64 replies to this topic

[Rich C]

Some investors want to follow the advice of the financial companies that manage their 401-K accounts, and they show up once a year to tell you how to manage your money.

 

They talk to you about asset allocation over bonds, stocks, and international, rebalancing occasionally (once a year), and holding for the long term.

 

Many employees follow that advice, and are pretty happy with it, until a crisis hits, like the Dot Com bust in 2000 - 2002, and the financial crisis of 2008.  They they wish they had sold out sooner than they did.

 

In my blog, once a month I take a long term view aimed at helping these investors sidestep a crisis before too much damage is done.

 

From today's blog entry:

 

"The first fact I check is the PE on the S&P 500, which is sitting at 24 for Q2, with 96% of the stocks reported for Q2.  In general the stock market is overvalued on the basis of the 12 month trailing earnings GAAP PE.  We have seen this condition exist for years, so it is not a short term indicator at all, except to keep your guard up.

 

The candidates for president are making all sorts of promises that they won’t keep, because that is what presidential candidates do.  There is always a congress to prevent them from doing the most outlandish things, unless we keep electing outlandish congressmen.  But I don’t expect a major impact on the markets regardless of who is elected.

 

Oil has rallied from its lows earlier this year and is bouncing between 40 and 50.  That is pretty good, high enough for the oil companies to make money, and low enough for consumers to enjoy driving around.

 

The economic statistics are stable and show slow growth.  The initial read on Q2 GDP was light at 1.2%, following the Q1 reading of just .8%.  That will keep the Fed on the sideline for a Sept. rate hike.  The market seems to like it when the Fed is not tempted to raise rates, but it is kind of crazy that it also means the market likes a weak economy, which is not supposed to be true.  Just think about that for a while.

 

The Q2 earnings reporting season is mostly over, with most firms meeting or beating expectations, but the weakness here is how LOW the expectations were.  If you set the bar low enough, anyone can get over it.  We’ll beat last quarter’s earnings, but not last year’s earnings in the same quarter.  It is a primary reason that stocks are not going up, because earnings are weak.

 

We’re seven years into this recovery, so we’re late in the game, in an overvalued market on a PE basis, with weak GDP growth and poor earnings.  Wow, that doesn’t sound too good to me.

 

The CNBC analysts all say that TINA is at work.  In other words, regarding stocks, “There Is No Alternative”.  Bonds don’t offer a decent yield.  But, there is an alternative, and that is cash.  Another alternative being discussed these days is gold, which is usually held as a hedge against inflation.  I always say, buy what you know.  If you are familiar with the gold market and can write down a couple of paragraphs about what moves gold, where we are, and make a case to yourself, I don’t have a problem with owning a small position in gold.  If you don’t understand the market, you’re probably should stay out.  "

 

There is a little more in the blog, including a 10 year chart of the DJIA.

 

Once a month I do a similar update on the Long Term View in my blog at http://RichInvesting.wordpress.com

Edited by Rich C, 24 August 2016 - 09:21 PM.

[Rich C]

Economics:

GDP = 1.1% growth in Q2, the latest quarter that has reported fully.  Q1 was a light .8%.  The Atlanta Fed GDPNow estimate for Q3 currently is 3.3%.

Oil rose from a low of $28 per barrel in the spring, to a high of $53 a barrel this summer.  As the summer driving season comes to an end, oil has fallen to $43 a barrel.  This seems like a good level, where the oil companies can make money, and the consumer can afford to ride around.

Fed Funds Rate = .5%, unchanged since the last Fed rate hike last December.  The markets are riled currently over whether the Fed will hike rates again in Sept. or Dec.  The Fed is talking about “normalizing rates” indicating more rate hikes down the road.  The stock market has not reacted well to the initial talk of rate hikes, going all the way back to the “taper tantrum” in 2013.  The direction of rates is changing, but they remain historically low, which indicates a short term risk to the market, but not a long term negative.

