Monthly Archives: December 2017

Tesla stock plunged nearly 13% today on news that the company will lay off about 3,000 employees or 7% of its total staff as speculation mounts that demand for its Model 3 sedan is falling.

Here’s an excerpt of the email Tesla Chief Executive Elon Musk sent to employees:

As we all experienced first-hand, last year was the most challenging in Tesla’s history. However, thanks to your efforts, 2018 was also the most successful year in Tesla’s history: we delivered almost as many cars as we did in all of 2017 in the last quarter alone and nearly as many cars last year as we did in all the prior years of Tesla’s existence combined! Model 3 also became the best-selling premium vehicle of 2018 in the US. This is truly remarkable and something that few thought possible just a short time ago.

Looking ahead at our mission of accelerating the advent of sustainable transport and energy, which is important for all life on Earth, we face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels. While we have made great progress, our products are still too expensive for most people. Tesla has only been producing cars for about a decade and we’re up against massive, entrenched competitors. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products.

Today’s unfortunate news confirms a warning I made in early-November in a piece called “Here Are The Hidden Risks That Will Sink Tesla“:

Elon Musk’s Tesla has been struggling financially since its inception and has lost over $1.1 billion in 2018 alone despite a surprise profit in the third quarter. As much as Tesla has been struggling, I just wanted to point out that Tesla’s struggles are occurring during the largest wealth bubble that has ever occurred in America’s history. Tesla is a luxury car company that sells expensive cars to affluent people, the U.S. is responsible for approximately half of Tesla’s sales, and U.S. wealth is artificially inflated and heading for a bust. Simply put, America’s wealth bubble is enabling many more people to buy Tesla automobiles than would ordinarily occur in a non-bubble environment.

As I explained in a recent presentation, U.S. household wealth has surged by approximately $46 trillion or 83% since 2009 to an all-time high of $100.8 trillion. Since 1951, household wealth has averaged 379% of the GDP, while the Dot-com bubble peaked at 429%, the housing bubble topped out at 473%, and the current bubble has inflated household wealth to a record 505% of GDP (see the chart below):

If Tesla can’t make it in this frothy environment, just imagine what will happen when America’s wealth bubble truly bursts and consumers are forced to dramatically tighten their belts…

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Do you want to be a big-time office landlord with an ownership stake in some big-city trophy office buildings? It’s more possible than you think. Shares of two of the largest publicly traded office REITs, SL Green (SLG) and Boston Properties (BXP), are trading at reasonable prices. Here’s the skinny on them.

SL Green is New York’s largest owner of commercial real estate, including ownership of 28.2 million square feet of space and another 18.3 million square feet of buildings securing debt and preferred equity investments. The firm has interest in 106 Manhattan buildings (around 12% of the office market) and 15 more suburban New York City buildings. These include a slew of midtown Park Avenue and Fifth Avenue locations. On top of this, the firm owns over 2 million square feet of Manhattan retail space with a mix of tenants that include Nordstrom, Burberry, Prada, Giorgio Armani, Tissot, Lowe’s, and CVS.

For all its attractive space, SL Green’s stock has languished lately. After having peaked at just under $120/share in the middle of 2016, it trades in the high $80 range right now. But that can be an opportunity for investors. The firm has generated $6.61 in funds from operations (FFO) over the past four quarters. That means it trades at around a modest 13 times FFO. Investors should remember that FFO is a REIT metric that adjusts net income for property sales and depreciation. It’s not a perfect cash flow proxy because all real estate involves some depreciation that a good analysis must add back. But FFO allows analysts and investors to take a first stab at cash flow, and to make comparisons between one REIT and another.

The firm has increased year-over-year same-store revenue impressively for the past four quarters — 2%, 7.4%, 7.8%, and .6%. It’s hard for SL Green’s tenants to complain that the rent is too darn high because they need or want to be centrally located in Manhattan. That’s why the firm still boasts higher than 95% occupancy. The rent is going up, and that’s good for shareholders.

SL Green paid a dividend of $0.8125 per share on October 15, 2018. That translates into a 3.7% dividend yield. The dividend soaks up only around half of the FFO the firm generated for the past four quarters, which means it’s well covered.

One big risk investing in firm carries is its new development project, One Vanderbilt Avenue. This is a $3 billion trophy property that is estimated to be completed in 2020. If the economy slows to the point where the firm has trouble leasing the building, that would spell trouble for shareholders. Still, the company has a strong record of growth since its IPO in 1997, and it emerged from the financial crisis in decent shape.

SL Green’s larger, more diversified competitor, Boston Properties has also suffered declines in its stock price recently. The stock peaked at around $140 per share in mid-2016, and trades at under $120 now. Instead of focusing on New York City, Boston Properties owns 164 office buildings (48 million square feet) in Boston, Los Angeles, New York, San Francisco, and Washington, D.C.

The firm has produced $6.20 per share of FFO for the past four quarters, and its stock trades at 18 times that. The firm is paying a $0.95 dividend, which appears save given its last four quarterly FFO readings of $1.49, $1.49, $1.58, and $1.64.

One negative is that the firm has reported only minuscule increases in year-over-year same-property net operating income over the past four quarters. Reports indicate that the Washington, D.C. office market is soft and where the firm has 10 million square feet or a little more than 20% of its property. Still, the firm’s diversified portfolio on both coasts give it an advantage and perhaps a stability that the market seems to like given its higher Price/FFO multiple.

Neither of these firms are paying a whopping dividend – 3.7% for SL Green and 3.2% for Boston Properties. The 10-year U.S. Treasury, by contrast, is paying around 2.7%, by contrast. Still, these landlords have the ability to increase rent in the future. You may not get rich owning these buildings at their current price, but you’ll collect a decent dividend that seems safe, and can be increased in the future.

“So now we are in a bear market, which isn’t defined by me as stocks being down 20%. A bear market is determined by the way stocks are acting.” :Jeff Gundlach- DoubleLine Capital

This article’s title is singularly the most important investment question of the day. If we are still in the bull market that began in March of 2009, we can buy and hold stocks and sleep well at night with an understanding that any losses are likely short-term in nature. If, on the other hand, we are entering a bear market, then we need to consider big changes to our longer-term portfolio allocations and alter our approach to short-term trading strategies.

Unfortunately, no one can answer the question definitively until we are in the grips of a bear market. Even then, when the market has dropped 20% or more, and long-term technical indicators turn convincingly bearish, there will be many investors who fail to realize that a new investment paradigm has begun.

Currently, valuation indicators are flashing red as they have been for a few years. Until recently this served as a stern warning but was not confirmed by technical measures of momentum. Over the last few months, this has changed, as our technical tools are, one by one, offering the same conclusion as our fundamental indicators. We would characterize the technical momentum indicators as flashing yellow and, as such, have yet to formally declare a bear market. That said we are quite suspicious and have taken appropriate risk-reducing actions.

To some, it may seem trivial to characterize the market as being bullish or bearish. There is an old saying that reminds us why it does matter: “markets take the steps up and the elevator shaft down.” Trading the stairs is quite different than trading the elevator shaft. The shaft leaves little room for error, and the volatility is punishing even if one has the right call, while the stairs are quite forgiving.

Volatility Indicator

In addition to momentum turning over and valuations that portend the potential for a large decline and years until we reclaim current levels, we are equally concerned that the tone of the market seems to be changing. Bull markets tend to trend gently higher with lessened volatility while bear markets impose sharp rallies and drops. It is this roller coaster-like behavior that has heightened our apprehension.

Sensing the change in a market’s tone is partly the benefit of years of watching markets and observing little signals that many investors do not notice. Fortunately for those with less experience or jobs in other fields, there is some science behind it too.

The first graph below shows the S&P 500 in orange with bear markets highlighted in gray. You will notice we inserted green and red numbers that correspond to related bull or bear market eras. The table below the graph uses two methods to compare volatility between bullish and bearish markets.

First, is the average 20-day difference which measures the percentage distance between the maximum and minimum intraday prices that occurred over rolling 20-day periods. The column next to it measures annualized volatility based on closing prices. The calculations are segmented for each bull and bear market.

It is worth stressing the following:

  • Bull markets last much longer than bear markets and account for a large majority of the time. The average duration of bull markets since 1970 is seven years while the average for bear markets is only one and a half years.
  • The two measures of volatility, 20 -day difference and annualized volatility during bear markets are nearly double that of bull markets. What bear markets lack in duration they make up for in volatility.

Both indicators are simply saying that prices move a lot more, up and down, in bear markets than in bull markets. That characteristic has been a very reliable indicator of a pending bear market.

The following graph is another way of adding to that point. The chart, like the first one, shows the S&P 500 and associated bull and bear markets. However, in darker gray, we added the 20 day average of the daily price changes, also called the average true range (ATR). This differs from the first graph as it measures daily closing price changes as opposed to the minimum and maximum intraday prices over 20 -day periods.

Notice again, daily price changes increase during bear markets and also during drawdowns that are not classified as bear markets. The average ATR during bull markets is 1.29% and the ATR during bear markets is significantly higher at 2.23%.


As shown in the bull/bear comparison table under the first graph, volatility in the current period which started in early October looks very similar to prior bear markets. Additionally, the 20 -day average ATR has been running slightly above the bear market average over the last few weeks.

Have we entered the bear’s den?  We are not 100% sold, but the characteristics of the current environment offer compelling evidence. Each day that passes brings us closer to that determination.

From a long -term investment perspective, investors should both reduce equity holdings and favor “safer” equity holdings.

Short -term traders should understand the potential for wild profit swings. Daily and hourly price volatility will be much larger than those to which we have been accustomed. Use stop losses diligently and other risk safeguards to limit losses. At the same time, allow flexibility with those limits to allow positions in your favor to run. Take what the market gives you and make sure the market pays you for taking risk in times of extreme volatility.

Since October 3, 2018, the S&P 500 dropped 19% and regained half of it over the last two weeks. As we have shown, these wild swings do not bear the fingerprint of a bull market. Stay tuned to our daily charts, articles and portfolio actions for further confirmation that we have a loose bear on our hands.

Lastly, the table below from @oddstats highlights the extreme volatility that accompanied the last two major drawdowns.

In August of last year, I wrote an article entitled “As Good As It Gets which discussed the record levels being set by a broad swath of economic indicators. To wit:

First, “record levels” of anything are records for a reason. It is where the point where previous limits were reached. Therefore, when a ‘record level’ is reached, it is NOT THE BEGINNING, but rather an indication of the MATURITY of a cycle. While the media has focused on employment, record stock market levels, etc. as a sign of an ongoing economic recovery, history suggests caution.”

