Low Volatility ETF's

There is a growing batch of US and global low-volatility ETF's - many of which sport decent dividend yields.  See this article by David Fabian of FMD Capital Management about the "Ins and Outs of Low Volatility ETF's."

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May 2016 USA market view

 jcJune

 

 

STOCKS.  The best three stocks in the 1-month category are CPXX @ 97%, USMD @ 79% and RYI @ 57%.

A stock trading on NasdaqCM, CPXX belongs to the Healthcare sector, Drugs – Generic industry.  With 25 employees, this biopharmaceutical company based in New Jersey, USA operates primarily in the home country and Canada developing therapies to treat cancer.

The stock price went up because it had a very strong up gap in March, it also went up well in April attracting the attention of investors, it made many headlines with good news, management filed excellent financials and announced progress in research nabbing a key FDA designation in the process, big institutional investors (Bruce Kovner and Israel Englander) were already invested in the stock big time and because another drug manufacturer, Jazz Pharmaceuticals, agreed to buy the company for US$1.5B.

Three stocks with the biggest 1-month decline are TDW @ –51%, GLF @ –52% and ARP–D @ –64%.

The top three stocks in the 3-month category are CPXX @ 1,305%, RYI @ 276% and SKY @ 156%.

The top three stocks in the YTD category are CPXX @ 1,609%, HMY @ 229% and AG @ 219%.

In the 12-month category, the best three stocks are CPXX @ 1,231%, SKY @ 213% and IGLD @ 209%.

In the “All time Highs” category the best three stocks are CPXX, PTI and NTLA.

SECTORS.  118 industry sectors out of 182 are in green territory, a decrease from last month.

The top three winners are Outsourcing, Beverages – Alcohol and Insurance – Multi Line.  The bottom three sectors are Movie & TV Production & Distribution, Steel Producers and ETFs – Currency.

MUTUAL FUNDS.  The top performers this month are two of the Ultrashort MSCI Brazil Proshares funds @ 29%, two of the Ultra Japan Profund Investor Class funds @ 15% and two of the Semiconductor Ultrasector Profund funds @ 12%.

EXCHANGE TRADED FUNDS.  The best three ETFs this month are DB Commodity Long ETN Powershares @ 52%, Vs 3X Inv Silver @ 37% and Ultrashort MSCI Brazil Proshares @ 30%.

FUTURES.  The top contracts are: (Currencies) US Dollar Index @ 2.50%, (Energies) ULSD NY Harbor @ 6.05%, (Financials) Ultra T-bond @ 1.24%, (Grains) Soybean Meal @ 17.38%, (Indices) E-mini Nasdaq 100 @ 4.17%, (Meats) Live Cattle @ 5.00%, (Metals) Gold @ –5.65% and (Softs) Orange Juice @ 19.89%.

INDEXES.  The best three indexes are S&P Information Technology @ 5.28%, NASDAQ 100 Index @ 4.21% and NASDAQ Composite @ 3.62%.

DOW Jones Industrial Average finished up @ 0.08% this month.*

            Relevant in May were titles like: “Puerto Rico says it will default on Monday”, “Wrong-Way Bets Rule U.S. Stock Market's $3 Trillion Recovery”, “How Close Is the Next Recession?”, “Bill Gross: 'Helicopter money' is coming in a year or so”, “Why Oil Prices Will Likely Drop Below $40 Soon”, “Hedge Fudge Managers Lose Their Swagger”, “These 3 events are threatening to shake up the market”, “Hedge funds — there are too many and most stink", "Steve Wynn lashes out on ‘unconscionable manipulation’ in the stock market", "Investors pouring billions into agriculture land, with returns performing better than S&P 500”, “This Is Very Good News - A Speculative Bull Market Is Emerging”, “Druckenmiller: These 2 charts show how 'unproductive' and 'reckless' companies have been”, “Legendary hedge fund manager Jim Simons.

