Weekly Cycle: A negative turn?

Stock Market Outlook 05.07.2018

Each week, I review the market using my own set of information sources to gauge the market. While I’d prefer to be long-term investors and check the markets less frequently, I believe my skills in selecting enduring businesses for long-term success are lacking those of great investors.

Instead, I use a trend following strategy with regular weekly checkups for proper diligence. A weekly outlook provides relief from overreacting on a day-to-day basis, while still allowing for relative short term moves.

Index Performance & Technical Indicators

stock market technical indicators and performance 05.07.2018

Performance
  • S&P 500 (SPY) up slightly over last week
  • Cannabis (MJ) up over 10% over last 30 days
  • Tech (QQQ) up 3.5% in past week and 5.6% in last 30 days. Similarly, cybersecurity (HACK) is up over 6% in last 30 days.
  • VIX is 50% down over last 3 months and 50% up over last year
Technical Indicators

Based on data and info from TradingView (Click  for 30% off a pro subscription)

Scores based on the cumulative total of positive and negative technical indicators signals over three time horizons on Trading View. Scores are weighted by multiplying total as follows: daily (x 1) weekly (x 2), and monthly (x 3). 

  • Trading signals have turned overwhelmingly positive for wide, general indexes including SPY, VTI, VEA.
  • Tech index (QQQ) has improved significantly since last week
  • VIX has fallen further, with a negative score indicating bearish sentiment towards volatility
OldProf’s Risk Analysis

Each week OldProf takes a look at a variety of sources to gauge overall market risk on both a short and long-term basis. He tracks a handful of indexes, economic indicators from respected sources, and volatility indicators. His weekly updates include a discussion of events with potential to effect markets, as well as general insight. Highly recommended reading.

This week, OldProf indicates a negative turn for short term trading conditions, while the long-term outlook remains unchanged.

 

Short-term trading conditions have turned negative.

The long-term fundamentals and outlook are little changed. The long-term technical health is back to strongly bullish.

This comes despite genuine positive surprises in earnings reports:

Corporate earnings continue to exceed expectations. This is especially interesting because of the unusual pattern this quarter. Expectations were not reduced significantly before the reports. These are true surprises. FactSet calls it the highest beat rate since they began compiling data in 2008.”

He also discusses how volatility effects trading vs investing, mentioning:

if stocks declined another 14%, would it tempt you to buy? If so, get your shopping list ready. The forward P/E on the S&P 500 has gone from 18.6 to 16.

Most people focus on price, not value, so these “sideways corrections” often go unnoticed.

StockTrader Recap

Mark Hanna publishes a weekly Market Recap full of charts and insight on news and market trends at StockTrader.

This week, Hanna writes that short-term conditions have further worsened, with long-term conditions remaining positive.

The indexes continue to mark time range bound at lower levels (with moderately high volatility) which should be a concern for bulls until it changes. Unlike consolidation after a move up, this is consolidation after a selloff which is not usually bullish.

Short term: A lot of consolidation at lower levels. That is a concern for bulls. More tests of the 200 day moving average – also not great.

Long term: Still very positive for the “buy and never sell” crowd.

Technical Update

Hacked (subscription-only) publishes a weekly technical update on U.S. indices with a weekly analysis of the S&P 500, NASDAQ, and DJIA, as well as a general market outlook. Other posts include trade recommendations (stocks, crypto & forex markets), worldwide-market updates, ICO analysis, and much more.

This week, Hacked’s outlook is “Neutral with a bullish bias”, which is more positive than last week’s “bearish bias.” There’s short and long term concern if SPX and QQQ break immediate term supports, yet they write “Further bullish momentum likely in the short-term.” More info on support levels in the weekly update.

Articles of note
The biggest companies focus on Customer Experience

Ben Thompson writes on the differences between Apple and Amazon, two companies closing in on $1 trillion valuations.

I mean it when I say these companies are the complete opposite: Apple sells products it makes; Amazon sells products made by anyone and everyone. Apple brags about focus; Amazon calls itself “The Everything Store.” Apple is a product company that struggles at services; Amazon is a services company that struggles at product. Apple has the highest margins and profits in the world; Amazon brags that other’s margin is their opportunity, and until recently, barely registered any profits at all. And, underlying all of this, Apple is an extreme example of a functional organization, and Amazon an extreme example of a divisional one.

Despite those differences, there is a commonality in a focus on customer experience.

Both, taken together, are a reminder that there is no one right organizational structure, product focus, or development cycle: what matters is that they all fit together, with a business model to match. That is where Apple and Amazon are arguable more alike than not: both are incredibly aligned in all aspects of their business. What makes them truly similar, though, is the end goal of that alignment: the customer experience.

More VC love for Canada

Like Brad Feld, venture capitalist (and prolific blogger) Fred Wilson is very positive on Canada.

