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.

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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.

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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.

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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.

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Global markets rally, small caps lag behind…

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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. 

Small caps continue to underperform…

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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.

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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. 

Financial Markets Week in Review: September 21-25

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This week was an overall risk-off environment, as US stocks lost 1.8% and foreign stocks down 2.7%.  Meanwhile Gold, Treasuries and the US Dollar found some demand. September has historically been the worst month for stocks, and Ryan Detrick astutely points out that this last week has historically been one of the worst weeks of the year.

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The weakness was broad based across most sectors. Only Utilities closed positive for the week. Health Care, mainly Bio-tech, has been a drag ever since the May highs. It’s concerning to see one of the leading sectors in a bull market suddenly turn into a laggard. But markets are cyclical in nature. They go against our natural tendencies to want to go with what is working. It’s possible that this under-performance continues into the late cycle stage. But that doesn’t mean there won’t be bargains in individual companies inside the sector.

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As all four major averages are below their 50 and 200 day moving averages, it’s prudent to be cautious in the near term. The St. Louis Fed Financial Stress Index has elevated due to the recent volatility, but is still below normal and well below the levels seen in 2008 and even 2011.

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Even the yield curve has flattened over the last 12 months or so. As short term yields start to pick up steam in response to the nearing Fed Funds rate hike. Though yields remain far from an inversion which has done a good job at predicting impending recessions.

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Most of the weeks economic data came from overseas. However on Friday, final quarter over quarter US GDP came in at 3.9%. Which was slightly better than the 3.7% estimates.

Fed Chair Yellen spoke on Thursday and again reiterated the likelihood of an initial rate increase before year end. She states that the Fed wants to get ahead of the curve before inflation picks, because if they wait too long they may have to tighten more quickly in response and that could disrupt financial markets. The Fed has consistently stated that they will maintain a very gradual pace of rate increases. And this is more important (and beneficial to equities) than the actual timing of the first.

It’s also possible that the market has already priced in the first increase for them. USD has increased over 20% in the last year, credit spreads have widened and the S+P 500 has fell some 12% already.

For next week…

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More important data on tap for next week: Consumer Confidence on Tuesday, China Manufacturing on Wednesday night and US NFP employment report on Friday.

It’s difficult but investors should try to avoid headlines and focus on data. Low recession odds and accommodating monetary policy has generally been beneficial for stocks. 3rd quarter earnings will begin soon and the bar has been set quite low. If earnings can get back on track that may help provide the necessary catalyst for equity markets.

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. 

Financial Markets Week in Review: September 14-18

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Last week was a week full of economic data and central bank announcements. Gold came out as the biggest winner, sporting a gain of 2.81%, while stocks, bonds and the dollar eked out minor gains.

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Retail sales came out on Tuesday, showing a month over month increase of 0.2% while the street was expecting a gain of 0.3%.

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On Wednesday the Core Consumer Price Index (CPI) showing a month over month increase in line with expectations of 0.1%. This excludes food and energy and it’s the main indicator used by the Fed in gauging inflation in their mandate to promote price stability.

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The big letdown for the week was the Philly Fed Manufacturing index on Thursday. The expectations were for a reading of 6.1, while the actual number came in at a negative 6.0. We have seen worse readings in the last few years, nonetheless this wasn’t a good outcome.

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Without a doubt the biggest event last week was the Federal Open Market Committee (FOMC) meeting, press conference, and economic forecasts. There was much speculation around this event in terms of raising the short term rate. Before the August stock market sell off it was a 50/50 proposition. By Thursday it was priced in as only a 30% chance. As it turns out, the majority were correct. The Fed kept short term interest rate at 0%, were it has been for almost seven years. They cited global market concerns as a main reason.

It is my opinion that the Fed has no plans to raise the Fed Funds rate until March 2016 or later. The Fed has historically been reactive, not proactive, to policy changes in either direction (whether easing or tightening). By keeping the threat of a rate increase open since last year, I believe they are attempting to keep any potential bubbles in financial markets from getting too out of hand. Of course bubbles are usually hard to identify until it’s too late. I could be wrong (I hope I am wrong) but I believe the Fed will maintain status quo until next year.

As for the Fed’s economic projections, there wasn’t a lot of change in their long term forecasts that I could see. They maintain longer run GDP projections of 2.0%, Unemployment rate of 4.9% and PCE Inflation of 2.0%. 13 of 17 FOMC participants believe 2015 is still the appropriate time for the first increase in the Federal Funds rate.

Full text link here: FOMC economic projections

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The chart of the week is the US dollar; resistance has come in around the $100 mark. Support may come in around the prior highs between $89-90. Upside target remains $107 as long as support holds.

For Next Week…..

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There is a handful of important economic data.

Tuesday night is Flash Manufacturing PMI for China. With all of the attention to China’s market lately, this could be a key to Wednesday’s trading.

Wednesday there is German and French Flash Manufacturing PMI as well as European Central Bank President Mario Draghi.

Thursday the US Fed Chair Yellen will speak.

And Friday is the Final US GDP number. The expectations are for a quarter over quarter gain of 3.7%.

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.