 

[1] At the age of 78 and with a net worth of US$15.5B, Jim is the USA’s 26th and the world’s 50th richest man on Forbes’ March 2016 list, up from previous years.

 

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New Month, New Dividends: Welcome June!

dvdsBaseline Analytics has refined a series of stock and ETF-screening algorithms that pinpoint timely, high-probability trades and investment opportunities.

The results of Baseline Analytics' stock and ETF screens are delivered in a downloadable Excel file.  This file can be sorted to identify various performance and technical criteria to help provide a further edge to your trading and investments. Instructions are provided to guide you through your review. Our goal is to deliver such opportunities at your fingertips, with minimal research and analysis needed on your end.  We do provide a link to Yahoo Finance for each of our timely picks should you want to delve further into particular equities or ETF's.

Baseline Analytics has published its list of the stocks going Ex-Dividend in March that exhibit favorable technical trends. Perhaps a dividend-payer or two will emerge as a timely, attractive investment. This list was developed following the 5/27/16 market close. 

This list is offered free of charge.  Please check out our Premium Services , currently offered as OPEN ACCESS!

Click here for the list.

Subscribers to Baseline Analytics receive our proprietary screens regularly, and this screen in particular will be honed even further for more targeted opportunities, including noteworthy fundamental and technical criteria.  Receive these updates as well as our TrendFlex family of market trend signals and risk assessment tools as a subscriber to Baseline Analytics.

Profitable investing!

Baseline Analytics

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3347 Hits

April 2016 USA market view

 

JC0416

 

STOCKS.  The best three stocks in the 1-month category are GPL @ 122%, AMPE @ 89% and CYBE @ 85%.

A stock trading on NYSE MKT, GPL belongs to the Basic Materials sector, Silver industry.  With 340 employees, this company based in Vancouver, Canada engages in the mining of mineral properties in Mexico. It explores for silver, gold, lead, and zinc.

The stock price went up because the company’s financials released at the beginning of the month were good, the production results for the first quarter of 2016 released in mid April were good too, the stock made it on a technical list of promising breakouts on April 22 and the financials for the first quarter of 2016 released on April 25were encouraging.

The breakout was very good at producing four up days each with an up gap which have beaten the other candidates on the breakout list.

Three stocks with the biggest 1-month decline are CLMT @ –66%, FREE @ –71% and BBEPP @ –74%.

The top three stocks in the 3-month category are GPL @ 323%, CDE @ 266% and GDJJ @ 256%.

The top three stocks in the YTD category are GPL @ 332%, HMY @ 293% and AXU @ 270%.

In the 12-month category, the best three stocks are AVXL @ 313%, GPL @ 307% and ERII @ 286%.

In the “All time Highs” category the best three stocks are BGSF, BGS and CINR.

SECTORS.  141 industry sectors out of 182 are in green territory, a sharp increase from last month.

The top three winners are Food – Misc. & Diversified, Transportation – Services and Banks – West.

The bottom three sectors are Insurance – Property & Casualty, ETFS – Technology and Gaming.

MUTUAL FUNDS.  The top performers this month are two of the Precious Metals Ultra Sector Profund Inv Funds @ 39%, U.S. Global Investors World Precious Min, Duff & Phelps Select Energy MLP Fund Inc and US Global Investors Funds World Precious @ 33% and Nuveen All Cap Energy MLP Opportunities @ 32%.

EXCHANGE TRADED FUNDS.  The best three ETFs this month are G-X Gold Explorers ETF @ 57%, Purefunds ISE Junior Silver [Sm @ 55% and Proshares Ultra Gold Miners ETF @ 54%.

FUTURES.  The top contracts are: (Currencies) South African Rand @ 7.23%, (Energies) Oil @ 20.49%, (Financials) 30-day FED Funds @ 0.04%, (Grains) Soybean Meal @ 21.39%, (Indices) S&P GSCI @ 9.59%, (Meats) Lean Hogs @ –1.48%, (Metals) Silver @ 18.68% and (Softs) Cotton @ 11.31%.

