“Patience is not just about waiting for something… it’s about how you wait, or your attitude while waiting.” – Joyce Meyer
Memorial Day Weekend served as the unofficial start to the summer, but many vacation plans have been canceled and large gatherings are still prohibited, leaving no question that this summer will be quite different. One notion that was touted at the beginning of this month was should investors “Sell In May and Go Away”. It was more prominent this year than ever before as many saw the 700 point, 31% rally from March 23 to April 29th as a market gone too far too fast, and given the backdrop wasn’t justified. Perhaps they forgot and decided not to factor in the 35% decline in 21 trading days that occurred in March.
From the outset, not many believed in the rally, and so it appeared the setup was “perfect” for those inclined to abandon, hedge, or go “net short” the S&P. With the poor economic data being reported across the globe, the consensus view saw the risk/reward as being skewed to the downside.
A quick look at the last 4 years indicates that it wasn’t a good idea to sell in May. While last year would have resulted in paring losses, the prior 3 years would not have worked out very well at all. Then again, this time was supposed to be different. The bears reminded us this is not the bull market backdrop investors have been used to. A lesson learned, trying to “outthink” the stock market rarely produces success.
I’m not inclined to go with an all or nothing decision and more importantly, investors should have a personalized asset allocation strategy that they adhere to. At the end of the day, it should come down to watching the price action. That will determine if an investor should play “hard” or take a step back, possibly lighten up or just observe.
There is always uncertainty in the markets, but never the type of uncertainty we have now. The incessant commentary on a vaccine. The idea that the pandemic will get worse as states rush to re-open. The next round of the virus will be coming and it could meet up with the seasonal flu. Then there are the geopolitical issues with China now emerging.
The “what If “ crowd is in their glory, and for an investor like myself it is 95% noise. Why? 95% or more of what was predicted hasn’t come to pass on any level regarding this virus scare. Investors are constantly bombarded with conflicting news related to this outbreak daily, and given the fact that none of us has ever dealt with a global pandemic, no one knows how things will play out. However, many are telling us exactly how it will play out. Far too many added “Scientist” to their Financial Analyst resumes. When it came to forecasting on both fronts they were found to be dead wrong. Another lesson learned, investing using preconceived notions is a recipe for failure.
I’m certainly not going to be determining my short to intermediate-term investment path based on conjecture and rank speculation. Rest assured that is exactly what took place on the investment scene since the word Coronavirus was first uttered. Now we have a big rally off the lows with valuations the most expensive we have seen since 2001, volatility near peaks levels, and some investors can neither understand or “deal” with it.
Except there are others that are dealing with it and dealing with it very well in fact. Many of the opportunities presented by this virus episode have produced gains that far outweigh the “averages”. While reaping those rewards, savvy investors were well aware of the “potential “ perils this summer. The outlook for the second wave of COVID-19 outbreaks, a failed therapeutic or vaccine, mounting election uncertainty, and growing tensions between the US and China. However, price action in certain areas of the market was marching to a different narrative. Learning the lesson to follow the market’s message is one of the hardest things for investors to grasp. It separates success from failure.
Now before the critics start interpreting the commentary this week to suggest that I am telling investors to go “all in” because the equity markets will rise unabated, please read this next sentence carefully. A temporary pullback of about 5 to 7% at some point during the summer would be consistent with the average drawdown we have seen over the last ten years.
However, if this downside pressure were to occur, it may very well be a buying opportunity. That last comment may not sit well with the “virus” squad that predicted doom for both the human race and the equity market. If they followed their notion on the “health scare”, how ironic that they are the ones that are financially dead. Any downside pressure will bring out the self-proclaimed “experts” to tell us the “Next Leg Down Is Now Upon Us”. The problem is they told us the same thing on March 29th when they were selling fear by forecasting S&P 1800. That horrific “call” implied an additional 27% decline for the S&P 500 was on its way. A valuable lesson, avoid the charlatans selling a “story”
In a world of zero interest rates, if equities are priced based on the present value of future cash flows, then one bad year of earnings now shouldn’t have much more than a 10% impact on stock prices. The market is looking past that valley. That was noted in early May when the positive price action, NOT the headlines were the area to concentrate on.
Of course, there are negatives. Economic activity is still very weak, people are still “afraid” of the virus, interest rates remain near their lows suggesting expectations for a weak recovery. Then again there were few instances when the fixed income market aligned with the incessant new highs during the previous bull market. On the positive side of things, economic activity looks to have bottomed, market breadth is widening, investor sentiment remains negative, and the view from 30,000 feet shows a BULL market trend back in place. If the medical “experts” remain in the “back of the room”, confidence will emerge as it will be very clear we will all have to live with this virus. “Life” and the economy will begin to move forward.
