over 1%. Gold “outperformed” by falling only .60%.

So what happened?


Last week Manufacturing PMI came in well below expectations and below the 50 level, which indicates contraction.


This week the Services PMI also came in well below expectations. The street was expecting 55.4 and we ended up getting 51.4. Still expanding, but disappointing.

On Thursday the European Central Bank failed to announce any new plans for additional stimulus. And Friday morning Boston Fed president Rosenberg made the case for increasing rates sooner rather than later.

In my opinion the combination of poor data and more hawkish central banks induced some profit taking. We were probably overdue for some sort of pullback seeing as the markets had essentially risen some 10% in a straight line after the “Brexit” selloff.


The chart above shows the S&P 500 is only about 3% off it’s all time highs. So we must take Friday’s selling into context. There is some potential support between 2116 and 2110 which coincides with the “Brexit” gap and prior swing highs. The most common correction during these last 7 years has been of the 5% variety, which from current all time highs projects support around 2075. Either of these spots could work but it’s possible the market could head lower too.


The key is too focus on the big picture. The above chart shows the cumulative advance -decline of the NY stock exchange. This chart has been on fire ever since the early year sell-off. This represents broad market participation on this advancement and not the picture of a market getting ready to roll over.

We couple this with earnings growth that is starting to come back and an economy that is growing well below it’s capacity but not signaling recession either. This suggests the likelihood of continued upside for equities whenever and wherever this correction concludes.  The Fed could probably derail this by raising rates at far faster pace than the street anticipates. However everything they have said so far suggests they don’t plan on recreating a 1932 style policy error.

The key thing for investors is to focus on re-balancing instead of predicting. We know we will have another bear market at some point in the future and that stocks are more risky the higher they go and less risky the lower they go. So there is nothing wrong with becoming a little more conservative as stocks go higher and a little more aggressive as stocks go lower. Instead of getting spooked and scared completely out of the market, take some profits and rebalance into some of the laggards (whether it be bonds, value stocks, etc) and vice versa when the market rallies.

There is nothing wrong with accepting that we can’t fully predict every up and down and plan accordingly. What is a problem is when we get scared and sell at lows and then reverse and buy when the market is high. Do whatever it takes to avoid this, whether it be to stop watching the business news, stop looking at the accounts for awhile, or finding a capable advisor to do this for you.

Why you should stay the course with your investment strategy…

The key to successful investing is understanding that there isn’t a perfect solution, there isn’t an investment strategy that doesn’t have drawbacks, and no strategy will be immune to periods of under-performance.

At first this statement may seem like an oxymoron. After all, I’m saying that the key to successful investing is understanding that there isn’t a perfect solution. But hear me out. Once you understand that there isn’t a perfect solution and that there’s no magic recipe for market beating results all of the time, it will free you from the bondage of chasing every tip, strategy, or hot stock that happens to be performing well in the near term.

The only way I know of to be successful at investing is to develop a strategy and stick with it through thick and thin. There is no one size fits all solution here either. What works for me is to create a diversified portfolio of holdings, dedicating portions to holdings that work in a variety of different market environments (treasuries for deflation, growth stocks for risk on, high quality dividend and value stocks for the dull periods, etc.). This way there’s no need to try to predict every short term macro outcome each year (which is impossible anyways). My stock picking strategy is basically growth at a reasonable price. But there are a plethora of different strategies to choose from. You just need to understand your goals, time horizon and risk tolerance. And if you can’t do it yourself, find a competent advisor that can do it for you.


Let’s use the example of Warren Buffett since he’s the most famous investor of our time. Buffett’s Berkshire Hathaway is up over 1,000,000% from it’s beginning in 1964 to the 2015. Handily outperforming the S&P 500 (up 2,300%) over that same time frame. So by looking at this chart you’d assume that Buffett must beat the market all of the time right?


Actually this isn’t true at all. Per Bloomberg, Berkshire beats the S&P 500 51% of the time on a monthly basis, 55% of the time on a quarterly basis, and 67% of the time on a yearly basis. So in the short term it’s basically a coin flip and even on a yearly basis Berkshire under-performs the S&P one third of the time. The aggregate difference is so staggering because Buffett isn’t focused on beating the market but instead he focuses on his strategy and sticks with it through thick and thin.

So if the greatest investor of our time, with unlimited capital, fails to beat the market on an annual basis 1/3rd of the time, why do we think we can possibly do better? The problem is in the way we assess performance, focusing far too much on the short term. This leads investors to constantly change their strategy in a frantic search to find the perfect solution, when none exists. This search generates transaction costs, tax liabilities (if applicable), buying stocks/asset classes at highs, while selling stocks/asset classes low. In totality it usually causes more harm than good and once we accept this fact, the sooner we can move onto healthier investing behaviors and benchmark time horizons.

Now obviously this isn’t a truly fair comparison. Buffett basically operates a hedge fund and his insurance department of the business offers almost unlimited cash flow to buy more and more stock as it goes down. A luxury unfortunately very few of us will ever have. But the premise remains the same. The increased focus on annual returns has done more harm than good in my opinion. Personally I think performance stats on anything shorter than 5 years shouldn’t hold much weight. A typical full market cycle usually occurs in five years or so and that is how you truly judge performance.

Who cares whether you made 5% or 8% one year if you had to take on too much risk to achieve it and lose 50% of your account value during the next inevitable bear market. Who cares if your high dividend stock is paying 5% dividends instead of the 1.5% a treasury bond pays when your a conservative investor. That 3.5% isn’t going to make a difference when the stock drops 10% in one day anyway (something a treasury bond wouldn’t do).

Assess your goals in comparison to your risk tolerance and time horizon and use a strategy that best fits your comfort level and don’t look back. Don’t be tempted to deviate to the newest investing fad that’s flying high. You’ll do fine without it.

