“Attitude is a little thing that makes a big difference” – Winston Churchill
Over the past year, many notable market statistics showing the tenacity of this bull market have been on display. Most are ignored because they just go against the way the human mind perceives things. Most believe a long streak surely can’t be sustained, and the famous last words that something is overdue for a change are uttered.
This bull market asserted itself among the best of all time this past week. It is now officially 10 months without a 3% correction for the S&P 500. This is now the second longest streak ever. But when the 3+% dip finally occurs, it won’t mean the bull market is near the end. Long streaks without a 3% correction took place in the mid ’60s, early ’80s, and mid ’90s, all times that saw continued gains well after the initial 3% correction.
The chart below shows more market strength, telling us that the S&P has not experienced a weekly decline of more than a 2% for 50 weeks in a row. That streak now sits at 52 weeks. Like many of the prior statistics similar to this, the consensus reaction is that equities are overextended, and the gains have to come to an end. That begins the parade of warnings of pullbacks, corrections and crashes.
Rather than joining the crowd that says the stock market is way overdue for a pullback, the theme here has been strength begets strength. Here is yet another example indicating that these events are not the precursors for a large market correction, but can be the platform for further upside.
What we are witnessing now is something that has only happened five other times in market history. Ryan Detrick tells us that this current streak is actually the weakest of the prior instances standing at a gain of 14.8%. The data speaks for itself. After a show of strength, the S&P is higher in all instances and higher by a meaningful percentage. Of course, this time could be different, but it sure appears to be another instance of a strong equity market getting stronger.
Mr. Detrick, the author of the research note, goes on to say:
“Bull markets tend to advance amid calm trends and turn more volatile near tops, while volatility usually takes full grip during bear markets. We expect more volatility to start soon, but tranquility has reached historic proportions, so we’d view an increase in volatility as perfectly normal; by no means are we seeing reasons to think this bull market is over.”
His study also shows that a long period with less volatility is not necessarily a bad thing. That is contrary to what many have forecast with their low VIX warnings since late 2016. It has now been over a year with multiple warnings. All the while telling investors to beware of a spike in volatility and lighten up on stock exposure. That hasn’t worked out too well.
Skeptics can rattle off their reasons why this bull market is dangerous at these levels and the bulls can counter to show enough evidence to dispute every last one of them. Anyone that has used the time and age angle in their arguments are finding that to be crumbling before their very eyes.
This economic cycle has been unique and so has this stock market. Age alone does not mean it is at risk of ending soon. In this cycle the Fed started to raise interest rates from zero. That in itself should be enough of a clue to suggest this cycle won’t follow the norm.
Furthermore, the U.S. economy has gradually transitioned from being industrial to service driven. That lessens cyclicality with its inevitable swings between peaks and valleys. This inherently makes it more of a stable not too hot, not too cold Goldilocks economy. None of that is suggesting there will never be another peak nor a recession in our future. What it may be suggesting is what we have come to know as norms and timing models may not apply to the extent that they once did.
Ned Davis Research takes a peek into 2018 and concludes that the greater cyclical risk will be in 2018. A time when the economic and earnings cycles will be more mature, a growing contingent of central banks will be tapering or tightening. I won’t attempt to dispute that now for the same reason I won’t put forth a forecast for the stock market in 2018. It’s too early and too many things can occur.
For sure there will be a big speed bump ahead for this bull market. What causes it and when it occurs no one knows. Jeff Miller noted just that in his latest missive, Is it time to ask what could go wrong? He answers that question with a great in-depth report telling investors that many things are going right. In that article, a recent Barron’s headline, How This Bull Market Will End, was brought to investors’ attention. Folks, when I see a headline like that in Barron’s, I am here to tell anyone that wants to listen, the stock market is not topping. It may be best to follow the script that is in place and not commit the same mistakes that many have already made. Trying to outthink the equity market.
On that note Urban Carmel shares his thoughts in an interview with Financial Sense, indicating that it may be premature to believe this bull market is over.
Estimating the impact of Hurricane Harvey on GDP will be very challenging, but it will have an impact. The blow to the economy may not be fully known for a while. Sources suggest that tremor could trim second-half growth some before turning into a stimulative situation, as monies will start trickling down to assist in the rebuilding process.
