Market Notes 8-22-2020

A FEW STOCKS CARRY THE MARKET TO NEW HIGHS, WHILE MOST LANGUISH, AND THE “REAL” ECONOMY KEEPS GETTING WORSE

As the election draws near, there is (of course) endless debate about whether the stock market will crash if the Democrats win the election and sweep the Senate. Almost everyone I have heard on CNBC seems to agree that the Democrats are bad for the stock market, they will raise taxes, increase regulations, and so on. But the fact is, since 1952, Democrats have historically been better for stock market performance (10.6% average annual return) than Republicans (4.8% average), according to Forbes. There is also an article on the Fidelity Investments website that concludes it really doesn’t make much difference if you go all the way back to 1789, but I am not sure how they figured out who was whom in the early days of the Republic. My own opinion is, 1) nobody really knows, and 2) the 100 largest corporations in America are too powerful to be seriously affected by who wins the election. Apple alone has a larger market capitalization than the DAX, the 30 largest companies in Germany combined! Maybe we could trade Apple for Germany!(?)

The S&P 500 reached an all-time closing high this week at 3,397, even as the Advance-Decline line fell back into negative territory at 1:2, and one equal-weighted tracking stock of the index, RSP, closed at 109.25, down about 1.5%, down 6% for the year, and almost 9% below its own all-time high. That one is probably more reflective of what’s really happening.

The construction of the S&P 500 and NASDAQ, and especially NASDAQ 100 is such that the top 6 stocks have as much as 50% weighting in those indexes. The more those stocks advance, the more distorted the market average becomes. The Dow is different. It is a price-weighted index, and when Apple splits on August 31, that stock will have much less effect on that index. At that point, arguably, the Dow Jones Industrial Average will be more representative of the U.S. stock market than the S&P 500, the index that has been considered the broadest measure since its creation in 1957. The Dow may also begin to lag the S&P 500 and NASDAQ, as Apple does not figure to fall out of the top spot anytime soon.

Tesla is also splitting, and it may be listed in the S&P 500. If it is, that index will become even more distorted than it is now. If it isn’t, everyone will be asking why, so it probably will be. Those Standard and Poor’s guys are not much for standing up to any kind of pressure from the public or powerful corporations. Remember, they are the same people that brought us the AAA rated mortgage backed securities packed with DDD rated mortgages that gave us the 2008 financial crisis.

None of the major indices reflects the reality of what’s happening in the economy as a whole. The average person may own an Apple phone, but there is no way she owns a Tesla. The income gap and the wealth gap will continue to widen for the foreseeable future.

The debate over which index best reflects the state of the “real economy” will continue for as long as there are financial markets. Are equal weighted indexes more reflective of the real economy? Not! Do you think it makes sense to value Amazon, Apple, Google, Tesla, Microsoft, and Facebook equally to Barnes & Noble, Samsung, Firefox, Ford, Pinterest, and Oracle? Unless someone figures out a more accurate way to measure it, we are stuck with what we got. Meanwhile, there are literally more indices measuring the stock market than there are stocks. How crazy is that?

The conundrum for investors is, if you buy broad-based index funds, S&P 500 and NASDAQ will most likely continue to outperform the others, but the more of those you buy, the more unbalanced your portfolio will be. And if you don’t buy those, the value of your portfolio will underperform “the market”, unless you:

  1. happen to pick the “right” sector funds or stocks (i.e. you are smarter than the rest of us)
  2. have the “right” financial advisor
  3. have inside information like Senators Burr and Loeffler, or
  4. are just plain lucky.

In any case, folks in the market (the ones with money to invest) are going to continue to gain over folks who aren’t in the market, as the endless rally in the stock market probably continues as long as the Fed continues to throw trillions at the market and buy (or threaten to buy) worthless bonds of failing corporations, to stave off the horrendous reality that will happen if they stop. This also has the effect of exacerbating the same issues, by supporting companies that are big enough to benefit from the stimulus over those that are too small to matter, like individual restaurants and retail stores. I heard one estimate this week that more than half of America’s small businesses figure to close forever before we are done with the effects of Covid 19.

Increasingly over time, the message of the stock market has become that ordinary people and small businesses just don’t matter very much. (If that sounds cynical, it’s because it is.) And much as one may want to change that, history is against such change, because the real power to change things politically and economically resides overwhelmingly with powerful corporations.

The Technicals (the boring part, but this is the part that can make you money)

The S&P 500 remains at 26 times estimated 2021 earnings, now sitting just under the key 3400 level, and the Dow is just under 28,000 once again. September has historically been the worst month of the year for the stock market, but even with all the problems our economy faces, now too numerous to list, there is still no confirmation of any type of trend reversal visible in the charts.