 

Valuation:

PE on S&P 500 = 24.5 (based on 12 month trailing GAAP PE) vs. 19 for the last 30 year average, which I adjusted to exclude the Dot Com bust in the early 2000’s and the financial crisis in 2008-2009 when valuations were clearly excessive.  This is an overvalued market by 29%.  However in the last 30 years, we have seen these periods of overvaluation persist for several years.  This is not a sell signal, but it is a caution light.

Age of primary move = 7 years.  This bull market started in March of 2009.  It is an aging bull market, well past the average duration.  However, starting from as low as we did (a true crash in 2008), and with the long period of low interest rates and slow recovery, the long duration of the bull market is at least explainable and it can continue IMO.

 

Geo-Political:

Europe appears stable, although non-performing loans in Italian banks have the markets skittish.  Mario Draghi, head of the ECB, recently commented there has not been any discussion of extended the current QE plan that is set to expire next spring.  Their stock markets took a hit.

The Middle East is as stable as it has been.  A cease fire (the second) just took effect in Syria, a welcome event.

Russia has been quiet, suffering from low oil prices and economic sanctions since their Ukraine incursion last year.

China growth is on the government’s track of 6.5% GDP for 2016.  Growth is slowing there as they transition from a govt. funded infrastructure building economy to a consumer led economy.  That is not easy to do, so there is some risk there to everyone who does business with China.

 

Technical:

Chart of Dow Jones Industrial Average (DJIA) – 10 year

Technically, the picture is neutral, but there are some points of concern.  RSI at the top of the chart is at 50 on a long term basis, which is neutral.  MACD at the bottom of the chart is up at 200 on a long term basis, but it looks like it may roll over and head down, which would be a negative.  The last weekly histogram is a small blue one (negative, below zero) which is not good.

 

Regarding price action, we’ve entered a correction.  There is a double top at 18,000 on the Dow, and that old resistance will provide the first level of support.  If that does not hold, next lower support is 17,000, followed by 15,500.  Also of concern is the Dow again dropping below the bottom of the long term trend channel.  This happened earlier this year, twice, and the market managed to climb back up into the channel, but both times, it just barely got back in, then fell out the bottom again.  We don’t know yet, but it is clearly a caution flag.

 

 

Is the primary trend still in effect?

The bull market continues.  There are caution flags all over.  The bull market is very mature, it is overvalued, and both the technicals and price action are weak.

Edited by Rich C, 14 September 2016 - 11:05 AM.

[Rich C]

Here's the chart I referred to in the post above:

 

http://stockcharts.c...214&a=152891474

Edited by Rich C, 14 September 2016 - 12:00 PM.

[Rich C]

GDP for Q2 was +1.4%, not great, but slow growth.  Oil is stable and reasonable, interest rates are historically low even if the Fed raises in Dec.  Japan seems to be concluding that negative interest rates have been a failure, they won't "ease" anymore, so if the US raises in Dec., the dollar should not gain quite so much in value.  The shooting wars remain local.  Valuation is moderately high on the S&P 500, the the 12 month trailing GAAP P/E of 24, relative to a trimmed 30 year average of 19.  The technicals are mixed, with MACD moving downward on a 10 year chart.  The price action looks like a trading range the last couple of months, one day we'll break out.  My conclusion, its uninspiring, but its still a bull market that is 7.5 years old.

 

Edited by Rich C, 19 October 2016 - 05:26 PM.

[Rich C]

The bull market is 7.5 years old, and the chart looks like it is tired, hanging out at the bottom of the channel.  It is overvalued with a trailing 12 month GAAP PE of 24.

 

On the other hand, GDP came in at 2.9% for Q3, and GDP Now is forecasting 3.1% for Q4.  The Fed is expected to hike next month, which could produce a temporary upset like it did last Jan. / Feb., but rates would still be at near historic lows.

 

The bull market marches along.

