After a strong run-up from the November election and through February, the market was up on a “Trump Bump.” Personally, I thought the “Trump Bump” was more of a celebration over the discontinuance of anti-market policies put in place by an Obama administration that never understood how a market economy works. Hilary Clinton would have continued those same misguided policies for the same reasons. That Clinton lost and the anti-market policies ended was reason enough for the stock market run-up. Aside from reducing a few regulations, Trump as not actually done much to support an improvement in the economy or the stock market.
Then came March and April.
The rapid run-up in the preceding months has not only ended, but turned into a lingering consolidation or sell-off phase. This is likely to remain a short-term but necessary correction after the quick run-up. The reasons this is so is that underlying economic fundamentals remain strong. Everything from an improvement in the housing market to uptrends in consumer and business confidence, upward movements in wages, increased durable goods orders and rapidly increasing business earnings offer supporting evidence.
Given that the economic fundamentals that determine the long-term in the stock market are strong and, although they are influenced, they do not ultimately depend on the enactment or failure of a particular policy. Thus, investors interested in the long-term need do nothing. It is simply the case that the market correction is necessary before a new upward trend will take over within the context of this particular bull-market. That said, having cash on had with which to buy the dips is probably a sound strategy. Buying small amounts in the event that a stock falls further is also prudent.
As the market may test its 100 or 200 day support lines, there are a great many strategies that short-term traders might use to their advantage. Because there are so many strategies and because I am more of an investor who actively manages longer-term investments, I won’t go into those.
Update for 4/18/2017
Don’t read too much into Monday’s strong risk-on or stock buying behavior. It is more likely an aberration from the slow slide . Investors should continue to buy small amounts on dips and position themselves for profits when a renewed upward trend becomes the norm. The slide and bottom will last longer and go lower if earnings misses like GS are frequent, otherwise it will be shallower.
Lessons from the past week of March 17 – 21. I actually made a lot of money this week by holding the stock picks that I recommended. I also held some dividend funds that saw inflows and unrealized capital gains when the market tanked 3 out of the last 5 days. Of course, I also received dividends. Thus, for me it was a really good week. The market had good fundamentals in earnings but the French elections and tax policy issues made for a choppy and uncertain market that favored traders. Next week has a lot of first quarter earnings, but also the same sources of “noise” that causes an oscillation from risk-on to risk-off. I stocked up on more of my inverse beta stock TZA just as a hedge against a strong-risk off bias. I’ll have next weeks stock picks out soon. In the meantime, good investing!
Update for April 28 (last trading day):
Forward looking market will rely on earnings strength and earnings season was better than expected. Other forward-looking support derives from the underlying strength in the economy, continued bull market strength, and hope related to tax reform. Backward looking forces such as Q1 GDP growth of 0.7% was not as weak as some expected (e.g., 0.2% by the Atlanta Fed). This suggests that buying my stocks picks and recommendations in the weekly stock picks section on any dips as they occur will remain a winning strategy.
May 14 Stock State:
Although a recession cannot be predicted, the data show we are still in an expansionary economic phase. This supports a continued the current bull market in equities.
Rationale:
1) The economic expansion and stock market driver is a wave to technological advances in artificial intelligence, robotics, and the internet of things such as cloud computing and other mobile applications. Possibly, this is a Schumpeter Wave (http://www.economist.com/news/business/21587207-corporate-dealmakers-should-heed-lessons-past-merger-waves-riding-wave) that has a very long duration.
2) Economic data from leading and coincident indicators are generally positive. This includes positive indications from long-run indicators such as the interest rate yield curve (i.e., that long rates exceed the short rates), The real money supply, the Chicago Fed Financial conditions Indexes (financial conditions are very critical), industrial commodities prices, and the labor and real estate markets. Coincident indicators such as retail sales and consumer spending ( about 70% of total economic expenditures) are even more positive.
