Data suggests more upside

Coming off a weekend of political disappointment, it’s easy to get caught up in the emotions of it all. As I pointed out, the market was due for a pullback, and it got a reason to. We can “beat a dead horse” and dissect all of the “what-if” scenarios and implications of the failure. But none of this will be fruitful for your investment decisions. We know that pullbacks and corrections are an inevitable part of investing. And once in awhile we get a major decline, usually due to a recession. The key question is does the data suggest a business cycle peak?

The short answer is no.

2017-03-28_1129

Consumer confidence numbers just came out at a high not seen since November 2000.

Small business optimism

Scott Grannis points out that Small Business Optimism has soared post election and is near all time highs.

2017-03-28_1148

Earnings growth is finally back and is projected to be around 9-11% for 2017. This would be the largest annual increase in earnings since 2011. And this doesn’t even factor in the potential for tax reform and repatriation.

And interest rates are still very low. The earnings yield on the S&P 500 is currently 5.59%, while the 10 year treasury bond yield sits at 2.38%. Even the Fed’s overly optimistic projection suggests the real Federal Funds rate won’t even turn positive until another two years or so. So, even though valuations are on the high side and interest rates have risen quite a bit post elections, stocks still present an attractive risk premium.

2017-03-28_1201

An interesting chart to follow going forward is the ten year yield. Post election the 10 year yield has risen on the assumption of pro-growth policies of the new administration. Since then a trading range between 2.3% and 2.62% has been formed. An upside breakout suggests all is clear, while a breakdown suggests that more of the President’s agenda may be in jeopardy.

Time will tell. But for now, things are looking pretty good to me. But I parse this by saying we’re probably closer to the end of the bull market, than we are to the beginning. The stock market and the economy don’t always correlate. We’ve had great performance in stocks over the last 8 years, while the economy largely under-performed. I wouldn’t be surprised if, going forward, we experience a situation where the economy starts to outperform, while stock performance slows down to an eventual crawl.

The great thing about diversification and asset allocation is that we don’t have to be prophetic. We stick to our strategy and re-balance when necessary. It’s that simple, but certainly not easy.

Advertisements

Do election years affect market performance?

2015-12-10_1027

Heading into another election year, the sentiment appears to be somber as the candidates reflect on the many data points that suggest an economy that is still growing subpar and wage growth that is still stagnant. And seeing that the most recent bear markets of 2000 and 2008 happened to fall on an election year, investors are on edge about the uncertainty and the level of volatility that it may bring.

I decided to take a look at the historical data of S&P 500 returns for election years and the following year, since 1928, to see if maybe we are overweighting the most recent experiences. Click on the spreadsheet picture above to expand the photo.

I have to admit the answers were a little surprising to me. In totality there doesn’t appear to be any discernable pattern. Which goes to show you that markets don’t trade in a vacuum, the situations surrounding each event are almost never the same. And the real components surrounding investment returns have more to do with recession odds, yield curve, corporate profits etc., than they have to do with quantifiable statistics.

However in each case, presidential year and following year, the volatility remained the same (Max to Min return between +50% to -36%). Average returns were similar although presidential elections years showed a better overall return.

The biggest thing that stuck out to me was the overall decrease in volatility during the election years as opposed to the following years. Without doing this study I would have guessed it would have been the other way around, with volatility increased during the election years due to the uncertainty of who would be chosen for the office and what their policies may mean for the economy.

Over 80% of election years ended with a positive S&P 500 return as opposed to the 50/50 coin flip of positive returns for the year following an election.

So we still have no guarantee whether 2016 will be part of the 20% of election years that end negative or part of the 80% of election years that end positive, but the history suggests that the outcome may not be a gloomy as others will lead you to believe.

Source:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

 

Global markets rally, small caps lag behind…

2015-10-26_1454

Three out of the four major market averages pushed above their 200 day moving average during last week’s rally. Meanwhile the Russell 2000, or small caps index, has lagged behind and is still about 5% away from its 200 day (red line).

However it looks like the Russell is in a bull flag pattern, with two higher lows (1135 and 1144) and two highs at 1169. A break above 1169 would confirm this pattern and likely send the Russell above the prior swing high at 1193 and possibly up to the 200 day at 1215.

r2kA closer look at price action shows the trendline coming in around 1150. A break below the trend line would invalidate the pattern and setup for some more downside.

In totality it’s been an amazing run off the late September lows. The S+P 500 has gained about 10% just in the last 2-3 weeks. And even though there bound to be a temporary break or pause at some point in the near future, new bull market highs look inevitable.

Apple reports earnings tomorrow and the Fed’s FOMC statement on Wednesday should keep investors busy.

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. 

Walmart (WMT) price chart update…

wmt_1

Walmart is leading the Dow Jones average lower today as the company announces a decrease to it’s 2015 sales outlook and warns of future sales and earnings declines to come. Down almost 9% today, it’s one of the worst days in 20 years for the stock.

From a purely technical aspect, a price move like this is rarely reversed in a short amount of time and it usually leads to more downside to come. As you can see on the price chart above, the $62 level has been broken decisively.

The next price level to watch comes in around $52.

wmt_2

There is additional confluence in the mid to lower $50’s as well. As $53.29 was the 2000 bull market high and $54.36 is the 2008 bull market high. So between $52-$54 (if it gets there) may be enough support to halt the decline.

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. 

Small caps continue to underperform…

rut_

The market opened higher today and then quickly reversed lower into negative territory. This comes after a day of solid gains across the board, so maybe it’s partly profit taking. I think it’s also the continued underperformance of the small cap stocks that ran into resistance today.

The chart above shows the Russell 2000 index opened higher but hit resistance at the August 24th lows and has since lost all of the gains from yesterday. The Russell 2000 is the only major average that is trading below it’s August 24th lows. This will need to change in order to put in a sustainable bottom in equities.

spx

On a positive note, the other three major averages are still trading above their August lows. On Tuesday of this week, the SP 500 came close to that pivot low at 1867. We’ll have to see if this continues to hold, however as we pointed out there is much support in the 1850-1820 area as well. So even if the August lows get violated, I believe it’s unlikely to expect it to decline much further. I suspect the next move to be a sustained rally back above 2020.

Tomorrow the US non-farm payroll reports numbers are set to be released. This may have market moving implications.

Want to learn how to trade and analyze the markets? Whether your 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.