Sunday, October 19, 2014

Week Ahead Magazine: How Quickly Sentiment Changes

At the start of this past week it seemed the bears were out in force and it led to selling pressure on the indices through Wednesday. However, trading on Wednesday may have been a capitulation day as the S&P 500 Index and Dow Jones Industrial average were down nearly 3% from their respective day's high and low. The market turnaround carried through to the week's end. The only index managing to gain on the week though was the small cap Russell 2000 index which was up 2.8%. Small caps have struggled since late last year and remain down 7.0% year to date.

A number of articles in this week's magazine focus on the change in investor sentiment from bearish to more bullish. Ben Carlson, CFA, who writes for A Wealth of Common Sense, referenced a financial advice quote from Jason Zweig of The Wall Street Journal that sums up what investors should be thinking in these volatile times.
"I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself."

"That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good."
Below is the link to this week's magazine.


Tuesday, October 14, 2014

Equity Put/Call Ratio And VIX Indicating Oversold Conditions

Although an equity put/call ratio over 1.0 is ideal for this sentiment indicator to indicate oversold market conditions, the current .91 level is an extreme one. Coupled with the spike in the VIX, today's market bounce is not a surprise.

From The Blog of HORAN Capital Advisors

Further indications of an oversold market are the percentage of S&P 500 stocks trading above their 50 and 200 day moving averages. As the two charts note below, this technical indicator certainly indicates oversold market levels.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Fundamentals drive stock prices in the long run and we believe U.S. fundamentals remain intact and support higher equity prices into year end and at least through the first quarter of 2015. As was noted in the Trahan interview, the U.S. economy seems to be decoupling for international markets and economies. The market does not move higher in a straight line so continued volatility should be expects. As was noted by Bespoke yesterday, the average S&P 500 stock has corrected 13%. With the market down about 6% from its high, some stocks have certainly corrected by a much larger 13%; hence potential opportunity for investors.


Sunday, October 12, 2014

François Trahan: Best Four Years Ahead For U.S. Equity Investors

One factor that is a certainty at the moment is there is not a lack of strategy commentary around the future direction of the equity markets. The difficulty for investors is deriving an investment thesis from them since many different conclusions are drawn from the market's recent weakness.

In a recent interview of François Trahan of Cornerstone Macro by Consuelo Mack on WealthTrack, Trahan believes the next four years could be some of the best for U.S. equities. Trahan is a Founding Partner of Cornerstone and was ranked the #1 portfolio strategist by Institutional Investor in 2013. He has received this honor in seven out of the past 9 years.

One key underpinning of Trahan's point of view is the fact macro economic data is responsible for 80% of market moves. In that regard, he believes the U.S. economy and market is decoupling from many of the economies outside of the U.S. If one believes this viewpoint, he notes U.S. economic growth consists of 70% driven by the consumer and only 14% by exports, consumer oriented stocks should do well. As a result U.S. centric investments are an area of the market he expects to do well over the next four years. He does expect further choppiness in the market during the next three months.

One mantra that is getting repeated today is "don't fight the Fed." As the end of QE is near and the Fed poised to increase interest rates, probably mid year in 2015, higher rates are thought to be a negative for equities. He notes, however, that stocks can do well in a rising rate environment. In the 1990's the Fed had four tightening cycles and stocks rose in three of them and were flat in the other. We have commented on this fact as well, Rising Interest Rates Can Be Good For Stocks.

The entire interview below is worthwhile to review.


Sunday, October 05, 2014

Week Ahead Magazine: Equity Market Entering Seasonally Strong Period

Last week included two trading days to end the third quarter and three trading days to start the fourth quarter of 2014. In total the week was one where nearly all U.S. and international indices ended in the red. From a positive perspective strength was seen in U.S. markets after mid day on Thursday and this carried over into Friday. For the week though, the Russell 2000 index continues to struggle to find support and was down 1.3% and is now down 5.1% year to date. The other major U.S. indices were down .6 to .8% on the week. Overseas saw braod weakness as well:
  • the DAX (Germany) down 3.1%,
  • the CAC (France) down 2.6,
  • the Nikkei 225 (Japan) down 3.2%, and
  • the Kospi (South Korea) down 2.7%.
In spite of the weakness ending the third quarter and at the beginning of the fourth quarter, the market is entering a seasonally strong period.  A number of reports, one included in this week's magazine, note in a midterm election year October is the strongest month on average for the S&P 500 Index. This October market strength carries over into the full fourth quarter through the second quarter of year three of the presidential cycle. History is not a guaranty of future outcomes; however, the future does have a tendency to rhyme.