You couldn’t ask for a better way to start the unofficial Summer trading season. It was “Risk On” across the board as everything from commodities to stocks rose. The S&P opened the week trading above 3000 for the first time since March 5th. The Russell 2000 was an outperformer on the day gaining 2.88% adding to the outsized gain from the week before.
The Bulls were just getting started as the rally extended into Wednesday. The S&P gained another 1.5% closing decisively above its 200-day moving average and putting the 3000 levels in the rearview mirror. Every sector finished in the green. The Russel tacked on another 3+%. That increased the gain from May 14th low to 16%. It became apparent the market is signaling the Stay at Home trade has now morphed into an Economy-Related rally. Good news for the Bulls.
After this strong upward move many analysts were anxious over the much anticipated “Chinese” rhetoric. That proved to be a non-event, and after a brief “pause” stocks rallied to close out the week in strong fashion. So for May were everyone was supposed to run away, the S&P closed out the month with a 4.5% gain. The Dow 30 followed with a 4.2% increase. While the Russell 2000 and the Nasdaq Composite finished up the month with gains of 6.9% and 6.7% respectively.
Global markets rallied during the past week as well. Monday started positively with the Nikkei and ASX 200 leading the charge up 7+% and 5+%, respectively.
While the STOXX 600 has a long way to go before it gets to its 200-Day moving average, it also rallied 6% to the highest levels since the first week of March.
Q1 GDP was revised to a -5.0% growth rate versus the -4.8% pace registered in the Advance report. It’s the third weakest number on record. In 2019 GDP posted growth rates of 2.1% in Q4 and Q3, 2.0% in Q2, and 3.1% in Q1.
Consumer confidence index rises to 86.6 in May from a 6-year low of 85.7 in April left the measure in expansion territory despite a big net pull-back over the last three months, leaving confidence slightly closer to the 18-year high of 137.9 in October of 2018 than the 25.3 cycle-low in February of 2009. The same pattern is evident in other confidence surveys, and this resilience may support sales as shutdown restrictions are lifted.
Personal income surged 10.5% in April while consumption dove -13.6%, reflecting effects from the coronavirus shutdowns. The original -2.0% decline in March income was bumped down to -2.2% following February’s 0.5% gain. Government transfers supported income last month. The savings rate jumped a whopping 33.0% after March’s 12.7% (was 13.1%) rise.
Dallas Fed’s manufacturing index rose 24.8 points to -49.2 after sliding -3.9 points to -74.0 (was -73.7) in April, following the record -70.9 point crash to -70.1 (was -70.0) in March, as the region suffered from the double whammy of the coronavirus shutdowns and the cratering in oil prices. Nearly every component improved, with many halving April losses.
Richmond Fed manufacturing index rose 26 points to -27 in May, a little better than expected, after crashing -55 points to -53 in April. Most of the components improved, suggesting the worst of the impact is over after unprecedented relief measures from the government and the Fed.
Weekly jobless claims contracted -323k to 2,123k in the week ended May 23 after tumbling -241k to 2,446k. Claims have been declining since surging to 6,867k in the March 27 week. The 4-week moving average is now at 2,608k from 3,044k.
New home sales sharply beat estimates with a 0.6% April rise to 623k, after -35k in downward Q1 revisions that were part of annual adjustments to the series back through 2015. new home sales have only modestly trimmed the winter spike to a 774k pace in January that marked the highest rate since 2007. As in March, the April data showed weakness in the northeast and west but firm levels in the midwest and south, though analysts saw April gains for all regions except the west.
Pending home sales to buy previously owned homes in the US slumped 33.8 percent over a year earlier in April of 2020, following a 16.3 percent plunge in the previous month. It was the biggest annual decline ever in pending home sales due to the coronavirus crisis.
Lawrence Yun, NAR’s chief economist;
“With nearly all states under stay-at-home orders in April, it is no surprise to see the markedly reduced activity in signing contracts for home purchases. The latest pending home sales numbers reveal the greatest decline since NAR begin tracking such transactions in January 2001.”
“While coronavirus mitigation efforts have disrupted contract signings, the real estate industry is ‘hot’ in affordable price points with the wide prevalence of bidding wars for the limited inventory. In the coming months, buying activity will rise as states reopen and more consumers feel comfortable about homebuying in the midst of the social distancing measures.”
“Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11% in 2020 with the median home price projected to increase by 4%.In the prior forecast, sales were expected to fall by 15% and there was no increase in home price.”
