Weekly Cycle: Market Outlook for 07.16.2018

Weekly Cycle: Market Outlook for 07.16.2018

Each week, we review the stock market using a specific set of information sources in order to cut through the noise generated by media publishing attention grabbing headlines. Weekly updates give e the opportunity to play trends while not overreacting on a daily basis.

 

“Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day-if you live long enough-like most people, you will get out of life what you deserve.”

― Charles Munger, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

 

Market Performance

Performance of a handful of macro indexes, as well as index and ETFs on specific sectors of particular interest.

 

Observations:

  • VNQ (Vanguard REIT index) up over 8% over last 90 days
  • SPY up slightly oer last week
  • MJ down over 7% vs last year
  • VWO (emerging markets) down over 8% over last 90 days

 

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). 

 

Observations:

  • SPY remains bullish, BOND remains bearish
  • MJ is down significantly from a week ago
  • XHB has surged in the last week
  • HACK very positive after 2 weeks of somewhat weaker scores

 

OldProf’s Risk Analysis

Each week, at the Dash of Insight blog, 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 writes in Weighing the Week Ahead: Anything Goes!

“Short-term trading conditions continue at highly favorable levels. Actual volatility remains low.”

“I continue to find that anyone with a reasonable approach to economics and any sort of analytical track record shares this basic thesis. Despite this, the people getting air time and page views are those whose recession forecasts are of the “kick the can” variety. They are now focused on 2020. How have their two-year forecasts done in the past?1

 

StockTrader Recap

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

This week, Mark writes in Weekly Market Recap Jul 15, 2018

“TRADE WARS ™!!!! certainly seems like a “sell the rumor, buy the news” event.”

“Short term: Very choppy on the S&P 500 of late but a new “higher high” (a high higher than the previous high – in this case early June) was hit.  NASDAQ same story but now all time highs.2

 

Articles of note

— A macro data update from Fat Pitch blog shows continuing positivity around the economy. 

“The macro data from the past month continues to mostly point to positive growth”

July Macro Update: The Economy Is Fine. Trade War Rhetoric Is The Main Risk

“In summary, the major macro data so far suggest positive but modest growth. This is consistent with corporate sales growth.  SPX sales growth in 2018 is expected to only be about 6-7% (nominal).

With the rise in earnings and the moderation in share prices, valuations are now back to their 25 year average. The consensus expects earnings to grow about 18% in 2018 and 10% in 2019. Equity appreciation can therefore be driven by both corporate growth as well as valuation expansion (chart from JPM).3

— More positive signs for the economy in general

“Currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight”

Investment and Recessions
Bill McBride Calculated Risk

“Currently new home sales (and housing starts) are up solidly year-over-year, and this suggests there is no recession in sight4

—  Many seem to think Chinese Tech industry is largely a copy of the American tech industry. Here’s an in-depth look at how it differs.

“Chinese tech isn’t an imitation of its American counterpart. It’s a completely different universe.”

Letter from Shenzhen
Logic Magazine

“Shenzhen is a city built on exceptions. David explains that when the Chinese government decided to experiment with capitalism in the 1980s, it didn’t want to expose existing major cities like Beijing or Shanghai to the risk of failure. Instead, the government chose Shenzhen, a tiny cluster of fishing villages, even building up a wall in some parts to demarcate the boundary between socialism and capitalism.
Since the beginnings of the experiment, Shenzhen has exhibited all kinds of hockey-stick-shaped growth that people in Silicon Valley talk about in hushed tones of exaltation. The population has skyrocketed from 30,000 to almost 12 million, the cost of living has gone up, innovation is surging, and the time it takes to create, design, or build a new product decreases day by day.5

— Here’s a bit of background on two Chinese tech giants; Tencent and Alibaba. 

“In 5 years, technology services will make up 65 percent of Ant Financial’s revenue, compared with ~34 percent in 2017”

Alibaba versus Tencent: who will win? – Chris Skinner’s blog
Chris Skinner’s blog

“Alibaba and Tencent. Both have market capitalizations that hover around half a trillion U.S. dollars. Both command sectors of the rapidly growing Chinese digital landscape: Tencent owns the leading gaming and messaging platform, while Alibaba rules e-commerce. Both are aggressive investors inside and outside China. Each is the pride of their not-quite-first-tier hometowns: Alibaba of the ancient city of Hangzhou near Shanghai and Tencent of shiny-new Shenzhen across the border from Hong Kong. Finally, both touch an astounding percentage of the world’s most populous country: Alibaba’s various online marketplaces count 552 million active customers; Tencent’s WeChat messaging service recently surpassed 1 billion accounts …6

— Vitaliy Katsenelson on Softbank’s Masayoshi Son and the outlook for Softbank. 

