You’ve heard the old Wall Street adage that recommends selling before the seasonal summer slump…it’s been updated for 2014: “SELL in MAYAPRIL and walk away.”
The S&P500 has broken below its 50 day moving average for the second time this year. Although it’s only off 4% from record highs, the NASDAQ is in near freefall. The tech heavy NASDAQ is well below its 50 day moving average (dma), fallen through support at the 100 dma, and is approaching the 200 dma.
The NASDAQ hasn’t fallen below its 200 dma since December 2012. In the past month, the index has fallen over 8% from a multi-year high. That’s the largest drop in well over a year. 2013 was characterized by many placid pullbacks in the range of 3-6%. The first four months of 2014 have been much more volatile, with at least 4 pullback.
The personality of the market has definitely changed. We have no way of knowing if it will be a minor correction, drop 12% like in 2012 or plunge 20% like in 2011.
There are plenty of reasons to be pessimistic.
First quarter profits have been revised down, from initial estimates of 6.5% growth to possibly as low as 1%.
Tension over Russia’s annexing of Crimea.
China’s slowing growth and unprecedented first private company bond default.
Deflation in Europe.
Cost of Obamacare.
This is not a time to be buying dips in the market but rather for building a watch list of quality stocks to purchase once the indexes resume an uptrend.
The market ended the first quarter mostly flat, with the S&P500 up 1.30% YTD and the NASDAQ up a mere 0.53%.
To put these meager increases in perspective, last year at this time the indexes were up 10.6% and 8.5%; and in 2012 first quarter increases were 12.6% and 18.97%.
Has the 5 year bull market ran its course? It’s too early to tell, but history can provide some insight. Since World War II (nearly 70 years), besides the current market, there were 5 bull markets that lasted at least 5 years. Of those 5 bull markets, 3 went on to rally for a sixth straight year.
As one would expect, those 3 markets with a 6 year winning streak were uncommon:
1949-1955 up 38% in the sixth year
1974-1980 up 18% in the sixth year
1990-1996 up 21% in the sixth year [and continued to rally until imploding in the 2000 dotcom bubble]
Notice any trends?
‘49-55: post-WWII the USA emerged as a superpower and dominated global trade.
’90-96: end of the Cold War the USA becomes sole superpower with the collapse of USSR.
‘74-80: end of Vietnam era BUT this is more of an anomaly, the market was driven higher due to OPEC oil inflation not a post war peace dividend.
What then of the current bull market? Some might argue that we’re in a post war era (Iraq & Afghanistan). I wouldn’t make that argument for a number of reasons, not the least of which- Guantanamo is still a POW camp and our strategic drone missile reserve is depleted due to unending attacks throughout the Middle East.
In any case, no one would make the argument that the USA is in a global leadership position posed to dominate world trade as in previous post war eras. I believe that was the key to the previous long winning streaks- American global domination…and I don’t see anything like that on the current horizon.
No, it’s not all gloom and doom. In a future article I’ll discuss why the markets might be at a fair valuation.
Oh…you might be wondering what happened to the two bull markets that didn’t go on for a sixth year winning streak? They ended very badly, down 21% and 42%.
So what am I doing? As noted in a previous article, I took profits early and for now remain mostly in cash, patiently observing market conditions.
Today’s Investor’s Business Daily ran a headline in their “The Big Picture” column stating: ‘Stocks Trade Quietly As Bearish Pundits Remain Few ‘.
It was the “bearish pundits remain few” phrase that caught my contrarian eye. When euphoria sweeps the market and no one is crying wolf, I get concerned.
True enough, the S&P500 keeps setting record highs, and the market recovered extraordinarily well this week from concerns over Russian/Ukrainian relations. But the price/volume action continues to haunt. No trading session in the past four weeks has matched the heavy volume selling seen in early February.
Despite possible cooling of hostilities in Ukraine, the other concerns remain- emerging markets are still soft, poor retail sales are blamed on cold winter weather, and Obamacare uncertainties are getting more uncertain.
