Monthly Archives: September 2018

Michael Markowski: Stock Market Relief Rally High Extended

Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


The date range for the SCPA’s forecasted relief rally highs for stock markets of the US, Japan, Germany, France, South Korea, and Canada to occur has been adjusted. Based on the adjustment the SCPA’s new 100% statistical probability is that the relief rally highs from the March 2020 lows have been reached or will be reached by April 14, 2020.  Prior to the adjustment, the probability was 100% that relief rally high had been reached on or prior to Friday, April 3, 2020.

The adjustments were required when it was discovered that the empirical data for the Dow Jones Industrial’s index included Saturday trading sessions. From 1871 to 1952 the US market was open for trading on Saturdays. The inclusion of the Saturdays’ data distorted the SCPA’s date-of-event-to-occur forecasts since they increased the empirical data points for the researched periods by 20%. 

All of the event forecast dates by the SCPA (Statistical Crash Probability Analysis) which have been published are in the process of being revised. The only exception is that the final bottom for the Crash of 2020 will occur in Q4 2022 with a decline of 79% to 89% below 2020 highs. None of the previously published interim lows, highs, and final bottom percentages or price targets have changed.

As of Friday, April 3, 2020, all eight of the indices of the six countries had increased by a minimum of 18% from their March 2020 lows.  The SCPA had forecasted on March 24th that the probability for each of the eight indices to increase by 18% was 100% and that the probability of a 23% increase was 50%.  As of today’s April 6, 2020, close the Dow Jones Industrials composite became the first index to reach the 23% threshold with a gain of 24.5%.

My prediction is that the S&P 500’s secular bull market which began in March 2009 ended on February 19, 2020.  The ninth secular bear since 1802 began on February 20th.   Based on the peaks of the last three secular bull markets as compared to the troughs of the three most recent secular bears, the S&P 500 could decline by an additional 47% to 80% from its March 6, 2020 close.

Read my March 31, 2020, article entitled “Embrace the Bear” to learn about:

  • investing strategies that are best utilized during bear markets
  • investing in ETFs which go up when the market goes down
  • algorithms including the Bull & Bear Tracker and SCPA ’s which are being utilized by investors

TPA Analytics: Where Do We Go From Here (S&P 500)

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


TPA began to warn clients about trouble ahead in the beginning of March.  In early March, TPA saw warning signs in historic intraday volatility that it linked to ETFs and indexing, which TPA has been analyzing and reporting on since 2016.  These massive investing trends had created a market structure of co-movement and extreme volatility as huge waves of assets all tried to move in the same direction at once.

“World Snapshot 3/2/20 (S&P500 @ 2954) – “THE NUMBER OF LARGE QUICK INTRADAY MARKET MOVES OMINOUSLY ACCELERATES…A look at DJIA intraday chart 1 below shows the huge index changes that occurred in less than an hour on Friday: -665, +705, -526, +537, -550, and +644.  The benchmark S&P500 had declined 12.76% in just 7 days as the news about the Coronavirus worsened.  Still, the rapid rallies and declines on Friday raises the question of whether there are other market forces at work other than just investors selling stocks…”

“World Snapshot 3/11/20 (S&P500 @ 2882) – “HAVE ETFS CREATED AN UNSTABLE MARKET? There are implications that ETFs have reduced liquidity, added to volatility and, possibly, exacerbated declines.  The volatility of the past 3 weeks should force people to examine closely how this huge industry is affecting the stock market.  TPA began discussing the possible problems with the rapidly growing ETF market back in 2016.  ….TPA has found 3 metrics that point to potential problems in the market that stem from the overwhelming presence of ETFs: 1. ETF stock illiquidity, 2. ETF average bid-ask spreads widen[ing] 3. The difference between the ETF’s price and the intraday NAV… “

On Wednesday 3/12 at 10:00AM, TPA sent out its first note warning about the S&P 500 level 2500:

“Looks like long term support (11 YEAR) at 2500.  This is the uptrend line from the 3/9/09 close.  That does not mean it is a place to buy.  It is a place to watch and see what happens.  If we break through 2500, the next support is the 12/24/18 low of 2351, but that would not be as constructive as holding 2500.”

In Mid-March, TPA had seen enough.  The S&P500 had confirmed the break of its 11-year uptrend line.  The longest bull market had come to a close.  There would be intermediate term rallies, but the friendly bull market that had bailed investors out after each and every decline, could be counted on no more.

“World Snapshot 3/17/20 (S&P500 @ 2386)THE LONG TERM TREND IS OVER – A NEW PARADIGM One thing that is certain is that the 11-year uptrend line, which has supported the S&P500 through much turmoil and the longest bull market in history, is no longer intact.”

S&P 500 – 2009-2020

On 3/19, with stocks more oversold by some metrics than they were during the 2008 decline, TPA told clients that, although many pundits were looking at the Christmas Eve 2018 low of 2531 as support, the best long term support level was in the range of S&P500 2110 to 2180.  This was a strong support level where the risk/return tradeoff made the most sense.

“World Snapshot 3/19/20 (S&P500 @ 2409) “WHERE DOES THE RETURN-RISK TRADEOFF BECOME ATTRACTIVE? The S&P500 is down 29% since 2/19/20 and the broader Russell 3000 is down 31% since 2/19/20.  TPA has been telling clients that the long term trend has changed, but the declines are so staggering that it is close to the time to look for a level at which things may stabilize for the medium term.  TPA would advise clients that it sees the return/risk tradeoff getting more favorable in the 2110 to 2180 range (see the chart below).  S&P 500 2180 is down 9% from Wednesday’s close and down 35% from the 2/19/20 close; just 20 days ago.”

In fact, the 2110-2180 range was long term support.  The low on 3/23 (my birthday) was 2191.86 a mere 50 BPs above the range after a 35% decline in 23 days (first chart below).  A closer look shows that the futures on 3/23 preopen did trade into the 2110-2180 range; hitting a low of 2175 (second chart below).

S&P500 – 2110-2180 support

NOW WHAT? 

The S&P500 has now rallied 19% off of its low close of 2237.40 on 3/23 and 21% from its intraday low of 2191.86 on 3/23. The benchmark is now within sight of its 50% retracement.

By definition, a 50% retracement of the S&P500 would be a rally that retraced 50% (+574) of the net loss (-1148) from 2/19 to 3/23.  The chart below shows that the 50% retracement level is approximately S&P500 2811 (the low of 2237 + 574 = 2811).  S&P500 2811 is over 6% above Monday’s close.

The second chart shows that there is also technical resistance from the break of August – October 2019 support at just above the S&P2811 level. It is very hard in the volatile environment to be too exact, but at the S&P500 2800 – 2830 level, the risk/return trade-off becomes bad for the market.

Sector Buy/Sell Review: 04-07-20

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.

HOW TO READ THE CHARTS

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.

As noted last previously, the steepness of the decline reset our parameters. Now, the goal is to rebalance portfolio risk. We previously removed sectors most exposed to “COVID-19” and can now start looking for entry points.

Basic Materials

  • XLB rallied sharply on Monday but failed to close above last week’s high. 
  • While XLB is extremely oversold, it is also on a very deep sell signal. The recent rally has done little to restore confidence in the sector and is lagging in terms of relative performance.
  • We sold all of our holdings previously.
  • Use rallies back to previous support levels to clear positions for the time being. There are too many unknowns currently, and just way to early, to assume a bottom is in. 
  • Short-Term Positioning: Bearish
    • Last Week: No Positions
    • This Week: No Positions
  • Long-Term Positioning: Bearish

Communications

  • XLC is deeply oversold and is performing better than the overall market. We added to this area recently and there is currently upside to the 38.2% retracement level.
  • Currently on a sell signal, and deeply oversold, we like the more defensive quality of the sector for now as Communications has an “anti-virus” bid to it. 
  • The rally on Monday did close above last week’s high, but the overall rally underperformed Monday’s market surge. 
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Added to holdings up to 3%.
  • Long-Term Positioning: Neutral

Energy

  • For now, use rallies in energy to clear positions BUT we want to watch for a bottoming process to begin building long-term exposure. 
  • The rally on Monday was very positive as it broke above last week’s high, however, the exuberance over a deal from Saudi Arabia and Russia is premature. This is particularly the case given both countries have “shale” drillers on the ropes. 
  • Be patient, we have plenty of time to do this correctly. 
  • Short-Term Positioning: Bearish
    • Last week: Sell into rally.
    • This week: Sell into rally.
    • No position currently
  • Long-Term Positioning: Bearish

Financials

  • Financials are rallying on hopes of a turnaround, but there is a LOT of credit risk outstanding currently which is going to hurt their balance sheets and earnings. 
  • Financials are being impacted by both the a credit crisis stemming from the energy sector, rising defaults from a crashing economy, and “zero interest rates” from the Fed is a negative for net interest margins.
  • We sold out of financials previously and will re-evaluate once the market calms down and finds a bottom. 
  • Sell on any rally.
  • Short-Term Positioning: Neutral
    • Last week: No position
    • This week: No position
  • Long-Term Positioning: Neutral

Industrials

  • As with XLB, so goes XLI.
  • XLI had a good rally on Monday, but that rally underperformed the broader market and failed to move above last week’s highs.
  • We sold all of our holdings previously and will opt to wait for a better market structure to move back into the sector. 
  • Short-Term Positioning: Bearish
    • Last week: No position.
    • This week: No position.
  • Long-Term Positioning: Bearish

Technology

  • We recently added to our Technology holdings which technically is the best looking chart available.
  • The rally on Monday cleared both last week’s high AND the 38.2% retracement.
  • If we get a pullback that holds that support level OR closes above the 200-dma, we will add more weight to the sector for now.
  • Short-Term Positioning: Bullish
    • Last week: Holding positions.
    • This week: Holding positions.
    • Long-Term Positioning: Bullish

Staples

  • XLP also has a very good technical setup currently. The rally on Monday cleared last week’s highs and the 50% retracement level. 
  • Look for a pullback to either the 38.5 or 50% retracement levels to add to positions. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions
    • This week: Look to add 1/2 position on a pullback.
    • Long-Term Positioning: Bullish

Real Estate

  • XLRE has recently rallied back to the 38.2% retracement level, and has failed to close at that level. 
  • The rally on Monday was solid, but failed to close above last week’s highs.
  • There is a lot of credit risk in the sector and we are going to add back to REIT’s opportunistically.
  • Short-Term Positioning: Bullish
    • Last week: Hold position.
    • This week: Add holdings on a pullback to previous lows.
  • Long-Term Positioning: Bullish

Utilities

  • We noted last week: “XLU rebounded nicely over the last week back to the 50% retracement level. This is the level where most retracements fail.”
  • That is precisely what happened as XLU pulled back and Monday’s rally failed to get it back to resistance. 
  • Look to add to XLU on a pullback to recent lows that holds.
  • Short-Term Positioning: Bullish
    • Last week: Hold position.
    • This week: Add on pullback to support.
  • Long-Term Positioning: Bullish

Health Care

  • XLV held support and rebounded nicely back to, and broke above, the 50% retracement level. 
  • Look for a short-term pullback that holds the 50% retracement level support AND / OR recent lows to take the position to full weight. 
  • Short-Term Positioning: Neutral
    • Last week: Hold positions
    • This week: Look to add on pullback.
  • Long-Term Positioning: Bullish

Discretionary

  • We sold the entire position previously due to exposure to the economic shutdown from the virus. 
  • There is no reason at the moment to add the sector back until we see “some signs of life” in the economy. 
  • We are focusing on Staples for the time being but will watch for recovery in Discretionary.
  • Short-Term Positioning: Neutral
    • Last week: Hold position
    • This week: No position
  • Long-Term Positioning: Neutral

Transportation

  • We have remained out of the economically sensitive sector and as noted last week the impact of the “coronavirus” will likely have global supply chain impacts.
  • The sector is oversold short-term, which could elicit a reflexive bounce. However, such a bounce should be used to sell positions into for now.
  • Short-Term Positioning: Neutral
    • Last week: No position
    • This week: No position
  • Long-Term Positioning: Bearish

Technically Speaking: The 4-Phases Of A Full-Market Cycle

In a recent post, I discussed the “3-stages of a bear market.”  To wit:

“Yes, the market will rally, and likely substantially so.  But, let me remind you of Bob Farrell’s Rule #8 from our recent newsletter:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

However, the “bear market” is only one-half of a vastly more important concept – the “Full Market Cycle.”

The Full Market Cycle

Over the last decade, the media has focused on the bull market, making an assumption that the current trend would last indefinitely. However, throughout history, bull market cycles make up on one-half of the “full market” cycle. During every “bull market” cycle, the market and economy build up excesses, which must ultimately be reversed through a market reversion and economic recession. In the other words, as Sir Issac Newton discovered:

“What goes up, must come down.” 

The chart below shows the full market cycles over time. Since the current “full market” cycle is yet to be completed, I have drawn a long-term trend line with the most logical completion point of the current cycle.

[Note: I am not stating the markets are about to crash to the 1600 level on the S&P 500. I am simply showing where the current uptrend line intersects with the price. The longer that it takes for the markets to mean revert, the higher the intersection point will be. Furthermore, the 1600 level is not out of the question either. Famed investor Jack Bogle stated that over the next decade we are likely to see two more 50% declines.  A 50% decline from the all-time highs would put the market at 1600.]

As I have often stated, I am not bullish or bearish. My job as a portfolio manager is simple; invest money in a manner that creates returns on a short-term basis, but reduces the possibility of catastrophic losses, which wipe out years of growth.

Nobody tends to believe that philosophy until the markets wipe about 30% of portfolio values in a month.

The 4-Phases

AlphaTrends previously put together an excellent diagram laying out the 4-phases of the full-market cycle. To wit:

“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?”

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.

1992-2003

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

“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 ‘dot.com’ crisis was the rule-change which allowed the nation’s 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.

Names like Enron, WorldCom, Global Crossing, Lucent Technologies, Nortel, Sun Micro, and a host of others, are “ghosts of the past.” Importantly, they are the relics of an era the majority of investors in the market today are unaware of, but 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.

2003-2009

Following the “dot.com” 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 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?

2009-Present

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 were steadily hitting the headlines: “there is no recession in sight,” “the bull market is cheap” and “this time is different because of Central Banking.”

Well, as we warned more than once, all that was required was an “exogenous” event, which would spark a credit-event in an overly leveraged, overly extended, and overly bullish market. The “virus” was that exogenous event.

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, fueled by Central Bank liquidity, it is understandable why mainstream analysis believed the markets could only go higher. What was always a concern to us was the rather cavalier attitude they took about the risk.

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

As we repeatedly warned, what gets lost during bull cycles, and is always found in the most brutal of fashions, is the devastation caused to financial wealth during the inevitable decline. It isn’t just the loss of financial wealth, but also the loss of employment, defaults, and bankruptcies caused by the coincident recession.

This is the story told by the S&P 500 inflation-adjusted total return index. The chart shows all of the measurement lines for all the previous bull and bear markets, along 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 all or a very substantial portion of the previous bull market advance.

There are many signs suggesting the current Wyckoff cycle has entered into its fourth, and final stage. Whether, or not, the current decline phase is complete, is the question we are all working on answering now.

Bear market cycles are rarely ended in a month. While there is a lot of “hope” the Fed’s flood of liquidity can arrest the market decline, there is still a tremendous amount of economic damage to contend with over the months to come.

In the end, it does not matter IF you are “bullish” or “bearish.” What matters, in terms of achieving long-term investment success, is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

Major Market Buy/Sell Review: 04-06-20

HOW TO READ THE CHARTS

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

  • Last week: “Well, that bounce finally came and it was as vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.”
  • After running into the bullish trend line and the initial 38.2% retracement, the market failed and has established a downtrend. A retest, and potential break of the March lows is likely, but we will monitor this carefully. With the Fed flooding money into the system, we could be set up for some very volatile moves, but the economic data is about to become horrific and earnings estimates will be revised sharply lower. 
  • Remain cautious for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $220
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 38.2% retracement level and failed. We could see some positive action on Monday, but we remain firmly entrenched in a bear market for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss set at $185
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • We had previously put on a small QQQ trade for a reflexive rally, but we closed that out. 
  • As with SPY and DIA, the QQQ has established a downtrend, but technically is in MUCH better shape than the other markets with the bull-trend still intact.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small-caps have a lot more downside to go as both small and mid-cap companies are going to be hardest hit by the virus.
  • Be careful what you own, there are going to be quite a few companies that don’t make it. 
  • Avoid small-caps. Use any reflexive rally to step-aside for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use any rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted last week: “‘A reflexive rally is likely. Use those levels to sell into. Do so this week.”
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Last week, the President said he talked to Saudi Arabia and they were in talks with Russia to cut $10 million barrels of production. That tweet sparked a vicious rally in oil keeping prices above the critical level of $20.
  • Saudi and Russia are NOT likely going to cut production meaningfully as they now have shale drillers in a stranglehold. They are going to talk a lot, but they aren’t going to do anything until they extinguish shale to some degree. For the last couple of years, I have warned this outcome would eventually occur. 
  • Use this rally in oil to clear positions in your portfolio for now. We will very likely retest or set new lows in the coming months as drillers are forced to “shut in” production. At that point we can start picking through the ruble for portfolio positioning. 
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our position in IAU and continue to have a small holding in GDX, as the previous liquidation left a lot of value in the sector. However, performance remains lazy at this point, so we are looking for pullbacks to support to add to our holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • The dollar fell sharply as we had a reflexive “bear market” rally. However, with concerns over global economic strength rising, money is flowing back into the dollar for safety. 
  • The recent volatility of the dollar makes it hard to trade for now, so be patient for the moment and let things calm down. We can look to add a long-dollar trade on a pull back to the $98-99 areas. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Aaand It’s Gone…The Biggest Support For Asset Prices

Since the passage of “tax cuts,” in late 2017, the surge in corporate share buybacks has become a point of much debate. I previously wrote that stock buybacks were setting records over the past couple of years. Jeffery Marcus of TP Analytics, recently confirmed the same:

“U.S. firms have been the biggest incremental buyer of stocks in each of the past four years, with their net purchases exceeding $2 trillion – Federal Reserve data on fund flows compiled by Goldman Sachs showed.”