Overall, industrial production is down 15.9% annualized in the past three months versus Q4, with the drops in EM Asia dramatically worse than the rest of the world.
Given U.S. and European numbers so far for April, this data is likely to continue to worsen in the coming months despite reopening and resumed activity in China over the last few months.
Chinese industrial production rose by 3.9 percent year-on-year in April 2020, reversing from a 1.1 percent fall in the previous month and compared with market expectations of a 1.5 percent gain. This was the first growth in industrial output since December last year, as the economy slowly emerges from the COVID-19 outbreak.
FactSet Research weekly update:
For Q1 2020:
- With 95% of the companies in the S&P 500 reporting actual results, 64% of S&P 500 companies have reported a positive EPS surprise and 57% of S&P 500 companies have reported a positive revenue surprise.
- The earnings decline for the S&P 500 is -14.6%. If -14.6% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings reported by the index since Q3 2009 (-15.7%).
- The blended revenue growth rate for the first quarter is 0.8%, which is slightly above the revenue growth rate of 0.7% last week. Positive revenue surprises reported by companies in the Consumer Staples and Health Care sectors were mainly responsible for the small increase in the overall revenue growth rate during the week. If 0.8% is the actual growth rate for the quarter, it will mark the lowest year-over-year growth in revenue for the index since Q2 2016 (-0.2%).
- 19 S&P 500 companies have issued negative EPS guidance, and 18 S&P 500 companies have issued positive EPS guidance.
- Valuation: The forward 12-month P/E ratio for the S&P 500 is 21.0. This P/E ratio is above the 5-year average (16.8) and the 10-year average (15.1).
At the sector level, the Health Care (81%) and Materials (79%) sectors have the highest percentages of companies reporting earnings above estimates, while the Consumer Discretionary (40%), Financials (51%), Real Estate (52%), and Utilities (54%) sectors have the lowest percentages of companies reporting earnings (or FFO for Real Estate) above estimates.
The Political Scene
The U.S.-China relationship is showing further signs of strain, and the question so many analysts are concerned about is now how long it can hold before significantly escalating. Following last week’s enhanced export controls targeting Huawei, the Senate passed a bill this week that would require Chinese firms to delist from U.S. exchanges if they do not meet certain auditing standards (potentially affecting about 150 U.S.-listed firms). On the fiscal relief front, bipartisan support for further action is growing, which could see a bill produced sometime in June.
It seems Congress acts quicker on these types of issues while playing politics on economic issues that affect the “home front”.
The much-anticipated press conference on Friday wasn’t the “nightmare” event for the stock market so many were forecasting.
The last Bullet point will save the U.S. between $400-$500 million annually. That is 10 times the amount of funding that China pays.
Other “headline remarks“ that was already known;
“China has ripped off the U.S. for decades”
“China cover-up allowed coronavirus to spread all over the world”.
The announcement was a HUGE positive for the U.S. We learned a lesson from the pandemic. How overly dependent this country was on certain medical supplies, drugs, and other items that were produced in China. Perhaps that ill-conceived approach and dependency will slowly come to an end. All should be reminded it started with the words when Chinese tariffs were put in place. “Companies need to get out of China”. At the time it was met with disbelief and scorn.
Obsessing over what may or may not be announced is a fool’s errand and it should be another lesson learned.
No surprise. Fed’s Beige Book highlighted the crushing weakness in the economy due to the “disruptions associated with the COVID-19.” And while there were hopes that overall activity would pick-up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.
The report was prepared by the KC Fed with data collected on or before May 18, so still in the prime of weak data reports. The Beige Book said consumer spending fell further due to the mandated closures that were largely in place during the survey. There were “severe declines” in leisure and hospitality, with very little tourism. Auto sales were “substantially lower” than last year, but several districts did not improve.
There were also “sharp” drops in manufacturing in a majority of Districts, while production was “notably weak in auto, aerospace, and energy-related plants. Additionally, residential home sales plunged due partly to fewer new listings and to restrictions on home showings. Bankers reported strong demand for PPP loans, while commercial bankers said a large number of retail tenants had deferred or missed rent payments. Agricultural conditions worsened. with several Districts reporting reduced production capacity at meat-processing plants due to closures and social distancing measures. Energy activity plummeted as firms announced oil well closures, which led to historically low levels of active drilling rigs.