In the “rush to be bullish” this a point often missed. When data is hitting “record levels” it is when investors get “the most bullish.” Conversely, they are the most “bearish” at the lows.

But as investors, such is exactly the opposite of what we should do. It is just our human nature.

“What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from.” – T.S. Eliot

There currently seems to be a very high level of complacency that the economy will continue its current cycle indefinitely. Or should I say, there seems to be a very large consensus the economy has entered into a “permanently high plateau,” or an era in which economic recessions have been effectively eliminated through monetary and fiscal policy.

Interestingly, it is that very belief on which the Fed is dependent.  They have voiced some minor concerns over a slowing in some of the data, yet they remain committed to trailing economic data points which suggest the economy remains robust.

But herein lies “the trap” for investors.

With the entirety of the financial ecosystem now more heavily levered than ever, due to the Fed’s profligate measures of suppressing interest rates and flooding the system with excessive levels of liquidity, “instability of stability” is now the biggest risk.

The “stability/instability paradox” assumes that all players are rational and such rationality implies avoidance of complete destruction. In other words, all players will act rationally and no one will push “the big red button.”

Again, the Fed is highly dependent on this assumption to provide the “room” needed, after a decade of the most unprecedented monetary policy program in U.S. history, to extricate themselves from it.

The Fed is dependent on “everyone acting rationally.” However, as was seen in the last two months of 2018, such may not actually be the case.

That market rout, and pressure from the White House, has caused the Fed to tilt a bit more “dovish” as of late. However, it should not be mistaken that their views have substantially changed or that they are no longer committed to the reduction of their balance sheet and hiking rates, albeit at a potentially slower pace.

There is good reason to expect that this strong [economic] performance will continue. I believe that this gradual process of normalization remains appropriate.

But that may be a mistake as I pointed out recently:

“But the cracks are already starting to appear as underlying economic data is beginning to show weakness. While the economy ground higher over the last few quarters, it was more of the residual effects from the series of natural disasters in 2017 than “Trumponomics” at work. The “pull forward” of demand is already beginning to fade as the frenzy of activity culminated in Q2 of 2018.

To see this more clearly we can look at our own RIA Economic Output Composite Index (EOCI) which is an extremely broad indicator of the U.S. economy. It is comprised of:

  • Chicago Fed National Activity Index (an index comprised of 85 subcomponents)
  • Chicago Purchasing Managers Index
  • ISM Composite Index (composite of the manufacturing and non-manufacturing surveys)
  • Richmond Fed Manufacturing Survey
  • New York (Empire) Manufacturing Survey
  • Philadelphia Fed Manufacturing Survey
  • Dallas Fed Manufacturing Survey
  • Markit Composite Manufacturing Survey
  • PMI Composite Survey
  • Economic Confidence Survey
  • NFIB Small Business Index 
  • Leading Economic Index (LEI)

All of these surveys (both soft and hard data) are blended into one composite index which, when compared to U.S. economic activity, has provided a good indication of turning points in economic activity.

As shown, the slowdown in economic activity has been broad enough to turn this very complex indicator lower.

One of the components of the EOCI is the Leading Economic Index (LEI) which is a strong leading indicator of the economy as shown below.

The recent downturn in the LEI suggests economic data will likely be weaker in the quarters ahead. However, this downturn wasn’t a surprise and was something I showed would be the case in July of 2018.

As shown, over the last six months, the decline in the LEI has actually been sharper than originally anticipated. Importantly, there is a strong historical correlation between the 6-month rate of change in the LEI and the EOCI index. As shown, the downturn in the LEI predicted the current economic weakness and suggests the data is likely to continue to weaken in the months ahead.

Another component of the EOCI is the National Federation of Small Business index. In 2018, that index peaked at a record of 108.8 and has since fallen more than 4-points in recent months. While it has been of little concern to the media, it should be noticed that at no point in history did the index peak at a record and not substantially decline over the coming months.

More importantly, notice that peaks in the optimism have previously always occurred shortly after a recession ended, not nearly a decade into an economic upturn. Such suggests the time between the current peak and the next recessionary spat could be closer than seen previously.

However, while small business owners are still “saying” they are optimistic, they are not necessarily acting that way. A look at their level of economic confidence versus their capital expenditures suggests a much more cautious stance relative to their level of “optimism.”

Currently, their level of capital expenditures has plunged back to levels more often seen during a recessionary period than a burgeoning economic upswing.

The same goes for the difference between the “expectation of sales” versus their “actual sales.”

Notice that actual sales are always less than expectations, but the current gap is one of the largest on record. More importantly, both actual and expected sales have turned lower in recent months which was during the seasonally strong Christmas shopping period.

All of this underscores the single biggest risk to your investment portfolio.

In extremely long bull market cycles, investors become “willfully blind,” to the underlying inherent risks. Or rather, it is the “hubris” of investors they are now “smarter than the market.” 

However, while the Fed is focused on what has happened in the past, the market is focused on what will happen in the future. What the current trend of economic data suggests is that the global economic weakness, which we have been discussing for the last few months, has now come home to roost. As shown below, the EOCI index has provided a leading indication historically to market weakness. The difference between small corrections and larger declines was determined by the secular period of the market.

What shouldn’t be overlooked, is that the risk to investors is a negative impact to corporate profitability in the quarters ahead. Valuations are still a major issue for investors as corporate profits have not grown over the last 8-years. (They have only set a record recently on an “after tax” basis due to recent legislative changes.)

Of course, changing profits on the bottom line of the corporate balance sheet is not what drives the economy. That comes from consumption, and if pretax corporate profits aren’t growing, neither is revenue which is consistent with the modest rates of economic growth seen over the last decade.

This is why both the Fed, and the markets, are very dependent on “stability.” As long as no one asks the “tough questions,” the bullish thesis can continue as momentum and psychology remain intact.

Unfortunately, as seen in the last quarter of 2018, “instability” can happen very quickly leaving investors with little time to react. The recent market rout was likely a warning sign that investors should not dismiss as a “one-off” event.

  • The Federal Reserve is still looking to increase rates.
  • They are also committed to continuing the reduction of their balance sheet which is extracting liquidity from the financial markets.
  • Even if the Fed doesn’t hike rates further, rates are still materially higher than they were two-years ago which is impinging consumers discretionary incomes.
  • Earnings estimates are still too high
  • China is becoming a bigger problem.
  • Debt remains a substantial problem as default risks increase
  • Domestic economic weakness, as shown, is gaining traction
  • The Global economy is weakening at a faster pace than the US economy, and;
  • Markets have begun to show their vulnerabilities.

What happens next is anyone’s guess, but erring to the side of caution currently will likely turn out to be a good decision.

Each week we produce a chart book of 5 to 10 stocks which have hit our watch list for potential additions to our long-short equity trading portfolio.

We have broken down the list into two sections – Long and Short and have provided targets for potential actions.

Importantly, these equities are not part of our long-term investment themes and are far trading purposes only. We may, or may not, implement any of the ideas on this list. They are simply for consideration.

Also, it is entirely possible that our long-term themed equity model could be long a position which could show up on the “short-idea” list temporarily. Trading and investing, while having many commonalities, are different based on time frames and objectives and are not always handled exactly the same.


There are four primary components to each chart:

  • The price chart is contained within the shaded area which represents 2-standard deviations above and below the short-term moving average.  
  • The Over Bought/Over Sold indicator is in orange at the top.
  • The Support/Resistance line (green) is the longer-term moving average which also acts as a trailing stop in many cases.
  • The Buy / Sell is triggered when the green line is above the red line (Buy) or vice-versa (Sell).


ABT – Abbott Laboratories

Currently In Equity Model
  • Stock has held the long-term moving average as support and is currently consolidating its 2017-2018 gain.
  • Short-Term Positioning: Bullish
    • Add to existing position: $71
    • Stop-loss is $66

AMT – American Tower Corp.

  • Outside of only a small correction in December, AMT remains a strongly trending candidate.
  • Long-term support remains solidly intact.
  • Short-Term Positioning: Bullish
    • Buy either on pullback to $160 or on breakout above $165
    • Stop-loss is currently $150

AVGO – Broadcom, Inc. 

  • The correction in AVGO came early last year. 
  • AVGO is now back on an important “buy signal” and above long-term supports. 
  • Short-Term Positioning: Bullish
    • Buy on either a pullback to $240 or above $260.
    • Stop-loss is currently $230

FL – Foot Locker, Inc.

  • Long-term bullish trend line continues to hold.
  • FL is now back on a “buy signal”
  • Short-Term Positioning: Bullish
    • Buy on “breakout”: $60
    • Stop-loss is currently $47.50

HSY – Hershey Foods Corp.

  • Long-term bullish trend line continues to hold.
  • HSY still on a “buy signal” but it is weakening.
  • Short-Term Positioning: Bullish
    • Buy with an initial target of $112
    • Stop-loss is currently $104


ALB – Albemarle Corp.

  • ALB broke critical support in December.
  • Has now triggered a “Sell Signal” and is looking to break recent support.
  • Short-Term Positioning: Bearish
    • Short @ current levels
    • Stop-loss is currently $77

GT – Goodyear Tire & Rubber

  • Failed at overhead resistance withing a long-term downtrend.
  • Triggered a new “sell signal” and broke recent lows.
  • Short-Term Positioning: Bearish.
    • Short at current levels.
    • Stop-loss is currently $22.50

IFF – International Flavors & Fragrances

  • IFF continues to struggle.
  • With a new “sell signal” close to registering look for short opportunity.
  • Short-Term Positioning: Bearish
    • Short on a break below $132.50
    • Stop-loss is currently $140

LYB – LyondellBasell Industries

  • Recent rally failed at downtrend resistance.
  • LYB remains on a deep “sell signal” currently with very “bearish” momentum.
  • Short-Term Positioning: Bearish
    • Short at current levels.
    • Stop-loss is currently $87.50

SHW – Sherwin Williams Co.

  • Recent rally failed at downtrend resistance.
  • SHW on a “sell signal” currently with weak price momentum.
  • SHW also forming an important “head and shoulders” formation.
  • Short-Term Positioning: Bearish
    • Short at current levels and add to short at $370
    • Stop-loss is currently $420

In late-November, I warned that plunging oil prices and the bursting of a Fed-driven bubble in the shale energy industry would also cause a bust in high-yield or “junk” bonds (because the shale bubble is financed by high-yield bonds). High-yield bonds continued to plunge into late-December along with crude oil and stocks. Since Christmas, however, all three markets have rebounded sharply as many market participants think the worst is now over. But is it?