As John Authers previously noted:

“For much of the last decade, companies buying their own shares have accounted for all net purchases. The total amount of stock bought back by companies since the 2008 crisis even exceeds the Federal Reserve’s spending on buying bonds over the same period as part of quantitative easing. Both pushed up asset prices.”

In other words, between the Federal Reserve injecting a massive amount of liquidity into the financial markets, and corporations buying back their own shares, there have been effectively no other real buyers in the market. 

Of course, as a corporation, you can’t spend all of your cash buying back shares, so with near-zero interest rates, debt became the most logical option. As shown below, much of the debt taken on by corporations was not used for mergers, acquisitions, or capital expenditures, but the funding of share repurchases and dividend issuance.

Unsurprisingly, when you are issuing that much debt for share repurchases, there is a correlation with asset prices.

Interestingly, we warned previously:

“The explosion of corporate debt in recent years will become problematic during the next bear market. As the deterioration in asset prices increases, many companies will be unable to refinance their debt, or worse, forced to liquidate. With the current debt-to-GDP ratio at historic highs, it is unlikely this will end mildly.”

While that warning fell mostly on “dear ears,” the debt is now being bailed out by the Fed through every possible monetary program imaginable.

No, Buybacks Are Not Shareholder Friendly

Let’s clear something up. Buybacks are NOT shareholder-friendly.

The reason that companies spent billions on buybacks is to increase bottom-line earnings per share, which provides the “illusion” of increasing profitability to support higher share prices. Since revenue growth has remained extremely weak since the financial crisis, companies have become dependent on inflating earnings on a “per share” basis by reducing the denominator. 

“As the chart below shows, while earnings per share have risen by over 270% since the beginning of 2009; revenue growth has barely eclipsed 60%.”

Yes, share purchases can be good for current shareholders if the stock price rises. Still, the real beneficiaries of share purchases are insiders where changes in compensation structures have become heavily dependent on stock-based compensation. Insiders regularly liquidate shares that were “given” to them as part of their overall compensation structure to convert them into actual wealth. Via the Financial Times:

Corporate executives give several reasons for stock buybacks but none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay and in the short-term buybacks drive up stock prices.

That statement was supported by a study from the Securities & Exchange Commission which found the same issues:

  • SEC research found that many corporate executives sell significant amounts of their own shares after their companies announce stock buybacks, Yahoo Finance reports.

Not surprisingly, as corporate share buybacks are hitting record highs, so was corporate insider selling.

The misuse, and abuse, of share buybacks to manipulate earnings and reward insiders clearly became problematic.

Furthermore, share repurchases are the “least best” use of company’s liquid cash. Instead of using cash to expand production, increase sales, acquire competitors, make capital expenditures, or buy into new products or services, which could provide a long-term benefit. Instead, the cash was used for a one-time boost to earnings on a per-share basis.

Now, all the companies that spent years issuing debt, and burning their cash, to buy back debt are now begging the Government for a bailout. 

“Perhaps no other industry illustrates the awkward position that corporate America finds itself in more than airlines. Major airlines spent $19 billion repurchasing their own shares over the last three years. Now, with the coronavirus virtually paralyzing the global travel industry, these companies are in deep financial trouble and looking to the federal government to bail them out.” – The New York Times

And who gets the privilege to PAY for those bailouts – YOU. The U.S. Taxpayer.

Loss Of Support

As we warned previously, when CEO’s become concerned about their business, the first thing they will do is begin to cut back, or eliminate, stock buyback programs. To wit:

“CEO’s make decisions on how they use their cash. If concerns of a recession persist, it is likely to push companies to become more conservative on the use of their cash, rather than continuing to repurchase shares. If that source of market liquidity fades, the market will have a much tougher time maintaining current levels, or going higher.”

Yes, companies are indeed reacting to the “coronavirus” pandemic currently. However, they were already in the process of cutting back on repurchases in 2019. As noted recently by Jeffery Marcus:

“Birinyi Associates, the leading firm that does research on buybacks, shows below that announced buybacks have declined significantly in 2019… ‘ it’s the biggest drop to start a year since 2009.'”

This is also because cash balances fell sharply, as corporations loaded-up on debt.

As the impact of the “economic shutdown” deepens, corporations are scrambling to protect their coffers. As noted on Friday, 75% of announced buyback programs have been cancelled.

Greg’s tweet has a complete table, but here is the relevant chart. There is a tremendous amount of support being extracted.

Do not dismiss the data lightly.

The chart below is the S&P 500 Buyback Index versus the Total Return index. Following the financial crisis, as companies began to lever up their balance sheets to increase stock buybacks. There was a marked outperformance by those companies leading up to the crisis.

However, while corporate buybacks have accounted for the majority of net purchases of equities in the market, the benefit of pushing asset prices higher, outside of the brief moment in 2018 when tax cuts were implemented, allowing for repatriation of cash, performance has waned. Now, those companies which engaged in leveraging up their balance sheet to engage in repurchases shares are significantly underperforming the total return index.

Without that $4 trillion in stock buybacks, not to mention the $4 trillion in liquidity from the Federal Reserve, the stock market would not have been able to rise as much as it did over the last decade.

Conclusion

As I stated, CEO’s make decisions on how they use their cash. With the economy shut down, layoffs in the millions, and no clear visibility about the economic recovery post-pandemic, companies are going to become vastly more conservative on the use of their cash.

Given that source of market liquidity is now gone, the market will have a much tougher time maintaining current levels, much less going higher. As noted by the Financial Times:

“The rebound in equities has sparked optimism that we may be past the worst. However, we still believe it is too early to the call the bottom. From a positioning perspective we still believe there hasn’t been a full capitulation.

Hedge funds and risk-parity funds have reduced their equity exposure considerably. But institutional active funds and passive products have room for further outflows. The fiscal bill passed by the US government also allows individuals to withdraw up to $100k from their 401k, without penalty. We believe this could result in over $50bn of further outflows from the retail community. As well, over 50 companies in the S&P 500 have already suspended their share repurchase programs, which accounted for over 25% of buybacks in 2019. We believe the slowdown in buybacks could result in $300bn of lost inflows in the next two quarters.” – HSBC

Be careful.

The bear market isn’t over yet…not by a long shot.

Major Technical Failures Confirms Bear Market Risk


  • Major Technical Failures Confirms Bear Market Risks
  • MacroView: The 2020 Investment Summit
  • Financial Planning Corner: Anatomy Of A Bear
  • Sector & Market Analysis
  • 401k Plan Manager

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Catch Up On What You Missed Last Week


Major Technical Failures Confirm Bear Market Risk

In last week’s discussion, we stated the “bear market” was not yet complete. This was despite the “market rally,” which convinced the media the “bull market was back.”

While it was indeed a sharp “reflex rally,” and expected, “bear markets” are not resolved in a single month. Most importantly, as we discussed in our employment report on Thursday, “bear markets” do not end with “consumer confidence” still very elevated. 

“Notice that during each of the previous two bear market cycles, confidence dropped by an average of 58 points.”

This past week, we saw early indications of the unemployment that is coming to America as jobless claims surged to 10 million, and unemployment in April will surge to 15-20%.

Confidence, and ultimately consumption, which comprises 70% of GDP, will plummet as job losses mount. It is incredibly difficult to remain optimistic when you are unemployed.

No Light At The End Of The Tunnel – Yet.

The markets have been clinging on to “hope” that as soon as the virus passes, there will be a sharp “V”-shaped recovery in the economy and markets. While we strongly believe this will not be the case, we do acknowledge there will likely be a short-term market surge as the economy does initially come back “online.”  (That surge could be very strong and will once again have the media crowing the “bear market” is over.)

However, for now, we are not there yet. As we noted last week’s Macroview there are two issues currently weighing on the economy and markets, short-term.

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance can be provided. This will lead to higher, and a longer-duration of unemployment.”

Furthermore, the bill only provides for  two and a half times a company’s average monthly payroll expense over the past 12 months. However, the bill fails to take into consideration that not all small businesses are labor and payroll intensive. Those businesses will fail to receive enough support to stay in business for very long. Furthermore, the bill doesn’t provide for inventory, other operating costs, and spoilage.

Small businesses, up to 500-employees, make up 70% of employment in the U.S. While the government is busy bailing out self-dealing publicly traded corporations, there will be a massive wave of defaults in the small- to mid-size business sector.

Secondly, we are not near the end of the virus as of yet. As noted last week:

“While there is much hope that the current ‘economic shutdown’ will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.”

This was confirmed again this week by the New York Times’ columnist David Leonhardt:

“Five ways we know that the American response to the coronavirus isn’t yet working.

  1. There is still no sign of the curve flattening.
  2. The caseload is growing more rapidly here than in Europe.
  3. The shortage of medical supplies continues.
  4. There is still a testing shortage.
  5. Nationwide, the policy response remains inconsistent. 

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any disruption to their income going into recession. As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits lead to higher unemployment and lower asset prices until the cycle is complete.

Two important points:

  1. The economy will eventually recover, and life will return to normal. 
  2. The damage will take longer to heal, and future growth will run at a lower long-term rate due to the escalation of debts and deficits. 

For investors, this means a greater range of stock market volatility and near-zero rates of return over the next decade.

The Bear Still Rules

Over the last two weeks, we published several pieces of analysis for our RIAPro Subscribers (30-Day Risk Free Trial) discussing why the “bear market rally” should be sold into. On Friday, our colleague, Jeffery Marcus of TP Analytics, penned the following:

Meanwhile, the charts below of the S&P500 benchmark tell TPA the following:

  1. When the 11-year bull market trend ended, other shorter trends were also violated.  In late February, the S&P 500 fell below its 14-month uptrend line, and in early March the 13-month uptrend line was violated.  Those breaks set in place the steep declines seen in the 2nd and 3rd weeks of March.
  2. While it may seem like an epic battle is going on around S&P 500 2500, the real problem is the downtrend forming from the 2/19 high.
  3. TPA still continues to see real long term support in the 3% range between 2110 and 2180. A less likely move below that support, would leave long term support levels of the lows of 2014 and 2015.

S&P 500 – Long Term

His analysis agrees with our own, which we discussed with you on Tuesday:

“While the technical picture of the market also suggests the recent “bear market” rally will likely fade sooner than later. As we stated last week:

‘Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.’

Importantly, despite the sizable rally, participation has remained extraordinarily weak. If the market was seeing strong buying, as suggested by the media, then we should see sizable upticks in the percent measures of advancing issues, issues at new highs, and a rising number of stocks above their 200-dma.”

Chart updated through Friday.

On a daily basis, these measures all have room to improve in the short-term. However, the market has now confirmed longer-term technical signals suggesting the “bear market” has only just started.

Major Technical Failures

Price is nothing more than a reflection of the “psychology” of market participants. The mistake the media made by calling an “end” to the “bear market” is they were using an outdated proxy of a “20% advance or decline” to distinguish between the two.

However, due to a decade-long bull market, which had stretched prices to historical extremes above long-term trends, that 20% measure is no longer valid.

Let’s clarify.

  • A bull market is when the price of the market is trending higher over a long-term period.
  • A bear market is when the long-term upward trending advance is broken and prices begin to trend lower.

The chart below provides a visual of the distinction. When you look at price “trends,” the difference becomes both apparent and more useful.

This distinction is important. With the month, and quarter-end, behind us, we can now analyze our longer-term weekly and monthly price trends to make determinations about the market.

The market has now violated the 200-week (4-year) moving average. Given this is such a long-term trend line, such a violation should be taken seriously. Also, that violation will be very difficult to reverse in the short-term, and suggests lower prices to come for the market.

Using the definition of “bull and bear” markets above, the market has also violated the long-term “bull trend” on a “confirmed” basis.

A confirmed basis is when the market violates a long-term trend, rallies, and then fails. As Jeffery Marcus, noted above, that market is now establishing a confirmed downtrend with the recent rally failing at downtrend resistance. (Also, the 50-200 dma negative cross will apply more downward pressure on any forthcoming rally.)

Most importantly, for the first time since the “Great Financial Crisis” lows, the market now has a confirmed close below the bull-trend line. If the market is able to rally in April, and close above the long-term trend line, then the “bull market” will technically still be intact. However, if the month of April closes below that trend, a confirmed “bear market” will be underway and suggests markets will see lower levels before it is over.

There are reasons to be optimistic about the markets in the very short-term. We will get through this crisis. People will return to work. The economy will start moving forward again.

However, it won’t immediately go right back to where we were previously. We are continuing to extend the amount of time the economy will be “shut down,” which exacerbates the decline in the employment, and personal consumption data. The feedback loop from that data into corporate profits, and earnings, is going to make valuations more problematic even with low interest rates currently. 

This is NOT the time to try and “speculate” on a bottom of the market. You might get lucky, but there is very high risk you could wind up losing even more capital.

For long-term investors, remain patient and let the market dictate when the bottom has been formed.

This was a point we discussed in Rothschild’s 80/20 Rule:”

You can have the top 20% and the bottom 20%, I will take the 80% in the middle.” – Rothschild

This is the basis of the 80/20 investment philosophy, and the driver behind our risk management process at RIA.

Yes, you may sell to early and miss the 10% before the peak, or you sell a little late and lose the 10% from the peak. Likewise, you may start buying into the market 10% before, or after, it bottoms. The goal is to capture the bulk of the advance, and miss the majority of the decline.

Investing isn’t a competition of who gets to say “I bought the bottom.” Investing is about putting capital to work when reward outweighs the risk. 

That is not today.

Bear markets have a way of “suckering” investors back into the market to inflict the most pain possible.

This is why “bear markets” never end with optimism, but in despair.


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Richard Rosso, MBA, CFP®, CIMA


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite

Note: The technical gauge bounced from the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline in early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

The bounce from last week, as expected, failed.

There are no changes to our sector recommendations from last week.

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact on the economy. No change this week. We are getting more interested in REITs again, but are going to select individual holdings versus the ETF due to leverage concerns in the REITs.

Discretionary is going to remain under pressure due to people being unable to go out and shop. This sector will eventually get a bid, so we are watching it, but we need to see an eventual end to the isolation of consumers.

Current Positions: No Positions

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

Two weeks ago, we shifted exposures in portfolios and added to our Technology and Communications sectors, bringing them up to weight. We remain long sectors which are currently outperforming the S&P 500 on a relative basis and have less “virus” exposure.

Current Positions: XLK, XLC, 1/2 weight XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Five weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. We remain out of these sectors for now.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain.

Current Position: None

S&P 500 Index (Core Holding) – Given the overall uncertainty of the broad market, we previously closed out our long-term core holdings. We will re-add a core once we see a bottom in the market has formed.

Current Position: None

Gold (GLD) – We added a small position in GDX recently, and increased our position in IAU last week. With the Fed going crazy with liquidity, this will be good for gold long-term, so we continue to add to our holdings on corrections.

Current Position: 1/4th weightGDX, 1/2 weight IAU

Bonds (TLT) –

Bonds have rallied as the Fed has become THE “buyer” of bonds on both a “first” and “last” resort. Simply, “bonds will not be allowed to default,” as the Fed will guarantee payments to creditors. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

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:

As noted last week, the “biggest rally in history” failed this past week, confirming a downtrend from the February highs.

We are just now starting to see some of the economic damage coming to the forefront:

  • 10 million jobless claims
  • 700k unemployment – this will surge into the millions next month.
  • Confidence on the decline (bad for GDP and stocks)

We are about to see terrible numbers across the board with employment and economic growth hitting numbers not seen since the Great Depression.

The impact to earnings will likely be larger than currently expected which will weigh on markets in the months ahead.

We have added hedges to our portfolios last week to “neutralize” our long-equity book. We are down to our core “long-term” equities that we will begin to add to opportunistically as the market bottoms and begins to recover.

Importantly, we will NOT buy the bottom. We are going to wait to clearly see the bottom has been put in, then we will aggressively begin to add exposure. At such a point, risk and reward will be clearly in our favor.

We continue to remain very defensive, and are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years. Just remain patient with us as we await the right opportunity build holdings with both stable values, and higher yields.

Please don’t hesitate to contact us if you have any questions, or concerns.

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

 

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

TPA Analytics: Risk Is To The Downside (S&P 500)

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


In the 3/17/20 World Snapshot entitled, The Long Term Trend is Over-a New Paradigm, TPA stated,

“For the markets, it is certain that the necessary actions to prevent a worsening epidemic will hurt the economy, but it is uncertain how long it will last and therefore how badly will the economy and businesses be hurt.  One thing that is certain is that the 11-year uptrend line, which has supported the S&P500 through much turmoil and the longest bull market in history, is no longer intact.”

So, no more easy buying on every decline and watching the longs go higher. This is tough stuff; with Covid-19 cases continuing to grow, governments enacting measures to stop the spread, which will hurt economies, and markets discounting future bad news.

