End of Quarter Rebalancing – Is This the Calm Before the Storm?

The market traded just about spot-on to last week’s Wealth Watch, with the S&P 500 rallying up to the 3,900 area before the sellers came in to drive the index back down. Some of the reason for the rally was re-balancing of portfolios by fund managers, but that should be complete by the end of the week, and we could see the indexes sell off even more. The 3,648 area on the S&P 500 is critical. We could see the market selling off to retest this area of support, and if the market does not hold then the next level of support is around 3,422 on the S&P 500.

I expect that the next couple days might show prices attempting to stabilize, and we could possibly even see a minor bounce. However, trends are bearish, and I do not anticipate that Tuesday’s high of 3,945.86 will be taken out before prices make their way down to challenge and undercut 3,644, even if this might require a couple weeks.

Bitcoin has really sold off from a high of around $67,000 down to $19,190 this morning. If the low of $18,200 is broken, Bitcoin could sell off to the $12,200 level.

Standard & Poor’s 500 Stock Index Declines | 1/03/1928 to 6/29/2022
  Type of Decline
  Dip (5%+)      Moderate Correction (10%+) Severe Correction (15%+) “Bear” Market (20%+)
Number of Occurrences 323 100 45 26
Mean Number of Occurrences Per Year 3.4 1.1 0.5 0.3
Mean Number of Days 35 100 186 289
Mean Decline (%) 10.8 19.5 28.2 35.6
Chances of Decline Moving to Next Stage (%)* 31 45 58 N/A
Last Occurrence 6/2/22 3/29/22 1/3/22 1/3/22
Return to Date (%) From Last Occurrence -8.6 -17.6 -20.4 -20.4
Avg. 6-Month Return After Peak (%) -2.8 -7.2 -12.0 -17.1
Avg. 12-Month Return After Peak (%) 0.4 -3.4 -8.7 -19.4

The S&P Global Flash U.S. Composite PMI fell 2.4 points in June to 51.2, a 5-month low. Services declined 1.8 points to 51.6, below the consensus for unchanged. Manufacturing also swooned more than expected, dropping 4.5 points to 52.4, the lowest reading in nearly two years versus a consensus of 56.1.

The report highlighted the first decline in manufacturing output in two years, with the Output Index decreasing 5.6 points to 49.6. It also noted the first drop in new orders for goods and services since July 2020. Similarly, new export orders fell at the fastest pace since June 2020. Employment slowed and backlogs decreased for the first time in two years. Business confidence slumped to its lowest point since September 2020, as providers were less upbeat about the future.

Inflationary pressures were high with both input costs and output prices rising substantially, but at a slower pace. Wages were adding to operating expenses, but more discounts were being offered, thereby pressuring margins.


Short-Term Rallies Give Hope But Need Caution

The HCM-BuyLine® is clearly negative and we have built up a tremendous amount of cash. I have enclosed our cash holdings as of Monday. The market should rally up to the 3800-3900 range on the S&P 500 before the selling starts again. Some of these rallies are shorts covering their positions. Look for the markets to sell back down to the 3600 range, and if that area of support cannot hold the next logical area of support is a very low 3000-3100. The market can have some very nice rallies in a bear market, so be patient and let the HCM-BuyLine® turn back up so we can get a clear picture the trend has changed.

There are some amazing buys out there right now, and way too many to list, but they are probably going to get more amazing and trade even lower. The cash some of these firms have on their balance sheet is incredible. What to do now?  Be patient, sit on the cash we built up, let the market tell us when it has bottomed, and then we can come back in with both barrels a-blazing’.


Cash and Cash Equivalents as of June 20, 2022
Howard Capital Management, Inc.