Fundamentally, nothing has changed. The bursting of the corporate debt bubble I’ve been warning about is still ahead and is unavoidable at this point. From a technical perspective, the breakdown that occurred in the
HYG high yield corporate bond ETF is still very much intact. Right now, the current rally is simply a re-test back to the key level known as a “neckline,” which was once a support level and is now a resistance level. If HYG bumps its head at this level (ie., can’t break back above), another powerful sell-off is very likely.

Billionaire “bond king” Jeff Gundlach feels the same way I do – “Use the strength we’ve seen in junk bonds as a gift and get out of them. Investors need to go into strong balance sheets…to survive the zigzag of 2019.” The recent bounce in high-yield bonds has helped to underpin the stock market rebound, but should the HY bond rally falter at the nearby resistance level, expect to see stocks head lower again. I’m taking a “wait-and-see” approach for now.

Please follow me on LinkedIn and Twitter to keep up with my updates.

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The Kansas City Federal Reserve posted the Twitter comment and graph below highlighting a very important economic theme. Although productivity is a basic building block of economic analysis, it is one that few economists and even fewer investors seem to appreciate.

The Kansas City Fed’s tweet is 100% correct in that wages are stagnating in large part due to low productivity growth. As the second chart shows, it is not only wages. The post financial-crisis economic expansion, despite being within months of a record for duration, is by far the weakest since WWII.

Productivity growth over the last 350+ years is what allowed America to grow from a colonial outpost into the world’s largest and most prosperous economic power. Productivity is the chief long-term driver of corporate profitability and economic growth. Productivity drives investment returns whether we recognize it or not.

Despite its foundational importance to the economy, productivity is not well understood. There is no greater proof than the hordes of Ivy League trained PhD’s at the Federal Reserve who have promoted extremely easy monetary policy for decades. It is this policy which has sacrificed productivity at the altar of consumption and short-term economic gains.

For more on the interaction between monetary policy and economic growth please read Wicksell’s Elegant Model.

What Drives Economic Activity

Economic growth is a direct function of productivity which measures the amount of leverage an economy can generate from its two primary inputs, labor and capital. Without productivity, an economy is solely reliant on the two inputs. Due to the limited nature of both labor and capital, they cannot be depended upon to produce durable economic growth over long periods of time.

Leveraging labor and capital, or becoming more productive, provides the dynamism to an economy. Unfortunately, productivity requires work, time, and sacrifice. It’s a function of countless factors including innovation, education, government policies, and financial incentives.


Labor, or human capital, is largely a function of the demographic makeup of an economy and its employees’ skillset and knowledge base. In the short run, increasing labor productivity is difficult. Realizing changes to skills training and education take time but they do have meaningful effect. Similarly, changes in birth rate patterns require decades to influence an economy.

Within the labor force, the biggest trend affecting current and future economic activity, both domestic and globally, is the so called “silver tsunami”, or the aging of the baby boomers. This outsized cohort of the population, ages 55 to 73 are beginning to retire at ever greater rates. As this occurs, they tend to consume less, rely more on financial support from the rest of the population, and withdraw valuable skills and knowledge from the workforce. The vast number of people in this demographic cohort makes this occurrence more economically damaging than usual. As an example, the old age dependency ratio, which measures the ratio of people aged greater than 65 to the working population ages 18-64, is expected to nearly double by the year 2035 (Census Bureau).

While the implications of changes in demographics and the workforce composition are numerous, they only require one vital point of emphasis: the significant economic contributions attributable to the baby boomers from the last 30+ years will diminish from here forward. As they contribute less, they will also require a higher allotment of financial support, becoming more dependent on younger workers.

Finally, immigration is also an important component in the labor force equation. Changes in immigration policies and laws are easier to amend to foster more immediate growth but political dynamics argue that pro-immigration policies and laws are not likely within the next few years.


Capital includes natural, man-made and financial resources. Over the past 30+ years, the U.S. economy benefited from significant capital growth, in particular debt. The growth in debt outstanding, a big component of capital, is shown broken out by sector in the graph below. The increase is stark when compared to the relatively modest level of economic activity that accompanied it (black line).

This divergence in debt and economic growth is a result of many consecutive years of borrowing funds for consumptive purposes and the misallocation of capital, both of which are largely unproductive endeavors. In hindsight we know these actions were unproductive as highlighted by the steadily rising ratio of debt to GDP shown above. The graph below tells the same story in a different manner, plotting the amount of debt required to generate $1 of economic growth. Simply, if debt were used for productive activities, economic growth would have risen faster than debt outstanding.Data Courtesy: Bloomberg, St. louis Federal Reserve

Data Courtesy: Bloomberg, St. Louis Federal Reserve


Since 1980, the long term average growth rate of productivity has stagnated in a range of 0 to 2% annually, a sharp decline from the 30 years following WWII when productivity growth averaged 4 to 6%. While there is no exact measure of productivity, total factor productivity (TFP) is considered one of the best measures. Data for TFP can found at the San Francisco Federal Reserve- (

The graph below plots a simple index we created based on total factor productivity (TFP) versus the ten year average growth rate of TFP. The TFP index line is separated into green and red segments to highlight that change in the trend of productivity growth rate that occurred in the early 1970’s. The green dotted line extrapolates the trend of the pre-1972 era forward.

Data Courtesy: San Francisco Federal Reserve

The graph below plots 10 year average productivity growth (black line) against the ratio of total U.S. credit outstanding to GDP (green line).

The stagnation of productivity growth started in the early 1970’s. To be precise it was the result, in part, of the removal of the gold standard and the resulting freedom the Fed was granted to foster more debt. For more information on this please read our article: The Fifteenth of August.  The graph above reinforces the message from the other debt related graphs – over the last 30 years the economy has relied more upon debt growth and less on productivity to generate economic activity.Data Courtesy: Bloomberg, St. Louis and San Francisco Federal Reserve

Demoting Productivity

Government deficit spending is sold to the public as economically beneficial. However, the simple fact that government debt as a ratio of GDP has continually grown, tells you this is a lie. Further, there is not just a financial cost to running deficits but an opportunity cost that is underappreciated or ignored altogether. The capital misallocated towards the government was not employed for ventures that may have resulted in economically beneficial productivity gains.

The government is not solely to blame. The Federal Reserve has used monetary policy to prod economic growth and deprive the economy of full economic recessions that clean up mal-investment. They have bailed out the largest enablers of unproductive debt. Their policies encourage public and private debt expansion, much of which has been unproductive as shown in this article.

We the people, also play a role. We drive bigger cars and live in bigger houses for example. We tend to spend more lavishly than generations past. Too much of this unproductive consumption is done with borrowed money and not savings. While these luxuries are nice, the economic benefits are very short-term in nature and come at the expense of the long-term benefits of more productive investment.


Given the finite ability to service debt outstanding and aforementioned demographic challenges, future economic growth, if we are to have it, will need to be based largely on gains in productivity. Current economic circumstances serve as both a wet blanket on economic growth and are clearly weighing on productivity by diverting capital away from productive uses in order to service that debt. Ill-conceived policies that impose an over-reliance on debt and demographics have largely run their course.

The change required will be neither easy nor painless but it is necessary.  Policy-makers will either need to become immediately responsive and take action to address these issues or discipline will be imposed by other involuntary means.

This is not just an economics story. Importantly, as investors in assets whose value and cash flows are dependent on these economic forces, we urge caution when the valuation of those assets is high as it is today amid such a challenging economic backdrop.

Baseball Hall of Famer and sage, Yogi Berra, once said, “It’s tough to make predictions, especially about the future.” But, as Morningstar’s Christine Benz notes, plugging in a return forecast is necessary for financial planning. Without it, it’s impossible to know how much to save and for how long. In this spirit, Benz has collected asset class return forecasts from large institutional investors and Jack Bogle, who is virtually an institution himself.

Because the forecasts are longer term, they are worth contemplating even if you can’t take them to the bank. Nobody knows what the market will do this year or next year. But it’s at least possible to be smarter about longer term forecasts. When you start at historically high valuations for stocks, such as those that exist now, it’s reasonable to assume future 7- or 10-year returns might be lower than average. In fact, the S&P 500 has returned less than 5% annualized (in nominal terms) since 2000 when it had reached its most expensive level (on a Shiller PE basis) in history. That’s only half of it’s long term average.

Below are the forecasts in table form and in bar chart form as Benz reports them. Some are nominal, and some are real; we’ve indicated which kind after the name of the institution.

At least two of the asset managers’ forecasts — GMO and Research Affiliates — take the Shiller PE seriously. That metric indicates the current price of the S&P 500 relative to the underlying constituents’ past 10-year real average earnings. When that metric is low, higher returns have tended to result over the next decade. And when it has been high, low returns have tended to result. Currently the metric is over 28. It’s long term average is under 17.

Investors should take all forecasts with a grain of salt. But when valuations are as high as they are now, it seems prudent to lower expectations.

As we are now in to day 26 of the government shutdown, the 800,000 federal employees and contractors being used as political pawns go without their first paycheck. This whole ordeal, while unfortunate, is a great reminder of what can happen to any of us: missing a paycheck:

Luckily many financial institutions have stepped up to the plate and done the right thing for the furloughed employees to modify loan agreements, waive late penalties and overdraft charges, but some may not be so forgiving.

What happens if you find yourself in this scenario? If you miss a paycheck, would life go on as you know it? The numbers say that for most, it’s doubtful. The Federal Reserve Board issued a report on the Economic Well-Being of U.S. Households last May and although most households are better off than they were a year ago, missing a paycheck could still make many cry or cringe. According to the study, only 4 out of 10 could meet a $400 emergency expense, or would do so by borrowing or selling something.

This takes us back to Personal Finance 101:

  • Spend less than you make.
  • Build an emergency fund.

We typically recommend that a dual income household have at least 3-6 months of expenses set aside in an emergency fund and a single income household 9-12 months. It always helps to know you have these funds to fall back on until things turn around. Life happens: people get laid off, companies or governments miss paychecks, and people get sick.

If these numbers seem lofty, don’t worry; they were lofty to everyone at one point.  Everyone must start somewhere. If you don’t have any savings now, start by trying to save $1,000. It’s amazing how many things that will fall into the “I need cash quick” range are under $1,000. Think about this: To save $1,000 in a year, you need to save $83 a month, or roughly $2.75 a day.  I notice that once people get on the right path to savings, they typically accumulate cash much quicker than they would have previously thought.

Do yourself and your family a favor and start an emergency fund or solidify it if you already have one. Don’t be afraid of holding cash, but also don’t leave it in an institution that won’t pay you any interest.  You can find banks that will pay you for holding your cash. Check out or as they are both good aggregators that will show you rates and rankings institutions that actually want your money.