From The Blog of HORAN Capital Advisors
Source: Dana Lyons

For the week ahead, the economic reporting will be light. Below is a list of the economic data to be reported in the coming week.

From The Blog of HORAN Capital Advisors

Following is the link to this week's Week Ahead Magazine.


Nancy Lazar Interview: The U.S. Continues To Be A Driver Of Global Growth

In September of last years we provided some commentary and a link to an interview conducted by Consuelo Mack with Nancy Lazar on WealthTrack, Is Middle America The New Emerging Market? At that time Nancy Lazar stated the Middle America was the new emerging market. In an interview on WealthTrack last week with Nancy Lazar, she continues to highlight the strengths of the U.S. Nancy was a founding partner of ISI Group and recently started her own firm, Cornerstone Macro. She has been rated as a top economist by Institutional Investor magazine for the past decade.


Nancy Lazar notes that China, once thought of as the main growth driver for global growth, is now waning due to China unwinding past excesses. Nancy believes the U.S. has resumed the role of the leading growth driver for economic growth. She notes the U.S. is now growing faster than China in Dollar terms.

From The Blog of HORAN Capital Advisors

A few other highlights from the interview which is worthwhile viewing in its entirety:
  • European growth is slowing and this will be a headwind for multinational U.S. companies since 20% of revenue is from Europe. The slowing in Europe is coupled with a stronger U.S. Dollar.
  • Lazar likes the U.S. consumer, i.e., discretionary sector, as the consumer has repaired their balance sheet and has become smarter in their spending habits. This is a bit of a double edged sword as consumers will be more discriminating on where they spend; however, she is projecting a strong holiday retail environment.
  • Chemical industry benefiting in the U.S. as the U.S. is the low cost producer for natural gas. Seven chemical plants under construction in the U.S. today and the build out of these plants runs through 2017.
  • As manufacturing in the U.S. expands, this is creating a multiplier effect in terms of jobs growth. For every one manufacturing job created, 3-4 non-manufacturing jobs are created as well.
In short, Lazar is positive on the U.S. and positive on the Dollar. She believes the U.S. economy is no longer in a crisis position and can stand on its won as the Fed steps away from its support.


Saturday, October 04, 2014

Investor Sentiment More Bearish

This past week's investor sentiment report by the American Association of Individual Investors (AAII) indicated investor bullish sentiment continues to decline. The bullish sentiment reading declined 6.42 percentage points to 35.42%. Individual investor sentiment is a contrarian indicator and is most predictive of future price action when the bullish sentiment is at extremes. If individual investors indicate a low level of bullishness, this would be one indication the equity market could be approaching a bottom. Although the current reading is not at an extreme, investors appeared to become less bullish as the market pulled back from its recent high reached in mid-September.

From The Blog of HORAN Capital Advisors
Data source: AAII

Additionally, as the below Google Trends graph shows, the search on the phrase "stock market correction" has increased significantly from September into October. Given the market's turnaround Thursday and continued into Friday, maybe this recent 4.6% correction will be the extend of the pullback as we have seen from the market over the past three years.

From The Blog of HORAN Capital Advisors


Wednesday, October 01, 2014

September Returns: Practically No Place To Hide

If there is one positive to the close of the month of September it is the fact investors can turn the page and set their sights on October and the fourth quarter. September has historically been the worst performing month in a calendar year and this is even truer when the prior month of August achieves returns greater than 3%. In fact, August of this year saw the S&P 500 Index return 3.8% and the Dow Jones Industrial Average return 3.2%. At the start of September, Ryan Detrick wrote an article, Welcome To September, The Worst Month Of Them All, where he looked at September return expectations under different time frames. Well, September 2014 did not go against the historical data.

