Wealth Watch Archives

April 24, 2023

Navigating The Wait-and-See Market: Patience Required

Chart: SPY 1-year daily

The HCM-BuyLine^® is positive, and pullbacks are buyable. However, the market is stuck in a trading range and has been for several weeks now. If we can break above 418 on SPY and move above 322 on the QQQs, we believe that we will see another strong move to the upside. A lot of traders and managers are looking at this area of resistance and are idling in wait-and-see mode.

Chart: QQQ 1-year daily

We anticipate that the Fed will be more dovish at the May meeting due to several leading indicators starting to fall. We are seeing a high probability for one last rate hike of 25bps, and after that we think they could be done raising rates. We continue to believe that increasing rates will do more harm than good at this point. The Conference Board’s Leading Economic Index (LEI) sank 1.2% in March, a much deeper drop than the consensus estimate of -0.7%. This was its 12th consecutive decline, and the most since April 2020. Most of the LEI components made negative contributions, led by building permits. The pace of decline in the LEI has accelerated, with the six-month rate of change sliding to -4.5%, the steepest drop since July 2020. Moreover, eight of the ten LEI components deteriorated over the past six months. The rate of decline in the LEI and the weak indicator breadth are historically consistent with falling economic activity. The Conference Board expects further economic weakness in the coming months and a recession start in mid-2023. Factory activity in the Philly Fed region contracted for the eighth consecutive month in April. The General Business Activity Index fell 8.1 points to -31.3, its lowest level since May 2020, and well below the consensus of -20.0. Most individual activity indicators were in negative territory, although some improved from the prior month, reflecting slower rates of decline. Such was the case for new orders, shipments, and employment. The cut in inventories, however, intensified. 1Q23 earnings season continues to come in “better than feared” and with 84 companies having report (17% of S&P 500), 79% are beating with a beat margin of 5.7%. Look for strength in biotech, technology, and energy, as all three sectors are looking strong.

April 17, 2023

From Bank Scare to Market Repair – Is Now the Time to Buy?

The markets are trading just about as anticipated after the banking scare and a fast and large sell-off, but they are recovering nicely. If we had not had the three banks fall into deep trouble, I believe we would be much further along in this uptrend. Pullbacks are buyable as the trend is up. Inflation is starting to roll over, which equals lower volatility and a higher market. This is the most anticipated recession in history; everyone is calling for a recession. It is all the rage, and the probability is that we will fall into a recession. The big question with everyone anticipating a recession is whether it has already been priced in, and we believe the answer is yes. If we do fall into a recession, it will be self-inflicted by the Federal Reserve moving too fast and too far. Inflation does appear to be abating, as it is falling faster than consensus expects. The March CPI and PPI show that the “higher for longer inflation” narrative is not coming true. In fact, the primary reason core CPI has remained high is the real estate rents component of the inflation calculation, which is up 8.1% YoY, while core CPI ex-shelter 3M SAAR is 2.6%, which is within the Fed target of ~2%.

Chart: SPY 200 Day Moving Average

The S&P 500 has been above its 200-week moving average for 25 weeks now, and this is a good indicator of a solid uptrend with very strong odds that the market will continue its upward climb.

April 6, 2023

Battle of The Beasts – Are The Bears Getting Tired Yet?

The HCM-BuyLine^® is positive, and pullbacks are buyable. We have heard a lot about capitulation to the downside, which means a big sell-off day sitting in the bottom of a bear market. In my opinion, there have already been a number of big sell-off days in the last 15 months of this bear market that could be viewed that way. But could the market capitulate to the upside, where we have several big up days where the bears and the shorts throw in the towel? We think this is happening now. The bears may be trapped as the S&P 500 has posted two consecutive quarterly gains. This has never happened in a bear market, at least since 1950. So, how long will the bears stay bearish?

It looks like the Fed has backed themselves into a corner by raising rates as fast and as far as they have. The question for the Fed is, do they break the economy or inflation, but they are going to break one of the two for sure. Or have they now come out from underneath the ether and become aware that breaking the whole economy, along with banks going under, might not be very smart.

March 29, 2023

March Madness – Private sector strengthens despite banking turmoil

The HCM-BuyLine^® is positive and held up well in the face of the very nasty storm the banking crises caused over the last three weeks. The technical patterns are shaping up, and I hope shaping up to the upside. If QQQ, which is tech heavy, can break above $313.00, we would consider this a bullish sign of strength and we would find it very encouraging. Meanwhile, the SPY ETF chart shows that the S&P 500 is trying to move higher but is still in a trading range.

PMIs show private sector activity strengthening: The S&P Global Flash U.S. Composite PMI jumped 3.2 points in March to 53.3, in expansion territory for the second consecutive month, and at the highest level since last May. The survey does not show any immediate negative impact on activity from the banking sector crisis that unfolded mid-month. Quite the opposite, it reflects stronger growth in Q1 than in the second half of last year which the index spent continuously below the break-even level of 50. The improvement in March was led by the Flash Services PMI, which also rose 3.2 points to 53.8, an 11-month high, and above the consensus of 50.3. In a sign that demand is firming, new orders grew for the first time since last September, with both domestic and export orders improving. Backlogs picked up at a quicker pace, another indicator of stronger demand and some capacity pressures. This led to more job creation, with employment rising at the fastest rate since last September. Cost inflation continued to ease, but selling price pressures picked up to a five-month high, driven by stronger demand. Service sector optimism about the growth outlook came down slightly from the prior month and remains below the series average, reflecting concerns about the impact of inflation and higher interest rates.

