JULY 31 – FRIDAY MARKET COMMENTS

Other than NFLX, the rest of FAANGs are generating a high-five response to earnings announcements putting tech back in the lead over recently rising defensive areas.

The debate over whether they are media generating or merely platforms will not be resolved for a long time while the rest of the world is jealous about the overall dominance and results.

This should add some support that has been missing in my momentum data.

The worst economic quarter on record is not encouraging.

Rising unemployment is expected to continue under the assumption that most businesses that can open are open and have needed staff. Additional hiring is dependent on not having another broad stay-at-home order. Further, the general fear fomented by mandated masks and social distancing will likely cause a return to pre-Covid consumption patterns be difficult to achieve. Resurgent virus remains problematic. NYC has been the poster child for mishandling the virus. A fall flare up will give the Governor and Mayor a chance to illustrate whether or not they have learned anything.

Census Bureau surveys over the past eleven weeks show continuing concerns over employment income which is another factor delaying a return to pre-Covid consumption levels.

WMT is downsizing corporate staff recognizing a need for change. UAL added to prior announcements that up to a third of pilots may be furloughed.

Europe’s data is even worse.

Consumers have cut back spending and likely to do even more with the loss of government unemployment benefits. One more negative for the “V.”

Where Trillions Dwell

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Where Trillions Dwell

Back in the 1980s, a popular Wendy’s commercial featured a soon-to-be-famous elderly lady peering at a small piece of hamburger perched on a huge bun. She then asked:

Where’s the beef?1

 In the March 11, 1984, Democratic debate, Walter Mondale used the line as a knockout blow to fellow candidate Gary Hart.2 Watch the commercial here. Watch the debate segment here.

Today we can ask a similar question:

Where’s the cheddar?

 With the huge market sell-off in March and April, we know that those who sold stashed a massive amount of cheddar or moolah. Unless they used it in the ensuing rally, it’s still there, somewhere, just sitting.

A little research reveals that a gigantic amount of bread (bigger perhaps than the bun holding the burger shamed in the Wendy’s commercial) is … to mix our metaphors … parked on the sidelines. Sitting. Waiting. Waiting for what?

On June 22, Jesse Pound wrote an article for CNBC. The article’s title pretty much summed up its contents: “There’s nearly $5 trillion parked in money markets as many investors are still afraid of stocks.”3 As pointed out by Mr. Pound, more than $4 trillion flooded into money markets as investors sold anything not nailed down. Money market assets peaked during the week of May 13, setting an all-time record of $4.672 trillion. Recent outflows, he said, still leave 90% of that amount waiting on the sidelines.4

Mr. Pound cites Ryan Detrick, a market strategist at LPL Financial, who noted that “after the 45% bounce, give or take, in the S&P, we haven’t seen really the big part of the retail crowd come back in. … It kind of shows again that a lot of people are really still on the sidelines.”5

Mr. Detrick revealed even more staggering numbers in a recent Tweet:
$15.4 trillion cash in bank accounts right now, a new record.

Recently up 15% the previous 3 months, another record.

Combined with the record of nearly $5 trillion in money markets and safe to say there’s a lot of cash on the sidelines.6

Another Stash of Cash

Another trillion dwells in orphaned retirement accounts. And this amount is likely to grow because of the massive loss of jobs in the recent virus crisis.

Many companies set up 401(k) plans for their employees. The employee contributes to the plan by way of paycheck deductions. In some plans, the employer contributes a certain percentage of the employee’s wages. Over time, these plans can grow significantly, the gains free from tax until the employee starts withdrawing funds upon retirement.

There’s a slight problem. As employees change jobs, they often forget about 401(k) plans with their previous employers. As reported by Mitch Tuchman in a June 2020 MarketWatch article:

Over a recent 10-year period as many as 25 million people in workplace plans changed jobs and left behind a 401(k) plan. Millions more have left behind more than one, according to a GAO study.7

Millions of people who lost their jobs during the pandemic will one day find new jobs, most likely with different companies. Yet their old 401(k)’s with the previous employers might just sit there, with no one paying any attention to any strategy of investment.