As the below two charts show, developed and emerging market equity returns and fixed income returns were mostly negative for the month. The one index that generated positive returns for the month was the livestock index which was up 6.20%. Anyone buying beef/pork type products in the grocery store is well aware of higher beef and pork prices. With respect to equity returns, the safest segment was the large cap sector. Both the Dow and S&P 500 Index were down .23% and 1.40%, respectively in the month of September. The large cap returns were far better than the 4+% to 5+% losses in mid and small cap stocks. Even fixed income or bond returns struggled. Although not displayed below, the one fixed income segment that generated a barely positive return was S&P's National AMT-Free Muni Bond Index which was up .03% for the month of September.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

From a sector perspective, energy, consumer discretionary, utilities and materials were poor performing market segments. The traditionally safe consumer staples were the best performing sector with a monthly return of .63%. This return was not even close to overcoming the -7.55% generated in the energy sector.

From The Blog of HORAN Capital Advisors

In spite of the tough returns for the month of September and the third quarter, the year to date returns in the larger cap stocks remain healthy. As our clients know, at HORAN Capital Advisors, we have been overweight large cap stocks for three or so years. No one knows whether this recent market weakness will lead to the much awaited 10+% correction; however, the market technicals are not terrible as we noted with the chart in our post on Sunday. Certainly, market technical support needs to be found around S&P 1,950-1,960. These price levels represent the 100 day moving average and the 50% fibonacci retracement.

Also noteworthy is the near oversold levels for the percentage of NYSE Composite Index stocks trading above their 50 and 150 day moving averages. As the two charts below note, only 25% of NYSE stocks are trading above their 50 day moving average and 39% trading above their 150 day moving average. Certainly, lower percentages have been reached in the past before the market finds a bottom.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Lastly, historically the 4th quarter has been a positive returning one especially starting late in the second year of the presidential cycle. In an interesting article, The Set Up For A 4th Quarter Rally Is Missing Something, many factors are in place for a 4th quarter rally. One potentially missing ingredient though is the level of investor sentiment, i.e., we are missing the high bearish sentiment reading that has been a variable that has been present in past market bottoms. The just mentioned article is a worthwhile read.

From The Blog of HORAN Capital Advisors
Source: The Fat Pitch


My sense is we may not be at the absolute bottom for this pullback. Potential issues facing investors are a stronger U.S. Dollar, the end of QE in October and the midterm elections in November. For the most part though, economic and company earnings reports are more positive than negative. However, many stocks are down much more than their respective indexes and they are providing an opportunity for investors to begin building positions in some of these stocks.


Monday, September 29, 2014

Dow Dogs Outperforming Dow And S&P 500 Indices

As investor may realize, the Dow Jones Industrial Average has significantly underperformed the broader S&P 500 Index on a year to date basis. The S&P 500 Index is up 7.00% on a price only basis while the Dow Jones Index is higher by only 2.98%. Because the Dow index is a price weighted index, companies in the index with higher stock prices have a larger impact on the Dow index performance. Consequently, higher priced stocks in the Dow have trailed the broader market. For example,
  • Boeing (BA), with a price of $128.77, is down 5.7%,
  • United Technologies (UTX), with a price of $105.08 is down 7.7% and,
  • International Business Machines (IBM), with a price of $187.57 is up only 1.1%.
Interestingly, the Dogs of the Dow for 2014 have outperformed both the Dow index as well as the S&P 500 Index on a year to date basis. As the below table shows, the price only return for the Dogs of the Dow have returned 7.4% through Monday's close versus 7.0% for the S&P 500 Index and 3.0% for the Dow Jones Industrial Average.

From The Blog of HORAN Capital Advisors

The Dow Dog strategy consists of selecting the ten stocks that have the highest dividend yield from the stocks in the Dow Jones Industrial Index (DJIA) after the close of business on the last trading day of the prior year. Once the ten stocks are determined, an investor would invest an equal dollar amount in each of the ten stocks and hold them for the entire year. Investors should note the strategy has generated mixed results over the years though.

