The State of the Markets:
In pondering the macro picture over the weekend, it occurred to me that the current environment can be summed up with one simple question: How much is enough? As in, how much do stock prices need to correct from their January blow-off highs in order to create a fairly valued market where longer-term, fundamental oriented investors return to the game in a meaningful way? Or, put another way, how much time needs to go by for rising earnings to create values in the market again? A month? A quarter? A year? How much is enough?
The key problem in trying to come up with an answer is there are host of additional "how much?" questions that need to be answered first. Sure, we can do some math and project what forward P/E's might look like in a few months (and according to "the man who moves markets" - AKA JPMorgan's Marko Kolonavic - valuations are looking better and better). However, there is an awful lot of uncertainty in the markets right now. And until we get some clarity on some of these issues, the question are likely to remain unanswered and the sloppy action is likely to continue.
For example, one of the key questions right now is how much is global growth slowing? Or is it actually slowing at all? Since a fair amount of the recent bull run was based on the idea of synchronized global growth, a slowdown in growth means adjustments need to be made.
Next up is the question of how much inflation is percolating? Everybody on the planet knows that there are "some" inflationary pressures thanks to commodity prices, tariffs, the tightening labor market, etc. But how hot will inflation become in the current environment?
The next question of how high rates will rise goes hand in hand with the inflation issue. While most folks are aware of the inflationary issues and the fact that Jay Powell & Co. are raising rates, the not-so small matter of treasury supply is also a major factor here. Lest we forget, it is estimated that the U.S. Treasury will double the amount of bonds it needs to issue over the next 18 months. So, when you couple this with the Fed unwinding its balance sheet, there can be little argument that there is likely to be upward pressure on rates. But, how much pressure?
Then there are the political and geopolitical risks. How much risk is there relating to what is politely being called a "constitutional crisis" (aka, impeachment proceedings)? Trust me, I'm not taking sides on whether or not this should happen, but I'd be a fool to ignore the possibility of such given everything that is going on in D.C.
On the geopolitical front, the question remains the same, how much risk is there? Are the issues with Korea, Iran and maybe even Russia, real enough to have an impact on markets? If so, please forgive me for asking the same question repeatedly, but how much risk?
And finally, there is the question of how much impact, if any, will there be from the trade fight with China? A lot? A little? None?
So, there you have it. Yes, the economy is growing. But we knew that. The earnings parade has been stellar. But, we knew that was going to be the case too. And companies are investing again in people, plants, and equipment. But, again, with all the hullabaloo surrounding the passage of the tax stimulus bill, none of this is really a surprise.
In sum, I believe the real key to this market is, yep; you guessed it, how much is enough? And if you have any ideas on the answer, please let me know. But in the meantime, I'm going to try and listen to Ms. Market's "message" as closely as I can in order to try and get some clues.
You cannot escape the responsibility of tomorrow by evading it today. - Abraham Lincoln
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.
Today's Model Review:
LEADERS Model: The LEADERS currently holds 20% positions in the Consumer Discretionary, Technology, Health Care, Financials, and Energy sectors.
CORE Model (Risk Managed Exposure):
Today's CORE model's exposure target: 55%
Current CORE Model exposure: 75%
To review, the goal of this model is to stay in tune with the overall risk/reward environment. Therefore, we make adjustments only when there is a meaningful and sustained divergence between the target model reading and our current positions.
TRADING Model: We currently hold trades in gold, commodities, global technology, and the internet sector.
2018 YTD Performance Update:
DD LEADERS: +1.4%
DD CORE: -0.7%
S&P 500: -0.4%
|Daily Decision Trading Service
Current Portfolio Summary
|The LEADERS Model|
|% of |
|Technology Select Sector SPDR||XLK||20%||12.1.16||$46.64||Buy|
|Health Care Select Sector SPDR||XLV||20%||11.27.17||$81.79||Buy|
|Consumer Discretionary Select Sector SPDR||XLY||20%||2.9.18||$99.67||Buy|
|Financials Select Sector SPDR||XLF||20%||2.12.18||$27.94||Buy|
|Energy Select Sector SPDR||XLE||20%||5.2.18||$73.57||Buy|
|The CORE EXPOSURE Model|
|% of |
|SPDR S&P 500 ETF||SPY||37.5%||4.17.18||$269.78||Buy|
|iShares S&P Small-Cap||IJR||37.5%||4.17.18||$79.83||Buy|
|The TRADING Model|
|% of |
|PowerShares Commodity Index ETF||DBC||25%||5.2.18||$17.43||Buy|
|First Trust Internet Index||FDN||25%||2.26.18||$124.00||Buy|
|iShares Global Technology||IXN||25%||2.26.18||$165.40||Hold|
|SPDR Gold Shares||GLD||25%||4.17.18||$127.27||Buy|
% of Model Explained
The number shown in this column represents the percentage of the the model this position represents.
Current Rating Explained
This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.
Positions Can Change
Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.
About the Daily Decision Models:
The Daily Decision is designed to be a simple, easy-to-follow e-letter service showcasing 3 different model portfolios. The LEADERS model is the flagship, growth oriented strategy that focuses on "where the action is" in terms of market leadership. The CORE model is a longer-term, risk-managed approach to keeping exposure to market risk in line with prevailing conditions. And as the name implies, the TRADING model is intended to be a tactical, opportunistic trading strategy.
Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: SPY, IJR XLK, XLV, XLY, XLF, DBC, FDN, IXN, GLD Note that positions may change at any time.
Wishing You All The Best in Your Investing Endeavors!
The Front Range Trading Team
NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.