INDEXES.  The best three indexes are CBOE Volatility Index @ 13.60%, S&P GSCI Index @ 11.17% and S&P Energy @ 8.78%.

DOW Jones Industrial Average finished up @ 2% this month.

E&OE.

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A Macro Economic and Technical Take on the Aging Bull Market - Re-post from March 2015 - 2/23/16

Barron's recently featured a talk with Doug Ramsey, Chief Investment Officer of Leuthold Group.  After six years of gains, Doug believes the the bull market is "tracing out a top."  "Valuations are high, yields are low, and areas like small caps, junk bonds and emerging markets have dipped in and out of bear territory - all worrisome signs for broad U.S. stock returns."  I admire Doug's work (Doug was one of my sponsors of my CMT designation at the Market Technician's Association). So this week I will take Doug's comments in mind while we view a longer-term perspective on the markets. Here are a few indicators of market bullishness and their current state of technical affairs: 

Small Cap vs. Large Cap Stocks

Small Cap strength and outperformance typically confirms the "risk-on" trade in equities. In the chart below, note how small caps underperformed the S&P 500 in 2014 (the brown line is a ratio of the Dow Jones Small Cap Index vs. the S&P 500). Small Caps recently bottomed out in October, and have since been recovering. Recently, however, small caps blazed against volatile general market indices, a potential sign of improvement in market internals.  

smallcapsoutperform03312015

 As seen in the chart below, small caps have continued to outperform the S&P 500:

iwmspx03312015

 

Dow Theory Confirmation (or lack thereof)

Dow Theory non-confirmation is another interesting, recent indication that a topping pattern in equities may be emerging. See this article in MarketWatch. Note that the Dow hit a new high in February, but the Transports lagged.  This is resolved either with the laggard index (in this case the Transports) catching up with the leader Dow, or the laggard pulling the leader down.  What's funky about this technical indicator is that it may be a 50/50 chance of either transports catching up or the Dow "catching down." For additional insight into the current view of Dow Theory, see this report by Matthew Kerkhoff.

dowtheory03312015

Growth vs. Value 

Growth has outperformed value as noted in the relationship between the Russell 2000 Growth Index and the Russell 2000 Value Index in the chart below (see the green boxes).  Those timeframes tend to be positive for the S&P 500. Recently, this relationship has looked a bit toppy with RSI again breaking above 70, a point at which past outperformance has reversed toward a more "risk-off" trade (denoted by the red boxes).

growthvalue03312015

 

Left unsaid in the above charts has been impressive market breadth in the major indices.  For more on this, visit "A Breadth of Fresh Highs" from the Baseline Analytics Market Tour Blog.

To respect the longer-term view, I visited Doug short at Advisor Perspectives. Doug's current assessment and outlook, as published in his March 16, 2015 analysis of economic indicators (click here for Doug's detailed report) is that

"The overall picture of the US economy had been one of slow recovery from the Great Recession with a clearly documented contraction during the winter of2013-2014, as reflected in last year's GDP for Q1 of last year. In April we'll get our first peak at Q1 2015 GDP. Preliminary data suggests that we'll see renewed finger pointing at the weather. The Big Four average in recent months suggests that the economy remains near stall speed."

In my opinion, to harken back to Doug Ramsey's perspective, a stalled stock market is consistent with a "stalled speed" economy, economic fundamentals catch up to valuations (and the financial juice injected by the Fed through last fall).