Some day the cases will plateau and start to decline and economies will begin to heal, but that light at the end of this tunnel is hardly in sight.  Meanwhile, the charts below of the S&P500 benchmark tell TPA the following:

    1. When the 11-year bull market trend ended, other shorter trends were also violated.  Chart 1 shows that in late February the S&P500 fell below its 14-month uptrend line and in early March the 13-month uptrend line was violated.  Those breaks set in place the steep declines seen in the 2nd and 3rd weeks of March.
    2. The zoom chart shows that while it may seem like an epic battle is going on around S&P500 2500, the real problem is the downtrend trying to form from the 2/19 high.
    3. TPA still continues to see real long term support in the 3% range between 2110 and 2180 (see World Snapshots 3/17, 3/19, 3/24, and 3/30).  Again, these are the breakout levels for the S&P500 after Crude bottomed on 2/11/16 and the market recovered (chart 3).  A less likely move below that support, would leave long term support levels of the lows of 2014 and 2015.  TPA is not willing to discuss that possibility at this juncture.

S&P 500 – Long Term

S&P 500 – Zoom

S&P 500 – Support Levels 2013-2020

#MacroView: THE 2020 – INVESTMENT SUMMIT

For the last couple of years, we have warned of an exogenous event which would cause a “cascade effect” through the markets and economy. To wit:

“While that laundry list of worries is long, none of them are going to be the ‘one’ which gets the market. It is the combination of these issues which provide the ‘fuel’ to amplify the impact of an unexpected, exogenous event, which ignites selling in the markets. 

Since it is ALWAYS and unexpected event which causes sharp declines in asset prices, this is why advisors typically tell their clients ‘since you can’t predict it, all you can do is just ride it out.’ 

This is not only lazy, but ultimately leads to the unnecessary destruction of capital and the investors time horizon.”

That exogenous, unexpected event, was the “coronavirus.”

Not unsurprisingly, the media is once again claiming “no one could have seen it coming.” However, this why we prepare for these events before they happen. Reacting to events is rarely a successful strategy.

So, what’s next?

For that, we turn to the experts in a series of videos to discuss the risks, and opportunities, which lay ahead of us.


RIA Advisors Is Proud To Present

The 2020 Investment Summit 

Hosted By: Lance Roberts, CIO RIA Advisors

Featuring:

  • Michael Lebowitz, CFA – RIA Portfolio Manager
  • Teddy Valle – Pervalle Global
  • Thomas Thornton – HedgeFund Telemetry
  • Jeffery Marcus – TP Analytics

Topics include:

  • Impact of Government bailouts
  • The Fed is fighting a losing battle
  • Market Outlook
  • ETF Liquidity issues
  • And more….

CLICK HERE TO START WATCHING NOW


#WhatYouMissed On RIA This Week: 04-03-20

We know you get busy and don’t check our website as often as you might like. Plus, with so much content being pushed out every week from the RIA Team, we thought we would send you a weekly synopsis of everything you might have missed.

The Week In Blogs

________________________________________________________________________________

Our Latest Newsletter

________________________________________________________________________________

What You Missed At RIA Pro

RIA Pro is our premium investment analysis, research, and data service. (Click here to try it now and get 30-days free)

________________________________________________________________________________

The Best Of “The Lance Roberts Show

________________________________________________________________________________

The 2020 Investment Summit

RIA Advisors is proud to present the 2020 Investment Summit 

Hosted By: Lance Roberts, CIO RIA Advisors

Featuring:

  • Michael Lebowitz, CFA – RIA Portfolio Manager
  • Teddy Valle – Pervalle Global
  • Thomas Thornton – HedgeFund Telemetry
  • Jeffery Marcus – TP Analytics

________________________________________________________________________________

Our Best Tweets Of The Week

See you next week!

2020 – INVESTMENT SUMMIT

RIA Advisors is proud to present the 2020 Investment Summit 

Hosted By: Lance Roberts, CIO RIA Advisors

Featuring:

  • Michael Lebowitz, CFA – RIA Portfolio Manager
  • Teddy Valle – Pervalle Global
  • Thomas Thornton – HedgeFund Telemetry
  • Jeffery Marcus – TP Analytics

Topics include:

  • Impact of Government bailouts
  • The Fed is fighting a losing battle
  • Market Outlook
  • ETF Liquidity issues
  • And more….

CLICK HERE TO START WATCHING NOW


Previous Employment Concerns Becoming An Ugly Reality

Last week, we saw the first glimpse of the employment fallout caused by the shutdown of the economy due to the virus. To wit:

“On Thursday, initial jobless claims jumped by 3.3 million. This was the single largest jump in claims ever on record. The chart below shows the 4-week average to give a better scale.”

This number will be MUCH worse when claims are reported later this morning, as many individuals were slow to file claims, didn’t know how, and states were slow to report them.

The importance is that unemployment rates in the U.S. are about to spike to levels not seen since the “Great Depression.” Based on the number of claims being filed, we can estimate that unemployment will jump to 15-20% over the next quarter as economic growth slides 8%, or more. (I am probably overly optimistic.)

The erosion in employment will lead to a sharp deceleration in economic and consumer confidence, as was seen Tuesday in the release of the Conference Board’s consumer confidence index, which plunged from 132.6 to 120 in March.

This is a critical point. Consumer confidence is the primary factor of consumptive behaviors, which is why the Federal Reserve acted so quickly to inject liquidity into the financial markets. While the Fed’s actions may prop up financial markets in the short-term, it does little to affect the most significant factor weighing on consumers – their jobs.

The chart below is our “composite” confidence index, which combines several confidence surveys into one measure. Notice that during each of the previous two bear market cycles, confidence dropped by an average of 58 points.

With consumer confidence just starting its reversion from high levels, it suggests that as job losses rise, confidence will slide further, putting further pressure on asset prices. Another way to analyze confidence data is to look at the composite consumer expectations index minus the current situation index in the reports.

Similarly, given we have only started the reversion process, bear markets end when deviations reverse. The differential between expectations and the current situation, as you can see below, is worse than the last cycle, and only slightly higher than before the “dot.com” crash.

If you are betting on a fast economic recovery, I wouldn’t.

There is a fairly predictable cycle, starting with CEO’s moving to protect profitability, which gets worked through until exhaustion is reached.

As unemployment rises, we are going to begin to see the faults in the previous employment numbers that I have repeatedly warned about over the last 18-months. To wit:

“There is little argument the streak of employment growth is quite phenomenal and comes amid hopes the economy is beginning to shift into high gear. But while most economists focus at employment data from one month to the next for clues as to the strength of the economy, it is the ‘trend’ of the data, which is far more important to understand.”

That “trend” of employment data has been turning negative since President Trump was elected, which warned the economy was actually substantially weaker than headlines suggested. More than once, we warned that an “unexpected exogenous event” would exposure the soft-underbelly of the economy.

The virus was just such an event.

While many economists and media personalities are expecting a “V”-shaped recovery as soon as the virus passes, the employment data suggests an entirely different outcome.

The chart below shows the peak annual rate of change for employment prior to the onset of a recession. The current cycle peaked at 2.2% in 2015, and has been on a steady decline ever since. At 1.3%, which predated the virus, it was the lowest level ever preceding a recessionary event. All that was needed was an “event” to start the dominoes falling. When we see the first round of unemployment data, we are likely to test the lows seen during the financial crisis confirming a recession has started. 

No Recession In 2020?

It is worth noting that NO mainstream economists, or mainstream media, were predicting a recession in 2020. However, as we noted in 2019, the inversion of the “yield curve,” predicted exactly that outcome.

“To CNBC’s point, based on this lagging, and currently unrevised, economic data, there is ‘NO recession in sight,’ so you should be long equities, right?

Which indicator should you follow? The yield curve is an easy answer.

While everybody is ‘freaking out’ over the ‘inversion,’it is when the yield-curve ‘un-inverts’ that is the most important.

The chart below shows that when the Fed is aggressively cutting rates, the yield curve un-inverts as the short-end of the curve falls faster than the long-end. (This is because money is leaving ‘risk’ to seek the absolute ‘safety’ of money markets, i.e. ‘market crash.’)”

I have dated a few of the key points of the “inversion of the curve.” As of today, the yield-curve is now fully un-inverted, denoting a recession has started.

While recent employment reports were slightly above expectations, the annual rate of growth has been slowing. The 3-month average of the seasonally-adjusted employment report, also confirms that employment was already in a precarious position and too weak to absorb a significant shock. (The 3-month average smooths out some of the volatility.)

What we will see in the next several employment reports are vastly negative numbers as the economy unwinds.

Lastly, while the BLS continually adjusts and fiddles with the data to mathematically adjust for seasonal variations, the purpose of the entire process is to smooth volatile monthly data into a more normalized trend. The problem, of course, with manipulating data through mathematical adjustments, revisions, and tweaks, is the risk of contamination of bias.

We previously proposed a much simpler method to use for smoothing volatile monthly data using a 12-month moving average of the raw data as shown below.

Notice that near peaks of employment cycles the BLS employment data deviates from the 12-month average, or rather “overstates” the reality. However, as we will now see to be the case, the BLS data will rapidly reconnect with 12-month average as reality emerges.

Sometimes, “simpler” gives us a better understanding of the data.

Importantly, there is one aspect to all the charts above which remains constant. No matter how you choose to look at the data, peaks in employment growth occur prior to economic contractions, rather than an acceleration of growth. 

“Okay Boomer”

Just as “baby boomers” were finally getting back to the position of being able to retire following the 2008 crash, the “bear market” has once again put those dreams on hold. Of course, there were already more individuals over the age of 55, as a percentage of that age group, in the workforce than at anytime in the last 50-years. However, we are likely going to see a very sharp drop in those numbers as “forced retirement” will surge.

The group that will to be hit the hardest are those between 25-54 years of age. With more than 15-million restaurant workers being terminated, along with retail, clerical, leisure, and hospitality workers, the damage to this demographic will be the heaviest.

There is a decent correlation between surges in the unemployment rate and the decline in the labor-force participation rate of the 25-54 age group. Given the expectation of a 15%, or greater, unemployment rate, the damage to this particular age group is going to be significant.

Unfortunately, the prime working-age group of labor force participants had only just returned to pre-2008 levels, and the same levels seen previously in 1988. Unfortunately, it may be another decade before we see those employment levels again.

Why This Matters

The employment impact is going to felt for far longer, and will be far deeper, than the majority of the mainstream media and economists expect. This is because they are still viewing this as a “singular” problem of a transitory virus.

It isn’t.

The virus was simply the catalyst which started the unwind of a decade-long period of debt accumulation and speculative excesses. Businesses, both small and large, will now go through a period of “culling the herd,” to lower operating costs and maintain profitability.

There are many businesses that will close, and never reopen. Most others will cut employment down to the bone and will be very slow to rehire as the economy begins to recover. Most importantly, wage growth was already on the decline, and will be cut deeply in the months to come.

Lower wage growth, unemployment, and a collapse in consumer confidence is going to increase the depth and duration of the recession over the months to come. The contraction in consumption will further reduce revenues and earnings for businesses which will require a deeper revaluation of asset prices. 

I just want to leave you with a statement I made previously:

“Every financial crisis, market upheaval, major correction, recession, etc. all came from one thing – an exogenous event that was not forecast or expected.

This is why bear markets are always vicious, brutal, devastating, and fast. It is the exogenous event, usually credit-related, which sucks the liquidity out of the market, causing prices to plunge. As prices fall, investors begin to panic-sell driving prices lower which forces more selling in the market until, ultimately, sellers are exhausted.

It is the same every time.”

Over the last several years, investors have insisted the markets were NOT in a bubble. We reminded them that everyone thought the same in 1999 and 2007.

Throughout history, financial bubbles have only been recognized in hindsight when their existence becomes “apparently obvious” to everyone. Of course, by that point is was far too late to be of any use to investors and the subsequent destruction of invested capital.

It turned out, “this time indeed was not different.” Only the catalyst, magnitude, and duration was.

Pay attention to employment and wages. The data suggests the current “bear market” cycle has only just begun.

Michael Markowski: Markets Now At Tipping Point, Ride Will Be Epic.

 Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


The market indices of the US, Japan, South Korea, Canada, France and Germany and the share prices for many of the world’s largest companies including Apple and Microsoft are at the tipping point.  Stocks and indices reached their post-crash and relief rally closing highs from March 25th through March 27th.

None of the indices for the six countries has since closed above their highs.  Since making their relief rally highs all eight of the indices have declined by 4.2% to 7.4%.

With each new passing day that the indices are unable to get new post-crash highs, the probability increases that they will careen back to and through their March 2020 lows.

Investors now need to make a decision; stay in the roller coaster or get out?

From my empirical research on the prior notable market crashes in early March 2020, I discovered that the 1929 crash and the bursting of the NASDAQ dotcom bubble in 2000 share the same genealogy as the crashes of the markets of the six countries which have been underway.  The discovery was significant. It enabled the events chronology throughout the lives of the 1929 and 2000 crashes to be utilized to forecast the events for the crashes of six countries which are now underway and future crashes. For more about the genealogy read 03/23/20 “Probability 87% that market is at interim bottom” article.

The table below contains the first four precisely accurate forecasts that were made from the statistical crash probability analysis’ (SCPA).  The SCPA was developed from the findings from my empirical research of the most notable market crashes since 1929.

The charts below depict the almost identical chronology for the post-crash events that occurred after the Dow Jones crashed in 1929 and the NASDAQ dotcom bubble burst in 2000.  The journey to the final bottom took the Dow 32 months and the NASDAQ 31 months. The NASDAQ declined by 78% and the Dow by 89% from their highs.

The “2020”, year to date charts of the US’ Dow Jones, S&P 500 and NASDAQ indices below depict their crash chronologies from February 20th through March 27th.  Again, the chronologies of the 2020 crashes and the 1929 Dow and 2000 NASDAQ crashes though their initial correction and relief rally periods are very similar.

It was no surprise that the chart patterns for Microsoft and Apple mimic the three US indices.  The two companies are the largest members of all three. Since they have significant index weightings, wherever the indices go, they will follow.

The above charts and tables provide the rationale as to why the eight indices of the six countries will soon begin their marches to the following in sequence:

  • new lows 
  • interim bottoms 
  • interim highs 
  • final bottoms in Q4 2022 with declines ranging from 78% to 89% below 2020 highs

According the Statistical Crash Probability Analysis’ (SCPA) forecasts the probability is 100% that:

  • The relief rally highs for markets of the six countries have either already occurred or will occur by Friday, April 3, 2020.  
  • The eight indices will reach new 2020 lows by April 30, 2020.

To be clear.  Those who are still invested in stocks, mutual funds, and ETFs need to give serious consideration as to whether or not they want to stay on the wild roller coaster.  The ride will take everyone to the interim bottoms which will be within 41% to 44% of the eight indices’ 2020 highs.

After reaching the bottom the indices will then ricochet back to and through the recent relief rally highs and to the post-crash highs according to the SCPA’s forecast.  What will likely power the heart-pounding ride to the top is news about a cure or vaccine for the Coronavirus. This is will enable those who choose to stay on the rollercoaster to be able to liquidate at higher prices.  After the post-crash high has occurred the SCPA’s probability is 100% that the indices will then reverse to begin their descents to the final bottom which will 79% below their 2020 highs. The probability is 50% for the bottom to be within 89%

The virus did not cause the crash.   It caused the correction for markets which were ripe for an epic market crash.  Therefore, the probability is extremely low that good news about the virus will be enough to drive the markets back to new all-time highs.  See my March 5, 2020 article “Overvalued stocks, freefalling US Dollar to soon cause epic market crash!”.

The SCPA is also forecasting a 100% probability for the key on the horizon events of the crash of 2020 below to occur in the sequence below.  The events and their probabilities are applicable to the eight indices of the six countries and for their largest members including Microsoft and Apple, etc.

  • Interim bottom by or before May 4, 2020
  • At interim bottom market will be 41% to 44% below 2020 highs
  • Post-crash high before the journey begins to final Q 4 2022 bottom will occur by as early as June 24, 2020 and by as late as September 18, 2020.
  • Post-crash highs to get market to within 17% of 2020 highs.

My only argument with the SCPA’s statistical probability analyses is can the markets get back to above or even to their March/April 2020 post-crash relief rally highs?  The simultaneous crashes in multiple markets for more than one country, let alone six countries, is historically unprecedented.

My hunch is that the damage to the markets and economies of the world’s leading developed countries will be much more severe than the damage caused by the 1929 crash.  The relief rally highs could prove to be the post-crash highs.

Should the recent highs be the post-crash highs, according to the SCPA the probability is 100% that it will take the markets a minimum of 15 years to get back above the highs reached during the week ended March 27, 2020.  Additionally, the findings from my extensive research on all of the secular bear markets since 1929 further support the SCPA’s forecast.

In addition to my empirical research of notable crashes, I also have been conducting empirical research on the Dow’s biggest one day gains from 1901 to 2020.  Based on my findings the probability is 94.4% that the Dow’s media sensationalized gains for the week ended March 27, 2020 were bear market rallies. See, “The TRUTH about Dow’s ‘… one day jump since 1933”.

Everyone should take advantage of markets being in close proximity of their post correction highs to exit the markets.  All mutual funds and stocks over $5.00 per share should be liquidated. I will provide my rationale for holding and also for buying low priced and penny shares in a future article.  My suggestion is to utilize a methodical approach by liquidating 20% of all holdings per day from April 1st to April 8th.