 

[Rich C]

The market has rallied 8% since the election.  Unfortunately earnings are not keeping pace with the rise in stock prices, pushing the 12 month trailing GAAP PE up to 25.4, versus 24.2 last month, and relative to 19 for my trimmed 30 year average.  With interest rates rising, that can pressure the valuation level, especially when the 5% rise in the dollar impacts multi-national earnings in January.  Earning for Q3 were good and showed a 4.3% increase versus Q3 last year.  We saw similar progress in Q2 versus last year, so it appears the earnings recession has ended.  The second revision to GDP for Q3 showed growth at 3.2%, a good number.  The Fed raised rates a quarter of a percent on Dec. 14 and the market did not blink, which is good news.  Everyone feels the economy can handle the rate hike.  The bull market continues.

 

 

[AChartist]

I'll wait a while to post it for now the DOW log quarterly is quite high in 6+ years and broke above two levels

 

of downtrend tops lines. The best of it might run from 2 to 6 years. Im not sure on things being mixed in the shorter

 

terms but corrections should be relatively minor above the recent breakout line. There is one cycle low at 2 years, the presidential 2nd year low.

 

I means to me to capitalize 401k and stocks for 2 years and maximize to 6 years.

[Rich C]

The rally has stalled currently.  People fixated on all the good that can come from Trump's election, lower taxes to spur spending, infrastructure spending, reduced regulation, cash repatriation.  I have not heard anyone talk about the challenges, his first fight with congress, and the deficit?  Will that bring the next correction?

 

GDP was good in Q3, the third estimate came in at 3.5%, very good.  After climbing significantly, interest rates have settled following the Fed rate hike in Dec., but settled at levels that are still historically low.  S&P earnings were very good in Q3, up 9% vs. the year prior quarter, and up sequentially as well.  The global geo-political scene is relatively calm.  Technically the picture looks good, we're solidly in the up-channel that has held for 7 years.  RSI is overbought on a long term basis, but in a bull market it can stay overbought for months.  MACD has resumed an upward move.

 

The 12 month trailing GAAP PE comes in at 25.5 which is moderately overvalued, but this has stayed overvalued for years in big bull markets, so it is nothing more than a caution right now.  I would say the same for the observation that the bull market is mature at nearly 8 years old, just something to be aware of.

 

We're still in a bull market on a long term basis, IMO.

[Rich C]

The stock market has resumed its upward move, on the back of solid earnings coming in for Q4.  With 80% of companies reporting, earnings are up 5% vs. the prior year, and this is the first time that has happened in back-to-back quarters in 2 years.  With these good earnings, the 12 month trailing GAAP (as reported) PE on the S&P 500 came in at 23.7, using the Q4 earnings as the starting point and going back 3 more quarters.  That is a significant improvement in valuation, and those changes can happen as we drop a quarter of lower earnings out the back of the time period, and pick up a quarter of improved earnings on the front end of the period (Q4).  This is despite the price increase of the S&P index recently.  Despite this good news on valuation, the PE remains moderately overvalued vs. its 30 year trimmed PE of 19.  I did the trimming to come up with the value of 19, from the data at S&P, trimming out recessions that radically distort the data.

 

GDP for Q4 came in at +1.9%.  Yellen testified before the Senate on 2/14 that the Fed expects to hike rates this year, moving toward more normal interest rates.

 

Technically, the market remains in the bull market channel that has been in effect the last few years, but it currently is overbought.

 

The bull market continues.

[Rich C]

The second estimate for Q4 2016 GDP also came in at 1.9%, a little light for a Q4, but not bad.  Atlanta Fed GDPNow currently sits at 1.2% for Q1.  The Fed is expected to hike a quarter of a percent this afternoon, reflecting confidence that the economy can handle higher rates.  Other major global economies seem stable and growing slowly.  The trailing 12 month GAAP PE on the S&P 500 comes in at 25, moderately overvalued, which would seem to limit the rate of future gains in the stock market, unless main street investors throw all caution to the wind and create a blowoff top.

 

Technically, the market remains in its longterm upward channel, a good sign.  The RSI is overbought at 71 so this is not a particularly good long term entry point.

 

The bull market continues.