Mr. Tuchman offers some sound advice: roll those old 401(k) accounts into an IRA account. That way, you—or your financial advisor—can make rational decisions about staying in the market, getting out of the market, or getting back in the market when the drop appears over. Beware, Mr. Tuchman advised, and make certain you complete a true rollover:

Make sure you request a rollover, not a distribution. If you take money out of your 401(k) plan you will be liable for taxes and, possibly, penalties for early withdrawal. Once the money is transferred you can begin to choose new investments in your IRA that better fit your current age, risk tolerance and retirement goals.8

Fear of Fear Itself

It looks as if fear accounts for this vast amount of wealth sitting on the sidelines. If I get back in the market, I think, it’ll no doubt crash. After all, I say to myself, look at the massive unemployment around me. How can the market possibly go up, I wonder?

Millions of sidelined investors asked those questions as the stock market recovered most of its pandemic losses. Granted, more convulsions loom just over the horizon. But it makes little sense to sit there and watch potential gains pass you by.

Protecting Against Crashes: Our 1-2-3 Approach

At RFS, we protect our managed accounts against the ravishes of stock market crashes.

First, we watch your account, every minute of every day.
Second, we use technical analysis and active management to decide when to deploy your funds … and when to pull them back into cash.
Third, we use trailing stops to guard against crashes.

A Word About Trailing Stops

A trailing stop is a type of stop-loss order that combines elements of both risk management and trade management. Trailing stops are also known as profit protecting stops because they help lock in profits on trades while also capping the amount that will be lost if the trade doesn’t work out.

Here’s how it works. When the price increases, it drags the trailing stop along with it. Then when the price finally stops rising, the new stop-loss price remains at the level it was dragged to, thus automatically protecting an investor’s downside, while locking in profits as the price reaches new highs.

A trailing stop-loss is a way to automatically protect yourself from an investment’s downside while locking in the upside.

For example, you buy Company XYZ for $10. You decide that you don’t want to lose more than 5% on your investment, but you want to be able to take advantage of any price increases. You also don’t want to have to constantly monitor your trades to lock in gains.

You set a trailing stop on XYZ that orders the position to automatically sell if the price dips more than 5% below the market price.

The benefits of the trailing stops are two-fold. First, if the stock moves against you, the trailing stop will trigger when XYZ hits $9.50, protecting you from further downside.

But if the stock goes up to $20, the trigger price for the trailing stop comes up along with it. At a price of $20, the trailing stop will only trigger a sale if the stock drops below $19. This helps you lock in most of the gains from the stock’s rally.

I Don’t Have Any Positions

When talking to your friends, you might say you don’t currently have any positions in the stock market.

But you do.

Your position is cash. And it forms a part of a gigantic ocean of liquidity that will one day seek and find a home. The home it finds is most likely to be the U.S. stock market. The wise approach is to have some of your wealth in cash, some in bonds, and some in stocks. Your risk tolerance will govern the percentages for each type of investment. But you really ought to have some positions other than a 100% position in cash.

Give Us a Call

Call Jack at (301) 294-7500, and we can start figuring out a sensible plan designed just for you.

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JULY 30 – THURSDAY MARKET COMMENTS

Today is 90 market days from the 3/23 low. If using the scan described in webinars July 7 or 8, adjust your scan. This is 90 days. I was off one day and checked after yesterday’s webinar with Jack.

We are losing any sense of normal correlations as “money is now free.” Economic problems ahead according to Chairman Powell with no end in site until the virus issue is resolved. Fear not, the Fed will do whatever it takes to protect risk assets. Without a new general welfare bill from Congress, Mr. Market is pessimistic this morning with rising jobless claims.

Some BTDers returned Wednesday. HFTs triggered to the upside on earnings. Pro traders traded ahead of HFTs, but the indexes remained within trading ranges.

While we have a gap down at the open, the numbers have improved about 20% since 7 AM EDT.

RSI & MACD for SP-500 are now negative.

While down from yesterday, SPY is trading above 12/31 close.

Some BTDers returned Wednesday. HFTs triggered to the upside on earnings. Pro traders traded ahead of HFTs, but the indexes remained within trading ranges.

While we have a gap down at the open, the numbers have improved about 20% since 7 AM EDT.

RSI & MACD for SP-500 are now negative.

While down from yesterday, SPY is trading above 12/31 close.

The Fed has no plans to interfere with bond traders.

Unfortunately, the Fed’s continuing purchase of Treasuries has distorted price discovery in the largest global market.