There are only three reasons why anyone would want to hold on to their stocks and mutual funds:

  1. Waiting to get back to break even.  It’s against human nature to take losses.  I knew investors in the 1970s who had been waiting for 10 to 20 years for a blue chip to get back to their purchase price.  Bite the bullet.
  2. Not wanting to pay capital gains.  Securities with gains can be “sold short against the box” to delay a taxable capital gain.   Capital gains taxes will only go up from here.
  3. Financial advisor advising otherwise.  Beware of the following:

a) An advisor’s largest percentage fee that can be charged is for the amount that an investor has in stocks.  If the investor is in cash the advisor can-not charge the fee.

b) The majority of financial advisors are affiliated with big brand name firms including Merrill Lynch, Morgan Stanley, Goldman Sachs and UBS, etc.  These advisors have to follow the party line. They do not have the independence to get their clients out of the market even if they wanted to.

c) The financial services industry utilizes propaganda to keep clients in the market during volatile periods.  Read “No One Saw It Coming’ – Should You Worry About The 10-Best Days” by Lance Roberts. He is among a few of the independent advisors who I know which had his clients’ 90% out of the market.

Shedlock: Recession Will Be Deeper Than The Great Financial Crisis

Economists at IHS Markit downgraded their economic forecast to a deep recession.

Please consider COVID-19 Recession to be Deeper Than That of 2008-2009

Our interim global forecast is the second prepared in March and is much more pessimistic than our 17 March regularly scheduled outlook. It is based on major downgrades to forecasts of the US economy and oil prices. The risks remain overwhelmingly on the downside and further downgrades are almost assured.

IHS Markit now believes the COVID-19 recession will be deeper than the one following the global financial crisis in 2008-09. Real world GDP should plunge 2.8% in 2020 compared with a drop of 1.7% in 2009. Many key economies will see double-digit declines (at annualized rates) in the second quarter, with the contraction continuing into the third quarter.

It will likely take two to three years for most economies to return to their pre-pandemic levels of output. More troubling is the likelihood that, because of the negative effects of the uncertainty associated with the virus on capital spending, the path of potential GDP will be lower than before. This happened in the wake of the global financial crisis.

Six Key Points

  1. Based on recent data and developments, IHS Markit has slashed the US 2020 forecast to a contraction of 5.4%.
  2. Because of the deep US recession and collapsing oil prices, IHS Markit expects Canada’s economy to contract 3.3% this year, before seeing a modest recovery in 2021.
  3. Europe, where the number of cases continues to grow rapidly and lockdowns are pervasive, will see some of the worst recessions in the developed world, with 2020 real GDP drops of approximately 4.5% in the eurozone and UK economies. Italy faces a decline of 6% or more. The peak GDP contractions expected in the second quarter of 2020 will far exceed those at the height of the global financial crisis.
  4. Japan was already in recession, before the pandemic. The postponement of the summer Tokyo Olympics will make the downturn even deeper. IHS Markit expects a real GDP contraction of 2.5% this year and a very weak recovery next year.
  5. China’s economic activity is expected to have plummeted at a near-double-digit rate in the first quarter. It will then recover sooner than other countries, where the spread of the virus has occurred later. IHS Markit predicts growth of just 2.0% in 2020, followed by a stronger-than-average rebound in 2021, because of its earlier recovery from the pandemic.
  6. Emerging markets growth will also be hammered. Not only are infection rates rising rapidly in key economies, such as India, but the combination of the deepest global recession since the 1930s, plunging commodity prices, and depreciating currencies (compounding already dangerous debt burdens) will push many of these economies to the breaking point.

No V-Shaped Recovery

With that, Markit came around to my point of view all along. Those expecting a V-shaped recovery are sadly mistaken.

I have been amused by Goldman Sachs and Morgan Stanley predictions of a strong rebound in the third quarter.

For example Goldman Projects a Catastrophic GDP Decline Worse than Great Depression followed by a fantasyland recovery.

  • Other GDP Estimates
  • Delusional Forecast
  • Advice Ignored by Trump
  • Fast Rebound Fantasies

I do not get these fast rebound fantasies, and neither does Jim Bianco. He retweeted a Goldman Sachs estimate which is not the same as endorsing it.

I do not know how deep this gets, but the rebound will not be quick, no matter what.

Fictional Reserve Lending

Please note that Fictional Reserve Lending Is the New Official Policy

The Fed officially cut reserve requirements of banks to zero in a desperate attempt to spur lending.

It won’t help. As I explain, bank reserves were effectively zero long ago.

US Output Drops at Fastest Rate in a Decade

Meanwhile US Output Drops at Fastest Rate in a Decade

In Europe, we see Largest Collapse in Eurozone Business Activity Ever.

Lies From China

If you believe the lies (I don’t), China is allegedly recovered.

OK, precisely who will China be delivering the goods to? Demand in the US, Eurozone, and rest of the world has collapse.

We have gone from praying China will soon start delivering goods to not wanting them even if China can produce them.

Nothing is Working Now: What’s Next for America?

On March 23, I wrote Nothing is Working Now: What’s Next for America?

I noted 20 “What’s Next?” things.

It’s a list of projections from an excellent must see video presentation by Jim Bianco. I added my own thoughts on the key points.

The bottom line is don’t expect a v-shaped recovery. We will not return to the old way of doing business.

Globalization is not over, but the rush to globalize everything is. This will impact earnings for years to come.

Finally, stimulus checks are on the way, but there will be no quick return to buying cars, eating out, or traveling as much.

Boomers who felt they finally had enough retirement money just had a quarter of it or more wiped out.

It will take a long time, if ever, for the same sentiment to return. Spending will not recover. Boomers will die first, and they are the ones with the most money.

S&P 500 Monthly Valuation & Analysis Review – 4-01-2020

J. Brett Freeze, CFA, founder of Global Technical Analysis. Each month Brett will provide you their valuable S&P 500 Valuation Chart Book. This unique analysis provides an invaluable long term perspective of equity valuations. If you are interested in learning more about their services, please connect with them.


Michael Markowski: Embrace The Bear – Next Leg Down Is Coming

 Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


Investors must embrace the bear. A savvy investor or advisor can generate significantly more profits from a secular bear, than a secular bull.  It’s also much easier to predict the behavior of a wild and vicious bear than a domesticated bull.

The new 2020 secular bear is the first for which an investor can utilize an inverse ETF (Exchange Traded Fund) to invest in a bear market from start to finish. The share price of an inverse ETF increases when a market goes down. The first inverse ETFs were invented in 2007. The new ETFs enabled investors to make significant profits at the end of the 2000 to 2009 secular bear market.  The chart below depicts the gains for the Dow’s inverse ETF before and after Lehman went bankrupt in 2008.

The increased volatility caused by the secular bear can be leveraged by algorithms which had not been utilized in prior bear markets.   Two of my algorithms have the potential to produce substantial gains:

  • Bull & Bear Tracker (BBT) 

From April 9, 2018, and through February 29, 2020, the Bull & Bear Tracker (BBT) trend trading algorithm which trades both long and inverse ETFs produced a gain of 77.3% vs. the S&P 500’s 14.9%.   March of 2020 will be the BBT’s 9th consecutive profitable month.

The Bull & Bear Tracker thrives on market volatility.  The algorithm’s best performance days since the inception of the signals have been when the markets are most volatile.

  • SCPA (Statistical Crash Probability Analysis)

The SCPA is a crash event forecasting algorithm. The algorithm has been very accurate at forecasting the crash of 2020’s events.  The SCPA’s forecast that the market had reached a bottom on March 23rd was precisely accurate.   From 03/23/20 to 0/3/26/20, the Dow had its biggest one-day gain (11.4%) and three-day percentage gain (21.3%) since 1929 and 1931, respectively.  Those investors who purchased the Dow’s long ETF (symbol: DIA) by close of the market on March 23, 2020, after reading “Probability is 87% that market is at interim bottom”  which was published during market hours, had a one day gain of 11% at the close of the market on March 24, 2020.

The SCPA’s future event forecasts throughout the life of the crash of 2020 are being utilized to trade long and inverse ETFs until the US markets reach their final bottoms in the fourth quarter of 2022.  Had the SCPA and inverse ETFs been available to trade the SCPA’s forecasts in 1929, savvy investors would have made more than 572% from December of 1929 through July of 1932. There were 14 Bear market rallies with average gains of 17%.  The rallies were followed by 14 declines which averaged 23%. could have produced average gains of 23% for inverse ETF investors.

Both the Bull & Bear Tracker (BBT) and SCPA complement each other. The BBT predicts market volatility before it increases. The SCPA forecasts the percentage increases for the bear market rallies and the percentage declines from the bear rally highs. My prediction is that the utilization of both of the algorithms will reduce the failed signals ratio for the Bull & Bear Tracker.

Based on the findings from my recently completed empirical research of the Dow’s best rallies from 1901 to 2020, the markets will remain extremely volatile for the foreseeable future.

The Truth About The Biggest One Day Jump Since 1933

The Wall Street Journal’s “Dow Soars More Than 11% in Biggest One-Day Jump Since 1933” was inaccurate.  It should have read since “1929”.  The article should have been about the Dow Jones industrials composite index having its best one day and three-day percentage gains since 1929 and 1931 respectively.

The gain of 21.3% for the Dow’s three-day rally that ended on March 26th was the index’s second best since 1901.  The one-day gain of 11.4% on March 24th ranks as the Dow’s fourth best day since 1901.  To understand the significance of the error read on.

Nine of the top ten three-day percentage gainers occurred during the first four years of the 1929 to 1949 secular bear market.  The Five rallies which occurred before the 1929 crash reached its final bottom on July 8, 1932 all failed. Their post rally declines ranged from 19% to 82%.

Six of the 10 biggest daily percentage increases in the table below for the Dow over the last 120 years occurred from 1929 to 1933.  There were two 2008 secular bear market rallies, October 13 and 28, 2008 among the top ten one day wonders. The losses for both of the one-day 2008 rallies at the March 2009 were 31.1% and 28.7% respectively.

Of the 100 best percentage gain days for the Dow since 1901, 29 of them occurred between the post 1929 crash and the final July 1932 bottom.  From the 1932 bottom to the end of 1933 accounted for an additional 23 of the 100 best days. All of those rallies were profitable. From the low to the end of 1933, the Dow increased by more than 100%.  The only other period or year which had concentrated representation in the top 100 was 2008 which had seven.

The Wall Street Journal’s error is significant since 100% of the top 100 best one day rallies from:

  • October 1929 to July 1932 resulted in significant losses
  • July 1932 bottom to end of 1933 resulted in significant gains

The error has created a false sense of security for investors and especially for investment professionals, who are aware that after the 1929 crash, the Dow bottomed in 1932.   Had the performance for the Dow’s performance cited in the headline been compared to 1929, the context of the article would have been very bearish instead of somewhat bullish.

From my preliminary empirical research findings there were only seven bull market rallies within the top 100 one day percentage gainers. Three of seven  in the table below were represented by 1987 and two by 2009.

The three post 1987 “Black Monday’ crash rallies enabled the secular bull which began in 2002 to resume. To understand why it’s not possible for the secular bull which began in 2009 to resume read my two March 2020 articles below.  The 1987 crash does not share the genealogy of the Dow 1929, NASDAQ 2000 and the 2020 crashes for the markets of the US, Japan, Germany, Canada, France and South Korea which are now underway.

Based on the findings from my empirical research the probability is 94.4% (17/18) that the Dow 2020’s one day and three-day top ten percentage gainers last week were bear market rallies.         

Many are hopeful that the crash which has been underway since February 20, 2020, is just a correction for the continuation of the secular bull market which began in 2009.  Based on my just concluded empirical research of the Dow’s best daily and three-day gains and my previous findings from my prior statistical crash probability analysis, the rationale is in place for the markets to continue to crash.   My deep fear is that the world is on the verge of a 1930’s style economic depression.

Everyone should take advantage of the Bear market rally that is currently underway to exit the market as soon as possible.

  • According to the Statistical Crash Probability Analysis (SCPA) forecast the probability is 100% that the relief rally high has either already occurred or will occur by April 8, 2020.
  • The probability is the same for the markets of the six countries to make new lows by April 30, 2020.

For more about the SCPA click here for access to all of my 2020 crash related articles.  To view the SCPA’s very accurate track record for March 2020 click here.

All mutual funds and stocks over $5.00 per share should be liquidated by April 8th. My suggestion is to utilize a methodical approach by liquidating 20% of all holdings per day from April 1st to April 8th.

The SCPA is also forecasting the probability is 100% for the coming attractions from the crash of 2020:

  • Interim bottom by or before May 4, 2020
  • At interim bottom market will be 41% to 44% below 2020 highs
  • Post-crash high before the journey begins to final Q 4 2022 bottom will occur from June 24, 2020 to September 18, 2020.
  • Post-crash highs to get market to within 17% of 2020 highs.

My only argument against the SCPA’s statistical probability analyses is can the markets get back to above, or even to their March/April 2020 post-crash relief rally highs?  The simultaneous crashes in multiple markets for more than one country, let alone six countries, is historically unprecedented.

My hunch is that the damage to the markets and economies of the world’s leading developed countries will be much more severe than the damage caused by the 1929 crash.  The relief rally highs could prove to be the post-crash highs.

If that proves to be the case, according to the SCPA the probability is 100% that it will take the markets a minimum of 15 years to get back above the highs already made by the relief rally and longer to get back to their post-crash highs. Additionally, the findings from my extensive research on all of the secular bear markets since 1929 further support the SCPA’s forecast.

There are only three reasons why anyone who is reading my articles would not to sell:

  1. Waiting to get back to break even.  It’s against human nature to take losses.  
  2. Not wanting to pay capital gains.  Securities with gains can be “sold short against the box” to delay a taxable capital gain,
  3. Financial advisor advising otherwise.  Beware of the following:

a) An advisor’s largest percentage fee that can be charged is for the amount that an investor has in stocks.  If the investor is in cash the advisor can-not charge the fee.

b) The majority of financial advisors are affiliated with big brand name firms including Merrill Lynch, Morgan Stanley, Goldman Sachs and UBS, etc.  These advisors have to follow the party line. They do not have the independence to get their clients out of the market even if they wanted to.

c) The financial advisor industry utilizes propaganda to get clients to remain invested during volatile periods. Read “No One Saw It Coming’ – Should You Worry About The 10-Best Days” by Lance Roberts. He is among a few of the independent advisors who I know which had his clients’ 90% out of the market.

Cartography Corner – April 2020

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


March 2020 Review

E-Mini S&P 500 Futures

We begin with a review of E-Mini S&P 500 Futures (ESM(H)0) during March 2020. In our March 2020 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for March are:

  • M4                 3614.00
  • M1                 3457.50
  • PMH              3397.50
  • MTrend         3166.53
  • Close             2951.00     
  • PML               2853.25
  • M3                 2678.00    
  • M2                 2525.50     
  • M5                2369.00

Active traders can use 3166.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for March 2020 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first trading session of March saw the market price rise, reflecting market participants’ “buy-the-dip” mentality towards February’s weakness and anticipation of the Federal Reserve responding with further monetary stimulus.  The high trade for March was realized during the second trading session at 3137.00, just under our isolated pivot at March Monthly Trend, MTrend: 3166.53.  The following two trading sessions saw lower highs, yet they also afforded market participants reasonable opportunities to sell against March Monthly Trend.  On March 6th, 2020, the market price began to break lower, with clustered support at QTrend: 2974 and Q2: 2934.25 being surpassed intra-session and the market price settling the session below QTrend.

During the following session, March 9th, the market price gapped lower on the open, breaking and settling below another clustered support zone at PQL: 2855.00 and PML:2853.25.  The following two trading sessions were spent with the market price oscillating between PQL / PML now acting as resistance and isolated support at M3: 2678.00.  On March 12th, the market price descended below isolated support at M3: 2678 and M2: 2525.50, stopping short of achieving the Monthly Downside Exhaustion level for March at M5: 2369.00.  The following three trading sessions were spent with the market oscillating between M3: 2678.00 now acting as resistance and support at M5: 2369.00.  The Monthly Downside Exhaustion level was first achieved on March 16th, 2020.

With the market price having achieved our isolated Monthly Downside Exhaustion level, our focus turned immediately to our weekly support levels.  The following four trading sessions, March 18th through March 23rd, saw the market price continue to descend below M5: 2369.00.  The low price for March was achieved on March 23rd at the price of 2174.00.

On March 23rd, the Federal Reserve committed to unlimited quantitative easing (QE).  That action stopped the market price descent and a rally ensued.  The final six trading sessions of March saw the market price rise sharply from the low, with monthly (and weekly) support levels acting as resistance.

Active traders following our monthly analysis had the opportunity to capture a 24% profit.

 

Figure 1:

Gold Futures

We continue with a review of Gold Futures (GCM(J)0) during March 2020.  In our March 2020 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for March are:

  • M4         1863.70
  • M1         1770.10
  • PMH       1691.70
  • M2         1582.50
  • Close        1566.70
  • MTrend   1560.26
  • PML        1551.10           
  • M3         1545.50                       
  • M5           1488.90

Active traders can use 1545.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for March 2020 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first six trading sessions of March, aided by the Federal Reserve’s actions on March 3rd, saw the market price ascend to and surpass intra-session February’s high price at PMH: 1691.70.  However, the market price did not settle above February’s high.

Over the following four trading sessions, the market price descended through multiple isolated support levels, including our isolated pivot at M3: 1545.50.  On March 16th, our Monthly Downside Exhaustion level for March at M5: 1488.90 was achieved and exceeded intra-session.  The low price for the month at 1451.74 was realized during that session.  The following four sessions were spent with the market price oscillating between clustered support levels at MTrend: 1560.26 / PML: 1551.10 / M3: 1545.50, now acting as resistance, and Monthly Downside Exhaustion level acting as support.

The Federal Reserve announcement of unlimited quantitative easing on March 23rd re-ignited market participant’s enthusiasm for Gold.  The market price cleared the clustered support levels at MTrend: 1560.26 / PML: 1551.10 / M3: 1545.50, now acting as resistance.  On March 24th and March 25th, the market price ascended to and surpassed intra-session February’s high price at PMH: 1691.70.  The final four trading sessions of March were spent with the market price essentially drifting sideways, with a final push lower towards isolated support at M2: 1582.50.