Headlines that grab your attention like this one entitled, Is The U.S. Economy Overdue For A Recession?, sometimes lead people to jump to a conclusion. While the overdue talk is everywhere, this missive brings fact to the discussion. There is no timeline to follow and this economy shows no signs of falling into one soon.
Anyone calling for an imminent recession because we are overdue will have some explaining to do. Business activity here in the U.S. as measured by the Markit Services PMI Index sits at a two-year high, rising to 55.3, up from the July reading of 54.6. Chris Williamson, Chief Business Economist at IHS Markit:
“The US service sector moved up a gear in August, providing a welcome boost to the economy after the sister PMI survey showed slower manufacturing growth. The two PMI surveys collectively point to the fastest rate of economic expansion since January as businesses enjoyed a summer growth spurt.”
JPMorgan Global Services PMI increased in August to a two-year high, once again serving as confirmation that the synchronized global recovery moves along. The index rose to 54.1, increasing from the July reading of 53.7. David Hensley, Director of Global Economic Coordination at JPMorgan:
“August saw global service sector output rise at the quickest pace in two years, underpinned by a similarly robust expansion in incoming new business.”
In what was an expected move, the ECB left rates unchanged. In a press release from the Central Bank:
“The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.”
Composite PMI out of the euro area remained strong. The index matched the July reading of 55.7. Chris Williamson, Chief Business Economist at IHS Markit:
“The solid PMI readings for July and August set the scene for another strong GDP number for the third quarter. With such robust growth being sustained into August, the region is on course to see GDP rise by 2.1% in 2017, which would represent the best performance since 2007.”
Germany’s service sector remained in expansion territory. Final Services PMI index reached a two-month high at 53.5. France lost some momentum on its Services PMI index as the August read fell to 54.9 from the strong number (56.0) posted in July. The same could be said for Italy as its Services index dropped to a respectable 55.1. This comes after a 10-year high of 56.3 reported in July.
Eurozone Retail sales growth muddles along with the headline PMI coming in at 50.8 versus the previous month’s reading of 51. Alex Gill, economist at IHS Markit:
“Mixed messages were evident in the latest eurozone retail data. While monthly sales continued to rise, they did so at a weaker and marginal pace.”
The largest contributor to the overall shortcoming in the retail sector was the weak report from France. Much of that weakness was offset by the strong results out of Germany, which reported its ninth consecutive month of sales gains.
More positive news out of Germany as the August Construction PMI grew at the fastest pace since records began in 1999.
The Bank of Canada raised its benchmark interest rate by a quarter point this past week. Finance Minister Bill Morneau:
“The bank is responding to what is a very positive set of economic indicators. We’ve had the fastest growth over the last year that we’ve had in a decade. We’ve had more job growth than was expected. These are all very positive indicators.”
FactSet Research Weekly update:
Analysts have been ratcheting down earnings estimates, led by negative revisions in the energy sector. It now remains to be seen how accurate these revisions are, or if we will see more upside surprises similar to the second quarter.
The Political Scene
The NY Times reports:
“The tax overhaul promised by President Trump and Republican congressional leaders is lugging a remarkably heavy load. The goal is not only to reduce the tax bills of corporations and small businesses, but also to stimulate investment, create jobs, increase global competitiveness and promote economic growth.”
In my view, if corporate taxes are cut, all of that is achieved. Not sure why that simple concept goes unnoticed. Sadly it does come down to playing politics instead of building a healthy Corporate America.
Market pundits will have yet another chance to ramp up the debt limit issue again this year. Congress reached agreement on the debt ceiling issue when it came to terms tying Hurricane Harvey relief to an increase to the debt limit which will fund the government until mid-December.
North Korea will continue to be a story for the foreseeable future; it’s a perfect cocktail of egos, military capacity, and risk seeking behavior from both North Korea and the U.S. creating potential for conflict. While neither side wants war, that does not mean military conflict at some level isn’t a possible outcome.
