Market Update January 17th, 2020
The market soars higher. Who doesn't love a bull market? How crazy has this market become??
There's one company that..... Oh wait...
Compliance won't let me tell you, but they have only grown 5% in sales in the last year and it soared. How about yesterday? Big miss for the retailer, the consumer! Ugh.... Wait. How about the car of the future? They've never made money. They sell a tenth of the two largest car manufacturers. You look at CNBC.....
It's puppy dogs and dandy lions. But what are the fundamentals showing us? UGH! I hate to spoil the party..... Yes, I know everyone thinks I'm Mr. Bear, not the case. But the fundamentals are telling us something completely different. Then the talking heads on CNBC. Who's right? Who's wrong? Let's dig into it!
First up, this is a new chart,
So you've got cycle one, two, three, four. The year before, actually fourth quarter 2018, we were in the fourth part of the cycle. Growth was slowing. Inflation decelerates. Fed was very dovish. Markets were deflating, right. 2018 fourth quarter, down almost 20%. Now, we made a move in the fourth quarter of 2019 to the third part of the cycle, which is where growth continues to slow. We're going to show you that these are the things you're not seeing on CNBC. Inflation accelerates, and how do we take advantage of that as part of our process? Fed is neutral. No doubt market stagflation well..... we're not quite seeing that right now.
When you look at earnings...
growth is slowing. Now, this is only twenty four companies. Keep in mind, the street is looking for 4 to 5% increase. Now we've gone from growth being 24 to 12, 1, 1, and then negative in the third quarter. Fourth quarter right now through those twenty four companies is -4.83%. So how about tech? Everyone loves tech, right? -42% with four companies so far, that's not particularly bullish. So, there is your growth story.
This was the biggest story of 2019...
And still the biggest story of 2020. What is actually going on here? The federal debt, the repo program. Starting in September of last year, the Fed started pumping money into the system for liquidity, which had dried up. Now we had gone up quite a bit. I talked about being in a 400 billion range. Last Friday, they did 89 billion dollars in one day, which was oversubscribed, by the way. So we have now added over 500 billion dollars each 1% growth in the federal debt, has equaled 1% growth in the S&P. One of the Fed chairs yesterday admitted it might be driving the market.
How about commercial loans?
If there is liquidity, how can loans be going down? That's the point of liquidity to loan money out. We're not seeing it.
The key right!?! Jobs and also the key, hit our lowest number in 14 months, 47.2 below 50 is contracting. Everyone keeps on saying that we're hitting a bottom. Not yet folks! We really have to continue to look at that.
How about continuous claims on jobs?
Now, you look here going back to 1970, the Grays are the big spikes, which are recessions. Now you look here, we've slowly gone up. Well, guess what? There's your fourth quarter, 2018. When you zoom in on that data, it's getting worse. Month after month. We're not talking about this. I am! I'm looking at it as part of our process.
CPI, inflation... So we talked about this as part of the cycle
Inflation continues to go up. So can we take advantage of that? Absolutely! We'll talk about that in a second.
Now, real GDP will come in at about 2% right now.
But, our research is saying a negative number, below zero or around zero with a little bit of wiggle room of about a 1/2%. So how do you have that unemployment report like you did last week, and have GDP going up? Something's wrong.
Let's do something new here, Book of the month! I do a lot of reading, a lot of research, of course, love my charts, but sometimes you have to go a little bit deeper. This month the big story is what, China? Right..... Or I like to call it the no deal in China. It's all about soybeans. Does it mean anything over time? You've heard me say consistently, we're never going to have a deal that the administration's talking about that has come from reading this book, The Hundred Year Marathon China's Secret Strategy to Replace America as the Global Superpower. Michael Pillsbury is the author. Great book. You read this. You will understand why China is not going to make a deal because they want to be number one, local clients, I'm here at Bethany Beach Books. You can pick it up looking at the beach in the background. For those not local, we'll have a link below.
Next up, let's go to the big charts!
Everything continues to go up, you've got a lot. This is called Basey, a big breakout. You know, the only thing and I've talked about this constantly is negative divergence. Relative strength is really down and the market's up. That is not a good sign. But despite that, we are positive.