Our analysis essentially bound the realized range for March.

Figure 2:

April 2020 Analysis

E-Mini S&P 500 Futures

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESM0).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Monthly Trend        2980.56       
  • Quarterly Trend      2918.33
  • Current Settle         2569.75       
  • Daily Trend             2567.31       
  • Weekly Trend          2501.47

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”, after having been “Trend Up” for four quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures are in “Consolidation”, settling below Monthly Trend for two months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Down” for five weeks.  The relative positioning of the Trend Levels has lost its bullish posture.

We wrote in March, “The final piece of the sustained Trend Reversal puzzle is a quarterly settlement under Quarterly Trend at QTrend: 2974.00.”  March’s settlement completed the puzzle.

One rule we have is to anticipate a two-period high (low), within the following four to six periods, after a Downside (Upside) Exhaustion level has been reached.  We now anticipate a 2-period high in the quarterly time- period over the next four to six quarters, in the monthly time-period over the next four to six months, and in the weekly time-period within two weeks.  This does not mean the market price will immediately reverse higher, as those two-period highs can occur at lower absolute levels.  In our judgment, in bear markets, two-period highs are the safest place to sell. Illustrations of this concept, in the monthly time-period, can be found in our April 2018 commentary.

Support/Resistance:

In isolation, monthly support and resistance levels for April are:

  • M4                 3420.75
  • PMH              3137.00
  • MTrend         2980.56
  • M1                 2876.50
  • Close             2569.75     
  • M3                 2188.50
  • PML               2174.00     
  • M2                 1494.75     
  • M5                950.50

Given that the first monthly resistance and support levels are roughly 300 and 400 points away from the current market price, we suggest active traders rely upon our weekly analysis to guide them directionally.

For less-active market participants with an intermediate or long time-period focus, we suggest using MTrend: 2980.56 and QTrend: 2918.33 as the pivot, respectively.  Maintain a flat or short position below the pivot and a long position above the pivot.

WTI Crude Oil Futures

For April, we focus on WTI Crude Oil Futures (“Crude”).  We provide a monthly time-period analysis of CLK0.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend    49.79             
  • Monthly Trend      44.43
  • Weekly Trend       26.73             
  • Daily Trend           20.94             
  • Current Settle       20.48

As can be seen in the quarterly chart below, Crude is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that Crude has been “Trend Down” for three months.  Stepping down to the weekly time-period, the chart shows that Crude has been “Trend Down” for five weeks.

Our model got short Crude in January with the break of Monthly Trend.  We had no insight into the actions of Saudi Arabia concerning oil output and pricing.  As we have, please consider the following words of wisdom from Ed Seykota:

“A surprise is an event that catches someone unaware.  If you are already on the trend, the surprises seem to happen to the other guys.”

To our knowledge, no one predicted that Saudi Arabia would boost production and cut its selling price for oil.      

Support/Resistance:

In isolation, monthly support and resistance levels for April are:

  • M4         53.47
  • PMH       48.66
  • MTrend  44.43
  • M1         42.66
  • Close        20.48
  • PML         19.27
  • M3         0.00     
  • M2         0.00                 
  • M5           0.00

Active traders can use 19.27 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Selected Portfolio Position Review: 04-01-20

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.

HOW TO READ THE CHARTS

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, we will now review some positions in our Equity Portfolio which are either a concern, an opportunity, or are doing something interesting.

NOTE: Over the last couple of weeks we have been repositioning the portfolio to weather out a storm we think is coming in April. As such we are have reduced exposure to areas we think are at risk and moved to areas where there is relative “safety.” We are currently carrying our minimum equity exposure so the next steps will be adding a short-hedge to portfolios to reduce relative exposure to the markets.


ABBV – AbbieVie (Added)

  • After buying ABBV previously, and taking some profits, we have added back to the position.
  • Along with MRK, ABT, & JNJ we are positioning the portfolio into holdings that will benefit from the COVID-19 virus in terms of revenues over the coming months. 
  • We are still underweight the position and will increase our holdings on any pullback to support at $65-67.50.
  • Stop loss is set at $65

ABT – Abbott Laboratories (Added)

  • As we did with ABBV, we previously took profits in ABT and have added back to the holding again. 
  • ABT has been performing better than the market recently, and is in a position to benefit from the virus impact. 
  • We like the company fundamentally as well. We will continue to build into the position on pullbacks in the market. 
  • Stop is set at $65

JNJ – Johnson & Johnson (Added)

  • JNJ is another long-term hold well positioned for the virus impact. 
  • We added to position and will continue to build into the holding opportunistically. 
  • The sharp recovery rally from the lows quickly regained support, which now becomes our level to add to the position. 
  • Stop is set at $120

CAG – Conagra Foods (Added 1/3 Position)

  • We are positioning more into staples rather than discretionary as we go through this cycle. CAG hasn’t done a lot, but has outperformed on a relative basis to the market.
  • CAG is struggling with its 200-dma. We have taken on a 1/3rd position and will look to add another 1/3rd at support around $27
  • Stop is reset at $24

MRK – Merck (Added 1/3 Position)

  • As with our other healthcare related holdings, MRK held important support so we added a 1/3rd holding to portfolios.
  • We will continue to add to the holding as opportunity presents itself. 
  • Stop loss is set at $65

IAU – Gold (Added)

  • There is very little doubt that what the Fed is doing will ultimately be “inflationary” down the road. 
  • We have traded gold several times in our portfolio, but are now looking to build a longer-term stake in the metal for that eventual outcome. 
  • We currently carry about 1/3rd of our total position and will continue to add on pullbacks to support. 
  • Stop is set at $13.75

CLX – Clorox (Added 1/3 Position)

  • CLX has performed exceedingly well during this correction in the market. It is currently overbought but has continued to hold support levels. 
  • We added 1/3rd of a holding to portfolios and will continue to add accordingly on pullbacks. 
  • Support is $160 currently.
  • Stop is set at $155

KHC – Kraft Heinz (Sold)

  • In order to keep our “equity positioning” balanced in the portfolio, we had to sell something to make room for some of the recent adds. 
  • KHC was a current candidate and was sold. 
  • Although we like the company longer-term. From a value perspective we think this will be a good “win” down the road, so we will look to add back the holding on the next market downturn. 

V – Visa Inc. (Sold)

  • Another “sell” we had to make was V.
  • We like Visa very much but it is currently trading at 15x price/sales and is going to be subject to , reduced spending and rising credit card defaults as the unemployment levels surge.
  • We will buy V back as we begin to see the economic fallout to come subside. 

HCA – HCA Healthcare (Sold)

  • HCA was also sold. 
  • We like HCA but it was our worst healthcare performer, so it was a logical candidate to make room elsewhere in the portfolio for better performing positions.

The COVID19 Tripwire

“You better tuck that in. You’re gonna’ get that caught on a tripwire.Lieutenant Dan, Forrest Gump

There is a popular game called Jenga in which a tower of rectangular blocks is arranged to form a sturdy tower. The objective of the game is to take turns removing blocks without causing the tower to fall. At first, the task is as easy as the structure is stable. However, as more blocks are removed, the structure weakens. At some point, a key block is pulled, and the tower collapses. Yes, the collapse is a direct cause of the last block being removed, but piece by piece the structure became increasingly unstable. The last block was the catalyst, but the turns played leading up to that point had just as much to do with the collapse. It was bound to happen; the only question was, which block would cause the tower to give way?

A Coronavirus

Pneumonia of unknown cause first detected in Wuhan, China, was reported to the World Health Organization (WHO) on December 31, 2019. The risks of it becoming a global pandemic (formally labeled COVID-19) was apparent by late January. Unfortunately, it went mostly unnoticed in the United States as China was slow to disclose the matter and many Americans were distracted by impeachment proceedings, bullish equity markets, and other geopolitical disruptions.

The S&P 500 peaked on February 19, 2020, at 3393, up over 5% in the first two months of the year. Over the following four weeks, the stock market dropped 30% in one of the most vicious corrections of broad asset prices ever seen. The collapse erased all of the gains achieved during the prior 3+ years of the Trump administration. The economy likely entered a recession in March.

There will be much discussion and debate in the coming months and years about the dynamics of this stunning period. There is one point that must be made clear so that history can properly record it; the COVID-19 virus did not cause the stock and bond market carnage we have seen so far and are likely to see in the coming months. The virus was the passive triggering mechanism, the tripwire, for an economy full of a decade of monetary policy-induced misallocations and excesses leaving assets priced well beyond perfection.

Never-Ending Gains

It is safe to say that the record-long economic expansion, to which no one saw an end, ended in February 2020 at 128 months. To suggest otherwise is preposterous given what we know about national economic shutdowns and the early look at record Initial Jobless Claims that surpassed three million. Between the trough in the S&P 500 from the financial crisis in March 2009 and the recent February peak, 3,999 days passed. The 10-year rally scored a total holding-period return of 528% and annualized returns of 18.3%. Although the longest expansion on record, those may be the most remarkable risk-adjusted performance numbers considering it was also the weakest U.S. economic expansion on record, as shown below.

They say “being early is wrong,” but the 30-day destruction of valuations erasing over three years of gains, argues that you could have been conservative for the past three years, kept a large allocation in cash, and are now sitting on small losses and a pile of opportunity with the market down 30%.

As we have documented time and again, the market for financial assets was a walking dead man, especially heading into 2020. Total corporate profits were stagnant for the last six years, and the optics of magnified earnings-per-share growth, thanks to trillions in share buybacks, provided the lipstick on the pig.

Passive investors indiscriminately and in most cases, unknowingly, bought $1.5 trillion in over-valued stocks and bonds, helping further push the market to irrational levels. Even Goldman Sachs’ assessment of equity market valuations at the end of 2019, showed all of their valuation measures resting in the 90-99th percentile of historical levels.

Blind Bond Markets

The fixed income markets were also swarming with indiscriminate buyers. The corporate bond market was remarkably overvalued with tight spreads and low yields that in no way offered an appropriate return for the risk being incurred. Investment-grade bonds held the highest concentration of BBB credit in history, most of which did not qualify for that rating by the rating agencies’ own guidelines. The junk bond sector was full of companies that did not produce profits, many of whom were zombies by definition, meaning the company did not generate enough operating income to cover their debt servicing costs. The same held for leveraged loans and collateralized loan obligations with low to no covenants imposed. And yet, investors showed up to feed at the trough. After all, one must reach for extra yield even if it means forgoing all discipline and prudence.

To say that no lessons were learned from 2008 is an understatement.

Black Swan

Meanwhile, as the markets priced to ridiculous valuations, corporate executives and financial advisors got paid handsomely, encouraging shareholders and clients to throw caution to the wind and chase the market ever higher. Thanks also to imprudent monetary policies aimed explicitly at propping up indefensible valuations, the market was at risk due to any disruption.

What happened, however, was not a slow leaking of the market as occurred leading into the 2008 crisis, but a doozy of a gut punch in the form of a pandemic. Markets do not correct by 30% in 30 days unless they are extremely overvalued, no matter the cause. We admire the optimism of formerly super-intelligent bulls who bought every dip on the way down. Ask your advisor not just to tell you how he is personally invested at this time, ask him to show you. You may find them to be far more conservative in their investment posture than what they recommend for clients. Why? Because they get paid on your imprudently aggressive posture, and they do not typically “eat their own cooking”. The advisor gets paid more to have you chasing returns as opposed to avoiding large losses.

Summary

We are facing a new world order of DE-globalization. Supply chains will be fractured and re-oriented. Products will cost more as a result. Inflation will rise. Interest rates, therefore, also will increase contingent upon Fed intervention. We have become accustomed to accessing many cheap foreign-made goods, the price for which will now be altered higher or altogether beyond our reach. For most people, these events and outcomes remain inconceivable. The widespread expectation is that at some point in the not too distant future, we will return to the relative stability and tranquility of 2019. That assuredly will not be the case.

Society as a whole does not yet grasp what this will mean, but as we are fond of saying, “you cannot predict, but you can prepare.” That said, we need to be good neighbors and good stewards and alert one another to the rapid changes taking place in our communities, states, and nation. Neither investors nor Americans, in general, can afford to be intellectually lazy.

The COVID-19 virus triggered these changes, and they will have an enormous and lasting impact on our lives much as 9-11 did. Over time, as we experience these changes, our brains will think differently, and our decision-making will change. Given a world where resources are scarce and our proclivity to – since it is made in China and “cheap” – be wasteful, this will probably be a good change. Instead of scoffing at the frugality of our grandparents, we just might begin to see their wisdom. As a nation, we may start to understand what it means to “save for a rainy day.”

Save, remember that forgotten word.

As those things transpire – maybe slowly, maybe rapidly – people will also begin to see the folly in the expedience of monetary and fiscal policy of the past 40 years. Expedience such as the Greenspan Put, quantitative easing, and expanding deficits with an economy at full employment. Doing “what works” in the short term often times conflicts with doing what is best for the most people over the long term.

Anatomy of The Bear. Lessons from Russell Napier.

One of my annual re-reads is Russell Napier’s classic tome “Anatomy of the Bear.”

A mandatory study for every financial professional and investor who seeks to understand not only how damaging bear markets can be but also the traits which mark their bottoms. Every bear is shaken from hibernation for different reasons. However, when studying the four great bottoms of bears in 1921, 1932, 1949 and 1982, there are several common traits to these horrendous cycles.  I thought it would be interesting to share them with you.

First, keep in mind, bear markets characteristically purge weakness – weak companies, weak advisors, weak investors. I want you to consider them less a bloodletting and more a cleansing of a system. There will be unsuitable investors who will never return to the market and justifiably so. Businesses that were patronized pre-Covid, will either be gone or completely reinvent. Bear markets slash equity valuations. Unfortunately, this doesn’t mean that stocks return to healthy valuations quickly after a bear departure. Some believe the global economy can turn on and off like a light switch without major repercussions. In other words,  the belief is once the worst of this horrid virus ceases,  business activity invariably will return to normal. I believe it’ll be quite the contrary.

I mentioned on the radio show in December that I expected wage growth to top out in 2019. Keep in mind, through this yet another outlier economic upheaval, there will be employers who will realize they don’t require as many employees and will let them go or cap their wages for years to rebuild profit margins. Without the tailwind of stock buybacks to equity prices, corporate employees will bear the brunt of the pain. In addition, organizations will realize many of their remaining employees are equipped to work from home and perhaps gather in-person perhaps once a month or every couple of weeks. Thus, large commercial space will no longer be required which is going to require massive reinvention by the commercial real estate industry.
The cry of nationalism will rise. Products manufactured overseas especially China, will take a hit which means Americans will face greater inflationary challenges while also dealing with muted or non-existent wage growth. We will experience ‘ more money chasing too-few goods.’ Many, especially younger generations will continue to strip themselves down to basics (I especially envision this in Generation Z;  those born in the mid-late 1990s such as my daughter Haley).  This sea-change will require most of the U.S. population to finally live below their means, dramatically downsize, reinvent, expand, the definition of wealth to include more holistic, ethereal methods that go way beyond household balance sheets and dollars.
I hope I’m wrong. So very wrong about most of what I envision for the future.
Here are several traits that every major market bottom share – courtesy of Russell Napier:

  1. Bears tend to die on low volume, at least the big bears do. 

Low volume represents a complete disinterest in stocks. Keep in mind this clearly contradicts the tenet which states that bears end with one act of massive capitulation – a  downward cascade on great volume. Those actions tend to mark the beginning of a bear cycle, not the end. A rise in volume on rebounds, falling volumes on weakness would better mark a bottoming process in a bear market.

2. Bears are tricky.

There will appear to be a recovery; an ‘all-clear’ for stock prices. It’ll suck in investors who believe the market recovery is upon us just to be financially ravaged again. Anecdotally, I know this cycle isn’t over as I still receive calls from people who are anxious to get into the market and perceive the current market a buying opportunity. At the bottom of a bear, I should be hearing great despair and clear disdain for stock investing.

3. Bears can be tenacious.

They refuse to die or at the least, quickly return to hibernation. The 1921 move from overvaluation to undervaluation took over ten years. Bear markets, where three-year price declines make overvalued equities cheap, are the exception, not the rule. As of this writing,  the Shiller P/E is at 24x – hardly a bargain.  At the bottom market cycle of the Great Recession, the Shiller CAPE was at 15x. There is still valuation adjustment ahead.

4. Bears can depart before earnings actually recover.

Investors who wait for a complete recovery in corporate earnings will arrive late to the stock-investment party.  Most likely it’s going to take a while (especially with their debt burden), for the majority of U.S. companies to reflect healthy earnings growth. CEOs who employ stock buybacks to boost EPS will be considered pariahs and gain unwanted attention from Congress and even the Executive Branch. My thought is a savvy investor should look to minimize indexing and select individual stocks with strong balance sheets which include low debt and plenty of free cash flow within sectors and industries that are nimble to adjust to the global economy post-crisis.

5. Bear market damage can be inconceivable, especially to a generation of investors who never experienced one.

The bear market of 1929-32 was characterized by an 89% decline. The average is 38% for bears;  however, averages are misleading. I have no idea how much damage this bear ultimately unleashes. The closest comparison I have is the 1929-1932 cycle. However, with the massive fiscal and monetary stimulus (and I don’t believe we’ve seen the full extent of it yet),  my best guess is a bear market contraction somewhere between the Great Depression and Great Recession. At the least, I believe we re-test lows and this bear is a 40-45% retracement from the highs.