 

Marco-Economic Perspective

A few economic indicators point to a potential inflection in the markets, based on past performance.  Below is a chart of Initial Claims for Unemployment and the Wilshire 5000 Index. Note that initial claims have tended to find a bottom in the 250,000 to 300,000 level consistently since the mid-1970's.   Also note that there is a fairly consistent penchant for troughs in initial claims to precede tops in the Wilshire 5000.  The noteworthy exception can be seen in the "roaring 1990's" in the stock market, as the trough in initial claims in 1988 was not followed by any meaningful market setback. Even if economic growth opportunities today mirror in part the growth of the 1990's, visually the sharp ascent of the Wilshire 5000 is pronounced (as can be seen at the right of the chart in the orange line) and worthy of a bit of vertigo.

unemp clains wilshire 03272015

On a high level valuation perspective, the market has been tracking the growth in corporate profits rather steadily.  As expected, corporate profit growth tends to do a fair job of leading the market, as can be seen by the peak in profits in 2007 leading the topping action in the S&P 500, and similarly in 2011.  Note the timeframe of 2013 and later; there is a rather steady wide gap between the percentage change (from the prior year) in corporate profits vs. the percentage change in the S&P 500, the latter of which has settled toward the 15% level while the former is closer to single digits. Could this be suggestive of a slowing in the S&P 500 growth rate to a level more consistent with the slowing growth in profits?

spxprofitsfred

Our next view is a monthly chart of the S&P 500.  Although forecasting a market peak is a mix of technical analysis and black magic, it is interesting to note that a cyclical overlay, showing peaks and troughs over the last 20 years, reinforces the age of this bull market:

SPXcycle03092015

So should this be the peak year, where might the bottom be?  One approach is to apply Fibonacci Retracement levels to the current bull market, starting with the lows of March, 2009. A "modest" 38.2% retracement in a secular bull market would put the S&P 500 at the 1600 area. Using our two year spread between peak and trough would suggest 2017 as a bottom.  See below the monthly chart of the S&P 500 with a fibonacci retracement overlay:

SPXfib03092015 

In periods of rising economic growth, falling bond prices (rising rates) does not mean stocks need to decline too.  In the chart below, I have circled (see red ovals) the periods in which bonds have dropped (the 30-year Treasury) but equities (S&P 500 shown by the green line) have climbed. Despite a variety of technical relationships we can identify to support (or deny) the direction of the stock market, the main factor to keep in mind, in my opinion, is the age of this bull as referenced above by Doug Ramsey.

 bondsstocks03112015

So what's the strategy?  Yes the bull is aging, but even flat to single-digit returns over the course of an upcoming two-year period, marred by a correction (perhaps when rates finally do climb) may not be all that bad. Beware that at some point the inevitable recession will surface, and the aforementioned correction may be the leading indicator to such an event. As a tactical approach to this market environment, long term investors should maintain a responsible blend of equities, bonds, cash and alternatives, commensurate with their risk profile.

 

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8220 Hits

Emerging Interest in Energy ETF's - Rebound Coming?

oilgasWritten by David Fabian of FMD Capital Management.     A year ago I wrote an article about the unconventional trend of fund flows into energy ETFs as prices continued to plummet.  The surprising fact is that investors were pouring more and more money into these funds even as deflation continued to decimate both commodity futures and energy stocks.  This runs contrary to the typical cycle of outflows in a plunging asset class as fear of further losses sets in.

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Sector Detector: Bulls try to find a backbone in the face of fear and loathing

Written by Scott Martindale of Sabrient Systems.     Investors find themselves paralyzed by uncertainty given mixed messages from prominent market experts and talking heads, some professing the sorry and deteriorating state of the global economy, and others cheerleading the continued improvement in the fundamentals, particularly here in the U.S. Indeed, the nearly identical chart of the S&P 500 in 2015 compared to 2011 gave hope to a similarly solid start to 2016 as we saw in 2012, but instead we have seen the worst start to a New Year in history.

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2789 Hits

New Month, New Dividends: Hello February!

dvdsBaseline Analytics has refined a series of stock and ETF-screening algorithms that pinpoint timely, high-probability trades and investment opportunities.

The results of Baseline Analytics' stock and ETF screens are delivered in a downloadable Excel file.  This file can be sorted to identify various performance and technical criteria to help provide a further edge to your trading and investments. Instructions are provided to guide you through your review. Our goal is to deliver such opportunities at your fingertips, with minimal research and analysis needed on your end.  We do provide a link to Yahoo Finance for each of our timely picks should you want to delve further into particular equities or ETF's.

