Download pdf version – Market Watch – Buying Power Weak, but PTI Strong – Dec 13, 2020
“The only certain thing about the future is that it will surprise even those who have seen furthest into it.”
– Eric Hobsbawm
Bottom Line: The correction I’ve been expecting may have started last week, after the recent runup in the week before. In the end, most of the broad market averages lost 1% or less.
Our Primary Trend Indicator remains firm and is clearly confirming the new highs in stocks. Leadership for example (or the number of net new highs) scored a new high last week – by a significant margin.
A major shift has been taking place towards the long-abandoned energy sector with energy stocks also finished in the green last week. I think a major move may also be underway into the also-neglected Uranium space and it seems odds are high that nuclear power may be a big part of energy policy going forward.
There are some signs of excess, as well as some weakness in our Buying Power Model but despite these concerns, the weight of evidence remains bullish.
Our Trending Value Portfolio Process doesn’t take holiday but this is likely to be our last regular Market Watch for the year. On the business front we will be finishing up any year end reviews, preparing our portfolio reports for the end of 2020 and accumulating the data for your January tax reporting.
One question that keeps coming up from clients is along the lines of “How are stocks rising with (…insert something horrible here) …going on?”
It’s a good question but in a nutshell, the economy and the stock market are two different things.
First, economic data is difficult to get a handle on at this stage and I firmly believe that there is more than one economy right now. Imagine a “covid lockdown” economy that lasts forever which frankly, it seems it might. Certainly some businesses will struggle, like restaurants and airlines. However, some sectors of the economy will do well, and some will boom. I’m not just talking about stay at home stocks, like DoorDash, but real growth companies that have lasting business models with growth opportunity like Crowdstrike Holdings, a cyber security company or frankly, even Carrier Global which manufactures air Conditioning and HVAC equipment.
Second, and somewhat surprising, budget deficits, which are obviously a long-term problem, are positively correlated to corporate profits one year later. Ned Davis Research Profits Model continues to improve, and apparently big gains in corporate profits are likely.
Third, and perhaps most important is interest rates.
Morgan Housel, author of the book The Psychology of Money had this to say recently.
This quote highlights the extremely important relationship between interest rates and financial asset valuation and partly, if not largely, answers the question “how can stocks like Tesla and others be going up and be worth so much when the political response to Covid has ravaged so much of the economy?”
It does raise the real question of what happens to these growth companies when interest rates really start to rise, but I’ll leave that for another time. Pro tip. It’s not great.
Those are a few good reasons why ‘things can go up’ when the economy is questionable and Covid data worsens.
In the Markets
Our Primary Trend Indicator remains broadly supportive of stocks.
As an input to this trend model, last week nearly 92% of stocks in the S&P 500 were trading above their 200-day Moving Average. The chart below shows that we’ve seen it before – like in 2013, a few times between 2009 and 2011, and early 2004. All turned out to be fantastic long-term entry points with years of gains ahead of them.
We can’t know it will play out that way again, but this does suggest that the odds support higher stock prices in the next year or two.
Our Buying Power Indicator for the S&P500 is weak. Over the past 30 years accumulation patterns in the stock market have always shown Money Flows being extremely positive on all frequencies at this stage of the market rally. Coming out of every Bear Market our Buying Power Indicator was always positive and this time it is not! Yet. This seems to be telling us that institutional buyers of the stock market are not participating.
If this does not change in the coming weeks, odds are our PTI will also deteriorate and we’ll continue to reduce our exposure to the stock market.
In our Portfolios
This week, among other things we sold Amazon and Microsoft.
Why would we sell Amazon and Microsoft?
Very simply because they lost all relative strength. Over the last year, both stocks have fallen into the bottom 50% of performing stocks in the S&P500. This is shown by both stocks falling into the red zone in the matrix below which represents the entire S&P500, with the Green zone representing the top 25% of performing stocks in the S&P500. It is statistically proven that the odds suggest continued under performance once you hit the red zone.
While I have no idea what is next, that alone is criterion enough for us to move on to something else, and especially when our BPI is on defense.
Is it possible that the “FANMG” type stocks resume leadership? Sure. However, odds suggest otherwise, at least for now and our job is to put the odds in your favor, systematically and consistently.
Importantly we generally learn why a stock is struggling, after years of underperformance. Is it possible that by 2022 we are reading about how AMAZON has been losing market share to other direct to customer sites with better sites and service like Ebay, Buydig.com, Rakuten.com, Overstock.com, Aliexpress and Etsy? It’s possible. We’ll find out in a year or two. For now, we move on.
The data shows that the bull market is intact but also that big money buyers remain absent. This has historically been a bad sign but until our PTI remains so strongly bullish, we stick with the trend.
We are committed to following the data and making sure your portfolios benefit from change, rather than fall victim to it.
We remain completely open to any eventuality that the markets bring. Our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.
I hope you have a very good weekend. If you have any questions about this update, or anything else please do not hesitate to reach out.
Hopefully we get you our year end letter before too long and we’ll be in touch in January to get the tax reporting season underway. In the mean-time the Schenk Wealth Management team wishes you and your loved ones a great Christmas.
Peter Schenk, CMT, CIM | Portfolio Manager
Words we operate by:
“Deliver to the world what you would buy if you were on the other end. There is huge pleasure in life to be obtained from getting deserved trust. The way to get it is to deliver what you would want to see if you were on the other end.”
“Strive not to be a success, but rather to be of value.”