Unless an investor decides to make massive portfolio changes preparing for an event that may never take place, there is little one should do. A chart representing what took place regarding the equity market in the period of 1993-2000 when N Korea first emerged with its saber rattling should be enough to prove that point.
I recognize there could be a knee jerk reaction to any North Korean event and this may be the issue that sparks a correction, but no one knows that for sure. Let’s be realists. With the recent gains during 2017, there was always a chance for a correction without any North Korean issues. That possibility always exists. If that is truly the issue for some, then one has to question if they should have any money invested in stocks. Risks are part of equity investing, and a chance for a pullback that won’t be pleasant is here every day. Trying to call that, and getting it “exactly” right is like winning the lottery. I don’t know of anyone that has done either.
LPL Research puts the North Korean issue into perspective with charts and market statistics that will surprise many. For those curious as to what any conflict will mean to U.S. based companies, FactSet Research reports the aggregate revenue exposure of the S&P 500 to the Asia/Pacific super region is 10.9%. So far the tensions in the region have not had an impact on stock prices. S&P 500 companies with more exposure to the Asia/Pacific super region have not underperformed the index as a whole in recent weeks.
Core PCE inflation may have bottomed out, but it remains drastically below the 2% target the FOMC has set. The leaves the Fed with two choices, either keep hiking and essentially ignore their inflation target or wait and see what happens. There are of course risks and rewards to both. The committee seems to agree universally that the balance sheet should be reduced, and that announcement will more than likely come at the September meeting.
The current consensus seems to be for patience when it comes to more rate hikes. That would suggest the committee will come down on the side of respecting the 2% target rather than hiking into the weakening inflation picture. The call here for one more rate hike this year and done could actually be in jeopardy. The Fed may be on hold until at least January if not longer.
Bullish sentiment increased from 25.0% up to 29.28%, according to the latest survey from AAII. Despite the increase, sentiment came in below 30% for the third straight week, below 40% for the 34th straight week, and below 50% for a record 140th straight week.
Early in the trading week, crude oil saw a mini rally that took the commodity right to resistance at the 200-day moving average. For now WTI trades between resistance at $49.50 and minor support at $47.50.
With refineries shut down due to Hurricane Harvey, the weekly inventory report showed a build of 4.6 million barrels. Gasoline saw a decrease in inventories of 3.2 million barrels. Inventories have now declined by 40.5 million barrels in the last nine weeks. This past week was only the second week with a build in stockpiles.
WTI closed the week at $47.59, up $0.26 for the week, and continues to trade in a very tight trading range.
The Technical Picture
The short-term view of the equity market has always presented a challenge for technicians. Price action this year depicts what has been a very tricky bull market. Money rotation in sectors and the four major indices not correcting together at times have been especially confusing. This year shows the importance of keeping a view from 30,000 feet as a primary backdrop.
Some say any short-term analysis is useless, and while I wouldn’t go that far, I do agree that it has to be taken in context. In its defense, short-term analysis can spot divergences and changes in pattern that could develop into something to be very mindful of. Sitting back believing all is well while issues are brewing under the surface can cause a lot of pain.
That fine line then comes into play. Overreacting to a quick swing one way or another is counterproductive. Leaving the Long Term trend due to a short term divergence is one of the biggest mistakes any investor can make.
For the past 2-4 weeks the major indices have been declining in what appeared to be a correction. This may still occur because of some divergences that have popped up in the major indices. As noted last week, the week of September 2nd offered a bullish development with the indices perking up. The Russell and Dow Transports gained 2.5%, semiconductors added 3.5% and the Biotech sector now emerging as a leader rallied 8%. The Nasdaq reversal was most impressive completing a turnaround that led it to new all-time highs.
However, there were some divergences noted as well:
“While the S&P 500 is back above its 50 day moving average, 50% of the stocks in the index are trading above their 50 day MA’s. That represents a slightly negative breadth divergence, that indeed could be rectified in short order.”
We have seen a slight increase to a level now where 55% of stocks in the S&P are above their 50-day MA. Bespoke Investment Group displayed a chart that tells us not to be overly concerned about this issue just yet because there are other signs that underlying strength has not disappeared. The S&P has put in 210 straight trading days with 40%+ of stocks trading above their 50-day moving averages. The longest streak on record occurred in the early 1990 time period at 218.
