This Week in Barrons –
2-12-2017:
Thoughts:
Step right up, test your
strength, and ring the bell.
This little-known phenomenon
could make ‘stock-picking’ great again, and could cause long-suffering stock
pickers to do some dancing. ‘Risk on –
Risk off’ was a dominant feature of financial markets in the aftermath of the
2008 crisis. It meant that assets
perceived as ‘risky’ (such as stocks, commodities, and non-government bonds)
tended to either rally or sell off in unison, and assets perceived as ‘safe’
tended to do the same – but in the opposite direction. Within equities,
this caused a high correlation between individual stocks, and their specific
sectors. This made it difficult for
active, ‘stock-picking’ investors to beat the market. After all, why invest in a particular stock
when you can invest in the entire sector, for less risk, and obtain the same
returns?
Since the indexes have made
new, all-time highs – the correlation between stocks and sectors has fallen
quietly by the wayside. In fact, as
noted by the chart below, stock correlations are now significantly below their
post and pre-financial crisis averages.
Brian Belski, chief investment strategist at BMO Capital Markets
remarked, “These lower correlations are good news for stock pickers, as active
stock picking strategies will be the key to delivering outperformance in the
coming months. The years of riding the
wave of the index funds and ETFs could be coming to an end.”
And while stock pickers (or
at least the ones who pick the right stocks) may rejoice, the shift carries
some other ramifications. Nicholas
Colas, chief market strategist at Convergex, noted that low correlations mean
that getting sector and stock bets RIGHT just got a whole lot more serious. For example, many financial managers have
remained overweight in the energy sector because it was last year’s big
winner. Unfortunately, the sector has
fallen 3.3% year to date, but several winning stocks (within the sector) have
continued on their winning ways. The
goal of the stock picker is to find those specific winners, and not count on
the entire sector to perform as well as the winners themselves. So according to Nicholas, “The rough part
about the correlation’s sudden disappearance, is that being wrong just got a
whole lot more expensive.”
The lowering of the
correlation and the fewer stock market winners that come with it – could be by
design. SF brought to my attention that
over the next year our FED will either print money like crazy (and make the
past $10 trillion deficit pale in comparison), OR they will stop buying U.S.
stocks and bonds. I’m voting for door
number 1. Michael Cloherty (the head of
U.S. interest-rate strategy at RBC Capital Markets) believes that the unwinding
of QE “will cause a massive and long-lasting hit to our mortgage market. After all, America has been on a spending
spree for over a decade – adding over $10T to its debt load, and over 20
million people onto its health insurance rolls (ACA). Who's paying for this?”
In basic terms, the FED wrote
trillions of dollars’ worth of IOU's to pre-pay for all of our spending. After all, the economy has only grown at 1.5%
during the past 8 years, and the money had to come from somewhere. To further set the record straight – we (the
U.S.) purchased over half of our own debt.
Huh? Yes, we created our own debt
instruments (T-Bills) and because nobody else wanted to buy them – we sold them
back to ourselves. Heck, we even bought
back $1.5T of the Mortgage Backed Securities which failed in 2008. So:
-
We issued debt,
to buy assets (mortgages) which we know during the next recession will tank
($1.5T),
-
And (now that
interest rates are rising) those original T-Bills that we purchased are set to
double or triple – before we roll them over during the next several years.
Yes, our debts will need to
be repaid over the next several years, and many pet projects and benefits
(including Social Security) will take a hit.
How President Trump handles this financial undertaking will be a true
test of strength.
The Markets:
The S&P has now gone for
a record 40 days without an intraday swing of 1% or more. Does it mean that things are so balanced
between longs and shorts that wobbles are a thing of the past? OR, does it mean that every time the S&P
is in danger of falling more than 1% - SOMEONE rushes in and saves the
day? I'll take door number 2.
The FEDs are continuing to prop-up this market, and I’ll use oil as an example. This week we had the 2nd largest oil inventory build-up on record (14 million extra barrels), but the price of oil went higher. How does the price go up – when we have so much oil that we’re storing it in ships in Galveston Bay? Simple – if the U.S. allows the price to go down all of those billions in loans to frackers and drillers goes bust, and banks hate it when loans go unpaid. So, the FED uses paper money to pin the price of oil right where they want it.
The FEDs are continuing to prop-up this market, and I’ll use oil as an example. This week we had the 2nd largest oil inventory build-up on record (14 million extra barrels), but the price of oil went higher. How does the price go up – when we have so much oil that we’re storing it in ships in Galveston Bay? Simple – if the U.S. allows the price to go down all of those billions in loans to frackers and drillers goes bust, and banks hate it when loans go unpaid. So, the FED uses paper money to pin the price of oil right where they want it.
If you wonder just how much
the manipulation matters, the stock market is 24% ahead of last year at this
time, and corporate earnings are only 4.6% above last year. It’s my contention that this 19.4% gap is
coming from the U.S. Government allowing ‘Non-GAAP’ reporting of corporate
financials. For example, let’s examine
Humana’s latest earnings report: Humana’s actual Q4 sales revenues came in
short of estimates at $12.88B. Actual
GAAP (Generally Accepted Accounting Principles) earnings per share came in at a
NEGATIVE $2.68/share – but Humana reported a POSITIVE (Non-GAAP) $2.06 earnings
per share. Humana actually LOST $2.68
per share, but since the U.S. Government allows Non-GAAP reporting – Humana
reported a positive number and the stock went up. That is the reason that actual earnings are
only 4.6% of last year, but stock market returns are 24% higher.
