Stock Market Outlook 04.16.2018

Stock Market Outlook 04.16.2018

Our weekly checkup/outlook is meant to give me a macro-view of the market. We tend to mostly ignore political talk and the potential effects on markets. Too much of it is empty prognostication. There are likely some ties, but typically too difficult to correlate market movement to political actions.

Instead, we look at what is happening on a weekly basis, with much attention given to current risk/reward ratios.

TradingView Technical Signals

Most index signals have returned to positive scores, with the exception of BOND.

Financials (VFH) are still somewhat weak, along with China Tech (CQQQ) and the BRIC index BKF.

Notably, VIX has dropped considerably, especially on a weekly basis.

market update trading view signals

Data via TradingView.com (Click here to get 30% off a Pro subscription.)
Scored as follows:
-2 = strong sell
-1 = sell
0 = neutral
1 = buy
2 = strong buy

Gannon’s Risk Insight

Old Prof believes little has changed from last week, with poor short term conditions. Long-term risk has risen over the last 2 weeks.

Short-term trading conditions remained poor this week. In mildly bearish conditions our trading approaches can still be profitable, but that might not be true for everyone. We continue to monitor the technical health measures on a daily basis. If this indicator goes to fullish bearish, we liquidate trading (not investment) positions. We are not quite at that point, but I have rounded the result to “5.” This is not a forecast that the market will decline. It indicates increased difficulty in trading profitably.

The long-term fundamentals and outlook are little changed. Based upon historical data for this indicator, I have increased the 9-month recession probability to the 18% range. I am monitoring, but not yet especially worried. The long-term technical health is 1.5, but I rounded it up.

StockTrader Take

StockTrader says conditions have improved and there’s a need to remain cautious.

Short term: Things look better than a week ago but some more work is needed over the intermediate term. The S&P 500 DID hold that 200 day moving average despite testing it quite a few times. That said breaking over 2800 would be a new “higher high” and would signal and all clear – that is quite a ways away. Also, breaking over the trendline connecting the 2 recent highs of January and March would be a needed first step.

Also of note on earnings season, which is expected to be strong:

Earnings season will begin in earnest with the next few weeks bringing most of the big hitters. Earnings season is expected to very strong – it will be interesting to see how companies guide up the rest of the year due to the tax cuts.

My take is that enterprise software companies will report especially strong earnings, gaining both from direct tax cuts, as well as other companies spending gains from tax cuts on implementing and improving software.

Other articles of notes

Sentiment Now Broadly Bearish:

In prior posts highlighting investor sentiment data it has been noted that sentiment data is more actionable at market bottoms than at market tops.

With much of the sentiment now decidedly bearish, just possibly the market is nearing a bottom.

Update: Predicting the next recession:

[CR April 2018 Update: This was written in 2013 – and my prediction for no “recession for a few years” was correct. This still seems correct today, so no recession in the immediate future (not in 2018). ]

Our Take

Market is volatile yet economy remains strong. Some concern over war but most political talk of late has been of little substance. Tradewars appear overblown, while tax law changes seem undervalued in many companies. Enterprise software companies remain a favorite. If things look week after earnings season, will need to re-evaluate.

 

Predicting where the stock market will go is futile

Good perspective on how to view the stock market from Vitaliy Katsenelson. This was written a few weeks ago after the “correction” early in February:

Nobody but nobody knows what the stock market will do tomorrow, next week or next year. Stock market behavior in the short term is completely random. Completely! You’ll have a better luck predicting the next card at a black jack table than guessing what the stock market will do next.

What will the stock market do next? It’s the wrong question. It’s the question that should never be asked, and if asked should never be answered. Asking this question shows that you believe there is some kind of order to this random madness. There is not. And if you answer with any answer other than “I don’t know,” you’re a liar.

via What will the stock market do next? at Vitaliy Katsenelson Contrarian Edge

On the benefits of trend following investing

The consistency of a trend following strategy’s relative performance vs a 60/40 portfolio (impacting the ability for investors to stick with trend following) is the basis of an argument that’s taken place offline (yes, I also argue offline) with a FinTwit friend who is a huge proponent of buy and hold. It’s progressed to the point that we’ve discussed making a mini (very mini) Buffett style bet related to whether trend following or a 60% US Stock / 40% Bond allocation will outperform over the next five years (with money going to the winner’s charity of choice).

via The Behavioral and Performance Benefits of Trend Following at

What might the next bear market look like for investors?

Great piece from Ben Carlson where he poses & answer 6 questions about the next bear market. He begins by putting things in perspective, then looks at how various areas may react in the next bear market.

 

How bad will things get?

In fact, the median drop was 26 percent. A crash is always possible, but your baseline for a bear market shouldn’t be a huge meltdown

Will emerging markets outperform the U.S.?

Grantham’s view is that the relatively undervalued emerging markets should hold up better in a downturn than the relatively overvalued U.S. shares. This is a development most investors likely aren’t positioned for if they’re basing allocations on historical risk-reward characteristics.

Will managed futures provide positive performance in a down market again? …Managed futures were one of the few strategies that held up well in 2008 when everything else got hammered by providing positive returns during a market crisis. According to the BarclayHedge CTA Index, these funds were up more than 14 percent even as stocks around the globe fell 40 percent or worse for the year.

Will commodities provide diversification benefits?
Like most risk assets, commodities fell off a cliff during the financial crisis. But unlike these other assets, commodities are still languishing far below their highs from the previous peak.