“You can think of [Softbank] as buying a stock at a roughly 50% discount to the market value of its assets or as a way to buy Alibaba at less than half its current price”

What Would You Get if You Crossed Warren Buffett, Richard Branson and Steve Jobs? (Updated)
Vitaliy Katsenelson Vitaliy Katsenelson Contrarian Edge

“Like Apple co-founder Jobs, Son is blessed with clairvoyance. He saw the internet as an transformative force well before that fact became common knowledge. In 1995 he invested in a then-tiny company, Yahoo!, earning six times his investment. But he didn’t stop there; he created a joint venture with Yahoo! by forming Yahoo! Japan, putting about $70 million into a company that today is worth around $8 billion. (Yahoo! Japan is a publicly traded company listed in Japan.)7

— Sticking with Softbank, here’s an article from the NYTimes Dealbook on how underpriced SFBY is compared to the underlying assets. 

“SoftBank’s stake in Alibaba alone is now worth nearly $132 billion, or 40 percent more than SoftBank’s market cap.”

Investing in SoftBank Is Becoming a Bet on Its Founder’s Deal-Making Prowess
www.nytimes.com

“If those deals go through, what would be left of the company is essentially a gigantic, publicly traded venture capital firm. Its holdings would include:■ A 27 percent stake in Alibaba Group, the Chinese internet behemoth■ A 43 percent stake in Yahoo Japan■ A stake in ARM, the British designer of computer chips■ An investment in its nearly $100 billion Vision Fund, the much-ballyhooed tech investment vehicle that owns stakes in Uber and much more8

— On the Irreverent Investor, Michael Batnick presents a simple momentum strategy idea that has outperformed the S&P 500 index. 

a simple momentum investing strategy “outperformed the S&P 500 with significantly lower drawdown”

Simple Momentum

“Here are the rules: If the S&P 500 outperformed 5-year U.S. treasury notes over the previous twelve months, invest 100% of this portfolio in the S&P 500 in the following month. If the 5-year U.S. treasury notes outperformed the S&P 500 over the previous twelve months, invest 100% of this portfolio in bonds in the following month. That’s it. Pretty simple.9

— Mike Williams takes a rational look at the prospects of trade wars and believes it’s bluster than will go the way of countless other scares. 

“And the reality break here is that China has few attractive options other than making trade fairer.”

Like Water Off a Black Swan’s Back
Mike Williams Alan Steel

“The bluff and bluster will go the way of Brexit, Chinese Yuan devaluation fears (Acts I, II, II, IV, V, VI and VII), Ebola outbreaks, the outrage at the Border (I mean the Janet Reno version – not the current remake), and everything else that was previously going to throw the globe into the pits of hell.
10

 

 

 

 

 

  1. https://dashofinsight.com/weighing-the-week-ahead-inflation-on-the-horizon/
  2. https://www.stocktrader.com/2018/07/15/weekly-market-recap-jul-15-2018/
  3. http://fat-pitch.blogspot.com/2018/07/july-macro-update-economy-is-fine-trade.html
  4. http://www.calculatedriskblog.com/2018/07/investment-and-recessions.html
  5. https://logicmag.io/04-letter-from-shenzhen/
  6. https://thefinanser.com/2018/06/alibaba-versus-tencent-will-win.html/
  7. https://contrarianedge.com/2018/07/09/what-would-you-get-if-you-crossed-warren-buffett-richard-branson-and-steve-jobs-updated/
  8. https://www.nytimes.com/2018/07/13/business/dealbook/softbank-valuation-masa-son.html
  9. http://theirrelevantinvestor.com/2018/07/09/simple-momentum/
  10. https://www.alansteel.com/media-centre/letter-from-america/2018/07/like-water-off-a-black-swan-s-back/

Weekly Cycle: Market Update 05.29.2018

You can’t do the same things that other people are doing and expect to outperform them. When you do what everyone else does, you’re going to get the same results everyone else gets. But it’s not enough to be different — you also need to be correct

Second-Order Thinking: What Smart People Use to Outperform – Farnam Street Blog

Market Outlook Update for May 29, 2018

Each week, we review the stock market using a specific set of information sources in order to cut through the noise generated by media publishing attention grabbing headlines. Weekly updates give e the opportunity to play trends while not overreacting on a daily basis.

Market Performance

Performance of a handful of macro indexes, as well as index and ETFs on specific sectors of particular interest. 

Observations:

○ Volatility [VIX] has risen considerably in the last week
○ SPY and VTI have dropped slightly over last week, remain positive for last 30 days
○ Financials [VFH] and [MJ] performed worse over past week
○ Homebuilders [XHB] performed strongly over past week

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). 

Observations:

○ Indicators for SPY and VTI have dropped and remain positive over longer term
○ QQQ, HACK signals remain very strong
○ Signals for international markets [VEA, VEU] turned significantly worse
○ VIX has turned significantly more positive, which indicates a signal towards increased volatility

OldProf’s Risk Analysis

Each week, at the Dash of Insight blog, 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 writes that Short-term trading conditions improved dramatically.”

He also writes that this week is a very busy week for economic news this week and believes many will be wondering it it’s still worth listening to. Our typical preference is to ignore headlines about what might happen and instead react to what we see happening.

There is an avalanche of economic news in the shortened week ahead. While this will provide plenty to talk about, I expect many to be asking:

Should investors basically ignore the daily geopolitical news?

The Pundit-in-Chief commented that the market is getting it wrong every day, mistakenly trying to trade every swing in the news flow.