3) Risks to the stock market remain the same: Geopolitical, US politics, and fear of an overpriced stocks. As it is now, only the energy sector appears overpriced while the other areas of risk cannot be predicted.
Recommended Stock and Investing strategy: Buy my recommended stocks and funds aggressively on pull-backs and dips. Expect others that feel they have missed out on the stock market rally to do the same.
May 17 Update: Strong, long-run and forward-looking economic fundamentals based upon Q2 growth forecasts of 3 – 4% versus the US political risks of the Trump/FBI quagmire that threatens to spill over into Trump’s economic agenda. What to do? Investors will look at the long-run and ride out the short-run volatility. Traders will take advantage of short-run opportunities. Active investors, like myself that have cash on hand will look at the market pull-back as a buying opportunity for long-run gains. If it gets bad enough my inverse beta stock TZA produces significant gains that I can apply to short-run buying opportunities. Good investing!
Friday, May 19 update: Now we see the outcome of the previously stated conflict. Raging Market Bull Tramples US Political Risk.
Want more proof of the raging force of the current bull market? Just keep watching . . . and read about the Schumpeter Wave referenced above in the Economist.
Sunday, May 21 update: Aggressive bull markets come with aggressive pull backs. The one day (Wednesdays) sell-off offset almost all gains from Monday, Tuesday, Thursday, and Friday. Expect another sell-off, probably bigger, in June. Hedge against such pull-backs. Read “Look Out Below”. For me, the best hedge is to buy TZA on good days when it is down. A bigger position before a sell-off will then make you money you can use to buy back in at the lower prices. In the long-run, the Bull Market will Charge Ahead.
Alternative hedges such as cash and gold or silver are also good, but harder to predict in terms of the longer-run. Silver appears to have the most upside in the longer-run but gold will also perform well if the dollar weakens. Good Investing!
Friday, May 26, 2017 Market Update: Recent market top is NOT characteristic of risk-on buying. More of a large tech cautious buying. Implying this: Increased risk of a reversal and sell-off characterized by panic selling.
Increased risk of a sell-off might be only one possible scenario and is not as likely, perhaps, as a continuation of the upward bull-trend. This argument is supported by Friday’s negative open before a 3 day weekend which is a typical contrarian market in which sellers take profits and wait for the next market open. This implies a resumption of the existing upward trend on Tuesday, baring a negative geopolitical event during the weekend. Hedge your bets accordingly and read “look out below” just in case the worst scenario is what we get. Good investing!
May 28, 2017 Market Update: Indications that a secular bull-market will last for the next 15 years in which buyers out number sellers over this period are 1) Generational Demographics and 2) improving labor market conditions. Technology is not a concern. The only thing that matters is whether workers have the requisite skills such that technology is complementary rather than a substitute. For most semi-structured and unstructured jobs, technology is always complementary. I can’t do research as efficiently without software and search engines, for example. Research is at best semi-structured and technology is entirely complementary. Structured jobs, such as assembly line work, on the other hand, are those for which technology is a substitute. Moreover, higher minimum wages will only increase the rate at which technology substitutes for these types of positions.
The implications for market strategy are simply to Buy on the Dips. Pull-backs will occur and are hard to predict, but they are merely profit opportunities. Stay in it to win it in the long-run. Good Investing!
May 30, 2017 update: Seems were are getting used to the status quo of the bull market v. geopolitical and US political events and noise. The bull market is being driven by strong Q2 GDP forecasts and strong earnings in the short to intermediate term. In the long-run, buyers outnumber sellers due to demographics (gen. X and the millennial generation size) and secular labor market factors that drive up wages and income. As I said in the previous post, technology is a net positive that will add more to productivity than anything else.
There is no way to predict the short-run fall out from US politics or geopolitical events, or to predict a recession or market correction for that matter. There will be some pull-backs and corrections even without a recession, thus I would continue to hold some cash and buy my market beating stocks and funds on the dips. I’ll continue to provide an array of different types of funds and stocks for you to consider. Good Investing!