HCM Mutual Funds Cash %

Income Plus (HCMEX)*: 74%

Tactical Growth (HCMGX)*: 61%

Dividend Sector (HCMNX)*: 40%

*Click to view top 10 holdings

HCM Mutual Funds Cash %

HCM Defender 100 Index (QQH)*: 100%

HCM Defender 500 Index (LGH)*: 100%

*Click to view top 10 holdings

PWS Models Cash %

Nasdaq 100: 100%

Index Plus: 100% 

Sector Plus: 100% 

Yield Gen: 38% 

Short Term Bond ETF: 50% 

Long Term Bond ETF: 75% 

Muni Bond ETF: 100% 

Low Volatility: 0%

SMA Model Cash %

ALP Aggressive: 70%

ALP Growth: 69% 

ALP Balanced: 67% 

ALP Conservative: 65% 

All-American Aggressive: 62% 

All-American Growth: 62% 

All-American Balanced: 65% 

All-American Conservative: 65% 

Dividend Income Growth: 48% 

Dividend Income Balanced: 56% 

Dividend Income Conservative: 65% 

ILP ETF Growth: 91% 

ILP ETF Balanced: 58% 

ILP ETF Conservative: 38% 

Viper 2 Aggressive: 77% 

Viper 2 Growth: 66% 

Viper 2 Balanced: 54% 

Viper 2 Conservative: 55% 

Ultra Aggressive: 100% 

Horizon Income: 64% 

All Weather: 48% 

MIP Income: 82% 

MIP Conservative: 81% 

MIP Balanced: 81% 

MIP Growth: 81% 

MIP Aggressive: 81%

HCM-061622-61 • 1677-NLD-06172022

Disclosures

Investors should carefully consider the investment objectives, risks, charges, and expenses of Mutual Funds and ETF’s. This and other important information about the Funds are contained in the prospectus, which can be obtained at howardcmfunds.com or by calling 770- 642-4902. The prospectus should be read carefully before investing. HCM Funds are distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Northern Lights Distributors, LLC and Howard Capital Management, Inc. are not affiliated. HCM Funds are distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Northern Lights Distributors, LLC and Howard Capital Management, Inc. are not affiliated. NLD is distributor for the following: HCMEX, HCGMX, HCMNX, QQH, and LGH.

Important Risk Disclosure Mutual funds involve risk including possible loss of principal. When the Fund is out of the market and in cash or cash equivalents, there is a risk that the market will begin to rise rapidly and may cause the Fund to miss capturing the initial returns of changing market conditions. The mutual funds in which the Fund may invest may use leverage. Using leverage can magnify a mutual fund’s potential for gain or loss and therefore, amplify the effects of market volatility on a mutual fund’s share price. The Fund may be subject to the risk that its assets are invested in a particular sector or group of sectors in the economy and as a result, the value of the Fund may be adversely impacted by events or developments in a sector or group of sectors. The price of small or medium capitalization company stocks may be subject to more abrupt or erratic market movements than larger, more established companies or the market averages in general. A higher portfolio turnover will result in higher transactional and brokerage costs and may result in higher taxes when Fund shares are held in a taxable account. ETFs and mutual funds are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As a result, the cost of investing in the Fund will be higher than the cost of investing directly in other investment companies and may be higher than other mutual funds that invest directly in securities. The market value of ETF and mutual fund shares may differ from their net asset value. Each investment company and ETF is subject to specific risks, depending on the nature of the fund.

The Morningstar Rating for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history.  Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes.  It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance.  The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.  The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics.  The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns.  While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.


Rates on the Rise and the HCM Cash Buildup Continues

The Federal Reserve did raise interest rates by .75 percent this afternoon, and this is a welcome event. This is the first time there has been any real meaningful move to slow the rise in inflation. This market is looking for leadership from the White House, the Fed and the Treasury department and this is the only real meaningful event we have received from any office in the federal government.

The markets have sold off fast and deep after Friday’s inflation number jumped even higher. Optimism was starting to tick up as the market closed one day above the HCM-BuyLine® indicator on June 6th, indicating the potential start of a new trend. Remember, the market must close above the HCM-BuyLine® for 5 days for a confirmed signal to re-enter the market, which it did not do. The markets immediately sold off a sharp 9%+ in 4 trading days after the inflation number was released. One thing you most likely can expect is extreme volatility over the next few weeks, if not a few months.

I’m sure many of you have seen and read about Ray Dalio, who manages one of the world’s largest hedge funds. He is a big practitioner of transcendental meditation (TM). Transcendental meditation is usually practiced twice a day for 20 minutes where you sit in a quite space, close your eyes and try to empty your mind of stress and negative thoughts. Ray Dalio is a very big believer in TM and speaks about its benefits on a regular basis. So why do you think Ray is such a big advocate of TM? Answer: because of markets like this! Everyone, and I mean everyone, is getting thrown around the room in markets like this. Even Ray Dalio.