Baseline Analytics has published its list of the stocks going Ex-Dividend in January that exhibit favorable technical trends. Perhaps a dividend-payer or two will emerge as a timely, attractive investment. This list was developed following the 2/3/16 market close. 

Subscribers to Baseline Analytics receive our proprietary screens regularly, and this screen in particular will be honed even further for more targeted opportunities, including noteworthy fundamental and technical criteria.  Receive these updates as well as our TrendFlex family of market trend signals and risk assessment tools as a subscriber to Baseline Analytics.

Profitable investing!

Baseline Analytics

Continue reading
2679 Hits

January 2016 Market Report

  

Capturejc

 STOCKS.  The best three stocks in the 1-month category are DRD @ 65%, SPKE @ 25% and MBTF @ 23%.

A stock trading on NYSE, DRD belongs to the Basic Materials sector, Gold industry.  With 941 employees, this company founded in 1895 and based in Johannesburg, South Africa, engages in the retreatment, production, and sale of gold from surface tailings in the central Witwatersrand basin in Gauteng province South Africa.

The stock price went up because a solid Keltner Channel breakout occurred at the beginning of the month, a pattern which attracts increased attention from investors who kept on buying and buying throughout the month.

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Propensity for Panic

Written by David Fabian of FMD Capital Management.    In this video series, we take a look at the panic that has gripped the stock market in the first month of 2016. This review includes several key charts, trends to watch, and important levels we are monitoring at this time.  Recorded after the market close on January 28, 2016.

Click here for the video.

A log of our previous videos are posted here.

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1189 Hits

Can The Stock Market Return to New Highs?

Written by David Fabian of FMD Capital Management.     Surely one of the most incredible, and often times frustrating tendency in the stock market, is for the major indices to rally in the face of so much adversity.  Just when it appears that the world is falling apart through a combination of fundamental, technical, and cyclical factors, some unseen force comes through to unwind the negativity. 

This is also why its so difficult to forecast where stocks are headed with a high degree of conviction.  Last month all of the experts on TV told us we were headed for (or already in) a bear market.  Now those exact same talking heads are waving the all clear flag and talking about how the coast is clear.  What changed in so short a time frame?

There is a great saying on Wall Street that I will paraphrase as: nothing changes sentiment like price.  Meaning you are apt to get more bearish on the way down and more bullish on the way up.  It’s natural to become risk averse when you are losing money and want to get back in when it appears everyone else is riding prices higher.  Fighting those impulses, or adopting a counterintuitive mindset, can be one of your greatest allies throughout your investing career.

Examining where we are at in the current market, there is no doubt that the recent jump in the SPDR S&P 500 ETF (SPY) has been forceful.  I believe that many were positioned for more volatility ahead and were caught off sides when stocks all of a sudden adopted a resilient tone.

spy

This most recent leg higher appears different than the September fake-out.  Even modest dips have been bought throughout the rally and stocks have managed to keep down days to minimal blips on the radar.  This ultimately creates a “fear of missing out” (FOMO) that propels more and more investors back into the market as they try to recoup their losses or finish the year on a positive note.

No one wants to be the guy who sold and went to cash when their account was down 5%, only to see the market rally and finish the year with a 5% gain.  However, there is the potential for just that type of scenario to play out.

I’m not here to wave the green flag and tell you that you are going to miss a huge opportunity over the next two months.  By contrast, I am hesitant to put new money to work in stocks after such a big move to the upside.  I think that a more conservative approach of laddering back into new positions over time or looking to buy on weakness would serve you much better at this stage of the game.  Jumping in with both feet and whole lot of hope isn’t a sustainable investment approach.

