by Sabrient - October 5th, 2015 10:18 am
Reminder: Sabrient is available to chat with Members, comments are found below each post.
Courtesy of Sabrient Systems and Gradient Analytics
Uncertainty about the health of the global economy led investors to flee U.S. equities during Q3, primarily driven by worries about China's growth prospects and the Federal Reserve’s decision to not raise rates. Sure, there are plenty of real and perceived headwinds, but on balance it seems that a recession here at home is not in the cards. And when you consider sentiment and the technical picture, it appears that a continuation of Friday’s bounce is in store. The question remains as to whether the seasonally strong Q4 will be able to propel the bulls through levels of resistance that have built up.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
On a total return basis, the S&P 500 large caps fell -6% during Q3, and mid- and small-cap stocks also struggled as the S&P 400 and the S&P 600 fell -8% and -9% during the quarter, respectively. Defensive strategies outperformed, and defensive sector Utilities held up the best, while Energy and Basic Materials struggled in the face of falling commodity prices.
Global headwinds are evident, particularly in China, but even our domestic data shows weakness. ISM manufacturing report last week was barely above 50, and New Orders and Backlogs are quite weak. And then the monthly employment report disappointed. Looking at the imminent Q3 earnings reports from among S&P 500 companies, estimated earnings are expected to fall -4.7% quarter-over-quarter (the first decline since 3Q2009), while revenues are expected to fall -2.8% from last year (which would be the third quarter in a row with declines). The best reports are expected to come from Consumer Discretionary, Telecom, and Healthcare.
by phil - October 5th, 2015 8:31 am
It's all very exciting isn't it?
Well, not when you look at a weekly chart, like this one from Dave Fry but, when you look at and hourly chart, like the ones most people seem fixated on – like this one:
Well, you'd think this was actually the greatest rally ever and everything is all fixed – just like our very short-sighted, know-nothing, cheerleading MSM is telling you.
Sure we're still 8.25% below that 2,125 line but we're up 4% from 1,875 so let's focus on the good stuff – even though we actually fell the predicted 10% with a 20% (of the drop) overshoot and now we're bouncing 20% (of the drop) off the 10% line back to -8% line, which the 5% Rule™ tells us is a WEAK bounce. The strong bounce line is still back at 2,000 and that's when we'll turn more bullish. Until then, we're just waiting for this bounce to run out of gas so we can take our next poke short.
While we did start the day bearish on Friday, we knew the Fed speakers would turn things around and I called the flip at 10:17 in our live Member Chat Room, saying:
Silver into a new leg up now, Gold flying too. Dollar failing $95.50. /NKD down 500 points for another $2,500 winner!
NONETHELESS – We now have no more data and 3 more Fed speakers coming so I think we may get a bounce here (16,000, 1,890, 4,125 and 1,080 would be the bullish lines to play over – 2 of 4 need to be over and then you can play the 3rd and make sure the 4th follows and make sure NONE go back below).
by ilene - October 4th, 2015 10:42 pm
Courtesy of Joshua M Brown
There was a lot of excitement about the market’s dramatic reversal to the upside on Friday. What began as a down 250-open for the Dow Jones Industrial Average ended with an up-200 close. It is understandable to see investors cheering this type of action – it’s quite a relief to see early morning losses turn to gains so quickly and forcefully.
Unfortunately, it would be ahistorical to think that this is somehow indicative of the resumption of the bull market. The reality is that the biggest intraday point swings in history have all taken place in the context of downtrends and bear markets.
The below table goes back to 1987 and obviously points are not the same as percentages, but I think you’ll get the idea:
15 of these 20 large intraday point swings for the Dow occurred on days during which the Dow ended with a loss, 5 of 20 were on up-days. Every single of one of these large swings took place during a market crash (we can debate the 2010 “Flash Crash” on the merits of time frame) save for the latest entrant, August 24th of this year. 9 of the top 10 intraday point swings took place during the infamous 4th quarter of 2008.