Another alternative and something we have done for clients is find a money market that actually pays. We are currently finding rates north of 2%, but you have to look.  Short term bond funds, individual bonds or Treasury’s, while not as liquid, can also provide a boost to your savings with little risk.

If you have any questions, please don’t hesitate to email me.

Each week we produce a chart book of 10 of the current positions we have in our equity portfolio. Specifically, we are looking at the positions which warrant attention, or are providing an opportunity, or need to be sold.

While the portfolios are designed to have longer-term holding periods, we understand that things do not always go the way we plan. This monitoring process keeps us focused on capital preservation and long-term returns.


There are four primary components to each chart:

  • The price chart is contained within the shaded area which represents 2-standard deviations above and below the short-term moving average.  
  • The Over Bought/Over Sold indicator is in orange at the top.
  • The Support/Resistance line (green) is the longer-term moving average which also acts as a trailing stop in many cases.
  • The Buy / Sell is triggered when the green line is above the red line (Buy) or vice-versa (Sell).

When the price of a position is at the top of the deviation range, overbought and on a buy signal it is generally a good time to take profits. When that positioning is reversed it is often a good time to look to add to a winning position or looking for an opportunity to exit a losing position.

With this basic tutorial let’s get to the sector analysis.

ABBV – AbbVie, Inc.

  • Currently consolidating within a “pennant” formation.
  • A breakout to the upside would bring the target of $115 into focus.
  • Healthcare has been under pressure as of late as market is currently chasing momentum.
  • Position is close to triggering a short-term BUY signal
  • Short-Term Positioning: Bullish
    • Add to position: $90
    • Stop-loss is $82.50

CHCT – Community Healthcare Trust

  • Long-term trend line intact and recently bounced off that critical level.
  • Has been consolidating over last 6-months and the previous sell signal is close to reversing.
  • Short-Term Positioning: Bullish
    • Will look to add to position at $32
    • Stop-loss is currently $28
  • Long-Term Positioning: Bullish

DOV – Dover Corp.

  • Position has rallied nicely from oversold conditions.
  • Still on a sell signal currently which keeps our sell points and stop losses tight.
  • Short-Term Positioning: Bullish
    • Will look to exit the 1/2 position at $80.
    • If position breaks above resistance will look to add.
    • Stop-loss is currently $67.50

DUK – Duke Energy Corp.

  • Utilities have been under pressure as of late due to PG&E bankruptcy.
  • Trend remains very positive and support is near by.
  • Short-Term Positioning: Bullish
    • Looking to add to position if support holds at $62-64
    • Stop-loss is currently $60

JNJ – Johnson & Johnson

  • Bought 1/2 position for longer-term positioning.
  • Long-term trend support is holding.
  • Currently oversold and on a weekly sell signal. 
  • Short-Term Positioning: Cautious
    • Looking to add to position above $137.50
    • Stop-loss is currently $120
  • Longer-Term Positioning: Bullish

MDLZ – Mondelez International, Inc.

  • Stock trades in a very defined range so trading limits are tight.
  • Long-term support is holding,
  • Lot of overhead resistance at previous highs.
  • Currently on a very early sell-signal (bottom panel)
  • Overbought condition is being worked off.
  • Short-Term Positioning: Bullish
    • Sell Target: $44
    • Stop-loss is currently $38

NSC – Norfolk Southern Corp.

  • Bought 1/2 position with view to build out full position opportunistically.
  • Long-term trend line is currently resistance.
  • Sell signal is improving.
  • Currently coming off lower deviation band.
  • Short-Term Positioning: Bullish
    • Look to add to position on move above $165
    • Stop-loss is currently $140

PFE – Pfizer, Inc.

  • Long-term trend line is holding and bullish.
  • Currently on a sell signal and testing lower support.
  • Currently correcting overbought condition.
  • Short-Term Positioning: Bullish
    • Buy 2nd half of position at $44
    • Stop-loss is currently $42

VZ – Verizon Communications

  • Position bounced off support at 200-dma.
  • Currently on a buy signal. (bottom panel)
  • Short-Term Positioning: Bullish
    • Take profits at $60
    • Stop-loss moved up to $54

XOM – Exxon Mobil

  • With oil prices still trying to recover, upside remains in XOM.
  • Currently on a very deep sell-signal (bottom panel)
  • Very oversold and deviated from short-term moving average. 
  • Short-Term Positioning: Bullish (Trade Only)
    • Look to sell on a rally back to $75-77
    • Stop-loss moved up to $70

As the trumpets sound to signal the start of earnings season, the battle between fundamentals and “hope” begins. While earnings expectations have weakened markedly in recent months, the bulls remain steadfast in their belief the market correction is now over.

As I discussed in this past weekend’s missive :

“‘The stock market just got off to its best start in 13 years. The 7-session start to the year is the best for the Dow, S&P 500 and Nasdaq since 2006.’ – Mark DeCambre via MarketWatch

While headlines like this will certainly get ‘‘clicks’ and ‘likes,’ it is important to keep things is perspective. Despite the rally over the last several sessions, the markets are still roughly 3% lower than where we started 2018, much less the 11% from previous all-time highs.

Importantly, there has been a tremendous amount of ‘technical damage’ done to the market in recent months which will take some time to repair. Important trend lines have been broken, major sell-signals are in place, and major moving averages have crossed each other signaling downward pressure for stocks. 

“While the chart is a bit noisy, just note the vertical red lines. There have only been a total of 6-periods in the last 25-years where all the criteria for a deeper correction have been met. While the 2011 and 2015 markets did NOT fall into more protracted corrections due to massive interventions by Central Banks, the current decline has no such support currently. 

So, while there are many headlines circulating the ‘interweb’ currently suggesting the ‘Great Bear Market Of 2018’ is officially over, I would caution you against getting overly bullish too quickly.”

However, from a portfolio management perspective it is always a valuable exercise to analyze both sides of the argument to make a better investment decision. Therefore, let’s take a look at the technical case for the markets from both a bullish and bearish perspective.


1) Big Rallies Happen Off Big Lows

It isn’t surprising. given the magnitude of the rally following the Christmas Eve low, the “bullish bias” would quickly return. There is precedent for such exuberance as well as recently noted by Bespoke.

As they showed in their table below, whenever there has previously been a sharp fall of more than 15% in a quarter, followed by a sharp rally of at least 10% in the following days, the markets were higher in the near future.

Such a combination of events has only occurred 12 times over the past 75 years, and the market was higher 75% of the time in 3-months and higher 83% of the time in 12-months.

But note that in some of these cases these were big rallies within the context of a bear market such as the rallies in 2001 and 2008.

2) The Fed Has Gone “Dovish”

In recent weeks, the previously “hawkish” Federal Reserve has become much more “dovish” suggesting a “pause” in monetary policy is possible if needed.

This change has not gone unnoticed by the bulls. Since Fed Chair Jerome Powell used the word “patient” when referring to the Fed’s approach to hiking interest rates, stocks went straight up. Given there had seemingly been a disconnect between the Fed, the markets, and the White House, the change was a welcome support for the bulls.

It is also believed the Fed will back off of their balance sheet reductions if needed, although Jerome Powell has not made any public indication such is an option currently.

While not really a “technical measurement,” such a change in monetary policy would certainly provide support for the bulls in the near term.

3) Advance-Decline Line Is Improving

The participation by stocks in the recent bullish advance has been strong enough to push the advance-decline line above the recent downtrend.

Such a rise in participation suggests the momentum behind stocks is supportive enough to push stocks to higher levels and should not be dismissed lightly.

Currently, as shown above, the short-term dynamics of the market have improved sufficiently enough to trigger an early “buy” signal. This suggests a moderate increase in equity exposure is warranted given a proper opportunity. However, to ensure that the current advance is not a “head-fake,” as repeated seen previously, the market will need to reduce the current overbought condition without violating near-term support levels OR reversing the current buy signal.

There is a good bit of work to do to satisfy those conditions, but things are indeed improving.

Let me be VERY CLEAR – this is VERY SHORT-TERM analysis. From a TRADING perspective, there is a tradeable opportunity. This DOES NOT mean the markets are about to begin the next great secular bull market. Caution is highly advised if you are the type of person who doesn’t pay close attention to your portfolio OR have an investment startegy based on “hoping things will get back to even” rather than selling.


The bear case is more grounded in longer-term price dynamics – weekly and monthly versus daily which suggests the current rally remains a reflexive rally within the confines of a more bearish backdrop.

1) Short-Term: Market Rally On Declining Volume

The recent market rally, while strong, occurred amidst declining volume suggesting more of a short-covering rally rather than a conviction to a “bull market” meme.

Furthermore, the rally which was one of the strongest seen in the last decade, barely retraced 38.2% of the previous decline. In order for the market to reverse the current “bearish” context, it will require a substantial move higher back above the 200-day moving average.

Given the economic and fundamental backdrop currently at play, such a rally will likely prove to be very challenging.

2) Longer-Term Dynamics Still Bearish

If we step back and look at the market from a longer-term perspective, where true price trends are revealed, we see a very different picture emerge. As shown below, the current dynamics of the market are extremely similar to those of the previous two bull market peaks. Given the deterioration in revenues, bottom-line earnings, and weaker economics, the backdrop between today and the end of previous bull markets is consistent. 

In both previous cases, the market peaked in a consolidation process, broke down through longer-term major trend lines, and did so on falling momentum combined with a long-term moving average convergence-divergence (MACD) “sell” signal.

3) Bonds Ain’t “Buyin’ It”

If a “bull market” were truly taking place we should see a flight from “safety” back into “risk.” As shown below, the declines in the stock-bond-ratio has been coincident with both short and long-term market corrections.

Currently, we are not seeing “risk taking” being a predominate factor at the moment. Could this change, absolutely. However, currently, despite the surge in the markets from the December lows, both Treasury yields and the stock/bond ratio have remained fairly firm.

Such continues to suggest the current market rally remains a “counter-trend rally” within the context of an ongoing correction.

What you decide to do with this information is entirely up to you. As I stated, I do think there is enough of a bullish case being built to warrant taking some equity risk on a very short-term basis. 

However, the longer-term dynamics are clearly bearish. When those negative price dynamics are combined with the fundamental and economic backdrop, the “risk” of having excessive exposure to the markets greatly outweighs the potential “reward. “

Could the markets rocket higher as some analysts currently expect? It is quite possible particularly if the Federal Reserve reverses course and becomes much more accommodative.

For now the upside remains limited to roughly 80 points as compared to 230 points of downside.