One area of the market I have my eye on right now are semiconductor stocks.  There has been a great deal of M&A activity in this industry over the last several weeks in addition to a change in overall trend.  The iShares PHLX Semiconductor ETF(SOXX) is a market-cap weighted index of 30 companies in this sector.

soxx

After falling steeply in the third quarter and leading on the downside, SOXX has experienced an enviable snap back in recent weeks.  From a technical perspective, I think its worth noting that SOXX put in a higher low in September that was a positive sign of divergence from the broader market.  This has likely created a new momentum category that both growth and income investors should be mindful of through the remainder of the year.

The Bottom Line

The stock market loves to head fake us into uncomfortable decisions at the worst possible times.  That is why it is imperative that you make changes to your portfolio with a well-defined risk profile and sound investing principles.  My preferred tactic right now is to use a balanced asset allocation structure to survive market volatility and still participate in any additional upside momentum that carries us into year-end.

 

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2519 Hits

One Question Dominates: Correction or Reversal?

bunny cukWritten by Marc Chandler.    There is a sense that the markets are at crossroads. Many suspect there has been a trend change.   The reason for many to buy the dollar was the Fed was going to raise interest rates.   Lift-off may not be simply postponed until December, as was the decision to begin tapering, but a growing number of participants do not see it until March.  

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A Macro Economic and Technical Take on the Aging Bull Market - Re-post from March 2015 - 10/11/15

Barron's recently featured a talk with Doug Ramsey, Chief Investment Officer of Leuthold Group.  After six years of gains, Doug believes the the bull market is "tracing out a top."  "Valuations are high, yields are low, and areas like small caps, junk bonds and emerging markets have dipped in and out of bear territory - all worrisome signs for broad U.S. stock returns."  I admire Doug's work (Doug was one of my sponsors of my CMT designation at the Market Technician's Association). So this week I will take Doug's comments in mind while we view a longer-term perspective on the markets. Here are a few indicators of market bullishness and their current state of technical affairs: 

Small Cap vs. Large Cap Stocks

Small Cap strength and outperformance typically confirms the "risk-on" trade in equities. In the chart below, note how small caps underperformed the S&P 500 in 2014 (the brown line is a ratio of the Dow Jones Small Cap Index vs. the S&P 500). Small Caps recently bottomed out in October, and have since been recovering. Recently, however, small caps blazed against volatile general market indices, a potential sign of improvement in market internals.  

smallcapsoutperform03312015

 As seen in the chart below, small caps have continued to outperform the S&P 500:

iwmspx03312015

 

Dow Theory Confirmation (or lack thereof)

Dow Theory non-confirmation is another interesting, recent indication that a topping pattern in equities may be emerging. See this article in MarketWatch. Note that the Dow hit a new high in February, but the Transports lagged.  This is resolved either with the laggard index (in this case the Transports) catching up with the leader Dow, or the laggard pulling the leader down.  What's funky about this technical indicator is that it may be a 50/50 chance of either transports catching up or the Dow "catching down." For additional insight into the current view of Dow Theory, see this report by Matthew Kerkhoff.

dowtheory03312015

Growth vs. Value 

Growth has outperformed value as noted in the relationship between the Russell 2000 Growth Index and the Russell 2000 Value Index in the chart below (see the green boxes).  Those timeframes tend to be positive for the S&P 500. Recently, this relationship has looked a bit toppy with RSI again breaking above 70, a point at which past outperformance has reversed toward a more "risk-off" trade (denoted by the red boxes).

growthvalue03312015

 

Left unsaid in the above charts has been impressive market breadth in the major indices.  For more on this, visit "A Breadth of Fresh Highs" from the Baseline Analytics Market Tour Blog.

To respect the longer-term view, I visited Doug short at Advisor Perspectives. Doug's current assessment and outlook, as published in his March 16, 2015 analysis of economic indicators (click here for Doug's detailed report) is that

"The overall picture of the US economy had been one of slow recovery from the Great Recession with a clearly documented contraction during the winter of2013-2014, as reflected in last year's GDP for Q1 of last year. In April we'll get our first peak at Q1 2015 GDP. Preliminary data suggests that we'll see renewed finger pointing at the weather. The Big Four average in recent months suggests that the economy remains near stall speed."