The point is that massive intraday point swings, regardless of direction, are not synonymous with “healthy” action, they are indicative of deep confusion and fear within the various layers of the investor class firmament. Friday’s action could be the beginning of a classic October “Bear-killer” rally, but it is way to soon to be drawing that conclusion.
Why? Because there’s still a lot of work to do within the stock market, not just on price itself.
The next chart I created is meant to show that the episode we’re contending with now has been long in the making. Anyone searching for day to day “reasons” as to why the market makes a volatile move would do well to understand that the internals had been portending the correction for a long time now; the sins beneath the surface had been piling up, despite the seemingly benign lack…
by phil - October 4th, 2015 8:33 am
One Million Dollars!
Actually $1,020,881.30 to be exact. That's the balance of our paired Short-Term and Long-Term Portfolios, up $420,881.30 (70%) in 7 quarters. Overall, our larger, Long-Term Portfolio has been performing at a predictable 31.2%, as our goal on those plays is to make 15-20% per year and it's been our Short-Term Portfolio that has outperformed, thanks in large part to long bets on AAPL and short bets on oil as well as a whole lot of well-timed hedges along the way.
By far, our best performing virtual portfolio is our STP, which is currently up 261.6% at $361,645.90 and, most importantly, it's very much in cash with $325,736 of it on the sidelines and only 10 open positions as we chose to sit out the market chop – for the most part. Keep in mind the main function of our Short-Term Portfolio is to protect the LTP and most of our LTP positions are self-hedging (short puts mainly) at the moment – so they simply don't need a great deal of protecting.
We've been putting a lot of our short-term trading power into our brand new Option Opportunities Portfolio, which I just wrote a separate review on, those are trades that would otherwise have gone into our STP, where we generally look for bearish offsets to our LTP while we also like to grab good trading opportunities as they come along.
There have been a lot of questions about access to our trade ideas lately and, to clarify, ALL trade ideas start out in our PSW Member Chat Room, which you can sign up for here as eiter a Trend Watcher Member (view Basic Chat only) or a Live Chat Member, where you can join in the conversation during the trading day. Premium Chat Memberships are currently wait-listed.
As of Friday's close, our Short-Term Portfolio (STP) was 90% in cash with these remaining open positions:
- FAS – We were HOPING Yellen could do more for us so we can begin rebuilding our FAS Money trade at a higher price but this thing died and stayed dead so far. We already made our money so it's like a
by phil - October 3rd, 2015 12:45 pm
It's actually only been 56 days but close enough.
So far, we've only had to close 10 positions (average of about one per week) for a $13,255 gain, which is 13.25% of the portfolio's $100,000 base. Our original goal was to try to make $5,000 a month, so we're well on track so far. It's been a choppy, nasty market and we've spent the last two weeks protecting our long positions more so than trying to add new ones.
The goal of our Options Opportunity Portfolio, is to take advantage of short-term OPPORTUNITIES in the market using options for both hedging and leverage. Overall our goal remains closing about $5,000 a month in profits, some of which we roll over into longer-term positions that will being paying us steady incomes as they mature.
The only new positions we added this week were Micron (MU), which had a wonderful day on Friday after earnings and finished at $15.91, well over the $15.50 target we need to make 72% on that trade. To protect our very quick gains, we also added a Jan $25/30 bull call spread on the ultra-short Nasdaq ETF (SQQQ) at $1,600, which pays $5,000 should the Nasdaq slips – so that's $3,400 of downside added against our open positions. Once you have profits, you also have a responsibility to protect them!
Before we Review our open positions, here's a quick look at the ones we've closed:
Our biggest loser, BID, is still a working, open position. We have 20 of the April $32s still open at $4.30 and we're down $2,600 so that's $1.30 per contract which means we neet to be $5.60 above our $32 strike by April option expirations (15th). The purpose of these reviews (and it's a habit you should have for all your positions) is to decide whether we are on or off track on our open items and to make adjustments were we're not on track.
by ilene - October 2nd, 2015 4:31 pm
By John Mauldin
There is presently a bull market in complacency. There are very few alarm bells going off anywhere; and frankly, in reaction to my own personal complacency, I have my antenna up for whatever it is I might be missing that would indicate an approaching recession.
