Market Update: February 21, 2017

© Susan Walsh/AP Photo

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  • Stock advance continues following record-setting week. U.S. stocks are moving higher in early trading as markets reopen following the Presidents’ Day holiday. All three major averages ended the prior week at record highs; the S&P 500 (+0.2%) advanced modestly as telecom (+0.9%) was the best performing sector. Equities in Asia closed mostly higher overnight amid a quiet session, though the Hang Seng lost 0.8%. European markets are seeing broad strength in afternoon trading (STOXX Europe 600 +0.5%) as investors sift through PMI data that came in mostly above expectations; the U.K.’s FTSE is the exception (-0.1%) as disappointing earnings in the banking sector drag it lower. Finally, Treasuries are losing ground as the yield on the 10-year note is up to 2.44%, WTI crude oil ($54.78/barrel) is up 1.9%, and COMEX gold ($1234/oz.) is slipping 0.4%.

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  • Treasury prices initially lower, then rebound late week. Last week began with Chinese consumer price index (CPI) and producer price index (PPI) data rising much more than analyst estimates, setting the tone for more inflationary pressure on U.S. Treasuries. On Tuesday, Federal Reserve Chair Yellen, in her semi-annual testimony before Congress, stated that it would be “unwise to wait too long to hike interest rates.” This moved the yield on the U.S. 10-year Treasury higher by 8 basis points (0.08%) to 2.52%, as investors began to price in a March rate hike. Thursday’s session saw a slight rebound in prices following a move lower in European yields as the Greek bond market stabilized. This week, investors will be watching the economic calendar for more evidence of inflation.
  • Inflation expectations edge up. The 10-year breakeven inflation rate finished last week slightly higher, moving from 2.01% to 2.02%. Importantly, the breakeven rate is above the Fed’s 2% inflation target. This week, we take a deeper look at Treasury Inflation-Protected Securities (TIPS) and why, despite solid performance relative to Treasuries in the second half of 2016, there may be further opportunity within the asset class for investors seeking credit and inflation protection.
  • Municipals supply lower on the week. Muni supply, as measured by the Bond Buyer 30-day visible supply data, remains below the 10-year average of approximately $11 billion, coming in at $7.5 billion last week. Supply is expected to remain light due to the holiday-shortened week. However, March and April supply is expected to grow as the Bloomberg fixed rate calendar supply data already shows an increase in supply from $6 billion on Thursday, February 16 to $7.6 billion today.
  • Investment-grade corporates spread breaches 1.2% level. As measured by the Bloomberg Barclays US Corporate Index, this level had provided resistance since late January. As equities made a decisive move higher over the last two weeks, investment-grade corporates have followed suit. Equity strength, investors’ demand for high-quality yield (above that of Treasuries), and increased prospects for corporate tax reform were all contributed to the spread contraction.
  • Earnings dipped last week but estimates still holding firm. Q4 2016 earnings for the S&P 500 are now tracking to a 7.5% year-over-year increase (as measured by Thomson), down about 1% over the past week on insurance industry declines. Financials and technology are still on course for solid double-digit earnings gains. While a 7.5% growth rate is certainly nothing to sneeze at, the better news may be that consensus 2017 estimates are down only 1.1% since earnings season began (and still up over 10% versus 2016), buoyed by flat or positive revisions to financials, energy and industrials estimates. Interestingly, these sectors are particularly policy sensitive, suggesting policy hopes are seeping into analyst and management team outlooks.