There is always a trade off between risk and reward in every legitimate investment. After seven years of solid gains in stocks, I worry that investors may have developed amnesia about where we came from, while being sidetracked by performance chasing. Usually investors get sucked into this game at the most inopportune times.


Smuckers misses on revenues, where is support and what can we learn?


J.M. Smucker reported a miss on revenues while maintaining it’s EPS outlook. The shares are down about 8% today. I’ve long been a fan, and a shareholder. Strong balance sheet, that’s been a steady and consistent out-performer, in a “safe” industry.

The stocks had quite a run up leading into today’s earnings. It was up 26% YTD and even after today’s drop it’s still outperforming the S&P 500, at 7.61% YTD, by a wide margin. The company has a long successful track record to allow one quarter to derail any of that. In my opinion this has more to do with the run up leading into this report. It’s great to see a stock you already own go “parabolic”. But oftentimes that just means investors are pulling future returns forward into the present and the result is usually either sub-par performance going forward (as the prior gains are “digested”) or worse, a major swing high before a significant pullback (as the stock/asset class becomes significantly overvalued).

A major daily move like this is almost never resolved in one day. Which leads me to believe there will be further downside in the days/weeks to come. Projected support comes in at $132 and $120 respectively. If your bullish on the stock, these might be good price points to enter.

Perhaps the better question is what can we learn from this? While there is no one perfect way to invest or trade, this is what has worked for me.

  1. Never chase momentum

Nothing goes up (or down) forever. Patience is critical to successful investing and it’s one of the hardest elements to master. A stock actually becomes more risky the higher it goes and less risky the lower it goes. This goes against our natural instincts but it’s the truth.

2. Never over-allocate to any one individual company

How many blue chip companies over the last 50 years are no longer relevant? My personal rule is to never allocate more than 5% to any one individual company. This way even a 50% drop in the company’s stock would only have a 2.5% effect on your total portfolio.There are some great companies that look like they may be around forever. But the truth is no one knows what the future holds with any certainty. Don’t allow your pride to make you think otherwise.

3. Equal weightings for all companies in your portfolio

While this is not a hard and fast rule for me, I do think the theme is relevant. This sort of piggy backs off of #2. I’m not interested in trying to figure out what company may or may not outperform the other each and every year. To me this is a classic “paralysis by over analysis” and I think it does more harm than good. When you overweight certain stocks over another it becomes more emotional. You become more emotionally connected in the outcome of the stock and this can make for some bad judgement calls. Locate some good companies and buy them at good prices and in equal size portions. Let the chips fall as they may. After all there is much outside of our control in the short term anyway.

4. Stay balanced

There is much debate between passive and active management. The problem I find is that most people take one side over the other and become entrenched in that viewpoint. Personally I think both sides have excellent points and I use a combination of passive index ETF’s and active stock picking in my approach.

There is a growing trend in this “buy and hold forever” philosophy. This is mainly the product of a seven year bull market. Investors can certainly do better than this approach but it takes time and effort (nothing good is easy).

(Disclaimer: Long SJM)

Walmart price chart update post earnings…

Last year I posted a technical update on Walmart stock after it offered a disappointing profit and sales outlook. At that point the stock was trading in the $60’s and my thoughts were that the stock was going to head lower. “So between $52-$54 (if it gets there) may be enough support to halt the decline” was my actual reply.


Fast forward one year later and we can see that price did indeed drop into the upper end of the projected support range at $54.65 and has proceeded to rally to $74 as I type this (a gain of over 35%).

Today the company issued a better outlook along with an earnings and revenues beat. The company has made some meaningful investments in the e-commerce space to compete with Amazon.

While I thought the stock was intriguing as an intermediate term trade in the mid $50’s, I’m not nearly as excited now that the stock price is in the mid $70’s.  While the traditional valuation metrics aren’t terribly overvalued (outside of the PEG ratio), they are certainly no longer undervalued either.

It’s probably more well positioned than Target in the near term, while both companies offer attractive dividend yields, I still think there are better options.

Going forward I think this $74-$75 level will be key resistance. A clear break above could be a signal that this turnaround has legs.

Source: Wal-Mart lifts profit outlook as sales grow

Want to learn how to trade and analyze the markets? Whether you’re a day/swing trader or investor wanting to learn how to analyze trends in the financial markets, there is something in The Trading Playbook for everyone.

Target lowers outlook, where is support?


Target reported earnings this morning that included lowering the outlook on the companies profit and same store sales. The stock is down 7% and seems to be bringing the entire market down a bit this morning. Competition from Amazon and Walmart, along with the companies own internal issues seems to be the main problems. The stock trades at 14x TTM and forward earnings already with a 3% dividend yield, so I wouldn’t expect this news to be a catalyst for the stock to crater. But I do think price is headed back down and possibly below the prior two lows at $65.

How far below? Who knows. But I do see support at $61, which would match the 25% drop experienced in 2013-2014 due to the credit/debit card breach issue. $58 would be another key technical area to watch if it gets there. If your bullish on the stock for whatever reason, those would be two areas I would be interested in.


Personally I think there are better options in the retail space between Amazon, Ross Stores, Dollar Tree and even Dollar General. Target has never really shown much in terms of revenue growth and EPS growth has been non-existent for 3 years. And in terms of stock performance, Target has not been able to keep up with the S&P 500 on any time frame (which includes the dividend). So investors would have been better off owning the SPY or especially XLY.

Doesn’t mean the stock can’t outperform in the future. But trying to time that type of fundamental and technical turnaround is impossible for 99% of investors.

(Disclosure: Long AMZN, ROST)

Source: Target Cuts Outlook in ‘Difficult’ Environment