It was very easy to call the last two recessions well in advance because we had inverted yield curves. In the US at least, that phenomenon has a perfect track record of predicting recessions. The problem now is that, with the Federal Reserve holding the short end of the curve at the zero bound, there is no way we can get an inverted yield curve, come hell or high water. For the record, inverted yield curves do not cause recessions, they simply indicate that something is seriously out of whack with the economy. Typically, a recession shows up three to four quarters later.
I know from my correspondence and conversations that I am not the only one who is concerned with the general complacency in the markets. But then, we’ve had this “bull market in complacency” for two years and things have generally improved, albeit at a slower pace in the current quarter.
With that background in mind, the generally bullish team at GaveKal has published two short essays with a rather negative, if not ominous, tone. Given that we are entering the month of October, known for market turbulence, I thought I would make these essays this week’s Outside the Box. One is from Pierre Gave, and the other is from Charles Gave. It is not terribly surprising to me that Charles can get bearish, but Pierre is usually a rather optimistic person, as is the rest of the team.
I was in Toronto for two back-to-back speeches before rushing back home this morning. I hope you’re having a great week. So now, remove sharp objects from your vicinity and peruse this week’s Outside the Box.
Your enjoying the cooler weather analyst,
John Mauldin, Editor
Outside the Box
A Worrying Set Of Signals
By Pierre Gave
Sept. 28, 2015
by ilene - October 2nd, 2015 2:40 pm
The scandal swirling around Germany's largest listed company had its beginnings in an attempt to crack the U.S. market, the missing link in VW's global footprint. But, as Handelsblatt details, what began as expansion ended in deception (piecing together the events that led up to the scandal, based on the facts as they are currently known).
Volkswagen, the world’s largest automaker, has been brought to its knees by the emissions cheating scandal. The company’s share price has been virtually halved, its reputation is in tatters, customers are furious and employees are distraught.
Handelsblatt pieces together the events that led up to the scandal, based on the facts as they are currently known.
The following chronology is based on the work of six reporters and correspondents, who analyzed corporate documents and spoke to many of the people involved.
Chapter 1: The Big Plan is Hatched in Wolfsburg
Wolfgang Bernhard becomes head of the group’s core VW brand and, with the help of CEO Bernd Pischetsrieder, begins developing a new engine that will work with “common rail injection.” The new engine is to be used above all in the United States, where VW wants to start growing again. The group hopes that diesel engines, which are more economical and accelerate quickly, will help it gain ground against U.S. and Japanese rivals. There is one problem, however: The U.S. authorities have the strictest environmental standards.
Mr. Bernhard entrusts the new project to Rudolf Krebs, a developer at VW’s Audi brand. It quickly becomes apparent that it will be impossible to comply with U.S. emissions standards using current technology. Their solution is “adblue,” a technology used by German carmaker Daimler. Developers at VW and Audi are strongly opposed to the use of “adblue” in the planned engine, which later will come to be known as the EA 189, the engine containing the emissions cheating device. Mr. Bernhard is undeterred and presses on with plans for the new engine to incorporate “adblue” and common rail injection.
by phil - October 2nd, 2015 8:25 am
What are these people so terrified of?
Clearly the markets are not allowed to have even a normal correction before the Central Banksters leap in with more stimulus. This morning, China stepped up their game by directing their banks to "support" infrastructure projects (more empty cities and airports will fix everything!) with a new round of bond issues. The China Development Bank and Export-Import Bank of China have received additional funding from the State Administration for Foreign Exchange (SAFE) for the same purpose.
The Chinese Government is even showering love on the casino operators in Macau pledging to introduce more policies this year to support the city. Government support could include allowing more mainland Chinese cities to offer individual visas, and introducing multi-entry permits to make it easier for people to gamble.