Price is no longer a reliable indicator of economic direction or inflation. QE has messed up normality.

The Fed has no plans to interfere with bond traders.

Unfortunately, the Fed’s continuing purchase of Treasuries has distorted price discovery in the largest global market.

Price is no longer a reliable indicator of economic direction or inflation. QE has messed up normality.

Mexico’s President wants to reverse the 2014 decision allowing international oil companies access while “honoring contracts in place.”

How much more capital will be spent when it looks like a rising risk of nationalization? Large oil companies reported profits due to trading activities.

Yesterday’s webinar discussion of KODK’s rocket rise from the door of bankruptcy is due to the Administration’s grant of a loan to produce drug ingredients in an effort to reduce dependence on international drug companies. KODK’s chemical division is the sole survivor since smart phones destroyed its primary businesses. Price rise was HFT front running open orders.

The falling U.S. birthrate is becoming serious. The stay-at-home orders apparently will not reverse trend which is a negative for our economic health.

Falling costs of electric batteries is a negative for reselling electric cars. If you own one, its yours for keeps.

The final graph on yesterday’s report of the Wilshire 5000 less the 5 tech stocks is available here along with explanation and additional graphs.

I have been asked about why I don’t use Elliott Wave Theory. Partly because I do not understand it. Partly because Harry Dent has used it as long as I have known him, and it leads him to publish this type of “clarity”: Harry’s Take 7-28-20 Nasdaq 100 Channel Tested Bottom Friday: Should Break Down Soon… or May Surge Again Finally Into Mid-August. This “either it will crash or go up is the same clarity he left us with at the close of the February 2008 conference. My head spins when I think people use this for portfolio construction.

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635

JULY 29 – WEDNESDAY MARKET COMMENTS

Today is 91 market days from the 3/23 low. If using the scan described in webinars July 7 or 8, adjust your scan.  Tuesday’s market was weak due to a lack of retail and smaller funds’ buying activity. Stocks shifted down as a result.
My momentum buy and sell scans were below average. General conditions remain speculative as earning season is proving to be as bad as expected. There have been no big upside surprises. A rising number of companies are missing even the lowered estimates.

This morning’s market is trending up with most focus on the tech sector. COMPQX finishing higher this week could beat the winning streak set between May 1999 and February 2000.

Bad news is good news when it isn’t as bad as expected. SBUX sales only -40%. KODK apparently avoided bankruptcy by receiving a government loan. The Fed extended its lending facilities to year end. MCD to close 200 stores mostly within WM stores plus shed a big stake of Japan operations to save cash.

GS warns US$ could lose reserve currency status. Excessive debt and the Fed’s intent to link rate guidance to prices are part of the reasons for concern. However, the rise in the Euro is primarily the cause of the decline in US$. This should be a positive for gold.

This morning, when comparing SP-500 and XLU for the past month, XLU trend is improving and typically rallies ahead of major corrections. As a safe haven sector, this may indicate growing risk concerns which may subside if tech companies have good reports today and tomorrow.

In addition TLT moved through resistance last week. The 10-year is taking aim at 0.5% and the 30-year is under 1.5%. The Fed can control short rates, but long-term duration yields are generally indicative of growth and inflation expectations. Yield curve is flattening due to increasing demand for long dated bonds and falling expectations for the Fed hiking rates. My thesis is deflation is a bigger risk.

Rates suggest we are facing an extended period of low global growth. If you have not read the Hoisington report attached to Monday’s, email, you need to read it to evaluate the deflationary impact of global conditions.

The moves in XLU & TLT could be a head fake, but history suggest we should pay attention. Mean reversion risk is increasing.

House Judiciary Committee’s antitrust members will meet today with CEOs of AAPLFB and AMZN.

Here is the chart Vernon referred to in yesterday’s webinar.

We have yet to see if the big tech stocks, which have been the major gainers since 2018, will respond normally to any bad reports or if they will be propped up again to continue the illusion of a broad based bull market.

Regards,

Don Creech
2323 Alaska Ave. E.
Port Orchard, WA 98366
360-620-8635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regards,

 

Don Creech

2323 Alaska Ave. E.

Port Orchard, WA 98366

360-620-8635

 

 

 

 

 

 

 

 

 

 

 

Regards,

 

Don Creech

2323 Alaska Ave. E.

Port Orchard, WA 98366

360-620-8635