More importantly, the talent pool in Canada is rich. Canadians are well educated and there are a number of very strong engineering schools in Canada. All of our portfolio companies that have engineering teams in Canada claim they get higher quality and retention in those teams than the ones they operate in the US.

So I’m bullish on Canada and have been since we started investing here almost ten years ago. And unlike the US, Canada has the wind behind it’s back in tech right now.

Tesla is not a tech-company

Scott Galloway writes that Tesla is an automaker and shouldn’t be considered a tech company.

Tesla has an amazing product, but has been mistaken by investors as an internet firm. Tesla lacks the frictionless networking effects of a Google or Facebook and doesn’t have the Hermés-like margins of an Apple. Yet, it’s trading at a valuation more reflective of a firm that can scale like a Facebook or generate the profits of an Apple.

His outlook for the stock isn’t good:

This means by the end of the year Tesla analysts will begin wringing their hands over liquidity concerns and dilution. This fear, coupled with rising interest rates, could spook bondholders and result in the equity being the tail of the whip as enterprise value drops.

Lumber Gains

Howard Lindzon mentioned “peak lumber” in a recent post. Here are more numbers to show the change from Bill McBride at Calculated Risk.

Here is another monthly update on framing lumber prices. Early in 2013 lumber prices came close to the housing bubble highs – and now prices are well above the bubble highs.

Final Thoughts

Reports like this make me question living the SF Bay Area.

Let’s state it plainly: The Bay Area must increase its total housing stock by 50 percent over the next 20 years to bring affordability down to a reasonable level.

That’s certainly not going to happen. Even if it did, it’s hard to imagine transit would expand to accommodate that number of people.

Weekly Cycle: Calm before rapids?

Stock Market Outlook 04.30.2018

Each week, I review the market using my own set of information sources to gauge the market. While I’d prefer to be long-term investors and check the markets less frequently, I believe my skills in selecting enduring businesses for long-term success are lacking those of great investors. Instead, I use a trend following strategy with periodic checkups. A weekly outlook gives us some relief from worrying about day-to-day fluctuations, while still allowing for relative short term opportunities and trends.

Index Technical Indicator & Recent Performance Summary

Based on data and info from TradingView (Click  for 30% off a pro subscription)

  • Scoring has been updated this week to give a more granular look at each index on my list. Scoring is now based on the net count of positive and negative technical indicators signals over three time horizons (daily, weekly and monthly)
  • Volatility index (VIX) showed most movement of any on list over last week, dropping by 2.5%.
  • VNQ (Vanguard REIT ETF) performed best, though still showing negative signals on weekly and monthly basis.
  • China Tech stocks (CQQQ) up nearly 30% over past year
  • Cybersecurity ETF (HACK) has performed well over last year and gets top score on technical signals
  • VEA (developed markets ETF) slightly behind in technical signal score and shows good results over last year
  • Overall, technical signals look great on a monthly basis, good on weekly basis, and show a lot more volatility and randomness on daily basis.

stock market outlook 04.30.3018

Scores based on the cumulative total of positive and negative technical indicators signals over three time horizons on Trading View. Scores are weighted by multiplying total as follows: daily (x 1) weekly (x 2), and monthly (x 3). 

OldProf’s Risk Analysis

Each week OldProf takes a look at a variety of sources to gauge overall market risk on both a short and long-term basis. He tracks a handful of indexes, economic indicators from respected sources, and volatility indicators. His weekly updates include a discussion of events with potential to effect markets, as well as general insight. Highly recommended reading.

This week, OldProf doesn’t see much change from last week, with things largely remaining neutral in the short-term and looking bullish in the long run.

 

Short-term trading conditions remain in the neutral zone.

The long-term fundamentals and outlook are little changed. The long-term technical health is back to strongly bullish.

Similar to another article linked to below, he mentioned an article in Morningstar on the overuse of  declaring  “bubbles” in markets:

Many bubbles are proclaimed, but few arrive. The word is not useful; rather than signal something extraordinary, it has come to mean “securities I don’t like because they strike me as being too expensive.”

StockTrader Recap

StockTrader publishes a weekly Market Recap full of charts and insight on overall market trends.

This week, StockTrader says conditions have weakened on a short term basis. Despite strong earnings, markets haven’t reacted overly bullish, which may be a cause for concern. Nothing has changed in the long-term.

Earnings season remains strong – as anticipated – and while individual companies have been rewarded, it has not led to a broad rally of any sort as much of this was forecast.

Short term: A lot of consolidation at lower levels. That is a concern for bulls.

Long term: Still very positive for the “buy and never sell” crowd.

Technical Update

Hacked (subscription-only) publishes a weekly technical update on U.S. indices with a weekly analysis of the S&P 500, NASDAQ, and DJIA, as well as a general market outlook. Other posts include trade recommendations (stocks, crypto & forex markets), worldwide-market updates, ICO analysis, and much more.