Those are odds that Las Vegas would just love to give you. 

Guest Post by Michael Kahn, CMT. 

Mike is a Chartered Market Technician (CMT), Columnist, Editor, Analyst, Instructor, Speaker and Author of three books on technical analysis.

It is always difficult for we humans to separate our gut feelings from cold, hard data. After all, the latter is why we built computers so we don’t have to worry about those silly facts. I know I personally prefer to act on whims based on my extensive life experience as they masquerade for analysis.

That is why in the midst of on-again, off-again trade wars, budget battles, political fracturing, the Fed and slowing global growth it is completely uncomfortable to look at the data and buy this market.

Is it the blood in the streets that Rothschild espoused? Or is it fearful enough for Buffet’s “buy when others are fearful?” Maybe. The VIX did reach a peak of 36 a short while ago but that’s still just run-of-the-mill fearful.

But then along comes retired institutional market analyst and technician Walter Deemer to spoil the pity party (sorry, Puddles). He’s been tracking the Lowry’s 90% day signals throughout this current market turmoil and reported several of the bullish variety in the past few weeks.

Just so you know, a 90% upside day occurs when 90% of the volume and 90% of the points happen to the upside. It’s a little hard to do on your own and most people cheat a little by using 90% of the stocks moving (advancers) as a proxy for points. But you get the idea.

Paul Desmond, the late chief at Lowry’s, published the full set of rules for this signal but in a nutshell, market bottoms are likely when a few upside days follow the downside days. It tells us there was some panicky action to sell followed by enthused action to buy. The tide rolled out (go Clemson!) and then rolled back in.

Of course, we see a lot of isolated upside days in bear markets so it is important to have a few upside signals in a cluster. Clustering is even more important when there are only 80% upside days, instead of 90%. Clustering of both kinds seems to be the case now.

And then on January 4 (a Friday), Deemer tweeted this:

‘Another 90% upside day followed by a Whaley Breadth Thrust to confirm an intermediate bottom and Breakaway Momentum to confirm a four-year cycle low.’

I am not well versed in these two indicators so here is my look-see: Wayne Whaley published his findings in 2009 for his Advance Decline Thrust (ADT) indicator. It is simply the sum of advances for N periods (usually five) over the sum of advances plus declines over that same period. A reading above 70% is pretty good but above 75% is really good.

And now for Breakaway Momentum (BAM), from Walter’s own writings:

“Breakaway momentum (some people call it a “breadth thrust”) occurs when ten-day total advances on the NYSE are greater than 1.97 times ten-day total NYSE declines. It is a relatively uncommon phenomenon.”

As you can see, they are similar. And so is the Zweig Breadth Thrust, which looks a 10-day average of advances over advances plus declines to move from a very bearish 40% to a very bullish 61.5% in a 10-day span. Here is what that indicator looks like today:

Winner, winner, chicken dinner. It makes no sense that the market is so happy but that’s a gut reaction, not a data reaction. It’s not what we expect but there it is.

I’ll close with an excerpt from Whaley’s report which really gives us a good understanding of what all this breadth trusting is all about.

“Market rallies have been appropriately compared to the launch of a rocket. In order for a rocket to have enough momentum to exit the Earth’s atmosphere, the ship must be launched with enough initial force to defy the earth’s gravity and penetrate the Earth’s atmosphere. The theory is the market has an atmosphere of boundaries as well, made up of old trading ranges, resistance lines, and the tendencies of investors to pocket short-term profits. If the market is to have a chance of overcoming its own atmospheric constraints, the initial rally must be propelled with a thrust adequate in force to send the market through the levels of resistance that thwarted previous such launches.”

The fuel for that thrust is market breadth.

Deemer says the market today is very close to a BAM signal (as of publication midday Jan. 8) but cautions that there have been near-misses before. He’s waiting for the full signal.

I’m a bit more encouraged but then again, I’ve only been at this chart stuff for 31 years. Walter has 23 years more than that.

Each week we produce a chart book of the S&P 500 sectors to review where money is flowing within the market as whole. This helps refine not only decision making about what to own and when, but what sectors to overweight or underweight to achieve better performance.


There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s get to the sector analysis.

Basic Materials

  • Long-term trend line is currently broken
  • Previous support from February lows has been broken and is now resistance.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being reduced. (top panel)
  • Running into downtrend resistance.
  • Short-Term Positioning: Neutral
    • Last Week: Buy with target of $55
    • This Week: Sell 1/2 Position
    • Stop-loss moved up to $50
  • Long-Term Positioning: Bearish


  • Long-term trend line is currently broken
  • Previous support from February lows was broken and is now being tested
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Running into resistance at downtrend.
  • Short-Term Positioning: Neutral
    • Last Week: Buy with target of $47
    • This Week: Sell 1/2 position
    • Stop-loss moved up to $42
  • Long-Term Positioning: Bearish


  • Long-term trend line is currently broken
  • Previous support from February lows has been broken but sector is currently sitting on very minor support.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Running into downtrend resistance
  • Short-Term Positioning: Neutral
    • Last week: Buy with target of $64
    • This week: Sell 1/2 position
    • Stop-loss moved up to $60
  • Long-Term Positioning: Bearish


  • Long-term trend line is currently broken
  • Previous support from 2017 consolidation is currently holding.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition being worked off.
  • Short-Term Positioning: Bullish
    • Last week: Buy with target of $26
    • This week: Sell 1/2 position
    • Stop-loss moved up to $24
  • Long-Term Positioning: Bearish


  • Long-term trend line is currently broken
  • Previous minor support from late 2016 is currently holding.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition being worked off.
  • Sector pushing up into downtrend resistance
  • Short-Term Positioning: Neutral
    • Last week: Buy with target of $70
    • This week: Sell 1/2 position
    • Stop-loss moved up to $65
  • Long-Term Positioning: Bearish


  • Long-term trend line is currently broken
  • Previous minor support from 2017 is holding for now.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition being worked off.
  • Pushing up into downtrend resistance
  • Short-Term Positioning: Neutral
    • Last week: Buy with target of $64
    • This week: Sell 1/2 position
    • Stop-loss moved up to $60
  • Long-Term Positioning: Bearish


  • Long-term trend line is currently broken
  • Previous support from 2016 and 2017 is holding.
  • Currently on an early sell-signal (bottom panel)
  • Currently oversold on short-term basis.
  • Short-Term Positioning: Bullish
    • Last week: Buy with target of $54
    • This week: Sell 1/2 position.
    • Stop-loss is currently $50
  • Long-Term Positioning: Bearish

Real Estate

  • Long-term trend line is currently holding.
  • Lots of resistance at previous price peaks going back to 2016.
  • Currently on an early sell-signal (bottom panel)
  • Currently oversold (top panel)
  • Short-Term Positioning: Neutral
    • Last week: Buy with target of $31.50
    • This week: Sell 1/2 position
    • Stop-loss moved up to $31.50
  • Long-Term Positioning: Bearish


  • Long-term trend line remains intact.
  • Previous support continues to hold.
  • Currently close to an early sell signal. (bottom panel)
  • Oversold on a short-term basis.
  • Short-Term Positioning: Neutral
    • Last week: Buy at current levels
    • This week: Buy or Add to position
    • Stop-loss is currently $51
  • Long-Term Positioning: Bullish

Health Care

  • Sector broke the longer term trend which is now primary resistance.
  • Currently on a very deep sell-signal (bottom panel)
  • Overbought condition is being worked off. (top panel)
  • Short-Term Positioning: Neutral
    • Last week: Buy on pullback to $80
    • This week: Sell 1/2 position
    • Stop-loss moved up to $84
  • Long-Term Positioning: Neutral


  • Long-term trend line has been broken.
  • Previous support was violated but sector is attempting to reclaim it.
  • Currently on a very deep sell signal. (bottom panel)
  • Oversold condition being reversed
  • Sector pushing into downtrend resistance.
  • Short-Term Positioning: Neutral
    • Last week: Buy at current levels with target of $110
    • This week: Sell 1/2 position
    • Stop-loss moved up to $100
  • Long-Term Positioning: Bearish


  • Long-term trend line has been violated.
  • Previous support is holding for now.
  • Currently on a very deep sell signal. (bottom panel)
  • Oversold on a short-term basis.
  • Short-Term Positioning: Neutral
    • Last week: Buy at current levels
    • This week: Sell 1/2 of position
    • Stop-loss moved up to $54
  • Long-Term Positioning: Bearish
I was digging through some old charts over the weekend and stumbled across this gem from AlphaTrends which explains the “best time to buy stocks.”

“Is it possible to time the market cycle to capture big gains?

Like many controversial topics in investing, there is no real professional consensus on market timing. Academics claim that it’s not possible, while traders and chartists swear by the idea.

The following infographic explains the four important phases of market trends, based on the methodology of the famous stock market authority Richard Wyckoff.

The theory is that the better an investor can identify these phases of the market cycle, the more profits can be made on the ride upwards of a buying opportunity.”

So, the question to answer, obviously, is:

“Where are we now?”

I’m glad you asked.

Let’s take a look at the past two full-market cycles, using Wyckoff’s methodology, as compared to the current post-financial-crisis half-cycle. While actual market cycles will not exactly replicate the chart above, you can clearly see Wyckoff’s theory in action.


The accumulation phase, following the 1991 recessionary environment was evident as it preceded the “internet trading boom” and the rise of the “” bubble from 1995-1999.

As I noted last week:

“Following the recession of 1991, the Federal Reserve drastically lowered interest rates to spur economic growth. However, the two events which laid the foundation for the ‘’ crisis was the rule-change which allowed the nations pension funds to own equities and the repeal of Glass-Steagall which unleashed Wall Street upon a nation of unsuspecting investors.

The major banks could now use their massive balance sheet to engage in investment-banking, market-making, and proprietary trading. The markets exploded as money flooded the financial markets. Of course, since there were not enough “legitimate” deals to fill demand and Wall Street bankers are paid to produce deals, Wall Street floated any offering it could despite the risk to investors.”

The distribution phase became evident in early-2000 as stocks began to struggle.

While the names of Enron, WorldCom, Global Crossing, Lucent Technologies, Nortel, Sun Micro, and a host of others are “ghosts of the past,” relics of an era the majority of investors in the market today are unaware of, they were the poster children for the “greed and excess” of the preceding bull market frenzy.

As the distribution phase gained traction, it is worth remembering the media and Wall Street were touting the continuation of the bull market indefinitely into the future. 

Then, came the decline.


Following the “” crash investors had all learned their lessons about the value of managing risk in portfolios, not chasing returns and focusing on capital preservation as the core for long-term investing.

