Frankly, while I nostalgically wish for the old world of investing, I’m focusing my own money management and assets on using these new ETFs as trading vehicles, which is what they are perfectly designed for. A “passive” index ETF that can trade exactly like a stock is an ideal vehicle for expressing a diversified trading strategy.
Our next chart comes from my friend, the always-interesting John Hussman, in his August 14 letter. It shows the S&P 500 Index value (left scale) against the percentage of US stocks trading above their 200-day moving average (right scale). Stocks in that category are usually said to be in long-term uptrends.
This chart reveals a major disconnect. Even as the index moves steadily higher, the number of bullishly trending stocks has dropped considerably. On the other hand, it’s still above 50%, so we can’t yet say most stocks are losing momentum. This is a figure the bears are watching, though.
The significance of momentum was brought home to me last week when I visited with one of my favorite hedge fund managers. I normally think of him as a “left tail risk” guy, as he has made a great deal of money shorting the right things over the past decade or so. So I was somewhat surprised when I found him in an extraordinarily bullish mood. He was seeing value everywhere. We sat in front of his Bloomberg screen and watched it light up. Even as we talked, he was punching buttons and buying and selling, giving trade orders to his staff.
He pointed out that we have been in a “rolling bear market.” Different sectors have gone into a bear-market phase, but the overall market has kept on chugging upward. His remark brought to mind something I wrote about in 2006, when everyone was saying housing prices couldn’t go down. The reality was that every region I looked at had had a bear market in its housing prices, just not at the same time as the rest of the country. Thus the housing price index for the country looked quite sustainable. But for those of us in Texas, scarred by memories of being able to buy homes at auction on the county courthouse steps in Houston, the concept of falling home prices was very real.
I work closely with managers who “deconstruct” the S&P 500 and invest in various sectors from time to time. Not quite sector rotation but a close cousin. A few years ago I think everybody realized you didn’t want to be in energy stocks. But the overall index kept steaming right along.
Recession Watch
Stock valuations are the discounted values of future earnings. Future earnings depend on future revenue, which may diminish whenever the future includes a recession. So broad economic conditions are another factor to watch.
Broad economic conditions depend ultimately on the consumer’s ability and willingness to spend money. Last week’s July retail sales report gave us a peek at that. Core retail sales rose 0.6% from June. The uptick was more than analysts expected, and most categories were up, too. The exceptions were clothing and electronics sales. The latter may have to do with potential smartphone buyers waiting to see new iPhone models expected to debut this fall.
Peter Boockvar summed up the bigger picture:
Bottom line, after the slowest y/o/y core sales gain since March 2016 in June of 2.5%, they rose by 3.6% y/o/y in July, which is about in line with the 5-year average of 3.3%. This pace though still remains well below the 5%+ growth rates in the two prior recoveries. Here are some reasons why: many consumers have jobs, but we know accelerating wage gains remain spotty; the savings rate is near the lowest level since 2008; and credit card debt, student loans, and car loans each total $1T+. Lastly, we know healthcare spending (high deductibles) and rent have dominated the budgets of many.