The S&P 500 is still stair stepping upward, and it doesn’t look ready to reverse. The green trend line is still strong, even though the percentage increase is small, less than 1% for the week.

We did get sell signals on the short-term charts of the Dow, the Midcap Index, and the Russell 2000 along with what at first appeared to be a sell on the S&P 500, but the Dow and the S&P 500 bounced back on Thursday and Friday.

The NASDAQ remains in a powerful intermediate term uptrend, up nearly 2.6% for the composite and 3.8% for the NASDAQ 100 this week, with no sign of stopping or even slowing down. But it’s misleading. The advances are outnumbered 2-1 by declines for the week.

Long-term bonds did not continue their downward momentum from last week, in fact they bounced a bit. I still believe last week’s sharp selloff was more than an anomaly, however.

Gold looks like going to consolidate; it is still in a longer term uptrend, but that uptrend has weakened considerably in the past two weeks after gold became overextended.

The candles have turned red and there are preliminary sell signals visible in the upper chart, but the exponential moving average is still rising slightly,  the moving average midline in the chart is also rising, and 1900 looks like a major support level. In the first sub-graph, money flow is beginning to weaken, and the pink dot indicates the uptrend has stalled out. The CCI confirms this in the second subgraph and the CCI moving average is well into overbought territory, and is also still rising. So overall, it looks like a consolidation phase, not a bear market.

The Dow Jones Transportation average is still climbing and remains in an uptrend, the Midcap index gave an early sell signal, and the Russell 2000 small caps also weakened a bit.

The Volatility Index jumped on Thursday, but fell back within its range, and once again drifted lower for the week. However, it moved back into the top half of its short term range. It is interesting that even after the strongest 100 day rally of all time in the stock market, the volatility index is still above its long term moving average, i.e. it is still not confirming the “bull market”.

Crude oil once again failed to follow my instructions! It remains in a narrowing trading range, failed to break out although it still might, but its failure to do so is not the most encouraging sign. XLE, the energy ETF dropped to $36.03, also contrary to my analysis last week. If I had bought it, I would have been stopped out on 8/19.

We closed a bunch of positions, most with profits. MSCI, APD, GOOG, NOW, 1/3 of our position in KRNT, SPGI, TSLA, ADSK, HON, V SFIX, and FANG, along with some minor losses including IBB, NVCR, CVX, CDW, SONO  and TJX. New positions we took are mostly put credit spreads, include AYX, CTXS, CRWD, GLD, HRC, OKTA, ROKU, TMF, SHOP WORK, and ZS.

I am still only about 50% invested at this point. Open positions are listed below.

AYX (put spread)AMT

(put spread)

CTXSDT
CRWD (put spread)GLD (put spread)RPRX (stop limit order at 41.40)KRNT (reduced and hedged with call options)
HRCSPGI (put spread)OKTA (put spread)ROKU (put spread)
TMFMKTXWORKZS
CLOU (put spread)MRKSHOP (put spread)CYBR put spread
EIGI callsNVTA call optionsRNG (put spread)IHI put spread
MRNA short put

All of the put spreads are priced below the market and will profit as long as the stocks do not decline significantly. The calls will profit only if there are significant gains. The reason I used put spreads instead of outright long positions is that I don’t believe those stocks are ready to move up just yet, but I also don’t expect them to go down much.

INTERMEDIATE-TERM BUY SIGNALS:

These are informational only, not positions I hold. The buy signals represent stocks or funds that have back-tested well using our strategy.

New buy signals: CTXS, INTU

Last week’s early buy signals: RL (still too early), LUV (a weak buy) ICUI (also a weak buy)

Last week’s possible breakouts: BMY (not yet, but still possible), EEFT (failed), NKE (up 3%)

Our possible breakouts from two weeks ago: ENS, KLAC  and TJX are all sells.

For the month of August, my main trading account is up 7.1% and my more conservative retirement account is up 4.3%. The NASDAQ Composite is up 5.2% and S&P 500 is up 3.8%.

DISCLAIMER

The foregoing is solely the opinion of the author and is not an offer to buy or sell securities.
All investments involve risk, and the past performance of a security, industry, sector, market, financial product, trading strategy, or individual’s trading does not guarantee future results or returns. Investors are fully responsible for any investment decisions they make. Such decisions should be based solely on an evaluation of their financial circumstances, investment objectives, risk tolerance, and liquidity needs.

Any reference to a specific security should not be construed as a recommendation to buy or sell that security. Specific securities are mentioned for informational purposes only.

We do not claim our strategy will generate gains over the long term or that any particular recommendation will be correct.
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© 2020 by Benjamin Blakeman

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