In my opinion, to harken back to Doug Ramsey's perspective, a stalled stock market is consistent with a "stalled speed" economy, economic fundamentals catch up to valuations (and the financial juice injected by the Fed through last fall).

 

Marco-Economic Perspective

A few economic indicators point to a potential inflection in the markets, based on past performance.  Below is a chart of Initial Claims for Unemployment and the Wilshire 5000 Index. Note that initial claims have tended to find a bottom in the 250,000 to 300,000 level consistently since the mid-1970's.   Also note that there is a fairly consistent penchant for troughs in initial claims to precede tops in the Wilshire 5000.  The noteworthy exception can be seen in the "roaring 1990's" in the stock market, as the trough in initial claims in 1988 was not followed by any meaningful market setback. Even if economic growth opportunities today mirror in part the growth of the 1990's, visually the sharp ascent of the Wilshire 5000 is pronounced (as can be seen at the right of the chart in the orange line) and worthy of a bit of vertigo.

unemp clains wilshire 03272015

On a high level valuation perspective, the market has been tracking the growth in corporate profits rather steadily.  As expected, corporate profit growth tends to do a fair job of leading the market, as can be seen by the peak in profits in 2007 leading the topping action in the S&P 500, and similarly in 2011.  Note the timeframe of 2013 and later; there is a rather steady wide gap between the percentage change (from the prior year) in corporate profits vs. the percentage change in the S&P 500, the latter of which has settled toward the 15% level while the former is closer to single digits. Could this be suggestive of a slowing in the S&P 500 growth rate to a level more consistent with the slowing growth in profits?

spxprofitsfred

Our next view is a monthly chart of the S&P 500.  Although forecasting a market peak is a mix of technical analysis and black magic, it is interesting to note that a cyclical overlay, showing peaks and troughs over the last 20 years, reinforces the age of this bull market:

SPXcycle03092015

So should this be the peak year, where might the bottom be?  One approach is to apply Fibonacci Retracement levels to the current bull market, starting with the lows of March, 2009. A "modest" 38.2% retracement in a secular bull market would put the S&P 500 at the 1600 area. Using our two year spread between peak and trough would suggest 2017 as a bottom.  See below the monthly chart of the S&P 500 with a fibonacci retracement overlay:

SPXfib03092015 

In periods of rising economic growth, falling bond prices (rising rates) does not mean stocks need to decline too.  In the chart below, I have circled (see red ovals) the periods in which bonds have dropped (the 30-year Treasury) but equities (S&P 500 shown by the green line) have climbed. Despite a variety of technical relationships we can identify to support (or deny) the direction of the stock market, the main factor to keep in mind, in my opinion, is the age of this bull as referenced above by Doug Ramsey.

 bondsstocks03112015

So what's the strategy?  Yes the bull is aging, but even flat to single-digit returns over the course of an upcoming two-year period, marred by a correction (perhaps when rates finally do climb) may not be all that bad. Beware that at some point the inevitable recession will surface, and the aforementioned correction may be the leading indicator to such an event. As a tactical approach to this market environment, long term investors should maintain a responsible blend of equities, bonds, cash and alternatives, commensurate with their risk profile.

 

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4604 Hits

Seven 5-Star Gems

money head 1Baseline Analytics took its screening algorithms and applied them to S&P Capital IQ 5-Star Stocks.  We whittled down the list of 85 5-star leaders using the following criteria:

  1. Stock price in a bullish trend based on price above its 200-day moving average
  2. Price-to-Cashflow of 15 or less, which is below the average of the 85-stock list
  3. Dividend yield of 2% or higher
  4. A record of positive earnings suprises

Then, we applied this revised list of 17 stocks to our "Volume Surge" report format and chose those stocks with a RSI (Relative Strength Index) of below 65, avoiding overbought stocks.