The 10-year Treasury bottomed at 0.40% over the worldwide fears that are present. The 10-year note yield rallied off those lows to 1.18%. A trading range under 1% has been established now with the 10-year note closing the week at 0.65%, down .01% from the prior weekly close.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
Source: U.S. Dept. Of The Treasury
The 2-10 spread was 30 basis points at the start of 2020; it stands at 49 basis points today.
Investors and newsletter writers are slowly being convinced by the rally as the S&P 500 has retaken its 200-day moving average the past week. 33% of respondents in AAII’s weekly sentiment survey reported as bullish this week. That is up from 29% last week and the highest level of bullish sentiment since April 16th when it reached 34.8%.
Bearish sentiment declined by 1.1% to 42.1% this week. AAII’s survey is reading the lowest level of bearish sentiment since mid-April. This week was the third consecutive week with bearish sentiment declining, but despite that, it is still fairly elevated. This week marked the twelfth consecutive week in which bearish sentiment was at least one standard deviation above its historical average (30.4%). That is the longest such streak since a 14-week long streak in 2008.
Bespoke Investment Group:
“Fund Flows Still Show Little Equities Enthusiasm”
Equity fund flows remain negative. While there’s been lots of anecdotal evidence and “talk” of retail enthusiasm in the equity market, fund flows are a very different story. This week was relatively modest, with equity fund outflows in the bottom 6% of all readings across mutual funds and ETFs.
That totals $13.7 billion out the door, with the worst hits coming for global funds which saw flows in the bottom 3% of all readings. The last 3 months and year have been the worst on record for aggregate equity fund flow across mutual funds and ETFs, and the worst three months on record for world equity funds. ETFs tracking equities have not seen large inflows but they are also not suffering the same kind of outflows as mutual funds.
WTI Has rallied sharply but it is approaching likely resistance.
It was only a month ago that it appeared that the oil market was broken and the commodity would never go up again; since then, oil has rallied and energy stocks have done marginally well vs the rest of the S&P 500. Now, though, it might get a little tougher, as WTI nears what should be a likely resistance area from the breakdown in early March.
If it can clear the $35-36 zone, there’s not much standing in its way until ~$40-41, but the former zone could be a big hurdle. Also, Energy has recently started to trade sideways again versus the S&P 500, so the outperformance has stalled for now.
The price of crude oil closed the week at $35.16, which was an increase of $1.72 for the week, bringing the four-week gain to $15.68.
The Technical Picture
Recently one of the biggest technical concerns was that the major Advance-Decline lines weren’t reflecting the same kind of strength as the S&P 500 and NASDAQ. However, with the improvement in the small caps, the NYSE and NASDAQ A-D lines have now returned to a pattern of higher highs to help confirm the action in the indices.
Another bit of good news is that the Semiconductor Index (SOX) recently made a new high versus the S&P 500. As I regularly point out, SOX is often a leading indicator for the broad market so the BULLS would like it leading the way.
The DAILY chart of the S&P 500 shows the index breaking above resistance at the October ’19 breakout level (3025).
The moving average trend lines are clustered around the 2900-2950 range. The BEARS will need to take those levels out to regain control of the short term situation.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
One thing that we know for sure, the NASDAQ and NASDAQ100 other than a very brief spell in March remained in bull market configurations. Every moving average from the 20-day to the 20-Month are in uptrends. At no time did the longer-term 20-month MA for either index ever flatten or appear ready to “roll-over”. The two indexes are almost at new All-Time Highs and remain above their rising 10, 20, 50, and 200-day Moving Averages.
There are many that claim the entire COVID health scare has been handled incorrectly from the beginning. Startling statistics have emerged showing Nursing & Retirement Home inhabitants represent approximately 1.5% of the U.S. population but account for 42% of COVID-19 DEATHS.
If you aren’t living in one of those facilities your chance of contracting the disease then dying from it are infinitesimal. This isn’t “hindsight” or “Monday morning” quarterbacking, this was known from the first cases seen in the state of Washington. Where 60% of all COVID deaths in that state occurred in Long Term Care facilities.
Connecting the dots is a simple exercise for most. Yet there are decision-makers today continuing their wrong-footed approach that has caused undue chaos to millions of Americans.
Testing, the new “buzzword”. Every COVID-19 press conference or TV interview starts with “testing”. As of Friday, tests reported out by the states are at 450,000 per week in the U.S. The “positive” result rate is sitting at 5%. It’s time for a different “buzzword”. It’s also time for those setting roadblocks in the economy to come up with a new “excuse”.
Individual Stocks and Sectors
A couple of weeks ago, the Technology sector has been the only sector whose relative strength has been in a strong uptrend for the entirety of the past year meaning it has outperformed the S&P 500. While that is still very much the case, recently there have been some changes for the other sectors.