Art Cashin observed that traders seem to be learning a pattern. Aggressive statements by world leaders, including the Trump Administration, followed by more moderate policies. Art sees this understanding as part of the recent reduction in volatility.

StockTrader Recap

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

This week, Mark writes that it was “The second week in a row of low volatility which is usually advantage bulls” and goes out to point out positive signs in the Nasdaq.

“Short term: The S&P 500 is consolidating while the NASDAQ tipped its head over this trend line connecting highs of the year.

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

Technical Analysis 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 has not yet posted an update.

Articles of note

“Real Bear Markets, “The Big One” we hear so much about today is what produces excruciating, prolonged equity market declines. They have recessions attached. There is no sign of that I can find today. None.”

If You Want To See Bears, Go To The Zoo
Lloyd Clucas Seeking Alpha

“In my view we are experiencing a global economic “dead-cat bounce”. That worked for ’17 and should suffice for 2018. I hope it will be longer. But hope is not an investment strategy. Earnings have turned up and are accelerating again. How long? I have no idea. But you take what is there. [If you don’t, you can have tea with John Hussman or Jeremy Grantham.] And earnings are looking good for 2018. The tax cut for corporations is a big deal for 2018. It pushed up central value for many companies and hiked this year’s earnings estimate growth materially.”
1

“Now, with public and private funding flowing into Chinese start-ups, entrepreneurship has become an appealing alternative for a generation disillusioned with the conveyor-belt career paths of their forebears.”

How China’s Tech Revolution Threatens Silicon Valley
Alec Ash The Atlantic

“The tech revolution in China is ubiquitous in urban life. I use the messaging app WeChat for work calls and vacation bookings. I pay for a cup of coffee or a ride in a car with a scanned QR code on my phone. I go to work at a rented desk in an “experimental life space” called 5Lmeet, built in an old soy-sauce factory, which offers pop-up cuisine, a cashless, staffless convenience store, and an office space, the entrance gate to which uses face-recognition software to let me in. Every time I come out of a subway stop in Beijing, I have to fight through a mass of the cheap, rentable bicycles that have transformed transportation in the city. Dai Wei, the CEO of the leading bike-rental firm, Ofo—reportedly valued at $2 billion—is 27 years old.”
2

“Amazon had lowered prices at Whole Foods by an average of 5% over the last year. ”

Shopping at Whole Foods is finally a good deal—if you have Amazon Prime
Alison Griswold Quartz

“On May 16, Amazon announced that Prime members could get an extra 10% off sale items by downloading the Whole Foods mobile app, signing in with their Amazon account, and scanning a code at checkout. The “member deals” are available now at Whole Foods in Florida and will begin rolling out to the rest of the US this summer, Amazon said”
3

From 4 years ago and still a great read on common knowledge and where to look for big challenges

When Does the Story Break?
Epsilon Theory

” I believe that public markets today are essentially hollow, as what passes for volume and liquidity is primarily machines talking to other machines for portfolio “positioning” or ephemeral arbitrage rather than the human expression of a desire to own a fractional ownership share of a real-world company. I believe that today’s public market price levels primarily reflect the greatest monetary policy accommodation in human history rather than the real-world prospects of real-world companies. I believe that the political risks to both capital market structure and international trade (which are the twin engines of global growth, period, end of story) have not been this great since the 1930’s. Simply put, I believe we are being played like fiddles. That does NOT mean, however, that I think anything has to change next week … or next month … or next year … or next decade. The human animal is a social animal in the biological sense, and as such we are cognitively evolved to maintain our beliefs and behaviors far beyond what is “true” in an objective sense. This is, in fact, the core argument of Epsilon Theory, that there is no such thing as Truth with a capital T when it comes to the institutions and the social organizations that we create. There’s nothing more “natural” about our market behaviors than there is around, say, our fashion behaviors … the way we wear our clothes or the way we cut our hair. For 150 years everyone knew that everyone knew that gentlemen wore wigs. This was the dominant common knowledge of its day in the fashion world, absolutely no different in any way, shape or form than the dominant common knowledge of today in the investing world … everyone knows that everyone knows that it’s central bank policy that determines market outcomes. And this market common knowledge could last for 150 years, too.”
4

“This is ultimately the most important distinction between platforms and aggregators: platforms are powerful because they facilitate a relationship between 3rd-party suppliers and end users; aggregators, on the other hand, intermediate and control it.”

The Bill Gates Line

Ben Thompson Stratechery

“Third — and this is the point of this article — what Yelp seems to want will only serve to make Google stronger”

“it is suggestive of further growth in the year ahead and this should be positive for stocks, all else being equal.”

Only The Good News
David Templeton, CFA The Blog of HORAN Capital Advisors

“The purpose of this post is to highlight a number of the positive data points that one would expect to see in a strong economic environment like we are in now”

Our Take

Volatility has increased today after a few weeks of relatively low volatility. It’s still best to ignore more headlines as there appears to be more headlines than real changes.

We’re remaining mostly invested and believe there are short term opportunities. Risk has increase greatly from a year ago though no obvious reason for a general market downturn on the horizon, historically speaking.