This week, Hacked’s outlook is “Neutral with a bearish bias.” There’s concern that a general downward trend is possible. More info on support levels in the weekly update.

 While breaks of the intermediate-term supports are likely, outlook is not outright bearish until confirmation is received.

Short- and long-term bearish if S&P 500 and NASDAQ break their respective intermediate-term supports.

S&P 500 and NASDAQ need to hold their intermediate-term supports and break above the orange resistances for outlook to shift to bullish, at least in the short-term.

Articles of notes
Stop calling bubbles

Morgan Housel wrote a great post on the aforementioned topic on the rising trend in calling bubbles.

Since there’s no definition, anyone can classify anything they want as a bubble and no one can prove them wrong. What began as a serious topic among economists has become a job-security loophole for pundits.

Alas, he gives his own take on the true quality of a bubble:

It’s only a bubble if return prospects don’t improve after prices fall.

Canada to rise as for tech entrepreneurs

Brad Feld makes the case that Canada has a great opportunity – and even advantage over the US to rise as a home to tech entrepreneurs and startups due to immigration-policies put into place under Trump.

From a Bloomberg article on the topic:

A big reason for the shortfall is that the year-old program has been constantly under assault since the election of President Donald Trump…

…No one has been granted a visa, and Homeland Security said last year that it’s working on a plan to kill the rule entirely

Feld, as a venture capitalist, writes about his first-hand knowledge:

The Toronto/Waterloo startup community is on fire. Many companies I’m involved in are exploring offices in Canada, especially Vancouver (for the Seattle folks) and Toronto (for the east coast folks) since it’s so difficult to get work visas in the US for employees. Other entrepreneurs from around the world are simply opting to start the company in Canada rather than the US because of all the uncertainty around visa status.

There is a window in time where Canada has a massive strategic geographic advantage over the US.

Lindzon on Solar and Consumer Product Goods

Howard Lindzon, always transparent with his investments, wrote positively on solar and consumer products goods this week.

I’m noet yet familiar with this company specifically, though are long $RUN and $SEDG. He credits Charlie Bilello for the tip on First Solar.

At Stocktoberfest, my friend Charlie got a ‘perfect 10’ score for his ‘chart battle’ take on being long First Solar.

Regarding CPG, he writes about how $PG has been getting beat up due to the rise of microbrands.

Amazon does not want to kill Procter & Gamble…at least quickly. There are a lot of advertising and promotional dollars Amazon would like to extract from them marketing inside/on Amazon.

Over the next 10 years, the Company can also buy 1,000 rising microbrands and go directly to the customers themselves.

The whole CPG (Consumer Product Goods) sector is going to see explosive deal action and volatility for the forseeable future

Value of judgement to rise as a complement to AI

Coming to us via a post at Kottke.org on AI is an article at McKinsey titled The economics of artificial intelligence. Guest editor Patrick Tanguay surmises, and quotes from the original article:

The very interesting twist is here, where he mentions the trope of “data is the new oil” but instead presents judgment as the other complement which will gain in value.

“So as the value of human prediction falls, the value of human judgment goes up because AI doesn’t do judgment—it can only make predictions and then hand them off to a human to use his or her judgment to determine what to do with those predictions.

Investing in cannabis as a healthcare play

Todd Harrison and Loren DeFalco, who run CB1 Capital, makes the case for cannabis as a healthcare investment in this video from Stocktoberfest.

DeFalco, who runs CB1 Capital with Harrison, took notice in Cannabis-based products because of a seizure he had. His treatments did not help, and in certain cases worsened his health. He found real treatment in cannabinoid wellness.

 

Final Thoughts

I’ve been reading Kevin Fedarko’s book The Emerald Mile about the fastest ride ever down the Colorado through the Grand Canyon. He provides fascinating details on the history of the Canyon, including how the Canyon was formed seemingly slowly over a long period, yet most change came in short bursts.

Up through the first half of the twentieth century, most tourists who contemplated the walls of the Grand Canyon assumed that this landscape was shaped slowly and gradually over tens of millions of years. This is true, but only in the broadest sense—which is to say, by stretching the process out on the scale of deep time. In the 1950s and 1960s, however, the geologic credo was further refined and scientists began to appreciate that the steady march of geomorphic change is punctuated by catastrophic bursts: brief moments of exceptionally brutal violence in which things happen very quickly indeed. In the canyon, these bursts take the form of debris flows.

Fedarko, Kevin. The Emerald Mile: The Epic Story of the Fastest Ride in History Through the Heart of the Grand Canyon (p. 118). Scribner. Kindle Edition.

Nature’s patterns have a way of playing out in other aspects of life, including markets and technology, and this seems a fitting reminder.