Even though it was, and perhaps still is, the most beaten down of the sectors, Energy has outperformed the S&P 500 with its relative strength line rising since mid-March. Part of the reason for this is it has been more volatile, so the gains have been larger than other sectors while it is still down substantially more YTD than other sectors.
The Material sector is another laggard that seems to have seen its relative strength line bottom out for the time being. Since mid-March, the sector’s relative strength line has been trending higher.
The good news continued this week as Financials and Industrials broke recent downtrends and look poised to broaden out the entire rebound rally. Both the financial ETF (XLF) and (KBW) along with the Industrial sector ETF (XLI) are areas that have now attracted attention.
Money has been pulled out of the “hot” momentum names to fund this recent rotation. Despite the renewed interest in Financials, Industrials, and other cyclical areas, I am not abandoning the trades that have been working. While some of those stocks have traded too far too fast, companies that have reported solid earnings in this uncertain environment and raised guidance will continue to perform. They represent opportunities during pullbacks and most of them reside in Technology.
The same can be said of Health Care as it has been one of the top-performing sectors during the COVID pandemic. Its core business is immune to the virus. These growth areas will remain the place to be going forward, and any weakness in selected names are buying opportunities.
Even though small caps outperformed large caps this week, in many respects, they’re still lagging the S&P 500. With a 3% gain and the fifth positive week in the last six, the Russell 2000 finally made a new recovery high this week. However, it faces stiff resistance at these levels.
The key for small caps will be timing the turn of the economy. As economic activity starts to accelerate, small caps should be the biggest beneficiary, and with the entire market cap of the Russell 2000 nearly 30% less than the combined market cap of Microsoft (MSFT) and Apple (AAPL), it won’t take much to keep the sector going.
There’s not much new to say that I haven’t already stated in the many reports that have been published recently. The stock market seems content to chop around and shake as many weak holders out of positions as it can; the economy is historically bad but everyone already knows that; the technicals have improved over the past week but remain confusing to some; the Fed is willing to do whatever necessary to support the recovery, and few except the extremely bullish and the extremely bearish seem to have much confidence in how this coronavirus recovery will ultimately play out.
Analysts have gone back and forth on whether this has been a BEAR Market Rally or new BULL Market. During the last 2-3 months, the messages have been it matters little what we call it. Those that have been focusing on the price action have seen opportunities uncovered almost daily. A market of stocks, instead of a stock market.
Now that the index has shown its hand in the short term with a clear break to the upside, the BEARS will have to reevaluate their theory that the rally off the lows is just a “normal” occurrence during a Bear market.
An exogenous, self-inflicted shock to our economic system is impossible to compare with anything prior. And the price action over the past few months has been so compressed in time and extreme in its moves it makes comparisons to any other rallies difficult when searching for clues on how to proceed now.
Savvy investors saw this recovery in the S&P 500 driven by what we call the “COVID-19 trade,” which suggested the stay-at-home theme will now take hold and perhaps grow. It was evident many of these companies never had to close their business operations, and remained a beneficiary of the increased demand. A strategy to stay balanced by owning a group of these stocks has paid off handsomely.
Many were fooled as they were caught waiting for economic growth to start showing up. Finally, some signs from the market indicate it may be time to follow the “economic trade”. The COVID-19 momentum names are showing signs of being ready to turn over leadership to the “economy” trade as investors now realize the unlimited monetary support from the Fed and more aggressive economic reopening are tailwinds that will add to the economic rebound.
Small caps as measured by the Russell 2000 index (RUT), a barometer of the U.S. economy have surged in the last two weeks gaining 12+%. Financials and Industrial stocks were big winners while the COVID names that garnered all of the attention lately were sold.
There are many signs that the Secular Bull market is back, and the Bears will need to start coming up with ideas to convince themselves this remains a “Bear market rally”, a “head fake” or a “dead cat bounce”. I believe their theories fell apart weeks ago and said so on April 10th.
Each market participant must then decide how he or she wants to participate now. What has worked in the last 2 months is “balance”. Recognizing the signals and participating in what has been a successful rally where it never paid to get overly Bearish.
The attention getters were telling everyone why it was necessary to stay locked down and all of that negativity found its way into the minds of investors to stay away from stocks. At the end of the day, they had little “figured out”. They were fooled.
“The S&P 500 is now down 5.7% year to date, and up 9.3% over the last 12 months”.
Stay the course. Your choice.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client’s situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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Disclosure: I am/we are long EVERY STOCK IN THE SAVVY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.