Okay. Not really.

It took about 27 minutes for investors to completely forget about the previous pain of the bear market and jump headlong back into the creation of the next bubble leading to the “financial crisis.” 

During the mark-up phase investors once again piled into leverage. This time not just into stocks, but real estate, as well as Wall Street, found a new way to extract capital from Main Street through the creation of exotic loan structures. Of course, everything was fine as long as interest rates remained low, but as with all things, the “party eventually ends.”

Once again, during the distribution phase of the market, the analysts, media, Wall Street, and a rise of bloggers, all touted “this time was different.” There were “green shoots,” it was a “Goldilocks economy,” and there was “no recession in sight.” 

They were disastrously wrong.

Sound familiar?


So, here we are, a decade into the current economic recovery and a market that has risen steadily on the back of excessively accommodative monetary policy and massive liquidity injections by Central Banks globally.

Once again, due to the length of the “mark up” phase, most investors today have once again forgotten the “ghosts of bear markets past.” Despite a year-long distribution in the market, the same messages seen at previous market peaks have been steadily hitting headlines: “there is no recession in sight,” “the bull market is cheap” and “this time is different because of Central Banking.”

Lost And Found

There is a sizable contingent of investors, and advisors, today who have never been through a real bear market. After a decade long bull-market cycle, which only seems to go up, you can certainly understand why mainstream analysis continues to believe the markets can only go higher.

What is concerning is the rather cavalier attitude the mainstream media takes about bear markets.

“Sure, a correction will eventually come, but that is just part of the deal.”

What gets lost during these bullish cycles, and is found in the most brutal of fashions, is the devastation caused to financial wealth during the inevitable decline.

Let’s look at the S&P 500 inflation-adjusted total return index in a different manner. The first chart shows all of the measurement lines for all the previous bull and bear markets with the number of years required to get back to even.

What you should notice is that in many cases bear markets wiped out essentially a substantial portion, if not all, of the previous bull market advance. This is shown more clearly when we look at a chart of bull and bear markets in terms of points.

Whether or not the current distribution phase is complete, there are many signs suggesting the current Wyckoff cycle may be entering its final stage of completion. 

Let me remind you of something Ben Graham said back in 1959:

“‘The more it changes, the more it’s the same thing.’ I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, ‘the more it changes.’

The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound,  then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market.

In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one.”

He is right, of course, things are little different now than they were then.

For every “bull market” there MUST be a “bear market.” 

While “passive indexing” sounds like a winning approach to “pace” the markets during an advance, it is worth remembering that approach will also “pace” the decline.

The recent sell-off should have been a wake-up call to just how quickly things can change and how damaging they can be.

There is no difference between a 100% gain and a 50% loss.

(For the mathematically challenged: If the market rises from 1000 to 2000 it is a 100% gain. A fall from 2000 to 1000 is a 50% loss. Net return is 0%)

Understanding that investment returns are driven by actual dollar losses, and not percentages, is important in the comprehension of how devastating corrections can be on your financial outcome. So, before sticking your head in the sand and ignoring market risk based on an article touting “long-term investing always wins,” there is a huge difference between just making money and actually reaching your financial goals.

Each week we produce a chart book of the major financial markets to review whether the markets, as a whole, warrant higher levels of equity risk in portfolios or not. Stocks, as a whole, tend to rise and fall with the overall market. Therefore, if we get the short-term trend of the market right, our portfolios should perform respectively.


There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Long-term trend line is currently broken.
  • Recent rally pushed above initial resistance and is now testing resistance at Oct and Nov lows.
  • Downtrend line from all-time highs is converging with 200-dma (green dashed line) providing additional downward resistance.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $260
    • This Week: Sell 1/2 of position
    • Stop-loss moved up to $250
  • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • Long-term trend line is currently broken
  • Recent rally pushed above initial resistance and is now testing resistance at Oct and Nov lows.
  • The 200-dma (green dashed line) providing additional resistance at the Oct and Nov lows.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $240
    • This Week: Sell 1/2 of position
    • Stop-loss moved up to $232.50
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Long-term trend line is currently broken
  • Recent rally pushed above initial resistance and is now testing resistance at Oct and Nov lows.
  • Downtrend line from all-time highs is converging with 200-dma (green dashed line) providing additional downward resistance.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $160
    • This Week: Sell 1/2 of position
    • Stop-loss moved up to $150
  • Long-Term Positioning: Bearish

S&P 600 Index (Small-Cap)

  • Long-term trend line is currently broken
  • Recent rally pushing into downtrend line from all-time highs
  • 200-dma (green dashed line) providing additional overhead resistance to rally.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $65
    • This Week: Sell 1/2 of position
    • Stop-loss moved up to $62
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • Long-term trend line is currently broken
  • Recent rally is pushing into initial resistance at the Oct and Nov lows.
  • Downtrend from all-time highs and the 200-dma (green dashed line) are providing additional downward resistance.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $325
    • This Week: Sell 1/2 of position
    • Stop-loss moved up to $310
  • Long-Term Positioning: Bearish

Emerging Markets

  • Long-term trend line is currently broken
  • Recent rally pushed above initial resistance and is now testing the highs of the bottoming process over the last several months.
  • Market has broken above the downtrend line from last-years highs
  • The “sell signal” is close to being reversed (bottom panel)
  • Currently pushing back into very overbought conditions. (red circle)
  • Short-Term Positioning: Bullish
    • Last Week: Recommended “buy” with target of $41
    • This Week: Sell 1/3 of position and look for pullback which does not violate the downtrend line to add back, or initiate, a position.
    • Stop-loss remains at $38
  • Long-Term Positioning: Bearish

International Markets

  • Long-term trend line is currently broken
  • Recent rally pushing into resistance at the Oct and Nov lows.
  • Downtrend from all-time highs is converging with 200-dma (green dashed line) providing additional downward resistance.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is almost fully reversed.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $62
    • This Week: Sell 1/2 of position
    • Stop-loss moved up to $60
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Long-term trend line is currently broken
  • Recent rally pushing into resistance at top of 3-year channel.
  • Currently on very deep sell-signal (bottom panel)
  • Oversold condition is being worked off.
  • Short-Term Positioning: Neutral
    • Last Week: Recommended “buy” with target of $60
    • This Week: Sell 1/3 of position
    • Stop-loss moved up to $50
  • Long-Term Positioning: Bearish


  • Long-term trend line has been recovered.
  • Recent rally is pushing into resistance at previous minor tops. More resistance at 3-year highs.
  • Currently on “buy” signal (bottom panel)
  • Overbought on short-term basis. Needs pullback to allow for better entry point.
  • Short-Term Positioning: Bullish
    • Buy On Pullback To $120
    • Stop-loss is currently $119
  • Long-Term Positioning: Improving From Bearish To Bullish

Bonds (Inverse Of Interest Rates)

  • Long-term support continues to hold at $111.
  • Currently on a buy-signal (bottom panel)
  • Recent pullback is reducing overbought condition. (top panel)
  • Resistance currently overhead at $124.50
  • Strong support at the 720-dma (2-years) (green dashed line)
  • Short-Term Positioning: Bullish
    • Last Week: Set “entry point” at $121
    • This Week: Reducing “entry point” to $119-120
    • Stop-loss remains at $117
  • Long-Term Positioning: Bullish

Are technology stocks cheap? It seems like a strange question to ask as the market drops on news that Apple has indicated weaker future sales. I also doubted whether Facebook’s price reflected its business value in the middle of this past summer. I thought fair value for the business was around $140 per share assuming it could grow its free cash flow by a robust 6% annually over the next decade. The stock is now in the $130 range after pushing higher than $200 in the early summer.

But technology isn’t just the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google). And at least two important firms – DoubleLine and GMO – think the sector is at least relatively cheap. Here’s why.

First, technology is trading cheaply on a Shiller PE basis, shown by the fact that the DoubleLine Shiller Enhanced CAPE Fund (DSEEX) holds the sector. By using a bond portfolio as collateral, this fund gains exposure to an equity derivative that delivers exposure to four of the five cheapest S&P sectors (tossing the one with the worst one-year price momentum) on the basis of their Shiller PE ratios — and technology is one of those sectors currently. The Shiller PE, as a reminder, is the current price of a stock, sector, or index relative to its past decade’s worth of real, average earnings. Right now (and for more than a year) technology has come up as one of the four sectors the fund owns, meaning its Shiller PE is lower relative to its own historical average than other sectors’ Shiller PEs are to theirs. The other sectors the fund owns currently are Healthcare, Consumer Staples, and Communication Services.

This mechanical application of the Shiller PE may not satisfy investors looking for more a more absolute definition of value, but, relative to other sectors, technology is cheap on a serious valuation metric. If you’re going to be allocated to U.S. stocks in some way, shape, or form, this is a reasonable way to achieve that allocation.

Second, GMO, which is also a fan of the Shiller PE metric, and uses it in its asset class valuation work, also likes technology stocks. The Boston-based firm just published a white paper, written by Tom Hancock, the head of the firm’s Focused Equity Team, arguing that technology stocks were attractive. The firm’s “Quality” strategy has 45% of its assets in technology stocks, “including positions in three of the five FAANG stocks.” Alphabet (Google) and Apple are the two largest holdings of the firm’s Quality mutual fund (GQETX), managed by Hancock.

Rather than relying on traditional valuation metrics when picking individual stocks, the firm looks at how Alphabet, for example, invests in R&D, and how that investment can translate into higher future revenues. In other words, R&D isn’t properly counted as an expense that will never yield future revenue and earnings growth. On the basis of accounting adjustments like this, GMO views Alphabet as a cheap stock.

Hancock notes that GMO’s Quality portfolio doesn’t trade at traditional valuation multiples that are different from the broader market. But, “in an expensive market, quality companies typically trade at higher P/E’s than most ‘value’ investors would like.” Higher multiples are justified for companies with resilient margins and strong business models, and Hancock thinks the strategy can produce returns of 5% in excess of inflation.

Quality companies in the U.S. are also cheaper than those outside of the U.S., and Hancock surmises that’s because of a kind of scarcity value. Companies with consistently high margins and returns on invested capital are less prevalent outside of the U.S., so they trade at dearer prices.

Moreover, the U.S. technology sector consists of a diverse group of stocks. Only one of the FAANGs – Apple – is in the top-10 of the S&P 500 Information Technology Sector. Some of the largest constituents of that sector are the darlings from the technology bubble of nearly 20 years ago – Microsoft, Intel, Cisco, and Oracle. They turned out to be good businesses that were just overpriced then. Hancock lists Microsoft’s virtues as being in the cloud growth business and having a lock on the consumer. Qualcomm, by contrast, has a unique position in the smartphone supply chain, while Oracle provides legacy software and benefits from high switching costs. Finally, Visa and Mastercard are “borderline tech” companies, but, nevertheless, find themselves near the top of the S&P 500 Information Technology sector.