That prior streak led to major stock market gains throughout the ’90s. Strength begets strength. From what I can tell, the breadth issue is one that is more of a short-term issue. About 96% of Industry Groups have rising 200-day moving averages, the only one below that level is Energy. Similarly, 87% of Industry Groups are currently above their 200-day moving averages with the only three trading below: Banks (barely), Energy, and Telecom Services.
Recent run at new highs is fine, but the fact that Technology and Healthcare accounted for so much of the gains is something to keep an eye on. So before anyone wants to get too excited, it would be better to see Financials and Consumer Discretionary start to participate. Like with all early signals, watch and wait before drawing any conclusion. For better or worse things can change from here.
Chart courtesy of FreeStockCharts.com
The initial sell-off that opened the trading week was held in check at the 50-day moving average. Subsequent trading remained in a very tight range with both the 20- and 50-day moving averages (2,452 and 2,454 respectively) providing support.
The much anticipated correction has been on again, off again for weeks. Eventually this will get resolved, and we shouldn’t rule out consolidation of recent gains in time instead of price. Short-term support is at the 2,454 and 2,444 pivots, with resistance at the 2,479 and 2,525 pivots.
The fact that this story is real is quite sad. Some question why I continue to take exception with the constant bombardment of rhetoric that has been completely wrong for years. The article supplies an answer for investors. The use of hedges prior to a reversal of the primary trend is a waste of time and money.
When the VIX first consistently dropped below 20 in 2012, all we heard was that investors were becoming too complacent and that the story would end badly. I chuckle at the thought that I read those words five years ago. When the VIX dropped below 15, it was the same story. Now, with the VIX hitting an all-time low below 10, we hear it again. History shows that low VIX levels are the norm, and I’m not buying the thought that everyone is complacent. Indeed many have one foot out of the door. A far as I am concerned, it is not an indicator that any investor should wrap their strategy around. This year the VIX warnings started early, and if one followed that line of thinking, they dug themselves into a nice hole.
Individual Stocks and Sectors
One look at the recent new highs in the Nasdaq and it is no surprise that Growth has outperformed Value so far in 2017.
Below is a quick year-to-date performance chart for the S&P 500 and its eleven sectors:
Recent breakouts to new highs in the S&P Technology (XLK) and Healthcare (XLV) sectors suggest another leg higher for both could be in the making.
Speaking of technology, the recent new highs do not portray an area of the market that is overvalued. This is one of the reasons I continue to favor this sector over the long haul. Technology has been a market leader, but relative to the last 20 years, its P/E ratio is in line with its historical median.
That multiple is only just fractionally above its 20-year median of 23.1 with accelerating earnings. Most other sectors currently trade at multiples much further above their 20-year median levels. Healthcare is the other sector that is right in line; Telecom is well below at 14.9 given its historical median PE of 17.3, and with the dividend yields, there are opportunities there as well. Given those stats, the overvaluation arguments for Technology seem very weak.
Liz Ann Sonders posted graphics indicating that it’s not just the FAANG stocks that are responsible for the gains.
While the FAANG stocks have corrected, the S&P total return index has continued to rally.
Last week I mentioned the shares of Sarepta (SRPT) as a candidate for research. One of the principal drivers for that was a rather large purchase of Sarepta shares by the CEO recently. This past week the company announced positive trial results on its Muscular Dystrophy drug. The stock reacted positively and has now broken out of a year-long basing pattern.
Weakness still persists in the shares of Applied Optoelectronics (AAOI). I cover what I have done, what I am doing now, and my plans for the short term in this note to investors.
With market pundits coming back from summer holiday, congress back in session, North Korea ratcheting up the threats, and another strong Hurricane ready to hit the U.S., it would appear the dull days of summer are gone. Emotion, confirmation bias, failure to be flexible are all traits that impair our ability to manage money successfully. When stocks trade at or near new all-time highs, some investors are on edge, fears and worries spike. New issues seem to surface daily, and as soon as one disappears, another one takes its place. Ironically investors should feel just the opposite now, if they just step back and look at all of the supporting market data.