6. Bear markets end on the return of general price stability and strong demand for durables such as autos.

In 1949, as in 1921 and 1932, a return of general price stability coincided with the end of the equity bear market. Demand and price stability of selected commodities augured well for general price stabilization.  Watch how industrial metals recover such as copper, now at the lowest levels since the fall of 2017. The Baltic Dry Index is off close to 20% so far this year. Low valuations (not there yet), when combined with a return to normalcy in the general price level, may provide the best opportunity for future above-average equity returns. We are not there.

7. Bear markets that no longer decline on bad news are a positive.

The combination of large short positions in conjunction with a market that fails to decline on bad news was overall a positive indicator of a rebound in 1921, 1932 and 1949. Also, limited stock purchases by retail investors may be considered an important building block for a bottom.  Since the worst of economic numbers haven’t been witnessed yet, there remains too much hope of a vicious recovery in stock prices as well as the overall global economies.

8. Not all bear markets lead the economy by six-to-nine months.

Generally, markets lead the economy. However, this tenet failed to hold true for the four great bears. At extreme times, the bottoms for the economy and the equity market were aligned and in several cases, the economy LED stocks higher!  It’s unclear whether this bear behaves in a similar fashion only because of massive fiscal and monetary stimulus. We’re not done with stimulus methods either. If anything, they’ve just begun! I know. Tough to fathom.

For me and the RIA Team, every bear provides an important lesson. The beast comes in all sizes; their claws differ in sharpness. However, they are all dangerous to financial wealth.

I believe the market will eventually witness a “V” shaped recovery due to unprecedented stimulus. Unfortunately, I believe the economy will remain sub-par for a long period. Here’s a vision I shared on Facebook recently:

Let me give you one example how an economy cannot turn off, then on, like a light switch.

Joe’s Donuts is closed. Joe lets his 2 employees go, at least temporarily. Joe employs his wife Emily to assist as she’s just been laid off from her job. Joe is a quick thinker. He creates pre-packaged dough-to-go bags and sells them outside the store. His sales are off 75% as most businesses around him are shuttered. Joe was able to negotiate postponement of his rent for one month but will have to pay two months in May.

Joe has a profitable business but he’s already eaten through a quarter of his cash reserves to pay for supplies, maintain expenses to keep going. He can’t afford another month of quarantine.

The quarantine is lifted May 1 (best case scenario). Joe’s establishment is open! He’s hesitant to have employees return because he wants to gauge business for a month. He discovers that business is still off 40% from last year at the same time. Why? Because his patrons have either been let go or in repair of ravaged household balance sheets. In addition, he notices that purchasing boxes of donuts for office meetings is way off.

Joe contacts his former 2 employees. He tells them he still doesn’t require them. He’s handling the traffic sufficiently alone at this time. Joe now owes 2 months of rent. He takes one month from the business’ reserve account; distributes another from his retirement account.

Joe’s wife Ellen has been called back to work by her former employer, a local car dealership. She’s been asked to work the same job, same responsibilities. However, the pay is 10% less. Out of desperation, she takes the job. Meanwhile, Joe tells Ellen that they need to find a way to continue to cut household expenses…. Well, you get the picture.

I think this is reality for at least a year after the ‘all clear.’

There’s never been a better time to catch up on reading. Russell’s book is available through Amazon. For those interested in market history,  the pages hold invaluable insights.

For me, markets are always battlefields, but I’ve survived several conflicts.

Consider “Anatomy of The Bear,” part of your financial literary war chest.

Sector Buy/Sell Review: 03-31-20

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.

HOW TO READ THE CHARTS

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.

As noted last previously, the steepness of the decline reset our parameters. Now, the goal is to rebalance portfolio risk. We previously removed sectors most exposed to “COVID-19” and can now start looking for entry points.

Basic Materials

  • XLB severely broke down below it’s 200-dma and is subject to the impact of the virus and the shutdown of the global supply chain.
  • While XLB is extremely oversold, it is also on a very deep sell signal. The recent rally has done little to restore confidence in the sector and is lagging in terms of relative performance.
  • We sold all of our holdings previously. Currently, there is a trading opportunity here, but we are going to concentrate our holdings in better performing sectors for now. 
  • Use rallies back to previous support levels to clear positions for the time being. There are too many unknowns currently, and just way to early, to assume a bottom is in. 
  • Short-Term Positioning: Bearish
    • Last Week: No Positions
    • This Week: No Positions
  • Long-Term Positioning: Bearish

Communications

  • XLC is deeply oversold and is performing better than the overall market. We added to this area recently and there is currently upside to the 38.2% retracement level.
  • Currently on a sell signal, and deeply oversold, we like the more defensive quality of the sector for now as Communications has an “anti-virus” bid to it. 
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Added to holdings up to 3%.
  • Long-Term Positioning: Neutral

Energy

  • “Ain’t nothin’ good goin’ on.” 
  • For now, use rallies in energy to clear positions BUT we want to watch for a bottoming process to begin building long-term exposure. 
  • Be patient, we have plenty of time to do this correctly. 
  • Short-Term Positioning: Bearish
    • Last week: Sell into rally.
    • This week: Sell into rally.
    • No position currently
  • Long-Term Positioning: Bearish

Financials

  • Financials are rallying on hopes of a turnaround, but there is a LOT of credit risk outstanding currently which is going to hurt their balance sheets and earnings. 
  • Financials are being impacted by both the a credit crisis stemming from the energy sector, rising defaults from a crashing economy, and “zero interest rates” from the Fed is a negative for net interest margins.
  • We sold out of financials previously and will re-evaluate once the market calms down and finds a bottom. 
  • Sell on any rally.
  • Short-Term Positioning: Neutral
    • Last week: No position
    • This week: No position
  • Long-Term Positioning: Neutral

Industrials

  • As with XLB, so goes XLI.
  • We sold all of our holdings previously and will opt to wait for a better market structure to move back into the sector. 
  • Short-Term Positioning: Bearish
    • Last week: No position.
    • This week: No position.
  • Long-Term Positioning: Bearish

Technology

  • Technology is holding up better than the overall market and only started flirted with critical support. We added to XLK as discussed last week, taking our position to full weight currently. We will look to overweight the position opportunistically 
  • Short-Term Positioning: Bullish
    • Last week: Holding positions.
    • This week: Add to our holdings – full weight.
    • Long-Term Positioning: Bullish

Staples

  • The correction has gotten XLP extremely oversold and is trying to hold support. XLP is holding up better than the market and we are looking to add to our position. We will do so on come corrective action in the sector and market. 
  • However, as with everything, it is too soon to know if the sell-off is over. We are going to wait for a better bottom to form. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions
    • This week: Holding 1/2 position.
    • Long-Term Positioning: Bullish

Real Estate

  • XLRE broke all supports. But has recently rallied back to the 38.2% retracement level. 
  • There is a lot of credit risk in the sector and we are going to add back to REIT’s opportunistically.
  • Short-Term Positioning: Bullish
    • Last week: Hold position.
    • This week: No position currently. 
  • Long-Term Positioning: Bullish

Utilities

  • XLU rebounded nicely over the last week back to the 50% retracement level. This is the level where most retracements fail.
  • A pullback to support that does not violate it, will be an opportunity to add back into the sector. 
  • Short-Term Positioning: Bullish
    • Last week: Hold position.
    • This week: No position.
  • Long-Term Positioning: Bullish

Health Care

  • XLV held support and rebound nicely back to the 50% retracement level. 
  • As with XLU look for a short-term correction back to support to add to holdings. 
  • Short-Term Positioning: Neutral
    • Last week: Hold positions
    • This week: Hold 1/2 position, look to add.
  • Long-Term Positioning: Bullish

Discretionary

  • We sold the entire position previously due to exposure to the economic shutdown from the virus. 
  • There is no reason at the moment to add the sector back until we see “some signs of life” in the economy. 
  • We are focusing on Staples for the time being but will watch for recovery in Discretionary.
  • Short-Term Positioning: Neutral
    • Last week: Hold position
    • This week: No position
  • Long-Term Positioning: Neutral

Transportation

  • We have remained out of the economically sensitive sector and as noted last week the impact of the “coronavirus” will likely have global supply chain impacts.
  • The sector is oversold short-term, which could elicit a reflexive bounce. However, such a bounce should be used to sell positions into for now.
  • Short-Term Positioning: Neutral
    • Last week: No position
    • This week: No position
  • Long-Term Positioning: Bearish

Technically Speaking: 5-Questions Bulls Need To Answer Now.

In last Tuesday’s Technically Speaking post, I stated:

From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.

As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Chart Updated Through Monday

Not surprisingly, as we noted in this weekend’s newsletter, the headlines from the mainstream media aligned with our expectations:

So, is the bear market over? 

Are the bulls now back in charge?

Honestly, no one knows for certain. However, there are 5-questions that “Market Bulls” need to answer if the current rally is to be sustained.

These questions are not entirely technical, but since “technical analysis” is simply the visualization of market psychology, how you answer the questions will ultimately be reflected by the price dynamics of the market.

Let’s get to work.

Employment

Employment is the lifeblood of the economy.  Individuals cannot consume goods and services if they do not have a job from which they can derive income. From that consumption comes corporate profits and earnings.

Therefore, for individuals to consume at a rate to provide for sustainable, organic (non-Fed supported), economic growth they must work at a level that provides a sustainable living wage above the poverty level. This means full-time employment that provides benefits, and a livable wage. The chart below shows the number of full-time employees relative to the population. I have also overlaid jobless claims (inverted scale), which shows that when claims fall to current levels, it has generally marked the end of the employment cycle and preceded the onset of a recession.

This erosion in jobless claims has only just begun. As jobless claims and continuing claims rise, it will lead to a sharp deceleration in economic confidence. Confidence is the primary factor of consumptive behaviors, which is why the Federal Reserve acted so quickly to inject liquidity into the financial markets. While the Fed’s actions may prop up financial markets in the short-term, it does little to affect the most significant factor weighing on consumers – their job. 


Question:  Given that employment is just starting to decline, does such support the assumption of a continued bull market?


Personal Consumption Expenditures (PCE)

Following through from employment, once individuals receive their paycheck, they then consume goods and services in order to live.

This is a crucial economic concept to understand, which is the order in which the economy functions. Consumers must “produce” first, so they receive a paycheck, before they can “consume.”  This is also the primary problem of Stephanie Kelton’s “Modern Monetary Theory,” which disincentivizes the productive capacity of the population.

Given that Personal Consumption Expenditures (PCE) is a measure of that consumption, and comprises roughly 70% of the GDP calculation, its relative strength has great bearing on the outcome of economic growth.

More importantly, PCE is the direct contributor to the sales of corporations, which generates their gross revenue. So goes personal consumption – so goes revenue. The lower the revenue that flows into company coffers, the more inclined businesses are to cut costs, including employment and stock buybacks, to maintain profit margins.

The chart below is a comparison of the annualized change in PCE to corporate fixed investment and employment. I have made some estimates for the first quarter based on recent data points.


Question: Does the current weakness in PCE and Fixed Investment support the expectations for a continued bull market from current price levels? 


Junk Bonds & Margin Debt

While global Central Banks have lulled investors into an expanded sense of complacency through years of monetary support, it has led to willful blindness of underlying risk. As we discussed in “Investor’s Dilemma:”

Classical conditioning (also known as Pavlovian or respondent conditioning) refers to a learning procedure in which a potent stimulus (e.g. food) is paired with a previously neutral stimulus (e.g. a bell). What Pavlov discovered is that when the neutral stimulus was introduced, the dogs would begin to salivate in anticipation of the potent stimulus, even though it was not currently present. This learning process results from the psychological “pairing” of the stimuli.”

That “stimuli” over the last decade has been Central Bank interventions. During that period, the complete lack of “fear” in markets, combined with a “chase for yield,” drove “risk” assets to record levels along with leverage. The chart below shows the relationship between margin debt (leverage), stocks, and junk bond yields (which have been inverted for better relevance.)

While asset prices declined sharply in March, it has done little to significantly revert either junk bond yields or margin debt to levels normally consistent with the beginning of a new “bull market.”

With oil prices falling below $20/bbl, a tremendous amount of debt tied to the energy space, and the impact the energy sector has on the broader economy, it is likely too soon to suggest the markets have fully “priced in” the damage being done.


Question:  What happens to asset prices if more bankruptcies and forced deleveraging occurs?


Corporate Profits/Earnings

As noted above, if the “bull market” is back, then stocks should be pricing in stronger earnings going forward. However, given the potential shakeout in employment, which will lower consumption, stronger earnings, and corporate profits, are not likely in the near term.

The risk to earnings is even higher than many suspect, given that over the last several years, companies have manufactured profitability through a variety of accounting gimmicks, but primarily through share buybacks from increased leverage. That cycle has now come to an end, but before it did it created a massive deviation of the stock market from corporate profitability.

“If the economy is slowing down, revenue and corporate profit growth will decline also. However, it is this point which the ‘bulls’ should be paying attention to. Many are dismissing currently high valuations under the guise of ‘low interest rates,’ however, the one thing you should not dismiss, and cannot make an excuse for, is the massive deviation between the market and corporate profits after tax. The only other time in history the difference was this great was in 1999.”

It isn’t just the deviation of asset prices from corporate profitability, which is skewed, but also reported earnings per share.

The impending recession, and consumption freeze, is going to start the mean-reversion process in both corporate profits, and earnings. I have projected the potential reversion in the chart below. The reversion in GAAP earnings is pretty calculable as swings from peaks to troughs have run on a fairly consistent trend.

Using that historical context, we can project a recession will reduce earnings to roughly $100/share. (Goldman Sachs currently estimates $110.) The resulting decline asset prices to revert valuations to a level of 18x (still high) trailing earnings would suggest a level of 1800 for the S&P 500 index. (Yesterday’s close of 2626 is still way to elevated.)

The decline in economic growth epitomizes the problem that corporations face today in trying to maintain profitability. The chart below shows corporate profits as a percentage of GDP relative to the annual change in GDP. The last time that corporate profits diverged from GDP, it was unable to sustain that divergence for long. As the economy declines, so will corporate profits and earnings.


Question: How long can asset prices remain divorced from falling corporate profits and weaker economic growth?


Technical Pressure

Given all of the issues discussed above, which must ultimately be reflected in market prices, the technical picture of the market also suggests the recent “bear market” rally will likely fade sooner than later. As noted above”

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Importantly, despite the sizable rally, participation has remained extraordinarily weak. If the market was seeing strong buying, as suggested by the media, then we should see sizable upticks in the percent measures of advancing issues, issues at new highs, and a rising number of stocks above their 200-dma.

However, on a longer-term basis, since this is the end of the month, and quarter, we can look at our quarterly buy/sell indication which has triggered a “sell” signal for the first time since 2015. While such a signal does not demand a major reversion, it does suggest there is likely more risk to the markets currently than many expect.


Question:  Does the technical backdrop currently support the resumption of a bull market?


There are reasons to be optimistic on the markets in the very short-term. However, we are continuing to extend the amount of time the economy will be “shut down,” which will exacerbate the decline in the unemployment and personal consumption data. The feedback loop from that data into corporate profits and earnings is going to make valuations more problematic even with low interest rates currently. 

While Central Banks have rushed into a “burning building with a fire hose” of liquidity, there is the risk that after a decade of excess debt, leverage, and misallocation of assets, the “fire” may be too hot for them to put out.

Assuming that the “bear market” is over already may be a bit premature, and chasing what seems like a “raging bull market” is likely going to disappoint you.

Bear markets have a way of “suckering” investors back into the market to inflict the most pain possible. This is why “bear markets” never end with optimism, but in despair.

TPA Analytics: Death Cross On Russell 3000 Signals More Pain To Come

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


Major Market Buy/Sell Review: 03-30-20

HOW TO READ THE CHARTS

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 

  • We previosly wrote: “With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge.”
  • Well, that bounce finally came and it was a vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $220
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 38.2% retracement level and failed. While Monday and Tuesday could see a push higher for quarter end rebalancing, this is still a bear market to be sold into. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss set at $185
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Last Monday, in anticipation of a rally, we put on a small QQQ trade. The rally did occur and ran into resistance at the 38.2% retracement level. We closed out the trade Friday afternoon, as we were unwilling to hold over the weekend.
  • We may put on another trade soon, depending on getting the right setup. April promises to be sloppy. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • As noted last week, small-caps are extremely oversold, and on a very deep “sell signal.”  They did bounce this past week, but underperformed the major indexes substantially. 
  • Avoid small-caps. This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.” The rally this past week also underperformed the broad market. 
  • As noted last week, “MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only.” That rally is likely done for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • As noted last week, EEM was extremely oversold and on a deep sell-signal. A bounce was likely which occurred. 
  • We previously stated that investors should use counter-trend rallies to sell into. Do that now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • As noted last week: “EFA is very sold and on a deep sell signal. A reflexive rally is likely. Use those levels to sell into.”  Do so this week.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Oil continues to weaken and supplies are building as economic shutdowns are not good for the crude market. Bankruptcies are rising as well. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Last week we noted: “It seems that liquidation event may be passing. If Gold can climb back above the 200-dma we will look to add back our holdings.
  • It did.
  • We added to our position in IAU and continue to have a small holding in GDX, as the previous liquidation left a lot of value in the sector. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Added to position
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.”
  • That occurred this past week, and the dollar is now approaching its moving average support. 
  • The credit crisis, and rush to cash, sent the dollar surging to 7-deviations above the mean. As we noted previously, with the credit markets calming down we are starting to see previous relationships between asset classes return to normal. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Where “I Bought It For The Dividend” Went Wrong

In early 2017, I warned investors about the “I bought it for the dividend” investment thesis. To wit:

“Company ABC is priced at $20/share and pays $1/share in a dividend each year. The dividend yield is 5%, which is calculated by dividing the $1 cash dividend into the price of the underlying stock.

