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 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/