Stay optimistic. I have never met a rich pessimist!


Stocks Getting Rocked After Poor Inflation Numbers

The markets and the news have gotten so bad that it might actually be good. Confidence has dropped to about as bad as I have seen it in over 35 years. I was taken aback by Treasury Secretary Janet Yellen’s admission “Well, look, I think I was wrong then about the path that inflation would take,” Yellen answered. “As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly, that I at the time didn’t fully understand. But we recognize that now.” I appreciate her candor but anyone reading the Wall Street Journal or Investor Business Daily could see there was a real problem with inflation starting as far back as last year. Her latest hypothesis that we will not fall into a recession is not very inspiring.

The Reuters/University of Michigan Consumer Sentiment Index plunged 8.2 points in the preliminary June survey to 50.2, a record low, and far below the consensus of 59.0. It was the fifth decline in the past six months, as the sticker shock of higher gasoline and food prices continued to depress consumers. The assessment of current conditions dropped to its lowest level since May 1975, while consumer expectations were the worst since May 1980.

Friday’s report that the May Consumer Price Index gained 8.6% from the previous year was the highest inflation rate in more than forty years and pushed stock prices sharply lower for the day and week. Going into the report, expectations were for a slight dip in year-over-year inflation. As a result, Friday’s report apparently took stock and bond markets by surprise. The end result was sharply lower stock prices and a big jump in interest rates. As far as stocks are concerned, the recent rebound appears to have ended with a test of last month’s low now likely.

Core CPI, which excludes food and energy, rose a smaller 0.6%, but also exceeded the consensus of 0.5%. It was the biggest gain in nearly a year. Almost all core CPI components increased from the month before, as price pressures remained broad-based. Notably, shelter soared 0.6%, the most since January 1991. Airline fares jumped 12.6%, its third consecutive month of double-digit gains, as demand for travel increased, as did fuel and other costs. Used car and truck prices rose 1.8%, up for the first time in four months, while new vehicle prices rose 1.0% and have increased by at least that amount in nine of the past 13 months. The persistence of vehicle price growth reflects continued shortages and bottlenecks in this sector that emerged during the pandemic and have showed little improvement, as vehicle inventories continue to hover near historic lows relative to demand.


7-Week Losing Streak Finally Broken. Is Optimism Coming Back?

The S&P Index jumped 6.7% last week, the best since the week ending November 6, 2020. What’s more, the rally ended the losing streak at seven, avoiding a tie for the most consecutive weekly declines in the history of the benchmark. Breadth indicators like “Percentage of SPX issues above their 20-day moving average” jumped to their highest levels of the year.  This is encouraging given that trends remain negative.

One other development worth highlighting is the degree to which stocks hitting new 52-week lows plummeted to the lowest levels since early April.  Both of these readings suggest that the bounce late last week accomplished some technical progress and could be worth following.

The Conference Board’s Consumer Confidence Index fell 2.2 points in May to 106.4, a three-month low, but above the consensus of 103.9. The index is down 13.6 points from a year ago and has failed to recapture its pre-recession level so far in this expansion. In our analysis, the decline in confidence had generated a slowdown signal for the economy earlier this year. Nevertheless, the index remains well above its pandemic lows and far from recession territory.

Consumers felt more wary about both the present situation and the future outlook. On net, the assessment of current business conditions improved, while views on job availability weakened somewhat, but were still higher than pre-recession. The latter suggests a near-term uptick in the unemployment rate, but still tight labor market conditions. Consumer expectations backtracked 1.5 points to 77.5, its second lowest level since February 2014. Notably, expected business conditions hit their lowest level since October 2011, which historically has correlated with slower real GDP growth over the next two quarters. Job and income expectations were more favorable, but well below higher levels earlier in the expansion.


Caution Advised! Trader’s Rally Might be Temporary

The markets are deeply oversold and due for a nice trader’s rally. I would suspect a solid 10% move up, possibly up to around 4500 on the S&P 500 over the near-term. Be very careful because this could just be a TRADER’S RALLY. Stay nimble and set very tight stops.