Here is the important point. You do NOT receive a ‘yield.’

What you DO receive is the $1/share in cash paid out each year.

Yield is simply a mathematical calculation.

At that time, the article was scoffed at because we were 8-years into an unrelenting bull market where even the most stupid of investments made money.

Unfortunately, the “mean reversion” process has taken hold, which is the point where the investment thesis falls apart.

The Dangers Of “I Bought It For The Dividend”

“I don’t care about the price, I bought it for the yield.”

First of all, let’s clear up something.

In January of 2018, Exxon Mobil, for example, was slated to pay an out an annual dividend of $3.23, and was priced at roughly $80/share setting the yield at 4.03%. With the 10-year Treasury trading at 2.89%, the higher yield was certainly attractive.

Assuming an individual bought 100 shares at $80 in 2018, “income” of $323 annually would be generated.

Not too shabby.

Fast forward to today with Exxon Mobil trading at roughly $40/share with a current dividend of $3.48/share.

Investment Return (-$4000.00 ) + Dividends of $323 (Yr 1) and $343 (Yr 2)  = Net Loss of $3334

That’s not a good investment.

In just a moment, we will come and revisit this example with a better process.

There is another risk, which occurs during “mean reverting” events, that can leave investors stranded, and financially ruined.

Dividend Loss

When things “go wrong,” as they inevitably do, the “dividend” can, and often does, go away.

  • Boeing (BA)
  • Marriott (MAR)
  • Ford (F)
  • Delta (DAL)
  • Freeport-McMoRan (FCX)
  • Darden (DRI)

These companies, and many others, have all recently cut their dividends after a sharp fall in their stock prices.

I previously posted an article discussing the “Fatal Flaws In Your Financial Plan” which, as you can imagine, generated much debate. One of the more interesting rebuttals was the following:

If a retired person has a portfolio of high-quality dividend growth stocks, the dividends will most likely increase every single year. Even during the stock market crashes of 2002 and 2008, my dividends continued to grow. The total value of the portfolio will indeed fluctuate every year, but that is irrelevant since the retired person is living off his dividends and never selling any shares of stock.

Dividends usually go up even when the stock market goes down.

This comment is the basis of the “buy and hold” mentality, and many of the most common investing misconceptions.

Let’s start with the notion that “dividends always increase.”

When a recession/market reversion occurs, the “cash dividends” don’t increase, but the “yield” does as prices collapse. However, your INCOME does NOT increase. There is a risk it will decline as companies cut the dividend or eliminate it.

During the 2008 financial crisis, more than 140 companies decreased or eliminated their dividends to shareholders. Yes, many of those companies were major banks; however, leading up to the financial crisis, there were many individuals holding large allocations to banks for the income stream their dividends generated. In hindsight, that was not such a good idea.

But it wasn’t just 2008. It also occurred dot.com bust in 2000. In both periods, while investors lost roughly 50% of their capital, dividends were also cut on average of 12%.

While the current market correction fell almost 30% from its recent peak, what we haven’t seen just yet is the majority of dividend cuts still to come.

Naturally, not EVERY company will cut their dividends. But many did, many will, and in quite a few cases, I would expect dividends to be eliminated entirely to protect cash flows and creditors.

As we warned previously:

“Due to the Federal Reserve’s suppression of interest rates since 2009, investors have piled into dividend yielding equities, regardless of fundamentals, due to the belief ‘there is no alternative.’ The resulting ‘dividend chase’ has pushed valuations of dividend-yielding companies to excessive levels disregarding underlying fundamental weakness. 

As with the ‘Nifty Fifty’ heading into the 1970s, the resulting outcome for investors was less than favorable. These periods are not isolated events. There is a high correlation between declines in asset prices, and the dividends paid out.”

Love Dividends, Love Capital More

I agree investors should own companies that pay dividends (as it is a significant portion of long-term total returns)it is also crucial to understand that companies can, and will, cut dividends during periods of financial stress.

It is a good indicator of the strength of the underlying economy. As noted by Political Calculations recently:

Dividend cuts are one of the better near-real-time indicators of the relative health of the U.S. economy. While they slightly lag behind the actual state of the economy, dividend cuts represent one of the simplest indicators to track.

In just one week, beginning 16 March 2020, the number of dividend cuts being announced by U.S. firms spiked sharply upward, transforming 2020-Q1 from a quarter where U.S. firms were apparently performing more strongly than they had in the year-ago quarter of 2019-Q1 into one that all-but-confirms that the U.S. has swung into economic contraction.

Not surprisingly, the economic collapse, which will occur over the next couple of quarters, will lead to a massive round of dividend cuts. While investors lost 30%, or more in many cases, of their capital, they will lose the reason they were clinging on to these companies in the first place.

You Can’t Handle It

EVERY investor has a point, when prices fall far enough, regardless of the dividend being paid, they WILL capitulate, and sell the position. This point generally comes when dividends have been cut, and capital destruction has been maximized.

While individuals suggest they will remain steadfast to their discipline over the long-term, repeated studies show that few individuals actually do. As noted just recently is “Missing The 10-Best Days:”

“As Dalbar regularly points out, individuals always underperform the benchmark index over time by allowing “behaviors” to interfere with their investment discipline. In other words, investors regularly suffer from the ‘buy high/sell low’ syndrome.”

Behavioral biases, specifically the “herding effect” and “loss aversion,” repeatedly leads to poor investment decision-making. In fact, Dalbar is set to release their Investor Report for 2020, and they were kind enough to send me the following graphic for investor performance through 2019. (Pre-Order The Full Report Here)

These differentials in performance can all be directly traced back to two primary factors:

  • Psychology
  • Lack of capital

Understanding this, it should come as no surprise during market declines, as losses mount, so does the pressure to “avert further losses” by selling. While it is generally believed dividend-yielding stocks offer protection during bear market declines, we warned previously this time could be different:

“The yield chase has manifested itself also in a massive outperformance of ‘dividend-yielding stocks’ over the broad market index. Investors are taking on excessive credit risk which is driving down yields in bonds, and pushing up valuations in traditionally mature companies to stratospheric levels. During historic market corrections, money has traditionally hidden in these ‘mature dividend yielding’ companies. This time, such rotation may be the equivalent of jumping from the ‘frying pan into the fire.’” 

The chart below is the S&P 500 High Dividend Low Volatility ETF versus the S&P 500 Index. During the recent decline, dividend stocks were neither “safe,” nor “low volatility.” 

But what about previous “bear markets?” Since most ETF’s didn’t exist before 2000, we can look at the “strategy” with a mutual fund like Fidelity’s Dividend Growth Fund (FDGFX)

As you can see, there is little relative “safety” during a market reversion. The pain of a 38%, 56%, or 30%, loss, can be devastating particularly when the prevailing market sentiment is one of a “can’t lose” environment. Furthermore, when it comes to dividend-yielding stocks, the psychology is no different; a 3-5% yield, and a 30-50% loss of capital, are two VERY different issues.

A Better Way To “Invest For The Dividend”

“Buy and hold” investing, even with dividends and dollar-cost-averaging, will not get you to your financial goals. (Click here for a discussion of chart)

So, what’s the better way to invest for dividends? Let’s go back to our example of Exxon Mobil for a moment. (This is for illustrative purposes only and not a recommendation.)

In 2018, Exxon Mobil broke below its 12-month moving average as the overall market begins to deteriorate.

If you had elected to sell on the break of the moving average, your exit price would have been roughly $70/share. (For argument sake, you stayed out of the position even though XOM traded above and below the average over the next few months.)  

Let’s rerun our math from above.

  • In 2018, an individual bought 100 shares at $80.
  • In 2019, the individual sold 100 shares at $70.

Investment Return (-$1000.00 ) + Dividends of $323 (Yr 1) and $343 (Yr 2)  = Net Loss of $334

Not to bad.

Given the original $8,000 investment has only declined to $7,666, the individual could now buy 200 shares of Exxon Mobil with a dividend of $3.48 and a 9.3% annual yield.

Let’s compare the two strategies.

  • Buy And Hold: 100 shares bought at $80 with a current yield of 4.35% 
  • Risk Managed: 200 shares bought at $40 with a current yield of 9.3%

Which yield would you rather have in your portfolio?

In the end, we are just human. Despite the best of our intentions, emotional biases inevitably lead to poor investment decision-making. This is why all great investors have strict investment disciplines they follow to reduce the impact of emotions.

I am all for “dividend investment strategies,” in fact, dividends are a primary factor in our equity selection process. However, we also run a risk-managed strategy to ensure we have capital available to buy strong companies when the opportunity presents itself.

The majority of the time, when you hear someone say “I bought it for the dividend,” they are trying to rationalize an investment mistake. However, it is in the rationalization that the “mistake” is compounded over time. One of the most important rules of successful investors is to “cut losers short and let winners run.” 

Unfortunately, the rules are REALLY hard to follow. If they were easy, then everyone would be wealthy from investing. They aren’t because investing without a discipline and strategy has horrid consequences.

Bull Market? No, The Bear Still Rules For Now.


  • Bull Market? No, The Bear Still Rules
  • MacroView: The Fed Can’t Fix What’s Broken
  • Sector & Market Analysis
  • 401k Plan Manager

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2020 Investment Summit – April 2nd.

The “2020 SOCIALLY DISTANT INVESTMENT SUMMIT” is coming on Thursday, April 2nd.

Click the link below to receive an email with a special “invitation only” link when the summit goes “live.” (Current newsletter subscribers are already registered.)


Catch Up On What You Missed Last Week


Bull Market? No, The Bear Still Rules For Now.

Last week, we asked the question, “Is the bear market over?”

Our answer was simple: The ‘Bear Market’ won’t be over until the credit markets get fixed.”

On Monday, the market sold off to new lows, forcing the Federal Reserve to inject more liquidity to try and stabilize the “broken” credit market.  Then on Tuesday, before the markets opened, we wrote:

“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.

As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Chart Updated Through Friday

Not surprisingly, here were the headlines, almost exactly as we wrote them:

Well, you get the idea.

While it was indeed a sharp “reflex rally,” and expected, “bear markets” are not resolved in a single month. More importantly, “bear markets” only end when NO ONE wants to buy it.” 

Fed Can’t Fix It

As noted above, the “bear market” will NOT be over until the credit market is fixed. We are a long way from that being done, given the blowout in yields currently occurring.

However, the Fed is throwing the proverbial “kitchen sink” at the issue. As Jim Bianco noted on Friday:

“In just these past few weeks:

  • The Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook.
  • That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond-buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

  • CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
  • PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
  • TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
  • SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
  • MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-sized businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this.”

However, on Friday, the Federal Reserve ran into a problem, which could poses a risk for the markets going forward. As Jim noted, the mind-boggling pace of bond purchases quickly hit the limits of what was available to pledge for collateral.

Or rather, the Fed’s “unlimited QE,” may not be so “unlimited” after all.

The consequence is the Fed is already having to start cutting back on its QE program. That news fueled the late-day sell-off Friday afternoon. (Charts courtesy of Zerohedge)

While Congress did pass the “CARES” act on Friday, it will do little to backstop what is about to happen to the economy for two primary reasons:

  1. The package will only support the economy for up to two months. Unfortunately, there is no framework for effective and timely deployment; firms are already struggling to pay rents, there are pockets of funding stress in credit markets as default risks build, and earnings guidance is abandoned. 
  2. The unprecedented uncertainty facing financial markets on the duration of social distancing, the depth of the economic shock and when the infection rate curve will flatten, and there are many unknowns which will further undermine confidence.

Both of these points are addressed in this week’s Macroview but here are the two salient points to support my statement:

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher and longer-duration of, unemployment.”

“While there is much hope that the current ‘economic shutdown’ will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.”

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any type of disruption to their income going into the recession. As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits leads to higher unemployment and lower asset prices until the cycle is complete.

The Bear Still Rules

This past week, we published several pieces of analysis for our RIAPro Subscribers (30-Day Risk Free Trial) discussing why this was a “bear market rally” to be sold into. On Friday, our colleague, Jeffery Marcus of TP Analystics, penned the following:

  1. The long term bull pattern that existed since the 3/9/09 is over. That means the pattern of investors confidently buying every decline is over.
  2. The market became historically oversold on 3/23 using many metrics, and that oversold condition coincided with the long term support area of S&P 500 2110-2180.
  3. The short-covering and rebalancing had a lot to do with the size and speed of the 3-day rally.  Also, we know the lack of  ETF liquidity played a huge role as well as algorithmic trading.
  4. Technically the market can still go up 6.9% higher from here to hit the 50% retracement level (3386 – 2237 = 1149/2 = 574 + 2237 = 2811….2811/2630 = +6.9%.) I would not bet on it.
  5. The market only sustains a rally once there is light at the Coronavirus tunnel. 
  6. I do not think the S&P 500 will hit a new high this year. Maybe not in 2021, either.

His analysis agrees with our own, which we discussed with you last week.

“The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history.

Warning: Any reversal will NOT BE the bear market bottom. It will be a ‘bear market’ rally you will want to ‘sell’ into. The reason is there are still many investors trapped in ‘buy and hold’ and ‘passive indexing’ strategies that are actively seeking an exit. Any rallies will be met with redemptions.

Most importantly, all of our long-term weekly ‘sell signals’ have now been triggered. Such would suggest that a rally back to the ‘bullish trend line’ from 2009 will likely be the best opportunity to ‘sell’ before the ‘bear market’ finds its final low.”

Last week’s chart updated through Friday’s close.

While the recent lows may indeed turn out to be “the bottom,” I highly suspect they won’t. Given the sell signals have been registered at such high levels, the time, and distance, needed to reverse the excesses will require a deeper market draw.

As Jeff Hirsch from Stocktrader’s Alamanc noted:

“While we are all rooting for the market to find support here so much damage has been done. A great deal of uncertainty remains for the economy and health crisis. This looks like a bear market bounce. 

History suggests that we are in for some tough sledding in the market this year with quite a bit of chop. When the January Barometer came in with a negative reading, our outlook for 2020 began to diminish as every down January since 1950 has been followed by a new or continuing bear market, a 10% correction, or a flat year. Then another warning sign flashed when DJIA closed below its December closing low on February 26, 2020 as the impact of this novel coronavirus began to take its toll on Wall Street.

In the March Outlook, we presented this graph of the composite seasonal pattern for the 22 years since 1950 when both the January Barometer as measured by the S&P 500 were down, and the Dow closed below its previous December closing low in the first quarter. Below is a graph of DJIA, S&P 500 and NASDAQ Composite for 2020 year-to-date as of the close on March 25. Comparing 2020 market action to these 22 years, suggests a choppy year ahead with the potential for several tests of the recent low.”

“The depth of this waterfall decline may be too deep for the market to rebound quickly. This bear market also put this year’s Best Six Months (November-April) at risk of being negative. The record of down Best Six Months is not encouraging and it reminds us of a salient quote from the Almanac from an old market sage,

If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say.’— Edson Gould (Stock market analyst, Findings & Forecasts, 1902-1987)'”

On a short-term basis, the market is also suggesting some risk. The daily chart below shows the market rallied to, and failed at, the first level of the Fibonacci retracement we outlined last week, suggesting profits be taken at this level. While there are two remaining targets for the bear market rally, the probabilities weigh heavily against them. (This doesn’t mean they can’t be achieved, it is “possible,” just not “probable.”)

Furthermore, with the “Death Cross” triggering on Friday (the 50-dma crossing below the 200-dma), this will put further downside pressure on any “bear market” advance from current levels.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the sell-off is less than one-month-old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the results of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • Most importantly, a “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite

Note: The technical gauge bounced from the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline in early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Finally, the markets bounced this past week.

However, don’t get too excited; there has been a tremendous amount of technical damage done which keeps us on the sidelines for now.

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact on the economy. No change this week. We are getting more interested in REITs again, but are going to select individual holdings versus the ETF due to leverage concerns in the REITs.

Discretionary is going to remain under pressure due to people being able to go out and shop. This sector will eventually get a bid, so we are watching it, but we need to see an eventual end to the isolation of consumers.

Current Positions: No Positions

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

Early last week, we shifted exposures in portfolios and added to our Technology and Communications sectors, bringing them up to weight. We also added QQQ, which was closed out on Friday.

Current Positions: XLK, XLC, 1/2 weight XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Four weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. We remain out of these sectors for now.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only.

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash. We did add a small trading position in QQQ on Monday afternoon, and sold it on Friday.

Current Position: None

Gold (GLD) – We added a small position in GDX recently, and increased our position in IAU early this week. With the Fed going crazy with liquidity, this will be good for gold long-term, so we continue to add to our holdings on corrections.

Current Position: 1/4th weight GDX, 1/2 weight IAU

Bonds (TLT) –

Bonds regained their footing this week, as the Fed became the “buyer” of both “first” and “last” resort. Simply, “bonds will not be allowed to default,” as the Fed will guarantee payments to creditors. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

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:

Despite the headlines of the “biggest rally in history” this past week, it’s easy to get sucked into the “Media headline” hype. However, let’s put this into some perspective:

Over the last “X” days the S&P 500 is:

  • 5-days: +10.2% 
  • 6-days: +5.4%
  • 10-days: -6.25%

It is much less exciting when compared to the fastest 30% plunge in history.

Keeping some perspective on where we are currently is very important. It’s easy to get swayed by the media headlines, which can lead us into making emotional investment mistakes. More often than not, emotional decisions turn out poorly.

We are continuing our process of blending the Equity and ETF models. As we head out of this bear market, ETF’s will have much less value relative to our selective strategies.