Disclosure: family long UTX


Sunday, September 28, 2014

Week Ahead Magazine: Fear Headlines - September 28, 2014

After reading some of the market headlines last week, one would have thought the market experienced some type of terrible correction. A couple of headlines from CNBC that are shown below mention the market "springs back after rout" and market "sinks, fear surges." For the week, the S&P 500 Index was down 1.4% while the Dow Jones Industrial Average declined only 1%.

From The Blog of HORAN Capital Advisors

On Thursday, September 18, 2014, the S&P 500 Index hit a closing high of 2,011.36. So, after this past Thursday's market decline, the S&P 500 Index was down 2.26% and ultimately closed the week down only 1.42% from its high. I do not call this a "rout" or a market that "sinks."

Of course, the market seems overdue for a 10+ percent correction, but that does not mean one is around the corner. For the DJIA the last one occurred almost three years ago with the market low in October, 2011. As we noted earlier in the year the market seemed to experience an internal correction when social media and biotech stocks declined sharply in March and April. In the current third quarter it seems a similar situation is occurring as noted by the correction in some market segments. Additionally, a number of energy stocks and industrial stocks have experienced greater than 10% declines in the quarter.

From The Blog of HORAN Capital Advisors

Lastly, in reviewing a couple of technical aspects for the market, the S&P 500 Index, it remains firmly in an uptrend as noted by the green support line in the below chart. Certainly, some technical damage has been inflicted on the market in last week's minor pullback. The market has violated its 50-day moving average and the percent price oscillator (a version of the MACD) is in a negative downtrend as well. From a positive standpoint, the stochastic indicator appears to be turning higher and a positive turn in the PPO would be beneficial. Lastly, the percentage of stocks trading above their 50 day and 150 day moving averages are near oversold levels. The market may find support at the 50% Fibonacci retracement level of S&P 1,960.

From The Blog of HORAN Capital Advisors

Before looking at the week ahead, the economic news last week can be summarized as mixed. Probably the most noteworthy news items had to do with data out of Europe and China. The manufacturing and services sector PMIs for the eurozone dipped to their lowest levels of the year and China existing home sales declined. Potentially offsetting these concerns is the strengthening U.S. Dollar and the resulting impact of making foreign goods cheaper as they are exported to the U.S.

The coming week is loaded with a number of important economic reports.
  • Personal income and outlays, pending home sales and Dallas Fed Manufacturing Survey (M)
  • Chicago PMI and consumer confidence (T)
  • ADP employment report, PMI Mfg index, ISM mfg index and construction spending (W)
  • Jobless claims and factory orders (Th)
  • Employment situation, international trade report, ISM non-mfg index, global composite PMI and global services PMI (F)
For the week ahead magazine below, a number of links look at recent buyback activity as well as the performance of various market sectors. With a number of individual stocks experiencing significant corrections, one link reviews the fact some stocks just do not mean revert as investors might think. In short, just because a stock looks cheap, it does not mean it will generate market beating returns. And finally, it has been difficult gauging a great deal of insight into investor market behavior based on their sentiment as it has not been overly optimistic nor overly pessimistic. The Gallup article link notes that the "U.S. Investor Optimism Index is at its highest level in Seven Years. This index is officially know as  the Wells Fargo/Gallup Investor and Retirement Optimism Index. I have not reviewed the questions/data closely; however, the index had prior peaks in 2000 and 2007, both market tops. The current index level, though, is far below the 2007 peak.