We are not calling a bottom, but this selloff has created some amazing buys, and we think they could get even better. The HCM-BuyLine® is negative and until it changes, we will sit on the cash we have built up and let the HCM-BuyLine® tell us when to re-enter the market.

Some stocks we are looking at when the trend changes back to an uptrend are companies like Salesforce (CRM), Nvidia (NVDA), Advanced Microdevices (AMD), and the list goes on and on.

The S&P 500 roared into the close Friday, closing positive on the day at 3,901.36. The VIX closed at $29.43. The S&P 500 has still fallen seven weeks in a row, its longest losing streak since 2001. It recovered from its plunge into bear territory, but it’s still down 18% this year. 2022 is a midterm year, which typically experience a 17.1% average drawdown from peak to trough. When considering market cycles, this midterm year isn’t much of an anomaly.


Remaining Calm Amidst Major Selloffs

The HCM-BuyLine® is clearly negative, and we are sitting on a lot of cash. As it stands now, we are approximately 50% in cash and being patient is key. The markets will turn, we just do not know when, but we are in a very unique position with all the cash we have on hand. Our buy list a few months back was a page or two, now it’s a scroll. Lots of great companies have really dropped down in price.

We are not calling for a bottom, but there are some very interesting statistics on making a case for a bottom in the near-term.

Source: Bloomberg

Cash levels lining up at the highest levels in more than 20 years indicate the 2022 selloff is likely in its late stages. The first key takeaway from May 2022’s Bank of America (BofA) Fund Manager survey revolves around the levels of cash balances now being held in Assets under Management (AUM).  As seen below, these have reached the highest levels since 2001, over 20 years ago.  

21% of stocks are above their 200-day moving average and 79% are below their 200-DMA which means the odds are 89% that stocks are higher in 12 months. Historically speaking, when stocks have had this kind of selloff markets have tended to see a bottom.

The past week put the S&P 500 into a waterfall selloff seen only 18 times since 1940. During the week, stocks were down 5% for the week and had declined 16% in the past 5 months. Declining 16% in 5 months is a waterfall collapse. Waterfall declines show investors are now liquidating stocks with emotional fear taking hold. There are 13 waterfall selloffs since 1970. In 9 of the 13 most recent instances, the S&P 500 was often near the end of its decline.

Markets are in a bad way, but companies are still making very good money: Of the 458 companies that have reported so far (92% of the S&P 500), overall earnings results are beating estimates by a median of 9%, and 76% of those reporting are beating estimates in general.


Markets Struggle to Find Footing but Hope Remains for the 2nd Half of 2022

After what was a strong run-up, the HCM-BuyLine® has turned back to negative, and we have been reducing exposure to equites into any rally we have had. We are approximately at maximum cash, which is a very solid 40% or maybe a bit more. Remember, the HCM-BuyLine® has 73/27% average of being right or wrong. The market is deeply oversold, but any rally should be held suspect and patience should be adhered to. The market will bottom but only time will tell when it does. With the massive cash build-up we have, the turn of the market could be very rewarding. If we break the February 22 low the market will probably sell off to the 3980 level on the S&P 500, which would be the next level of support.

S&P 500 performance over the first four months of the year indicates a high chance that the market could rally in the last half of 2022. History suggests a weak start to the year could continue over the intermediate term, supporting a tactical underweight to stocks, but it does not prevent a second-half rally. Looking back, there have been 13 times where the first four months of the year were negative like it is today, and only 4 times did the S&P 500 not recover and end the year positive. Of those 4 times, the market recovered the following year. So, there is a 66% chance we will recover from the drop and end the year higher. This is important and if you’re an optimist, which I am, when the market does turn back up there will be some great buys with all the cash we have built up.

There is an amazing list of growth and technology stocks that have dropped down to the point where you could say they are value stocks at this time. We have our list ready, and it continues to grow. The markets will work themselves out given time.

Job openings increased 1.8% in March to a new record high of 11.5 million. There were notable gains in retail trade and durable goods manufacturing. Job openings increased in medium-size firms (50-249 workers) and large firms (250+ workers) but fell in small businesses (fewer than 50 workers). Hires ticked down 1.4% to 6.7 million, but the near-term upward trend was intact, as both the three-month and six-month averages continued to move up. Layoffs edged up 3.8% to 1.4 million, although still close to a record low level. Voluntary quits increased 3.5% to 4.5 million, a new record high and a sign of rising worker confidence about future job prospects.

