Weekly Cycle: Stock Market Outlook 06.04.2018

 

“The most painful realization…is that the people who disagree with us are not especially hypocritical or contradictory.”

The Acrobat and the Fly
Rusty Guinn Epsilon Theory1

 

Market Outlook Update for [June 06, 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 dropped considerably over the last week
  • Emerging Markets VWO ( and BKF) up over 3% in last week
  • China Tech surged again last week.
  • Cannabis down over 10% last 3 months

 

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:

○ Big improvement from a week ago for $SPY, $VTI
○ $CQQQ looks much improved this week
○ Emerging markets $VWO and $BKF much improved
○ $VIX has dropped significantly since a week ago

 

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 continue at favorable levels, much improved from the month-ago data.”

He also writes on how investors should handle news and speculation regarding Trade Wars:

“Is it time to worry about a trade war? For investors, not yet. For citizens, yes.

Free trade is an issue that differs dramatically in two ways:

  1. First-order impacts are very clear and immediate. The impact is on cohesive industry and worker groups. Nations emphasize their role as exporters.
  2. Other impacts are delayed, nuanced, and difficult to measure. Retaliatory tariffs have gradual impacts – inflation, producers (think soybean farmers) leaving the business, Fed rate increases in response to price pressures, and eventually a recession.

Investors cannot profitably plan now for these effects, since they will take many months or even years to show up.2

 

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 despite increased volatility “small caps (Russell 2000) and tech stocks held in quite well and we don’t have any major technical change in the indexes – more on that later..”

Short term: The S&P 500 remains mostly range bound and has for a few weeks, meanwhile the NASDAQ is looking a bit more spiffy of late.

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

$TSLA “The larger economic issue is that every durable good is becoming a service”

Software is Eating the World-Tesla Edition
Alex Tabarrok Marginal REVOLUTION

“stances. This week Consumer Reports changed their review to recommend after Tesla improved braking distance by nearly 20 feet with an over the air software update!3

“Consider this: how many investors buy stocks thinking they will sell at the bottom? NONE.”

Easy in Theory, Difficult in Practice – Of Dollars And Data
Of Dollars And Data

“Months go by and now the market is down 40%. Your spouse says to you, “Honey, we need to stop this. Think about our children’s future.” As this happens, one of your closest friend’s brags about how he sold when the market was down only 15%. CNBC reports this is the worst financial crisis of the modern era. You’re still buying and holding, yes?
4

User & subcribers models “grounded in fundamentals, with value coming, as it always does, from cash flows, growth and risk.”

User and Subscriber Businesses: The Good, the Bad and the Ugly!
Aswath Damodaran Musings on Markets

“Consequently, I went back to valuation first principles, where the value of any asset is a function of its cashflows, growth and risks, and adapted that approach to valuing a user or subscriber:
5

“Why is it that position sizing and actively managing a portfolio is seen as “trading”. It shouldn’t be.”

One Position Sizing Strategy for Long Term Success
Jae Jun The Value Investing Blog of Old School Value

“It’s that people believe a value investor has to invest a certain way.
By this, I mean things like:

don’t buy and sell often
know everything about the business you buy
hold small number of positions and bet big

6

GDPR is helping centralize market further to benefit of $FB $GOOGL

GDPR is centralizing the market
Tyler Cowen Marginal REVOLUTION

“The reason: the Alphabet Inc. GOOGL +2.58% ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.
7

“Predicting the A.I. winter is like predicting a stock market crash – impossible to tell precisely when…but almost certain that it will”

AI winter is well on its way
Piekniewski’s blog

“This gradual shift from rich, big corporations to government sponsored institutes suggests to me that the interest in this kind of research within these corporations (I think of Google and Facebook) is actually slowly winding down. Again these are all early signs, nothing spoken out loud, just the body language.
8

“With fewer births, and less net migration, demographics will not be as favorable…”

U.S. Births decreased in 2017
Bill McBride Calculated Risk

“Births have declined for three consecutive years following increases in 2013 and 2014.”
9

 

 

 

 

  1. http://epsilontheory.com/the-acrobat-and-the-fly/
  2. https://dashofinsight.com/weighing-the-week-ahead-is-it-time-to-worry-about-a-trade-war/
  3. http://marginalrevolution.com/marginalrevolution/2018/05/software-eating-world-tesla-edition.html
  4. https://ofdollarsanddata.com/easy-in-theory-difficult-in-practice-4d28200f638
  5. http://aswathdamodaran.blogspot.com/2018/05/user-and-subscriber-businesses-good-bad.html
  6. https://www.oldschoolvalue.com/blog/investing-strategy/position-sizing-strategy/?source=rss
  7. http://marginalrevolution.com/marginalrevolution/2018/06/gdpr-centralizing-market.html
  8. https://blog.piekniewski.info/2018/05/28/ai-winter-is-well-on-its-way/
  9. http://feedproxy.google.com/~r/CalculatedRisk/~3/Xnk5DygKf_g/us-births-decreased-in-2017.html

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.