March 23, 2023

It’s The Fed vs. Your Wallet In This New Market Reality

We live in a different world than we did just 24 hours ago. Are you stuck trying to analyze if it’s better or worse? Between Janet Yellen and Fed Chair Powell, I’m not sure if they could be more confusing and disorganized, which I find to be very disturbing. But unfortunately, that is what we are stuck with. Fed Chair Powell raised rates yesterday with the comment that there might be one more rate increase. After coming close to really destabilizing the banking system and our economy, he finally realized that they are killing everything just to kill inflation, which might be a touch unwise. The HCM-BuyLine® held up even after some real shockwaves over the last few weeks. We did have excess cash and have been adding to positions. We have no idea if another bank will implode, and clearly neither does anyone else. There are 400 PhDs that work for the Federal Reserve, not just regular employees, but 400 PhDs. You would think that with the invention of the telephone, which Alexander Graham Bell invented in 1875, one of these brilliant PhDs at the Federal Reserve would use it to call the CEOs and Presidents of the regional banks and have a conversation about how raising rates at warp speed was affecting them. The markets are trading a bit better today after a violent session yesterday. One reason is that the Fed has probably pushed us into a near-term recession. If so, they will be forced to reduce rates, which is why you are seeing bonds rally and the market rally in general. There are several positive technical moves that we are encouraged by, with some areas being close to a breakout, such as the NASDAQ and technology stocks. The QQQs, which is tech-heavy, are trying to break out of a nice pivot point. AGG, the ETF of the aggregate bond index, is trading much better as bonds have been rallying in the last two days. I’m actually very positive and constructive on the markets after the HCM-BuyLine® held up as well as it did, but the one outlier is the decisions being made by the Federal Reserve and the Treasury, which could either help or hurt us all.

March 13, 2023

Silicon Valley Bank Goes Under, Where Do We Go From Here?

To start the Wealth Watch I would like to let everyone know that we had almost no exposure to SIVB or the banking sector in general, and we do not own any bitcoin. Neither met our requirements for an investment. While I have been writing to expect volatility over and over for weeks, I think it is now clear to see that I was not kidding, was I? The last week has weakened the HCM-BuyLine® and we are watching closely for any break. The markets have been trading just about as we had anticipated, with a nice run-up in January, then a pullback followed by a period of consolidation which is to be expected. What was not anticipated was a bank failure. That caused a two-day selloff that was very hard. The trend is still intact, but just barely. Even if the HCM-BuyLine® is breached, we do anticipate a recovery back above the trend in short order. We spent a lot of time over the last three days analyzing whether we felt other banks were not being managed very well, and our conclusion is that this is most likely a one-off. In other words, the bigger banks look to be more sound. They are not taking on high risk loans like Bitcoin and tech startups like SIVB was. Furthermore, most of the larger banks are very well diversified whereas SIVB was not. I’m not sure how they were able to give loans to a lot of these startups, but it has created some good buying opportunities in the banking sector. Our top pick would be Bank of America, and while we do anticipate investing in that bank soon, we will give the banking sector time to stabilize before looking to invest.

SIVB, the 16th largest bank in the US, is one of Tech industry’s largest lenders and media stories suggest VC and PE firms might be advising founders to move cash away from SIVB — essentially fueling a panic among Financials that continued right up until regulators shut it down. SIVB’s failure highlights the fact that banks collectively are sitting on sizable losses on loans due to the rise in interest rates. The FDIC reported that at the end of 2022, the total unrealized losses is $620 billion (vs ~$15b 2021), and if these banks had to liquidate their portfolios, would substantially deteriorate book value. But with investors and depositors rattled by the troubles at SIVB, financial conditions are tightening. This potentially reverses some of the hawkishness one would expect from the Fed. Basically, restricted lending by banks amplifies the impact of Fed hikes in place now, and would reduce the need for future hikes. While the NFP jobs report will be very important for the Fed, the SIVB-induced bank scare actually offsets the inflationary risks for the Fed to an extent. That is, even if Feb jobs is really strong, the continued second-order effects of the SIVB-issues will likely contribute to a tightening of financial conditions. This means the odds of the Fed having to accelerate its pace of hikes might be reduced.

March 2, 2023

Volatility Can Be Scary, But The HCM-BuyLine® Remains Positive

The markets are trading about as we would expect. With the strong run-up in January, a pullback and period of consolidation was warranted. There is room for the market to move either up or down, with the trend still up as identified by the HCM-BuyLine®. The S&P 500 has traded down to support and is close to the 200-day MA. Like I stated last week, volatility is to be expected.