So, despite being known for top-down asset class valuation calls, the GMO Quality strategy is bottom-up and fundamentally oriented. And, just like the more mechanical, single-factor approach of the DoubleLine fund, it also finds technology stocks cheap – or cheaper than their brethren in other sectors.


Both the DoubleLine Shiller Enhanced CAPE fund and the GMO Quality III fund are worthy of investors’ consideration. Beware that the latter is for institutional investors, given its $10 million minimum. Get in touch with us if you have questions about portfolio construction, asset management, or financial planning.

  • Bull Rallies & Market Tops
  • Sector & Market Analysis
  • 401k Plan Manager

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Bull Rallies & Market Tops

Last week, we discussed the fulfillment of our expectations for a bull rally. While the rally was attributed to the rather “dovish” stance taken by Jerome Powell and commentary from the White House on potential progress on resolving the “trade war” with China. The reality is it had little to do with those headlines but was simply a reversal of the previous “exhaustion extreme” of sellers during November and December. 

The rally, as we laid out two weeks ago, continues to work within the expected range back to 2650-2700. 

Importantly, the previous deep “oversold” condition which was supportive of the rally following Christmas Eve has now been fully reversed back into extreme “overbought” territory. While this doesn’t mean the current rally will immediately reverse, it does suggest that upside from current levels is likely limited. 

Nonetheless, the rally from the December lows has been impressive. However, I want to caution investors from extrapolating a deeply oversold bounce into something more than it is.

Beware The Headlines

“The stock market just got off to its best start in 13 years. The 7-session start to the year is the best for the Dow, S&P 500 and Nasdaq since 2006.” – Mark DeCambre via MarketWatch

While headlines like this will certainly get “clicks” and “likes,” it is important to keep things is perspective. Despite the rally over the last several sessions, the markets are still roughly 3% lower than where we started 2018, much less the 11% from previous all-time highs.

Don’t forget to grab a cup of coffee and start your trading/investing day with me as I kick off my new radio show. 
Streaming Live On The Web

Importantly, there has been a tremendous amount of “technical damage” done to the market in recent months which will take some time to repair. Important trend lines have been broken, major sell-signals are in place, and major moving averages have crossed each other signaling downward pressure for stocks. 

While the chart is a bit noisy, just note the vertical red lines. There have only been a total of 6-periods in the last 25-years where all the criteria for a deeper correction have been met. While the 2011 and 2015 markets did NOT fall into more protracted corrections due to massive interventions by Central Banks, the current decline has no such support currently. 

So, while there are many headlines circulating the “interweb” currently suggesting the “Great Bear Market Of 2018” is officially over, I would caution you against getting overly bullish too quickly. 

Tops Are A Process

 As my friend and colleague Doug Kass wrote previously:

“Tops are a process and bottoms are an event, at least most of the time in the stock market. If you looked at an ice cream cone’s profile, the top is generally rounded and the bottom V-shaped. That is how tops and bottoms often look in the stock market, and I believe that the market is forming such a top now.”

He is correct.  

There have been several suggestions as of late that last years slide from October into December was simply a correction. Here is Mark Hulbert’s take:

“The stock market’s recent correction has been more abrupt than you’d expect if the market were in the early stages of a major decline.

I say that because one of the hallmarks of a major market top is that the bear market than ensues is relatively mild at the beginning, only building up a head of steam over several months. Corrections, in contrast, tend to be far sharper and more precipitous.”

However, I disagree.

I think Mark’s mistake is in simply looking at the plunge from the mid-year highs rather than the entire topping process which started in November of 2017. 

After a record breaking number of positive months in 2017 with extremely low volatility; 2018 was a year where volatility returned as prices consolidated in a very broad range. Notice there was important price support being built by the markets by repeatedly testing price levels over time before giving way. 

“So…is the bear market over OR is it just starting?”

The honest answer is “I don’t know.”

But, anything is certainly possible. 

However, a look back through history at previous “bear market beginnings” can certainly give us some things to consider.


After two previous bear market declines, as I discussed just recently with respect to “Secular Bear Markets,” the S&P 500 broke out to all-time highs convincing the “bulls” the worse was over. 

It wasn’t.

Over the next several months the markets continued in volatile trade,  retesting support several times before breaking down. 

But, at this point, it was still believed just to be a correction.

The change occurred when the market rallied, and failed, at the previously broken support line.

That “failure point” marked the beginning of the “1974 Bear Market.”


After the “Long-Term Capital Management” and the “Asian Contagion,” the market regained its footing and began a rampant run to all-time highs in 1999. The bulls were clearly in charge, and despite concerns of “Y2K,” stocks continued to press new highs. 

While Jim Cramer was busy publishing his list of the “Top 10 Stocks For The Next Decade,” the market begin to struggle to make new highs as volatility rose.

The early decline from “all-time highs” was only considered a correction as the demand by the bulls to “buy the dip” rang out loudly. 

“I think you’ll see healthier and broader advances in the market. Now is the time for optimism,” said Bill Meehan, chief market analyst with Cantor Fitzgerald (4/14/2000)

It wasn’t.

In early 2001, the market broke the support line that had contained the market over the last 24-months. 

Not to worry, it was simply just part of the “correction process” and many commentators on CNBC at the time were suggesting it was a “buying opportunity.” 

It wasn’t. 

The market rallied back, and failed, at the previously broken support line. 

That point marked the end of the topping process and the beginning of the “ Crash.” 


In 2006, the market was rallying as “real estate” was going wild across the country. Firms were hocking every type of exotic mortgage derivative they could find, leverage being laid on without concern, and pension funds were being pitched “high yield” opportunities. 

As the market broke out to new highs, there was little concern as there was “no recession in sight,” “subprime mortgages were contained,” and it was a “Goldilocks economy.”

Over the next year the market repeatedly hit new highs. Each new high was followed by a decline which tested broadening support giving the bulls repeated opportunities to call for “dip buying.” 

It was believed the year-long consolidation process was simply the “set up” for the continuation of the bull market. 

In early 2008, the running support line was broken as “Bear Stearns” failed sending off alarm bells to which few listened. The market rallied backed, and failed, at the previously broken support line. 

That point marked the end of the topping process and the real beginning of the “Financial Crisis.” 

By now, you should realize the similarities between all of these previous market tops and what is happening currently. However, it wasn’t just price movements that each of these previous bear markets had in common with the market today. 

Fundamental similarities existed also:

  • Valuations were high
  • Dividend yields were low
  • Federal Reserve was hiking interest rates
  • Economy was believed to be strong
  • Earnings were expected to continue to grow
  • Corporate balance sheets were believed to be strong
  • Yield curve was flattening
  • “There was no recession in sight.” 

The Big Test

 Over the next couple of weeks, the market is going to face the “test” that has defined the “bear markets” of the past.

With the markets already back to very overbought conditions, multiple moving averages just overhead, and previously broken support; the market is going to have its work cut out for it. 

However, if the bulls can regain control and push prices back above the November highs, then the “bear market correction of 2018” will officially be dead. 

But such is only one possibility out of many others which pose a far greater risk to capital currently. 

With the Fed continuing to extract liquidity, economic data slowing, and earnings likely to be weaker than expected, the current bounce is likely to be just that. 

As we have continuously repeated, if you didn’t like the November-December decline, it is simply a function that you have built up more uncontrolled risk in your portfolio than you previously realized. 

Use this rally to rebalance risk, sell losers and laggards, and add to fixed income and cash. 


We noted previously that we remain long many of our core holdings and in November and late December added positions in companies which had been discounted due to the market’s downdraft.

This past week, we did reduce our equity exposure by 6% to remove some positions which have not been performing as well as expected. 

The risk to the market remains high, but that doesn’t mean we can’t make money along the way.

Until the bullish trend is returned, we will continue to run our portfolios with a bit higher level of cash, fixed income, and tighter stops on our current long-equity exposure. 

We are excited about the opportunity to finally be able to add a “short book” to our portfolios for the first time since 2008. It is too early in the market transition process to implement such a strategy, but the opportunity is clearly forming. 

See you next week. 

Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders

S&P 500 Tear Sheet

Performance Analysis

ETF Model Relative Performance Analysis

Sector & Market Analysis:


This past week:

Discretionary, Communications, and Health Care all climbed above their respective 50-dma’s and are currently holding support. Volume has dried up over the last several trading days, so it will be important for these sectors to maintain their current support without breaking back down. Stops are $102, $$43.50, and $87 respectively.

Technology, Industrials, Materials, Energy Staples, and Financials each rallied on declining volume last week but have failed to get above their 50-dma’s currently. That overhead resistance is going to be challenged next week and it will be important, for the overall market, that these sectors make a move higher. Otherwise, I suspect we are going to see a correction evolve.

Current Postion: Staples 

Utilities and Real Estate Last week, Utilities bounced off the 200-dma which sets up a decent trading opportunity with a trailing stop at the 200-dma. Real Estate, also bounced and recovered back above its 200-dma. With rates coming back down, real estate can be added for a trade on a pullback to $31.50 that holds.

Current Positions: XLU added to Equity Trading Portfolio.

Small-Cap and Mid Cap – both of these markets are currently on macro-sell signals but did rally last over the last couple of weeks with the rest of the market. Currently, both are on short-term “buy signals” but are now back to very overbought. Take profits following last week’s trading call. 

Current Position: None

Trading Position: Close Trading Positions From Last Week

  • SLY – Target: $64.50 – Close Position
  • MDY – Target: $324 – Close Position

Emerging and International Markets -Emerging markets are once again trying to climb above its 50-dma…again. This has been consistently a trading trap over the last year. With the market very overbought, I would wait to see a better set up before adding exposure back into portfolios. 

International markets still look terrible and no real improvement is being made with the recent rally still confined to a very strong downtrend. With major sell signals in place currently, and very over-bought short-term, there is no compelling reason to add either of these markets to portfolios at this time.

Current Position: None

Dividends, Market, and Equal Weight – Not surprisingly, given the rotation to “defensive” positioning in the market, dividend-based S&P Index continues to outperform other weighting structures. The overall market dynamic remains negative for now and important supports are being tested. We are looking to sell our cap-weighted position entirely during this rally and reduce back to just our core, long-term, holdings of Equal and Dividend-Weighted indices.

