Weekly Cycle: Market Outlook for 07.23.2018

Weekly Cycle: Market Outlook for 07.23.2018

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.

 

The key is not playing the game better, but figuring out the right game to be playing.

– Brett Steenbarger – Where Are Edges To Be Found In The Current Stock Market?

 

Market Performance

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

 Market Performance Update 07.23.2018

Observations:

  • HACK up nearly 30% over last year
  • VWO down over 6% vs 3 months ago
  • MJ down over 12% vs 1 year ago

 

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). 

Technical Indicator scores 07.23.2018

Observations:

  • VFH (Vanguard financials ETF) significantly improved technical indicator scores
  • SPY, VTI continue to hold very positive trading scores
  • MJ continues very negative trend
  • XHB continues with very positive score, similar to last week

 

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: A Delicate (and Temporary) Balance

Short-term trading conditions continue at highly favorable levels. Actual volatility remains low. The VIX is once again higher than reality.

Bob sees the economy (still) in the expansion phase, although there are signs of moving to a “boom.” This is the period right before a peak, the technical definition of a recession. While many speculate about what inning this is, we cannot really know. We only know that the game is not over and is unlikely to end in the next year.

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

Generally a calm week for the indexes as most of the action was in individual stocks due to earnings

Next week marks the busiest week of S&P 500 corporations reporting quarterly results, with some 174 set to release earnings.

 

Articles of note

— Rusty Guinn has written extensively on the Three Body Market, and here mentions again how it can lead to longer periods of underperformance and outperformance.

“be prepared for the periods of its underperformance and outperformance to be longer than they have been historically”

It Was You, Charley
Rusty Guinn Epsilon Theory

“But from the more important relative perspective (at least for our exercise), its most significant outperformance against growth tends to come in chunks when the direction of returns to value and growth are changing most dramatically, rather than in more ordinary periods.

— Following up on a recent post on Alibaba, Jae Jun gives more insight as to what makes Chinese tech giant a “no-brainer”

“At the peak in 2016, Alibaba was converting $0.50 of every dollar into FCF.

Last year, it was 43%”

Why Alibaba Is A No-Brainer
Jae Jun The Value Investing Blog of Old School Value

“JD is currently taking the path of Amazon of reinvesting as much as they can. Alibaba on the other hand, has already created an internal bank and can afford to make mistakes without harming their business.
Sure JD has the bling and sexiness next to its name, but I find Alibaba to be a safer bet, with just as much upside.

— New home sales are under pressure yet Bill McBride at Calculated Risk sees reason to believe housing has yet to peak. 

“I think new home sales and single family starts will increase further over the next couple of years”

Has Housing Market Activity Peaked?
Bill McBride Calculated Risk

“Although housing is under pressure from policy (negative impact from tax, immigration and trade policies), I do not think housing has peaked, and I think new home sales and single family starts will increase further over the next couple of years.

— Is JNJ’s positive news a sign of good things to come from pharmaceuticals

“These four stocks are rated Buy and may be good purchases for growth accounts looking for safety and total return going forward.

Top Analyst Bullish on Big Pharmaceutical Stocks Before Q2 Earnings
247wallst.com

“John Boris from SunTrust sees the relatively good print from Johnson & Johnson Inc. (NYSE: JNJ), which featured a positive currency tailwind, as a good signal for the group as a whole.

— Urban Carmel at The Fat Pitch remains bullish in the long term (~9-12 months), though is less certain in the short-term (coming weeks)

“The short term is less clear. SPX has gained 3 weeks in a row; most often, these streaks are followed by a higher high”

Weekly Market Summary
Urban Carmel The Fat Pitch

“US equities have gained every month since April, and are up over 3% so far in July. Our long term view remains that SPX will make a new all-time high in the months ahead. That is now just 2.5% away.

— A new tax law allows capital gains to be invested in “opportunity zones” with taxes reduced & deferred. And all new investment grows tax free, similar to a Roth IRA but without any contribution limits. 

An Unlikely Group Of Billionaires And Politicians Has Created The Most Unbelievable Tax Break Ever
Steven Bertoni Forbes

“The heart of this new law: Opportunity Zones, or “O-zones,” low-income areas designated by each state. Investors will soon be able to plow recently realized capital gains into projects or companies based there, slowly erase the tax obligations on a portion of those gains and, more significantly, have those proceeds grow tax-free. There are almost no limits. No limits on how much you can put in, how much tax you can avoid and, for most of the country, the types of taxes you can avoid, whether federal, state or local. No limits on how long those proceeds compound tax-free. And precious few limits on what types of investments you can make.

— Is it time for a turnaround in emerging markets?

“emerging markets equities have lagged…most of the last decade” “region is now “cheap” and it might be ready to outperform”

Emerging Markets Might Be Ready To Outperform
Urban Carmel The Fat Pitch

“Emerging markets equities have lagged in 2018 and throughout most of the last decade. Recent fund outflows have been extreme. Fund managers are underweight the region. Their currencies and commodities are not liked. The region is now “cheap” and it might be ready to outperform.

— Most economic signals remain positive

“Overall, much of the economic and company news seems highly positive.”

Hard To Find Much Bad News
David Templeton, CFA The Blog of HORAN Capital Advisors

“One could surmise this good news might be all priced into equity prices, but the current overall economic and business strength does not seem to be suggestive of an economic downturn any time soon. Certainly the issues around tariffs and trade, and their ‘potential’ negative impact, are worth maintaining a close watch on.

 

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.