The S&P 500 ex-FAANG is trading at a 14.8 P/E, which shows a lot of value for most of the underlying issues in the S&P 500. A 14.8 average PE is not high for the rest of the S&P 500. We hear investors say the market is too expensive. But this is distorted by the higher multiples of FAANG, and we think the higher multiples of FAANG are justified. FAANG stocks are also very strong financially and making a lot of money even in this volatile market. The Conference Board’s Consumer Confidence Index fell 3.1 points in February to 102.9, down for the second consecutive month, and below the consensus of 108.5. While the index is down 26.0 points from its cycle high in mid-2021, it has been range-bound over the past several months and is holding up well above the lows during the pandemic. The current level is consistent with a continued economic expansion. Consumers felt better about the present situation, with that index component up 1.7 points to 152.8, its best level in ten months. The main driver was a pickup in job availability, which is running close to its highest level since 2000 and implies continued downward pressure on the unemployment rate over the near-term. At the same time, current business conditions were broadly viewed as neutral. Consumer expectations, however, dropped 6.3 points to 69.7, a seven-month low and near the worst level since March 2013. Expectations for jobs, business conditions, and incomes all worsened from the prior month. The confidence spread (present situation minus expectations) widened to 83.1 points, the most since March 2001. It suggests that even though consumer confidence is still high, consumers are nervous about the economic outlook. A peak in the confidence spread, followed by a sizeable decline, has historically been associated with slower economic growth or recession. Although this indicator has not yet peaked, we have it on watch for early signs of deterioration.

February 22, 2023

Don’t Blink – Bullish Signals Abound

The market has pulled back to the point of being oversold. After a nice rally a period of consolidation can often be expected. This has little effect on the HCM-BuyLine®, and it remains positive. The S&P has set into what is called a golden cross, where the 50-day moving average crosses above the 200-day moving average, reflecting another bullish pattern. Also, the S&P 500 remains above the 200-day moving average, and a breadth signal occurred on 1/12, another bullish signal. VIX, the volatility index, is now oversold and a reversal is probably imminent. Pullbacks are buyable until the HCM-BuyLine® turns negative, and it has a good amount of room to move before that happens. Remember, you sometimes have to do what is not comfortable to be successful, and sometimes markets are a very uncomfortable place to be.

The S&P Global Flash U.S. Composite PMI climbed 3.4 points in February to 50.2, its best level and in expansion territory for the first time since June 2022. The improvement in private sector activity comes on the back of some better-than-expected economic data for January, including nonfarm payrolls and retail sales. Although the latter may have been impacted by seasonality and benchmark adjustments, and the risk of recession later this year has not been eliminated, the cumulative evidence still suggests that the odds of a soft landing for the economy have improved. In both services and manufacturing, cost burdens eased but selling prices picked up. This suggests that firms continue to have pricing power, which bodes well for their profitability, but also implies that consumer price inflation may be stickier than anticipated.

February 15, 2023

Risk-On! – The HCM-BuyLine® Flashes Buy

The HCM-BuyLine® is positive, and risk should be taken. Pullbacks should be considered buyable. We have been adding exposure to equities and are near 100% back in the market. What can investors expect? Volatility, and I highlight that word for emphasis because there is a lot of fear out there due to the bruising 2022 market, not just for stocks but also the worst bond market in over 40 years. So, anytime Fed chair Powell steps in front of a microphone, hold on because the markets are going to move, and which direction is anyone’s guess. With the HCM-BuyLine® being positive the odds are a 73% chance that the market will continue to climb higher, and a 27% chance it does not hold and rolls over. In that case we again reduce our exposure to equity. What could be a very encouraging sign that not only are we now in an uptrend, but that a new bull market could be developing is the S&P 500 is setting what looks like a cup and handle pattern. The cup and handle is one of the more powerful technical chart patterns there is. They do not set up very often, but when they do set up and follow through, it usually leads to a very explosive and long-lasting rally. Time will tell. Consumer prices firmed up in January, driven by a rebound in energy and continued strong gains in shelter. Additionally, revisions to the seasonal adjustment factors converted the 0.1% decline in December to a 0.1% increase and showed stronger price growth in Q4 overall than previously estimated. Year-to-year price growth eased less than expected. Coming on the back of strong payrolls growth and further tightening in labor market conditions in January, this report confirms that the Fed is not yet done raising rates. We currently expect two more rate hikes this year before the Fed pauses to evaluate the impact of cumulative tightening. The Consumer Price Index (CPI) increased 0.5%, the most since last June, and above the consensus of 0.4%. Energy prices rose 2.0%, following two consecutive declines, while food prices rose 0.5%, still much stronger than the 0.15% average monthly gain in the year prior to the pandemic. Core CPI, which excludes energy and food, increased 0.4%, the most in four months, and above the consensus of 0.3%. Shelter was the biggest contributor, up 0.7%, accounting for more than half of the increase in the core. Both rent and owners’ equivalent rent rose by the same amount. Shelter’s increase was off the peak of 0.8% at the end of last year, but still near the biggest gain since August 1990. While private surveys show that rents have already started to decline, the change is captured in the much broader shelter CPI with a significant lag. We expect shelter CPI to moderate later this year.

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