This doesn’t mean we won’t use ETF’s at all, but we will selectively use them to fill in gaps to our individual equity selection, or for short-term trading opportunities.

Such was the case on Monday when we took on a position in QQQ for a bounce, and was subsequently closed out on Friday.

We also added small holdings of CLX and MRK to our long-term portfolio, as well as increased our exposure to IAU.

We continue to remain very defensive, and are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years.

We are just patiently waiting for the right opportunity to buy large chunks of these holdings with both stable, and higher yields.

Let me repeat from last week:

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns.

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

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If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

#MacroView: The Fed Can’t Fix What’s Broken

“The Federal Reserve is poised to spray trillions of dollars into the U.S. economy once a massive aid package to fight the coronavirus and its aftershocks is signed into law. These actions are unprecedented, going beyond anything it did during the 2008 financial crisis in a sign of the extraordinary challenge facing the nation.” Bloomberg

Currently, the Federal Reserve is in a fight to offset an economic shock bigger than the financial crisis, and they are engaging every possible monetary tool within their arsenal to achieve that goal. The Fed is no longer just a “last resort” for the financial institutions, but now are the lender for the broader economy.

There is just one problem.

The Fed continues to try and stave off an event that is a necessary part of the economic cycle, a debt revulsion.

John Maynard Keynes contended that:

“A general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn resulting in losses of potential output due to unnecessarily high unemployment, which results from the defensive (or reactive) decisions of the producers.”

In other words, when there is a lack of demand from consumers due to high unemployment, then the contraction in demand would force producers to take defensive actions to reduce output. Such a confluence of actions would lead to a recession.

On Thursday, initial jobless claims jumped by 3.3 million. This was the single largest jump in claims ever on record. The chart below shows the 4-week average to give a better scale.

This number will be MUCH worse next week as many individuals are slow to file claims, don’t know how, and states are slow to report them.

The importance is that unemployment rates in the U.S. are about to spike to levels not seen since the “Great Depression.” Based on the number of claims being filed, we can estimate that unemployment will jump to 20%, or more, over the next quarter as economic growth slides 8%, or more. (I am probably overly optimistic.)

More importantly, since the economy is 70% driven by consumption, we can approximate the loss in full-time employment by the surge in claims. (As consumption slows, and the recession takes hold, more full-time employees will be terminated.)

This erosion will lead to a sharp deceleration in economic confidence. Confidence is the primary factor of consumptive behaviors, which is why the Federal Reserve acted so quickly to inject liquidity into the financial markets. While the Fed’s actions may prop up financial markets in the short-term, it does little to affect the most significant factor weighing on consumers – their job. 

Another way to analyze confidence data is to look at the consumer expectations index minus the current situation index in the consumer confidence report.

This measure also says a recession is here. The differential between expectations and the current situation, as you can see below, is worse than the last cycle, and only slightly higher than prior to the “dot.com” crash. Recessions start after this indicator bottoms, which has already occurred.

Importantly, bear markets end when the negative deviation reverses back to positive. Currently, we have only just started that reversion process.

While the virus was “the catalyst,” we have discussed previously that a reversion in employment, and a recessionary onset, was inevitable. To wit:

“Notice that CEO confidence leads consumer confidence by a wide margin. This lures bullish investors, and the media, into believing that CEO’s really don’t know what they are doing. Unfortunately, consumer confidence tends to crash as it catches up with what CEO’s were already telling them.

What were CEO’s telling consumers that crushed their confidence?

“I’m sorry, we think you are really great, but I have to let you go.” 

Confidence was high because employment was high, and consumers operate in a microcosm of their own environment.

“[Who is a better measure of economic strength?] Is it the consumer cranking out work hours, raising a family, and trying to make ends meet? Or the CEO of a company who is watching sales, prices, managing inventory, dealing with collections, paying bills, and managing changes to the economic landscape on a daily basis? A quick look at history shows this level of disparity (between consumer and CEO confidence) is not unusual. It happens every time prior to the onset of a recession.

Far From Over

Why is this important?

Hiring, training, and building a workforce is costly. Employment is the single largest expense of any business, but a strong base of employees is essential for the prosperity of a business. Employers do not like terminating employment as it is expensive to hire back and train new employees, and there is a loss of productivity during that process. Therefore, CEOs tend to hang onto employees for as long as possible until bottom-line profitability demands “leaning out the herd.” 

The same process is true coming OUT of a recession. Companies are “lean and mean” and are uncertain about the actual strength of the recovery. Again, given the cost to hire and train employees, they tend to wait as long as possible to be certain of justifying the expense.

Simply, employers are slow to hire and slow to fire. 

While there is much hope that the current “economic shutdown” will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

“But Lance, once the virus is over everything will bounce back.” 

Maybe not.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any type of disruption to their income going into recession. As discussed previously:

“The ‘gap’ between the ‘standard of living’ and real disposable incomes is shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the ‘gap.’ However, following the ‘financial crisis,’ even the combined levels of income and debt no longer fill the gap. Currently, there is almost a $2654 annual deficit that cannot be filled.”

As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits lead to more unemployment, and lower asset prices until the cycle is complete.

While the virus may end, the disruption to the economy will last much longer, and be much deeper, than analysts currently expect. Moreover, where the economy is going to be hit the hardest, is a place where Federal Reserve actions have the least ability to help – the private sector.

Currently, businesses with fewer than 500-employees comprise almost 60% of all employment. 70% of employment is centered around businesses with 1000-employees, or less. Most of the businesses are not publicly traded, don’t have access to Wall Street, or Federal Reserve’s bailouts.

The problem with the Government’s $2 Trillion fiscal stimulus bill is that while it provides one-time payments to taxpayers, which will do little to extinguish the financial hardships and debt defaults they will face.

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher, and a longer-duration of, unemployment.

One-Percenter

What does this all mean going forward?

The wealth gap is going to explode, demands for government assistance will skyrocket, and revenues coming into the government will plunge as trillions in debt issuance must be absorbed by the Federal Reserve. 

While the top one-percent of the population will exit the recession relatively unscathed, again, it isn’t the one-percent I am talking about.

It’s economic growth. 

As discussed previously, there is a high correlation between debts, deficits, and economic prosperity. To wit:

“The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.”

However, simply looking at Federal debt levels is misleading.

It is the total debt that weighs on the economy.

It now requires nearly $3.00 of debt to create $1 of economic growth. This will rise to more than $5.00 by the end of 2020 as debt surges to offset the collapse in economic growth. Another way to view the impact of debt on the economy is to look at what “debt-free” economic growth would be. 

In other words, without debt, there has been no organic economic growth.

Notice that for the 30-year period from 1952 to 1982, the economic surplus fostered a rising economic growth rate, which averaged roughly 8% during that period. Since then, the economic deficit has only continued to erode economic prosperity.

Given the massive surge in the deficit that will come over the next year, economic growth will begin to run a long-term average of just one-percent. This is going to make it even more difficult for the vast majority of American’s to achieve sufficient levels of prosperity to foster strong growth. (I have estimated the growth of Federal debt, and deficits, through 2021)

The Debt End Game

The massive indulgence in debt has simply created a “credit-induced boom” which has now reached its inevitable conclusion. While the Federal Reserve believed that creating a “wealth effect” by suppressing interest rates to allow cheaper debt creation would repair the economic ills of the “Great Recession,” it only succeeded in creating an even bigger “debt bubble” a decade later.

“This unsustainable credit-sourced boom led to artificially stimulated borrowing, which pushed money into diminishing investment opportunities and widespread mal-investments. In 2007, we clearly saw it play out “real-time” in everything from sub-prime mortgages to derivative instruments, which were only for the purpose of milking the system of every potential penny regardless of the apparent underlying risk.”

In 2019, we saw it again in accelerated stock buybacks, low-quality debt issuance, debt-funded dividends, and speculative investments.

The debt bubble has now burst.

Here is the important point I made previously:

“When credit creation can no longer be sustained, the markets must clear the excesses before the next cycle can begin. It is only then, and must be allowed to happen, can resources be reallocated back towards more efficient uses. This is why all the efforts of Keynesian policies to stimulate growth in the economy have ultimately failed. Those fiscal and monetary policies, from TARP and QE, to tax cuts, only delay the clearing process. Ultimately, that delay only deepens the process when it begins.

The biggest risk in the coming recession is the potential depth of that clearing process.”

This is why the Federal Reserve is throwing the “kitchen sink” at the credit markets to try and forestall the clearing process.

If they are unsuccessful, which is a very real possibility, the U.S. will enter into a “Great Depression” rather than just a “severe recession,” as the system clears trillions in debt.

As I warned previously:

“While we do have the ability to choose our future path, taking action today would require more economic pain and sacrifice than elected politicians are willing to inflict upon their constituents. This is why throughout the entirety of history, every empire collapsed eventually collapsed under the weight of its debt.

Eventually, the opportunity to make tough choices for future prosperity will result in those choices being forced upon us.”

We will find out in a few months just how bad things will be.

But I am sure of one thing.

The Fed can’t fix what’s broken.

While the financial media is salivating over the recent bounce off the lows, here is something to think about.

  • Bull markets END when everything is as “good as it can get.”
  • Bear markets END when things simply can’t “get any worse.”

We aren’t there yet.

#WhatYouMissed On RIA This Week: 03-27-20

We know you get busy and don’t check our website as often as you might like. Plus, with so much content being pushed out every week from the RIA Team, we thought we would send you a weekly synopsis of everything you might have missed.

The Week In Blogs

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Seth Levine: COVID-19 Is Not The Last War

These are truly remarkable times in the investment markets. The speed, intensity, and ubiquity of this selloff brings just one word to mind: violence. It would be remarkable if it wasn’t so destructive. Sadly, the reactions from our politicians and the public were predictable. The Federal Reserve (Fed) faithfully and forcefully responded. Despite its unprecedented actions, it seems like they’re “fighting the last war.”

Caveat Emptor

My intention here is to discuss some observations from the course of my career as an investor and try to relate them to the current market. I won’t provide charts or data; I’m just spit-balling here. My goal is twofold: 1) to better organize my own thoughts, and; 2) foster constructive discussions as we all try to navigate these turbulent markets. I realize that this approach puts this article squarely into the dime-a-dozen opinion piece category—so be it.

Please note that what you read is only as of the date published. I will be updating my views as the data warrants. Strong views, held loosely.

The Whole Kit and Caboodle

Investment markets are in freefall. U.S stock market declines tripped circuit breakers on multiple days. U.S. Treasuries are gyrating. Credit markets fell sharply. Equity volatility (characterized by the VIX) exploded. The dollar (i.e. the DXY index) is rocketing. We are in full-out crisis mode. No charts required here

With the Great Financial Crisis of 2008 (GFC) still fresh in the minds of many, the calls for a swift Fed action came loud and fast. Boy, the Fed listen. Obediently, it unleashed its full toolkit, dropping the Fed Funds rate to 0% (technically a 0.00% to 0.25% range), reducing interest on excess reserves, lowering pricing on U.S. dollar liquidity swaps arrangements, and kick-starting a $700 billion QE (Quantitative Easing) program. The initiatives are coming so fast and so furious that it’s hard to keep up! The Fed is even extending credit to primary dealers collateralized by “a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.” Really?!

Reflexively, the central bank threw the whole kit and caboodle at markets in hopes of arresting their declines. It’s providing dollar liquidity in every way it can imagine that’s within its power. However, I have an eerie sense that the Fed is (hopelessly) fighting the last war.

The Last War

There are countless explanations for the GFC. The way I see it is that 2008 was quite literally a financial crisis. The financial system (or plumbing) was Ground Zero. A dizzying array of housing-related structured securities (mortgage backed securities, collateralized debt obligations, asset-backed commercial paper, etc.) served as the foundation for the interconnected, global banking system, upon which massive amounts of leverage were employed.

As delinquencies rose, rating agencies downgraded these structured securities. This evaporated the stock of foundational housing collateral. Financial intuitions suddenly found themselves short on liquidity and facing insolvency. It was like playing a giant game of musical chairs whereby a third of the chairs were suddenly removed, unbeknownst to the participants. At once, a mad scramble for liquidity ensued. However, there simply was not enough collateral left to go around. Panic erupted. Institutions failed. The financial system literally collapsed.

This War

In my view, today’s landscape is quite different. The coronavirus’s (COVID-19) impact is a “real economy” issue. People are stuck at home; lots are not working. Economic activity has ground to a halt. It’s a demand shock to nearly every business model and individual’s finances. Few ever planned for such a draconian scenario.

Source: Variant Perception

Thus, this is not a game of musical chairs in the financial system. Rather, businesses will be forced to hold their breaths until life returns to normal. Cash will burn and balance sheets will stretch. The commercial environment is now one of survival, plain and simple (to say nothing of those individuals infected). Businesses of all sizes will be tested, and in particular small and mid-sized ones that lack access to liquidity lines. Not all will make it. To be sure, the financial system will suffer; however, as an effect, not a primary cause. This war is not the GFC.

Decentralized Solutions Needed

Given this dynamic, I’m skeptical that flooding the financial system with liquidity necessarily helps. In the GFC, a relatively small handful of banks (and finance companies) sat at the epicenter. Remember, finance is a levered industry characterized by timing mismatches of cash flows; it borrows “long” and earns “short.” This intermediation is its value proposition. Thus, extending liquidity can help bridge timing gaps to get them through short-term issues, thereby forestalling their deleveraging.

Today, however, the financial system is not the cause of the crisis. True, liquidity shortfalls are the source of stress. However, they are not limited to any one industry or a handful of identifiable actors. Rather, nearly every business may find itself short on cash. Availing currency to banks does not pay your favorite restaurant’s rent or cover its payroll. Quite frankly, I’m skeptical that any mandated measure can. A centralized solution simply cannot solve a decentralized problem.

Fishing With Dynamite

The speed and intensity at which investment markets are reacting is truly dizzying. In many ways they exceed those in the GFC. To be sure, a response to rapidly eroding fundamentals is appropriate. However, this one seems structural.

In my opinion, the wide-scale and indiscriminate carnage is the calling card of one thing: leverage unwinding. It wouldn’t surprise me to learn of a Long Term Capital Management type of event occurring, whereby some large(?), obscure(?), new (?), leveraged investment fund(s) is (are) being forced to liquidate lots of illiquid positions into thinly traded markets. This is purely a guess. Only time will tell.

Daniel Want, the Chief Investment Officer of Prerequisite Capital Management and one of my favorite investment market thinkers, put it best:

“Something is blowing up in the world, we just don’t quite know what. It’s like if you were to go fishing with dynamite. The explosion happens under the water, but it takes a little while for the fish to rise to the surface.”

Daniel Want, 2020 03 14 Prerequisite Update pt 4

What To Do

This logically raises the question of: What to do? From a policy perspective, I have little to offer as I am simply not an expert in the field (ask me in the comment section if you’re interested in my views). That said, the Fed’s response seems silly. Despite the severe investment market stresses, I don’t believe that we’re reliving the GFC. There’s no nail that requires a central banker’s hammer (as if there ever is one). If a financial crisis develops secondarily, then we should seriously question the value that such a fragile system offers.

Markets anticipate developments. I can envision a number of scenarios in which prices reverse course swiftly (such as a decline in the infection rate, a medical breakthrough, etc.). I can see others leading to a protracted economic contraction, as suggested by the intense market moves. Are serious underlying issues at play, even if secondarily? Or are fragile and idiosyncratic market structures to blame? These are the questions I’m trying to grapple with, weighing the unknowns, and allocating capital accordingly.

As an investor, seeing the field more clearly can be an advantage. Remember, it’s never different this time. Nor, however, is it ever the same. This makes for a difficult paradox to navigate. It’s in chaotic times when an investment framework is most valuable. Reflexively fighting the last war seems silly. Rather, let’s assess the current one as it rapidly develops and try to stay one step ahead of the herd.

Good luck out there and stay safe. Strong views, held loosely.

TPA Analytics: Time To Buy CLX, KR, & MRK

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


The market has had a great 2-day rally, but the Coronavirus will be with us for a while. It is time to go back to stocks that outperformed when the market sank in February and March. The 3 stocks below (CLX, KR, and MRK) have declined recently, but were huge outperformers as the S&P500 dropped over 33%.

CLX – broke out above 15-month resistance in late February as the crisis began in earnest. CLX was the 8th best performer in the S&P1500 between 2/19/20 and 3/23/20. During that period CLX was up 5.25%, while the S&P500 was down 33.92% (see table below). CLX is down 23% in the past 5 days and is right back to the February breakout level, which should be support. TPA’s target is +20%.

CLX CLOROX CO 165.6600 Stop = 156.5487 Target = 198.7920

KR – rose above its 3 ½ year downtrend line in December. KR was the 10th best performer in the S&P1500 between 2/19/20 and 3/23/20. During that period KR was up 3.2%, while the S&P500 was down 33.92% (see table below). KR is down 18% in the past 4 days and is right back the breakout level, which should be support. TPA notes that the ratio of KR/S&P500 also broke out long term and short term and is at support; so it should outperform from here.

KR KROGER CO 27.9400 Stop = 26.4033 Target = 33.5280

MRK – is down 26% from its high on 12/20/19. It was one of the top 70 best performing stocks in the S&P1500 as the S&P500 fell 33.92% from 2/19/20 to 3/23/20. MRK was only down 19.2% (see table below). MRK is now all the way back to its breakout level from August 2018, which should be support. RSI analysis on a weekly basis shows that MRK is long term oversold. Chart 3 shows that the previous 3 times that MRK was this oversold on a weekly basis (2011, 2015, 2017) it was a good time to buy.

MRK MERCK & CO 68.2200 Stop = 64.4679 Target = 81.8640