To support firms, the government will expand tax breaks and tax advantages now granted small firms to larger firms as well. In addition, incentives to engage in R&D activity will be increased and broadened. The government also hopes to increase foreign trade through cuts in certain import and export duties. Unfortunately, all this is just putting a band-aid on a severed limb as the Corporate Debt situation in China is in a full-fledged melt-down:
This week, Macquarie released a must-read report titled "Further deterioration in China’s corporate debt coverage", in which the Australian bank looks at the Chinese corporate debt bubble, not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with "uncovered debt", or those which can't even cover a full year of interest expense with profit.
As noted by Zero Hedge: It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would…
by ilene - October 1st, 2015 3:20 pm
Courtesy of Dana Lyons
4th quarters in years ending in “5″ have typically been big…but will it be enough to save 140-year streak of positive “year 5′s”?
Way back on January 3, we posted a note on an interesting and unusual streak. Using the S&P 500 (and the S&P Composite from Robert Shiller, pre-1950), every year ending in a “5″ has posted a positive return since 1875. In other words, the last 13 "5″ years have left stock investors “high-fiveing” each other.
We will say right off the bat that, no, we do not, nor do we recommend basing one’s investment approach on this phenomenon. It is likely mainly due to coincidence, with a healthy dose of positive Presidential Cycle “Year 3″ tailwind mixed in for several of the years. Nevertheless, it is a consistent and compelling track record.
Of course we had to jinx it. At least the streak is in serious jeopardy at the moment, with the S&P 500 down roughly 8% going into the 4th quarter.
The S&P 500 needs to close the year above 2058.90 to avoid breaking the 140-year old streak. That’s a gain of over 8% from current levels. A pretty tall task for the upcoming 4th quarter, huh? Actually, according to today’s Chart Of The Day, all it would take is an average “5″ year 4th quarter to close the year positively.
We looked at the performance of the Dow Jones Industrial Average (we have more confidence in that quarterly data than the S&P) in the 4th quarter of every “5″ year since 1900. As it turns out, all 11 of the years have displayed positive performance, with an impressive +10.3% average return.
As the chart shows, the positively skewed performance is not the result of any “outlier”-type years either. One may argue that there are technically 2 outlier years in 1905 and 1985 (I like to chalk 1985 up to the Bears winning Super Bowl XX…but that’s probably just another coincidence), at +18.3% and +16.4%, respectively. However, the majority of the years (6) saw 4th quarter returns between +4.2% and +9.5%. So the consistency of this phenomenon has been impressive.
by phil - October 1st, 2015 8:31 am
We drew the S&P bounce chart for you yesterday and we said we expected a run to our strong bounce line at 1,910 from 1,877,75 at the time. The long play paid off at $50 per point, per contract for a lovely $1,612.50 per contract gain (you're welcome) and this morning, in our Live Member Chat Room as well as the Chat in our Options Opportunity Portfolio, we took advantage of the overshoot to 1,924 (also noted on yesterday's chart) to short the S&P again and, as you can see, that's paying off nicely already.
We don't officially trade Futures in the OOP but, once in a while, I'll throw a pick out there along with our usual options trading. MU was our most recent long position and they release earnings after the close so I can't tell you what our play was because it's still gettable for our Members but tomorrow I'll tell you how well it went.
Overall, we are pretty sure this "rally" is fake, Fake, FAKE!!! and that's how we're playing it so expect us to be adjusting our hedges and cashing in some longs as we get ready for what could be a major leg down in the markets. For those of you who haven't been following along and aren't well-prepared for a market downturn, I refer you to my weekend post: "Hedging For Disaster – Now, Are You Ready To Listen? "
As you can see from Declan's SPX chart (full post at Chart School) the S&P needs to get back over 2,020 just to get back to where we bounced after the Aug 24 disaster and that was a VERY QUICK (2-day) recovery to 1,993. Today is day 2 of bounce 2 and are we at 1,993? No, we are not.
Therefore, this bounce is WEAKER than the last bounce and, much like a bouncing ball that's losing it's kinetic energy, the S&P 500 is losing it's energy as gravity begins to take it's toll (see the classic "Stock Market Physics" for more on how this works). For…