Some of the bright spots might also be misleading. If employment continues to improve, it will ultimately result in higher wages which in my opinion will hurt productivity more than helping grow revenue. [Consumer deficit spending is way ahead of wages.] Additionally, although the Fed has promised to keep rates low, they may not be able to deliver. The 10 year treasury is creeping up, at the same time the dollar is declining.
Conflicting indicators can either be a sign that the market is correcting or that it’s uncertain. Either can be an early warning of pending turmoil.
For now, I’m remaining cautious and have taken profits…perhaps early. Time will tell.
We’re told that corporate earnings have been strong for the past several years. The trend has continued with the most recent earnings season- profits are up about 8%. The continued uptrend in profits has occurred in spite of the fact that revenue (top line sales) have been floundering. Earnings growth has been attributed to cost cutting, depressed wages, and low borrowing costs.
BUT…are earnings really growing? Rather than looking at earnings in nominal terms, or even inflation adjusted REAL values, consider evaluating S&P500 earnings in ounces of silver rather than in dollars. (see chart)
Earnings displayed in ounces of silver tell a fascinating story. Yes, corporate earnings have improved since the depths of the recession in 2009; yet they appear flat from 2010-2012 only rising significantly in 2013 (following QE3).
Also interesting is that during the depths of the 2009 recession earnings found support at near the same 1983 level as when the economy was transitioning out of the malaise and stagflation of the 1970s.
Also of note- the flat earnings period following the most recent recession had a silver ounce value near the low of earnings during the 1950s (about 2.8 ounces). The decade of the 1950s saw earnings in a range of approximately 2.8 to just below 4 ounces of silver.
The ceiling on corporate earnings stayed at 4 ounces until the end of the 1980s. Earnings were then energized to historic highs, propelled by deregulation, lower tax rates, the end of the Cold War, and the commercialization of the internet. Earnings peaked with the dotcom bubble at a value of over 10 ounces of silver.
What I find intriguing is that earnings have once again broken through resistance at 4 ounces. But what secular tail winds will propel earnings further? Certainly there are reasons to be optimistic…well, at least there is promise of abundant natural gas reserves.
As in the 1980s, the world economy is in a period of transformation. I’ll be watching corporate earnings in terms of silver. A spike above or below 4 ounces could indicate latent inflation/deflation and thus significant consequences to the direction of the stock market.
Today the S&P500 rose above the 50 day moving average in significant volume. That’s a good sign.
The market continues to show the same personality trait- manic/depressant. Exuberant for a few weeks, hitting new record highs and then a slight decompression. The downers are never more than 6% [versus a true correction of 10-15%]. Each mild correction has blown off enough steam to set the market in motion for yet another run.
There are many theories as to why the market hasn’t experienced a deep correction in well over a year. Everyone keeps forecasting and waiting for the overdue “big correction”. My personal theory is that’s exactly why we haven’t had a substantial correction…everyone is waiting for it. The big drop will come when it’s least expected.
So for now, the pattern is pretty much what we’ve witness since May 2013. One step forward, half a step back. What to do now that the market is trending up? Remember, at least 70% of stocks follow the broad market trend, so now is the time that traders are buying.
How long will it last? I have no idea. The uptrend could fail tomorrow. The market’s moved straight up for the past four days, don’t be surprised if it encounters some resistance, especially around S&P500 1850. If we get through 1850, then 1900 will be achievable. Especially if the 10 year Treasury hovers around 2.65%. The Fed has promised to keep short term rates at near zero, but they’re losing their grip on longer term rates.
So, if the trend holds, we can probably expect a 2-6 week rally with the S&P500 blowing past 1900, maybe even beyond 2000. The media will go into full blown hysteria when the market nears yet another meaningless “psychological milestone”. When the enthusiasm gets overwhelming, use that as a sell signal.
The bad news is that 1900 on the S&P500 is only a little more than 4% above today’s close. So we might not see a spectacular run before another depressant pullback kicks in. But in this Federal Reserve fueled market, the prudent investor isn’t greedy. Actually, the prudent investor isn’t ever greedy.