Obviously positive. Taking off, 1.73 for the week. Right now, this charts live on Friday morning.
Now on to the Daily..
What do I see here, if anything? So positive Long term, positive mid-term. Obviously positive in the short term. The only thing that's surprising to me with this kind of breakout is that the VIX volatility index hasn't broken below 10. It stayed above 12, which is highly unusual with this type of run. So everything here bullish, right? Positive, no question about it.
So let's take a look underneath the hood and the reason why I continue to have concerns.
So you've got the S&P in black, obviously, that goes straight up there. Behind the scenes, there is a histogram, the gray, which is new highs, minus new lows. On the New York Stock Exchange, which, of course, is the broad market, and you can look at last year and we've talked about this. When you're hitting highs, you're hit in pretty decent numbers. We're just not seeing that, the push that you would expect.
This chart shows why this market is so grossly over bought....
What we have here in the colors, Red is your 20 PE so your price earnings ratio. 15 PE is blue and 10 PE is green. What does that mean? The black line, is the S&P. If we were to get back to 20 times earnings, you're looking at about a 20% correction. If we were to get back to fair value, the long term average, which is 15. We're talking about 40% in losses. So when you look at this market, that continues to go up. It scares me. It's not going up with fundamentals, It's not going up with earnings, It's all driven by the Fed, and to get back to fair value, which, you know, again, a 20% pullback puts you at 2,600 and some change. I'm not saying it's happening, but this is clearly a stretch market. As an investor, you have to look at this and think, are you comfortable with your portfolio right now?
Next let's talk about treasuries, anything here?
The only thing we'll talk about is the street. Wall Street says we're going above two and we're not doing that. So the bond market continues to tell us a different story, and we saw that this week. Sorry Bond 👑
Next up, sector spotlight!
I'm going to continue to wear my bullish shirt. Why? Because the market is way more than the S&P, and when this market is way overstretched like it is, It concerns me. So if I can make return alpha in other asset classes, I'm going to do so. So we're taking advantage of what we saw in cycle 3, inflation rising.
The CRB index and pretty much straight up.
That's a bullish trend line. Sure, we've had a pullback. That was from Iran situation, we're kind of consolidating right there, but it's still in a bullish trend line. When you look at commodities index obviously that shows inflation.
Next, I look at the dollar.
Here we show correlation between the dollar & Oil. So the dollar, Correlation If there
are 100% correlated, move together. If they're negative, they move in opposite directions. If the dollar goes down, commodities go up. Right now, we're 0.6, not surprising with a little push back here, but we were about .90. I continue to watch both of those and they will help drive my decision on oil.
This is one of our big holdings here right now.
When you look at what happened in Fall of '19. Again, that's all Iran. What do you do in that scenario? Last year we talked about this when the Saudis were bombed and I said, don't buy it! Then, of course, it came right back. You have to be careful, where in this case, because we're in a bullish trend line, when it pulled back, it was an opportunity to add to your position, and that's exactly what we did. Volatility when it's above 35 you sell, it got up there were back down to 27, I really like that. Hopefully we'll see another push as we move forward.
Same thing with the dollar, opposite. As far as the correlation, Gold has taken off. A little bit of a pullback. Why? Because the dollar. In a bullish trend line, if you haven't got into gold, this is an opportunity. Now, I have my full allocation to gold right now. So I'm not adding unless we have new dollars with an existing client.
At the beginning of the year, when you look at inflation, you want to still diversify amongst that, And how about this one? Cocoa!
What??? Everyone thought I was crazy at the beginning of the year, kind of a long held support there, which is your 200 day broke above your 50 day, and it's been a beautiful looking chart and is up nicely year to date. Again, as an investor, if you're looking to reduce risk, the market is so much more than just the S&P and Dow. You can still get that alpha, which is performance, and diversification without being all in the S&P.
Let's wrap it up with fear and greed and our game plan going forward. Fear and greed couple weeks ago 93, good news is we're down to 91, which shows extreme greed in this marketplace. All signs positive on the charts underneath, Not so much. So yeah, they're positive, but I definitely am very cautious right now. I am diversified in other sectors, not just the market. As always, thanks for reading.