How will cryptocurrencies react? ..The rise in cryptocurrencies has corresponded with a bull market in stocks. And while cryptocurrencies have experienced a number of bear markets and crashes over the past few years on their way to remarkable gains, we have yet to see how they will handle a bear market in stocks.

 

Bitcoin NVT, NVT Signal trending upwards

$BTC NVT is trending upwards after bottoming Feb 6. See chart from @coinmetrics. NVT Signal chart from @Woonomic shows similar pattern. #bitcoin

Bitcoin’s NVT (network value/transaction) has been moving in a general upward trend since bottoming on Feb 6th. Here’s a chart using the great charting tools at coinmetrics.io:

bitcoin nvt moving up

Likewise, Willy Woo’s NVT Signal chart shows a similar pattern:

 

Look longterm for crypto investments

There’s a possibility that some big winners come out of the crypto projects. Sure, most are junk but like the tech boom, a few big winners may emerge. There’s a lot debate about how to value crypto assets. Most of that pertains to assets that are being used as intended now.

With many projects either not yet active, or still in the very early stages, any valuation based on data or metrics seems unlikely to be accurate. Investments need to be longterm, as Jeremy Epstein writes in How do you value crypto-assets? at Never Stop Marketing

if you are serious about profiting from this long term trend towards blockchain-based ownership of assets that will have value within decentralized networks, then the smart move is to ignore the short-term crypto mania and use this time to go as deep as you can on the fundamentals.

Do what you can to understand HOW a crypto-network is put together and how it will work. If you are about to make an investment, find someone who has really done his or her homework.

As an example of someone that’s done their homework, he cites the Store of Value blog.

Split the deal to reach for bigger upside

Advice on investing and splitting the deal in order to share risk and reach for rewards that may otherwise be unattainable from Fred Wilson in Splitting The Deal at A VC.  His experience comes from venture capital, but these seems applicable in any type of private investing.

I am a firm believer in splitting the deal, even when the economics (another word for ownership) suggest that there is no room for others.

My personal track record tells me that splitting the deal works. It helps you step up to something that has a lot of risk but also a lot of upside and it brings other people who can add value into the situation early on.

At a time when we are seeing venture funds get bigger and bigger, I am convinced that the hallmarks of old school early stage investing; small fund sizes, small rounds, and syndicates remain best practices

Apple is well-positioned, less flashy

Apple isn’t the same company it once was, and that’s ok as they seem aware of their position as market leader, rather than the upstart they once were. While they may not be overwhelming critics and consumers with new devices, they are making appropriate moves for a company in their “middle age.”

This is by no means a condemnation of Apple. Every single move I’ve described above is justified by two circumstances in particular.

First, as a general rule, challengers pursue interoperability while incumbents strive for incompatibility. This is Strategy 101: seek to fight battles where you have the greatest advantage. When Apple was making the iPod, it’s advantage was a superior device; making that device interoperable with Windows let Apple fight the portable music player battle on its terms. Today, though, Apple already has dominant market share: better to make its devices exclusive to its ecosystem, preventing rivals from bringing their own advantage (superior voice assistants, in the case of Alexa and Google Assistant) to bear.

Secondly, the high-end smartphone market — that is, the iPhone market — is saturated. Apple still has the advantage in loyalty, which means switchers will on balance move from Android to iPhone, but that advantage is counter-weighted by clearly elongating upgrade cycles. To that end, if Apple wants growth, its existing customer base is by far the most obvious place to turn.

In short, it just doesn’t make much sense to act like a young person with nothing to lose: one gets older, one’s circumstances and priorities change, and one settles down. It’s all rather inevitable.

via Apple’s Middle Age at Stratechery by Ben Thompson

Build your own index fund using blockchains

Another tool (in beta) for better managing money on your own, Prism lets you setup an index on your own. From  the post How Blockchains Will Disrupt Mutual Funds…You Build Your Own at Never Stop Marketing:

Prism is the world’s first trustless platform for creating portfolios of assets.

Designed and built by ShapeShift, Prism uses smart contracts deployed on the Ethereum network to bring custom portfolio management to everyone.

You can create and rebalance your own portfolio, as well as browse the public portfolios of others and follow them.

So that is exactly what I did.

Now, my one issue with the site (at the moment) is the relative limited number of coins that it supports. I had hoped to create a broader index of coins, but there are only about 25 or so coins (if you have ever used ShapeShift, you will see the exact same coins).

How Amazon continues to grow

There’s no doubt that Amazon continues to grow their power in the world of ecommerce. Here’s an interesting look at how they continue to grow their role with each additional transaction.

As crowds build on either side of the platform, the middleman becomes ever more indispensable. Oh, sure, a new platform can enter the market—but until it gets access to the 480 million items Amazon sells (often at deep discounts), why should the median consumer defect to it? If I want garbage bags, do I really want to go over to Target.com to re-enter all my credit card details, create a new log-in, read the small print about shipping, and hope that this retailer can negotiate a better deal with Glad? Or do I, ala Sunstein, want a predictive shopping purveyor that intimately knows my past purchase habits, with satisfaction just a click away?

Similarly, the more online buyers and sellers are relying on Amazon to do their bidding or settle their disputes, the less power they have relative to Amazon itself. They are less like arms-length transactors with the company, than they are like subjects of a despot, whose many roles include consumer and anti-fraud protection.

While this may be an argument against the practice, there doesn’t appear to be any change coming. Until there is, there’s no reason to believe Amazon won’t continue to grow.

See the full post From territorial to functional sovereignty: the case of Amazon at openDemocracy.

Disclosure: Long AMZN