Gold and silver may
experience a significant upside as we head into March. I say that for three reasons: One is because
Iran has stated publically that as of March – they will stop using the U.S.
Dollar for trading purposes. Understand,
EVERY nation (Libya, Iraq, etc.) that has abandoned the U.S. Dollar in favor of
a different currency has been destroyed.
Secondly, Wall Streeter Greg Guenthner thinks that gold
prices could jump 20% over the next several weeks because gold’s advance
in the first six weeks of 2017 has perfectly mirrored the action seen in the
same period in 2016. The precious metal
is looking like the perfect hedge against: inflation (which is rising), instability
in Europe, and the growing skittishness over Trump’s political agenda. “For the 2nd year in a row, Gold
has posted gains of 6% through the first week of February. In both cases, gold bounced off a late
December bottom, dipped in late January, and rocketed to new highs at the start
of February,” Guenthner says. “If this
keeps up, gold could be ready to repeat last year’s epic comeback.”
A third reason for the
precious metal’s rise is that traders think the S&P 500 is setting up for a
major pullback. Chartists like Sven
Henrich base start their analysis by counting the number of stocks above their
50-day moving average during each month.
December’s had 82% of stocks above their 50-day moving average, while January
fell to 75%, and February (to date) only has 60.6%. Which means that almost 40% of the stocks are
hurting – leaving fewer (overbought) stocks to hold up this rally. “This sort of combination has spelled trouble
for stocks in the past, most recently in the summer of 2015, but also in 2007,”
said Henrich.
But the DOW isn't at 20K because factories are humming, the consumer is in perfect financial shape, and debt levels are low. On the contrary, subprime loans are rising (along with their default levels), and the consumer is in horrible shape with half of them not being able to come up with $400 for an emergency. For more than a month you've heard me say that my theory was that we would get to DOW 20K, struggle a bit, and then ultimately go one final leg higher. On Thursday two things happened. One was that Trump announced that in a few weeks he would unveil a "phenomenal" tax plan. But more importantly (I think), FED head Bullard made headlines by stating, "Shrinking the federal balance sheet may allow policy space for future QE". Additional QE is the Holy Grail of a manipulated market. Following that statement, the market started to rise.
On Thursday, we broke back
over DOW 20K, and ended the week at DOW 20,269. The only
problem was, we did it on anemic transaction volume. When you cross a major milestone like DOW
20K, the S&P (SPY) should NOT be trading 65m shares like it
did Friday. The day after Trump was
elected we traded 265m shares. A volume
of 65m shares means that not everyone is ‘on board’ with this rally. And the two-day romp wasn't as easy to join
as you may think. Many stocks would pop
higher in the morning, and then fade lower during the day. And specifically, most of the moves came from
stocks that announced earnings either before the market opened or after the
market closed.
If this is the final push,
then I need to see some confirmation volume early next week, OR I would expect
to see this market pause and roll over.
Watch for a potential ‘gap-up’ on Monday, and then keep an eye on the
volume in the SPY. If we trade
significantly more than 100m contracts on the SPY – we could be in for a nice
ride to the long side. Otherwise, you
could see it begin to trade sideways and down for a fairly long time.
Tips:
Indexes: The Nasdaq is currently the strongest
of the index products, then the DOW, and then the S&P and Russell. If the S&P cannot get over 2320 on Monday,
I would expect to see consolidation and a movement lower into 2293.
Currencies: The Yen has more downside into the 87.25
level, and is buyable after that.
Crude: Trade crude until it makes
$55/barre, and then go short.
Copper: Copper looks good to the upside into the $2.80 to
$2.90 level.
Gold: I was looking for pullback to $1,216/oz. but did not
get it. I see gold moving higher past
the $1,245/oz. level.
My stance for next week is
neutral. I’m looking for places where I
can sell premium, or buy ‘out of the money’ options (March and April monthlies)
in anticipation of big moves. Most
stocks are extended, and you need to begin thinking what ‘advantage’ do you
have buying up at these ranges? I’m
watching:
-
RUT – (Russell
2000) anticipating a choppy week, and erring on the side of strength,
o
SNA –
(Snap-On) If RUT can remain strong, I’m looking to buy some out of the money
Calls for the March or April expiration.
-
XLE – (Energy
Sector) continued lower all during the week,
-
XRT – (Retail
Sector) was in rally mode all week, but faded on Friday,
o
ULTA – If
XRT can look good on Monday, I’m looking to buy some of the money Calls for the
March or April expiration.
-
CLVS –
(Clovis Oncology) I’m looking for it to have 4 more points to the upside –
starting next week.
-
AAPL – (Apple)
looking for a potential pin at $130/share on Friday,
-
NVDA – (NVidia)
had a Bearish engulfing candlestick last week so I look for it back around $110
before getting long again,
-
FB – (Facebook)
looking to re-enter back around $130 – it’s 21-day EMA,
-
WYNN – looking
to sell Call Credit Spreads at these levels,
-
LOW – (Lowes)
200-day moving average is around $75; therefore, selling Credit Spreads above
this line makes sense.
To follow me on Twitter.com
and on StockTwits.com to get my
daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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