The State of the Markets:
After a sloppy June, stock market investors appear to be enjoying the month of July. So far at least, the S&P 500 sports a gain of 3.75% for the month and is inching closer to that all-time high set back on January 26. And yet, many of my indicators aren't exactly in their happy places right now and analysts continue to toss around a laundry list of issues to fret about.
You know the drill. There is the trade war ("Tariffs are the greatest!"). Geopolitics (can you say, Iran?). Inflation. Rates (and, in turn, the yield curve). The Fed. Europe. The mid-terms. Housing (yes, really). Valuations. And of course, the economy.
On the latter subject, the bulls are quick to point out that this Friday's guesstimate on the country's economic growth rate (aka the Q2 GDP Report) should be strong - with lots of folks looking for headline GDP to have a 4-handle on it. Playing the extrapolation game, our heroes in horns contend that a strong economy will produce strong earnings going forward. What's not to like, right?
But, here's the rub - the "going forward" part. As we all know, the stock market is effectively a discounting mechanism for future expectations. As such, I can argue that the current growth in the economy was "baked in" to stock prices late last year.
So, the question is this. If we look six to nine months down the road, what is the stock market currently pricing in? And given that prices have been going nowhere fast for six months now (give or take a day), the immediate answer might be, not much.
How can this be, you ask? It's simple really. While there are no signs that a bear market or a recession is waiting in the wings, there is a fairly big batch of evidence suggesting that the trend of growth is slowing.
Tim Hayes, Chief Global Investment Strategist at Ned Davis Research Group (a firm that I know, trust, and have worked with since 1994), made this point to a couple of knucklehead interviewers on CNBC's European Squawk Box a couple weeks back. Tim's point was the rate of growth was slowing and that stocks were picking up on this. The facts were lost on these two nitwits, but for anyone with an open mind, Tim offered up some interesting data to ponder.
Mr. Hayes suggests that there is continuing evidence of what he calls a "reflation retreat" - especially on a global basis - that could (key word) increase the risk of bear market. Hayes opines that bearish signs include a decline in inflation expectations, the recent strength in defensive sectors, the weakness in cyclicals and Financials, the downtrend in commodities, what he calls a "risk off" condition in currencies, rising credit spreads, and, of course, a flattening yield curve. For a guy that, in my opinion, is usually pretty level-headed and upbeat, this is eye-opening a list.
In essence, Hayes is saying that since the secular bull market began on March 9, 2009, there have been two intervening cyclical bear encounters. As in the declines seen in 2011 and 2015-16. I like to call these brief negative cycles "mini bears" while others have dubbed them "teddy bears." But in any event, Tim says that the odds appear to be rising that another cyclical, mini, or teddy bear may be in our future.
Couple Tim's list of worries with the distinct lack of "oomph" within the current uptrend, high valuation metrics, narrowing leadership, what looks to be a protracted trade tiff, and the state of my favorite market models, and well, one can't be blamed for feeling that Friday's GDP and the current earnings parade may both wind up in the as good as it gets category.
Call me a "Negative Nancy" if you must. Tell me to step away from the keyboard and go work on my short game if you'd prefer. After all, my bullish buddies tell me that the market indices are "just fine, thank you."
But there is one very important lesson I learned a long time ago about the stock market game that just might apply here: Investors should strive to be the most fearful at tops and the most optimistic at bottoms. Hmmm... and what does the most recent sentiment data suggest?
Yes, it can be hard (VERY hard) to be skeptical when stocks are at or near new highs. No, I'm not calling a top. And no, I don't expect a bear (of any kind) to commence tomorrow. What I AM trying to do is point out that all is not right with the indicator world right now - especially if one moves away from price trend indicators. I'm trying to say that risk is elevated. And until/unless the bulls can show me some real (and sustained) "oomph" to act as an "all clear" signal, I'm going to remain skeptical/modestly cautious for a while.
Publishing Note: My next report will be published Monday morning (my chipping/putting definitely needs some work!).
Each year, NAAIM (National Association of Active Investment Managers) hosts a competition to identify the best actively managed investment strategies. In April, HCR's Dave Moenning took home first place for his flagship risk management strategy.
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Wise men talk because they have something to say; fools, because they have to say something. - Plato
Publishing Note: My next report will be published on Wednesday morning.
The new, state-of-the-art portfolio will be comprised of three parts.
The Risk-Managed Growth portion is made up of three trading strategies and accounts for 50% of the portfolio. The Market Leadership portion makes up 20% of the portfolio. And the Top Guns Stocks portion (10 of our favorite stocks) will make up the final 30% of the portfolio.
All three of our strategies will be run in a single Marketfy model - the model is currently labeled as the LEADERS model. The goal is to make the service simpler to follow by putting everything in one place.
Today's Portfolio Review:
2018 YTD Performance Update:
Daily Decision Portfolio: +7.7%
S&P 500: +5.5%
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.
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At the time of publication, the editors hold long positions in the following securities mentioned: SPY, IJR, QQQ, XLK, XLV, XLY, XLF, AAPL, NVDA, MSFT, GOOGL, AMZN, FB, SPGI, JPM, PFGC - 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.