With another new high in the Nasdaq, many keep bringing up the technology sector as a cause of concern because it is so heavily represented at the top of the market. This in turn causes the fears that we are once again headed for another Tech Bubble. That seems to be a commonly held belief despite the mountain of evidence that shows this growth area of the market is nowhere near bubble levels.
The tech wreck understandably left a bad taste in the mouth of investors, and probably the primary reason it remains in the minds of so many. Let’s employ some common sense please before emotion takes control hold of anyone’s thoughts. That event was 17 years ago! The caliber and importance of today’s top companies paints a much different picture than what we saw in the late 1990s.
“The S&P 500 has had a little over $1 trillion in total profit over the last 12 months. Apple (AAPL), Google (GOOG) (NASDAQ:GOOGL), Facebook (FB), and Microsoft (MSFT) have had about $100 billion, or about 9.8% of the total profit for the index. So, 10% or so of the index’s market cap that those four stocks represent is not ludicrous.”
Because of the Nasdaq crash in 2000, there still exists somewhat of a bias against technology. It’s how our minds work. When it comes to money we rarely forget, and many just can’t let that go. That human trait is also responsible for many not believing and or trusting this entire bull market.
All need to realize the transition to a more service oriented economy and the clear profitability of the big tech companies that comes with it. I do wonder sometimes if the top five stocks in the market were Industrials, would there be the same sort of concern present among investors?
The Financial Crisis and the thought of those losses remain. I have seen commentary to this day from investors saying they would never buy a bank stock again. That’s too bad. Maybe if they had put that ill conceived bias aside, they would have profited handsomely. If any market participant is not flexible, and won’t acknowledge or can’t see that change is taking place, they will not survive the financial markets.
The headlines tell us about gloom and possible doom, the facts support a bull market scenario. In the eyes of many, they see the state of the world today and just can’t buy into the latter scenario. The charts mystify many and some believe it is simply voodoo. The supporting historical data is dismissed because not many believe in following that theory. I simply rebut all of that by saying that is how the stock market works, and not subscribing to that concept will impair profitability.
In 1979 BusinessWeek ran the infamous cover story about the death of equities. During that period in history, economic headlines were filled with skepticism and questions. In 1982, the 10-year Treasury was 14.5 %, and the inflation rate was 8+%. So the obvious conclusion was to believe the consolidation period for equities would eventually break to the downside into a bear market.
The S&P went on to break to the upside and gain 1,335% in a secular bull market that lasted 18 years. I look around and I hear the same type of attitude towards stocks today, yet the interest and inflation rates are benign compared to prior periods in history.
If we go back to the period right after the BusinessWeek cover story, we see that the S&P broke out of a multi-year trading range to set sail on a record run. Ladies and gentlemen, believe it or not, the same pattern has emerged once again. That secular bullish theme has been presented here in numerous weekly updates. Investors can dance around all of the issues and make every excuse that this time will be different. I’m here to say the preponderance of evidence says that it won’t.
The secular bull market story does not mean all will be rosy every step of the way. There will be rough patches and even the possibility of a cyclical bear market thrown in. It will be up to investors to navigate the downturns, and without emotion, stay focused on what the market is telling them.
Sure, there are issues around that lead many to once again question what could derail this bull market. It is time to step back and look at what could go right. Issues that don’t seem to make the headlines, like the synchronized global economic recovery that is in progress. This bull market just transitioned into an earnings driven market with the recent turnaround in earnings growth.
We don’t need to put on rose colored glasses, but negative thinking rarely leads to positive outcomes; a concept that applies to investing every day of the trading week.
A salute to the first responders, volunteers and those who donated to the various organizations to help the Hurricane Harvey victims. Another team of great people are now in the same position as Hurricane Irma is set to hit the coast of Florida and the southeastern U.S. I wish all of them the best of luck.
to all of the readers that contribute to this forum to make these articles a better experience for all.
Best of Luck to All!
Disclosure: I am/we are long AAOI, AAPL, FB, GOOG, MSFT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article contain my views of the equity market and what positioning is comfortable for me. Of course, it can’t be for everyone, there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.