The Volume Surge report format is handy to identify stocks that are basing (trading range), as their uptrend may resume, as well as stocks that have had a good run but have retraced recent gains, representing an ideal entry point.

Click here for the downloadable Excel file. 

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Two Observations on US Corporate Earnings

Written by Marc Chandler.          The US corporate earnings season is almost half over.  Fears that the US S&P 500 would report the first decline in income since 2009 have eased. One of the key reasons is that operating margins appear to have improved more than anticipated.  Many had seemed to exaggerate the impact of the dollar's appreciation.  It is true that many corporations have cited the dollar's rise as a factor dampening the value of their foreign sales.  However, many analysts have confused this with a comprehensive evaluation.

As we have argued, the US does not have an export-oriented model like Germany or China.  Instead for numerous reasons outside the scope of this note, US companies have pursued a direct investment strategy of building and selling abroad. Analysts appear to have under appreciated the savings achieved by affiliates of US companies that manufacture outside the US, but sell their products to dollar-based customers.

Moreover, as one insightful analyst noted, there is a difference between international exposure and non-dollar exposures.  Of the S&P 500 with the greatest foreign exposure, 63% of those that reported beat consensus earnings expectations.  About half of the purely domestic companies have beaten expectations thus far.  

Separately, we note an inversion of the past relationship between corporations and the capital markets.  Traditionally corporations were net borrowers from the capital markets.  This is no longer an accurate portrayal of the relationship.  Between share buybacks and dividends, corporate America has become a net provide of funds.  This year the combination of share buyback and dividends may exceed $1 trillion for the first time.  

This is not simply a cyclical phenomenon.  Share buybacks have been rising for three decades as a share of profits.  In 2014, the S&P 500 companies paid out in buybacks and dividends 95% of their profits.  This year is on track to surpass 100%.   

According to Bloomberg data, last year, US companies bought back about $550 bln worth of stock.  This easily surpassed the net money that flowed into US mutual funds and ETFs (~$85 bln).   This year, Bloomberg estimates that through February, US companies plunked down more than $100 bln to purchase shares while investors have liquidated some of their US equity holdings.  

Buybacks reduce the shares outstanding (though partially offset by the exercise of stock options), and this impacts earnings per share. The shares of companies that have been more aggressively buying back their own stock have outperformed the less aggressive companies' stock by around 5% in 2014, according to some estimates.  Smaller cap companies have been more rewarded, with those buying back their own shares outperforming by 11%.  

According to a Brookings Institute study, IBM spent $116 bln on share buybacks in the 2004-2013 period. This is equivalent to about 92% of Big Blue's profits.  Apple is another notable example.  Between August 2012 and March 2015, Apple has returned $112 bln to shareholders.  Yesterday it announced that it would boost its share buyback program by $50 bln (to $140 bln) and increase the dividend by 11% (~$20 bln).  Its revenues rose by 27% to $58 bln.  

We have argued that the return on the factors of production (land, labor and capital) is a function of supply and demand.  The low commodity prices, for example, reflect weaker demand and greater supply.  The weak wage growth is a function of slower growth creating few opportunities.  Similar the low return to capital (interest rates and profits) are a reflection of the ample supply.  

The push back against the argument is that the low interest rates are a function of central bank activity.  In particular,  QE is understood as depressing the return of capital.  While we recognize QE as a factor,  we recognize that weak growth and low inflation also play important roles.  Traditionally, economists would expect that low interest rates would lower the threshold for investment projects, and in turn boost demand for investment.    This does not appear to be happening.  

The high payout of profits to shareholders has been embraced by many share activists and other investors. However, it is controversial.  Larry Fink of Blackrock is critical.  He has argued that returning so much capital to investors is tantamount to “eating one’s own seed corn.”

However one comes down on the issue, it seems indisputable that corporations have more money than profitable investment opportunities,  and that in reducing the number of shares outstanding, corporations are boosting  per share measures more than organic growth.    

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