The number of unemployed per job opening fell to a new record low of 0.515, indicating continued tightening in labor market conditions. The number of job openings has exceeded the number of job seekers for 11 straight months now, contributing to faster compensation growth. As this could potentially feed into a wage-price spiral, it supports the market’s and our expectation for a fast Fed tightening cycle this year.


“Don’t play the all-or-none game — What I have learned from 40 years of trading.”

Vance Howard Rings the NYSE Closing Bell November 2021

I have been doing this job of managing money just about my whole life and have loved nearly every minute of it. But as I get older and wiser, I do start to see things a lot more clearly. I had a younger member of our team ask me the other day “How do you seem so calm when the markets are falling part? It doesn’t seem to bother you at all.” I thought about that, and I realized that there are some advantages to getting older (even though I hate aging, it is better than the alternative), and two of those are experience and wisdom. The markets misbehaving makes me agitated, but not concerned. Why? Because I know the odds. We can’t guarantee anything in this business, so I will give odds from here forward. The odds of this market basing and moving higher are 99.9%, and the odds the indexes will make a new all-time high are 99.9%. The only question is when.

The HCM-BuyLine® has been one of the most productive indicators I think has ever been built. It will not call a top or bottom, but it gives a very good picture of when to reduce exposure and when to start buying again. We are sitting on about $480 million of cash in Tactical, $300 million in Dividend, and about $390 million cash and one-month T-bills in Income plus, and that does not include all the cash on the SMA side. So, all said and done we have about 30-35% in cash at HCM. We are still getting slung around the room like everyone else, but we have a huge amount of buying power when the markets turn around. We probably have one of the highest levels of cash in the industry compared to other firms such as Fidelity, BlackRock, and Vanguard. Odds are that those firms are most likely fully invested and will not be able to capture the bargains that the markets are creating at this very moment. When the market turns back up, we should be able to take advantage.

If you remember during the start of the pandemic, we were roughly 60% invested and 40% in cash. When the markets turned around, we redeployed that 40% cash cash back into the market around the second week of April and ended up posting some of the best returns in the industry that year. You don’t have to go 100% to cash to make a big impact on your portfolio when re-entering the markets. Remember earlier I talked about experience and wisdom? Well let me share with you what I have learned, and it was a baptism by fire. Going 100% to cash in a volatile market is a fool’s errand. I have done it many times, and the only time I should have was in 2008. That is verified by the way.

Our trading rules are to reduce exposure to equites in a down-trending market, but keep 60-70% invested and 30-40% in cash. These days the only time we will go to 100% cash is if the banking system is falling apart, which at this time it is not. In fact, our banking system is very strong.  By going to 100% cash, you are basically trying to call a top or bottom and that is very hard, if not impossible to do. Yes, by moving a lot to cash you feel great and look like a financial genius if the market continues to fall, but usually that only lasts for a very short period. In my experience it is typically 1-2 months, and then the markets base, move off the bottom, and move up by 10-20% while you’re sitting in all cash. Having been there myself, you feel horrible and look like a fool. By staying invested and building a 30-40% cash position, and by not playing the “All-or-None Game”, you can still buy some real deals when the market turns back up. This can end up making a big impact on your overall returns. By staying somewhat invested you participate in the recovery rally, which is usually very fast and strong. By playing too much defense and trying to sidestep every drawdown the market has thrown your way you will destroy your long-term performance. One of the biggest mistakes I have made is trying to play too much defense and not looking at the long-term odds.

I have a 22-year verified track record, and the numbers speak for themselves; my returns are some of the best in the industry. Like Will Rodgers said, “it ain’t bragging if you did it”. With that said, my returns would have been double and maybe even higher over that time if I had not been guilty early in my career of “playing the all-or-none game”. Historically, the market has always worked itself out, so reducing exposure in bad markets and staying invested with the majority of my funds would have been a huge advantage. Like I said, a baptism by fire. Remember the odds I gave earlier: 99.9%. I don’t know when the market will base and turn higher, or even how low it will go from here, but I do know the odds. You don’t have to win every round to win the fight.


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