Current Position: SDY, VYM, IVV

Gold – After having been out of Gold since early 2013, the metal is now improving to the point to where the risk/reward is now much more favorable for a longer-term hold. We are looking for two things to confirm a longer-term buy: 1) the 50-dma to cross back above the 200-dma, and 2) a pullback to the 200-dma for an entry point. With Gold very overbought short-term a continued short-term rally in the market over the next month will likely pull the froth out of the metal. If our conditions are met we will add a position to our portfolios. 

Current Position: None

Trading Position:

  • GLD – Buy Target: $119.00, Sell-Stop: $117

Bonds – Let me just repeat what I wrote two weeks ago:

“As we have been repeatedly suggesting since the beginning of the year, bonds would be the ‘GO TO’ haven when ‘SAFETY’ became a real concern. Look for a rally in the markets going into the new year which will likely pull some of the froth off of 10-year treasuries. Pullbacks to support should be bought.

Current Positions: DBLTX, SHY, TFLO, GSY

Trading Position: (Adjusting Buy Target Higher)

  • TLT – Buy Target: Moved up to $120, Sell-Stop: $119

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

No real change from last week as the market rally continues. With only our “core” equities currently remaining we will look to reduce equity exposure further during the month if things don’t begin to markedly improve. While the bullish trend, longer-term, remains intact, the bearish backdrop continues to mount. We will continue to use rallies to reduce risk, buy bonds, and maintain higher levels of cash for now.

As noted in the “Portfolio Positioning” section above, it is not yet viable to short the broader market. However, while that opportunity may be coming, shorting the market has capital risk just like being long. Given the recent uncertainty of the market, the best “hedge” remains cash for now.

Given the pullback in the market and the recent rally, we did take the opportunity to deploy some cash. 

  • New clients: We added 1/4th of our “core” long-term equity holdings and bond positions. We will continue to add to these positions on weakness. 
  • Equity Model: We sold 5-positions last week that technically have not been performing as well as we expected. We sold MSFT, CDW, AXP, MDT and UNH. Stops across all positions have been dramatically tightened up. This raised about 6% in cash with this rally and gives us an opportunity to add back positions on the anticipated retest of support.
  • Equity/ETF blended – Same as with the equity model. 
  • ETF Model: We will hold current holdings for now.

As we noted last week:

“There are certainly some catalysts which could reverse the current ‘bearish’ backdrop of the market in the short-term such as Powell backing off tightening monetary policy further and Trump backing of the ‘trade war’ with China.”

Not surprisingly, we have seen just that happening as of last week. While these actions certainly improved the short-term outlook, the longer-term backdrop remains negative simply from the length of the current economic and market cycle. However, we are into the seasonally strong period of the year so we are giving the bulls the benefit of the doubt for now. 

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging, if the market environment changes for the worse.


A Conservative Strategy For Long-Term Investors

There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.


Rally Runs Into Resistance

As I noted last week:

“Well, we finally got the rally we were looking for which could possibly extend into next week. However, as I have stated previously, with sell signals triggered on both a weekly and monthly basis, these ‘clearing rallies’ should be used to reduce equity risk to the markets.

In the coming weeks, any rally that takes the markets back to short-term over ‘bought’ conditions will be used to lower equity exposure to 50%, or a target or 30% equity in our 60/40 model.”

This week, the market is indeed pushing up into short-term overbought levels and is testing the underside of important previous resistance. 

One thing to note in the chart above is the horizontal dotted line that I have had drawn on the chart for the past 18-months. I noted originally that the markets break above the long-term trend channel would eventually be challenged. The recent correction has challenged that important level, if we break that confluence of support, we will be in a much more important bear market cycle. 

On Monday, take some action with respect to the following, if you haven’t already:

  • If you are overweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week. Reduce overall portfolio weights to 75% of your selected allocation target.
  • If you are underweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week but hold everything else for now.
  • If you are at target equity allocations hold for now.

Continue to use rallies to reduce risk towards a target level with which you are comfortable. Remember, this model is not ABSOLUTE – it is just a guide to follow. 

Unfortunately, since 401k plans don’t offer a lot of flexibility and have trading restrictions in many cases, we have to minimize our movement and try and make sure we are catching major turning points.

We want to make sure that we are indeed within a bigger correction cycle before reducing our risk exposure further. 

If you need help after reading the alert; don’t hesitate to contact me.

Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principle. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don’t see your exact fund listed, look for a fund that is similar in nature.


Throughout the market sell-off of the past few months, I’ve been showing key technical levels to help determine if further downside was likely or if the rout was truly over. In late-December, the S&P 500 broke below an important support zone from approximately 2,550 to 2,650 (which formed at the early-2018 lows), which represented a very important technical breakdown. The post-Christmas market bounce, so far, is simply a re-test of this zone, which is now a resistance. If the market bumps its head here, another wave down should be expected. If the market can close back above this zone in a decisive manner on the weekly chart, however, then it will have negated the December breakdown.

The weekly chart shows how two major technical breakdowns occurred in recent months. The current bounce has not resulted in a close back above the 2,550 to 2,650 resistance zone, so the S&P 500 is still in a downtrend.

Why I am worried about further downside? Because the market is still quite overvalued, among other reasons (global debt is up by $75 trillion since 2008 – no big deal!). The chart below of the Shiller PE ratio (cyclically-adjusted PE ratio) shows that the U.S. stock market’s valuation is still in rarefied territory. It’s going to take much more than the decline since early-October to unwind this bubble.

For now, I am watching if the S&P 500 can close back above the 2,550 to 2,650 resistance zone on the weekly chart or if it bumps its head and embarks on another leg down.

Please follow me on LinkedIn and Twitter to keep up with my updates.

Please click here to sign up for our free weekly newsletter to learn how to navigate the investment world in these risky times.

CNBC just published a piece about how venture capital spending hit an all-time high in 2018, surpassing the dotcom bubble record:

Venture capital just had its highest spending year in history.

The amount of money firms spent on private companies hit a new all-time record in 2018— well above the previous watermark from the dotcom boom.

Last year, venture capital firms spread roughly $131 billion across 8,949 deals, according to data published by Pitchbook and the National Venture Capital Association Thursday. The previous record was a $100 million total notched in the year 2000.

Although the dollar amount jumped by more than 57 percent from $83 billion last year, the number of deals went down. Deal count fell by about 5 percent this year from a roughly 9,400 total last year.

Cameron Stanfill, Pitchbook venture analyst who co-authored the report, said sky-high price tags for start-ups accounted for the new record total despite having fewer deals.

“There is a lot of money competing for a finite amount of companies, and that’s pushing prices up,” Stanfill told CNBC in a phone interview.

Though most people look at record VC spending as a sign of a strong, healthy economy, my research has found that the current VC boom is the result of another tech bubble that inflated due to the Federal Reserves ultra-stimulative monetary policies of the past decade (read my recent article about this). Unfortunately, this tech bubble is going to end just like the late-1990s dotcom bubble did – in another disastrous bust.

The chart below shows the monthly count of global VC deals that raised $100 million or more since 2007. According to this chart, a new “unicorn” startup was born every four days in 2018.

The chart below shows the Nasdaq Composite Index and the two bubbles that formed in it in the past two decades. Lofty tech stock prices and valuations encourage the tech startup bubble because publicly traded tech companies have more buying power with which to acquire tech startups and because they allow startups to IPO at very high valuations.

In the chart below, I compared the monthly global VC deals chart to the Nasdaq Composite Index and they line up perfectly. Surges in the Nasdaq lead to surges in VC deals, while lulls or declines in the Nasdaq lead to lulls or declines in VC deals.

Please watch my video presentation to learn why the U.S. stock market (and, therefore, the VC and startup arena) is experiencing a bubble. Though this presentation is a couple months old and the market has fallen since then, it’s still relevant for understanding how the bubble inflated and why much further downside is still ahead.

Now that the Nasdaq has fallen sharply, it wouldn’t be surprising to see VC activity wane. Unfortunately, I believe that we’re only in the early stages of the stock market and tech bust – a bubble that took nearly a decade to form does not disappear in a mere three months!

Please follow me on LinkedIn and Twitter to keep up with my updates.

Please click here to sign up for our free weekly newsletter to learn how to navigate the investment world in these risky times.

Wall Street glorifies companies that beat quarterly estimates by arguing that the long-term comprises a lot of short-terms. But beating earnings estimates for a few consecutive quarters doesn’t necessarily lead to long-term greatness. It assumes that significant changes to the business are visible in the reported numbers.

This is likely what General Electric executives rationalized as they destroyed the company’s protective shareholder “moat” and its respected corporate culture. Their short-term thinking focused on “beating earnings” on a quarterly basis, thereby insuring seemingly endless analyst upgrades. Except GE’s short-term success that was seen by the market came at the expense of unseen damage to its moat, balance sheet, and corporate culture.

Conversely, consider Apple reporting what analysts considered “disappointing” numbers for eight sequential quarters (three lifetimes on Wall Street) leading up to 2007. During that time, Apple is pouring every ounce of its resources into R&D and coming up with the iPhone. It cannot hire the right engineers fast enough and thus must pull in engineers who had been working on the Macintosh (then Apple’s bread and butter), which results in delaying the introduction of new computers by a few quarters (this did happen). Did those negative short-term results subtract from the value of the company, or were they instrumental in adding trillions of dollars of revenue to Apple?

Quarterly misses and beats show only what is seen, but true investors are able to see the unseen.

With the luxury of hindsight, I picked two examples, GE and Apple, that seem to prove that earnings misses are great and beats are bad — but they are neither. They are part of the vocabulary of the semi-staged reality game show on business TV — which I choose not to participate in. Facebook for example, was recently accused of using casino gaming psychology to get their users to keep coming back to see if their posts or family pictures were “liked.” Quarterly “beats” and “misses” are not much different; they add casino excitement to investing and turn unsuspecting investors into gamblers.

This doesn’t mean that an investor should completely ignore what happens in the short run, but quarterly earnings should be always looked in the right context — the context of the long run.

Long-term thinking should be deeply embedded in your stock analysis. A discounted cash flow (DCF) analysis model forces you to value a company the way you’d value a private business, bringing cash flows that lie decades in the future into the present.

But DCF analysis, though grounding, is a crude model that is most useful at the extremes of a company’s valuation, when a company is wildly overvalued or undervalued. This is why it makes sense to estimate a company’s value based on earnings multiples. In my process, I look at a company’s expected earnings three- to five years out and then discount it back (convert to today’s dollars). This is the key: By looking at a company’s earnings this far out, you muffle the noise of quarterly earnings — the “what have you done for me lately?” hysteria — and focus on the future.