Saturday, September 27, 2014

Buybacks Decline 27% In Second Quarter

Earlier this week S&P Dow Jones Indices released their buyback report for the S&P 500 Index. Of note was the 27% decline in buyback value in the second quarter versus the first quarter of 2014. Even on a year over year basis (Q2 2014 versus Q2 2013) buybacks declined 1.6%. Some important highlights from the buyback report:
  • "For the 12 months ending June 2014, S&P 500 issues increased their buyback expenditures by 26.6% to $533.0 billion from the $420.9 billion posted during the corresponding twelve month period in 2013."
  • "Companies on aggregate...issued fewer shares, with the net change resulting in a lower share count and higher earnings-per-share (EPS)."
  • "By reducing their share count, more companies are adding tailwinds to their EPS," says Silverblatt. "During the second quarter, 23% of S&P 500 issuers reduced their year-over-year share count enough to push up their earnings per share significantly versus just shy of 20% during Q1 and 12% during the second quarter of 2013."
From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

In the report Howard Silverblatt also comments on the continued need for companies to spend more on buybacks going forward in order to prevent share dilution from employee options that are in the money. These employee options have gained in value as the equity market continues to move higher. This potential increase in buybacks would provide support for a respective company's share price.

The report contains a number of useful tables with dividend and buyback data. Below is the table detailing the top 20 or largest buybacks in the second quarter.

From The Blog of HORAN Capital Advisors

Source:

S&P 500 Q2 Buybacks Decline 27% From Q1 2014
S&P Dow Jones Indices
By: Howard Silverblatt, Senior Index Analyst
September 23, 2014
https://my.spindices.com/documents/index-news-and-announcements/20140923-sp-500-buyback.pdf


Sunday, September 21, 2014

Week Ahead Magazine: September 21, 2014

A fairly eventful week last week with the Fed's policy decision essentially leaving rates unchanged and retaining the "considerable time" language in its rate announcement. Alibaba's (BABA) IPO was one for the record books in terms of size. Before investors jump in to buy the stock they should read Aswath Damodaran's commentary on the corporate structure of BABA. With those two items now in the rear-view mirror, the market managed to generate mostly positive returns last week. The one segment of the market having trouble gaining any upward traction is small cap stocks. On the week the Russell 2000 small cap index was down 1.2% and now is down 1.4% on the year. The other broad U.S. indices have generated near double digit returns year to date. The one large cap laggard is the Dow Jones Industrial Average which is up 4.2%.

For the week ahead, a number of economic reports are on the calendar:
  • Existing home sales (M)
  • New home sales (W)
  • Durable goods orders, and jobless claims (Th)
  • Second quarter GDP final reading (F)
A number of additional reports will be reported in the coming week, but those noted above are likely to be the most impactful to the markets. This week's magazine contains an assortment of articles readers may find of interest.


The Myth Of High Structural Unemployment

It has been almost a year since taking a look at the Beveridge Curve. In the earlier posts we noted the curve compares the unemployment rate with the job vacancy rate. The job vacancy measure we have used in prior posts is the data from the Job Openings and Labor Turnover Survey or JOLTS report. The limitation of the JOLTS report is data only began to be collected in December 2010. The importance of the Beveridge Curve analysis is the graph provides insight into potential structural unemployment. As the below graph shows, the curve has shifted upward and to the right indicating there may be a structural unemployment issue as job openings are going unfilled.

From The Blog of HORAN Capital Advisors

On the other hand, the Cleveland Federal Reserve Bank recently released a report that looks at the Beveridge Curve shift with data going back to 1951. For pre-JOLTS data, the report incorporated the Conference Board Help-Wanted Online Index (HWOL). As the graph in the Cleveland Fed report shows, the most recent data point has moved inside the curve generated after the 2001 recession.

From The Blog of HORAN Capital Advisors

A part of the Cleveland Fed's conclusion notes,
"However, one thing is clear: there is no shift to begin with. We believe that this debate and the ensuing evidence showed us that inferences about complicated and ill-defined concepts such as structural change in the labor market cannot be made by just looking for a break in the simple (and reduced-form) empirical relationships between macroeconomic aggregates in the midst of a deep and long recession."

As an aside, one aspect of this recovery that seems to gain a great deal of attention is the continuing decline in the labor force participation rate. The conversation around this data point leads to a discussion that if these non-participants were included in the unemployment data, one, the unemployment rate would be higher and two, the Beveridge Curve would show a more pronounced shift up and to the right. For some, this shift would indicate a structural unemployment issue in this recovery. For a detailed look at participation rate information, Bill McBride of the Calculated Risk blog provides a comprehensive analysis of participation rate data.

From The Blog of HORAN Capital Advisors