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  • Leading indicators rise. The Conference Board’s Leading Economic Index (LEI), an aggregate of indicators that tends to lead overall economic activity, rose a strong 0.6% month over month in January, beating the expected 0.4% increase and better than December’s also-strong 0.5% gain. The LEI is now up 2.5% year over year, a rate of change that historically has been accompanied by low risk of recession in the next year.
  • Domestic oil markets in focus. The addition to U.S. supply from shale deposits over the past decade is well known, but demand has changed as well, influenced heavily by our choice of vehicles as well as fuel efficiency standards. President Trump has signed a number of executive orders related to energy, most notably on the Keystone XL Pipeline. However, the administration has not weighed in on other issues, such as fuel economy standards. Any policy changes, as well as how they are enacted, could influence both U.S. supply and demand considerations.
  • European economic growth accelerates. A series of PMI data was released in Europe overnight, pointing to growth increasing at a faster rate than expected. Data from the two largest countries, France and Germany, were better than expected. The Eurozone composite reading (including services and manufacturing) registered 56, the highest reading in 70 months. Inflation in France remained contained at 1.3%, though many in Europe believe that the stronger economy will lead to higher inflation data in the near future.
  • More new highs. Equities staged a late-day rally on Friday to close at new record highs. In fact, the S&P 500 closed at its ninth record high for 2017. This is halfway to the 18 from 2016 and nearly to the 10 record highs made during 2015. Although no one knows how many more new highs will be made this year, it is important to note that they tend to happen in clusters potentially lasting decades. Going back to the Great Depression[1], there have been two long clusters of new highs – from 1954 to 1968 and from 1980 to 2000. The years in between were marked by secular bear markets and a lack of new highs. Could the current streak of new highs that started in 2013 last for many more years?
  • Four in a row. The S&P 500 gained 1.5% last week, closing higher for the fourth consecutive week for the first time since July 2016. The last time it made it to five weeks in a row was coming off of the February 2016 lows. Of the last 12 times the S&P 500 has been up four consecutive weeks, 10 of those times it has closed even higher two weeks later, so momentum can continue in the near term. The S&P 500 has been up only 3.5% in the current streak – the weakest four-week win streak in nearly five years. Going back to 1990, when the S&P 500 is up four weeks in a row, but with a total gain less than 4%, the average return the following two weeks is twice as strong (1.0% versus 0.5%) as the average return after all four-week win streaks.

MonitoringWeek_header

Tuesday

  • Markit Mfg. PMI (Feb)
  • Harker (Hawk)
  • Kashkari (Dove)
  • Eurozone: Markit PMI (Feb)
  • China: Property Prices (Jan)

 Wednesday

  • Existing Home Sales (Jan)
  • FOMC Minutes
  • Germany: Ifo (Feb)
  • OPEC Technical Meeting in Vienna
  • Brazil: Central Bank Meeting (Rate Cut Expected)

 Friday

  • New Home Sales (Jan)

 

 

 

 

 

 

 

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Market Update: November 28, 2016

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  • Markets inch lower to begin data-heavy week. U.S. equities are pulling back modestly this morning as investors pause following a record-setting week for major indexes and ahead of a swath of economic data due out this week, including Friday’s non farm payrolls report. Volatility in WTI crude oil prices is also adding to caution amid doubts a deal will be reached at Wednesday’s OPEC meeting. As expected, Friday’s shortened session saw low volume, and the major averages all moved modestly higher (S&P 500 +0.5%); utilities (+1.4%) and telecom (+1.1%) outperformed, while only the energy sector (-0.4%) lost ground on the day, trading lower alongside a 3% drop in oil. Asian markets finished mostly positive overnight Monday, with the exception of the Nikkei (-0.1%) due to a strengthening yen. Italy’s MIB (-0.9%) is leading the retreat in European stocks ahead of Sunday’s constitutional referendum. Finally, oil is back in positive territory by over 2% ($47.15/barrel) after seeing sharp declines overnight, COMEX gold ($1186/oz.) has advanced 0.6% after touching nine-month lows on Friday, and the yield on the 10-year Treasury is down 2 basis points to 2.33%.

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  • Corporate Beige Book shows improved sentiment among corporate executives, based on the use of more strong words relative to weak ones in earnings conference calls during Q3 2016 earnings season. Talk of recession was virtually non-existent, election comments were minimal, and fewer mentions of currency suggested limited Brexit disruption and reflected a smaller currency drag on earnings. Meanwhile, oil and China continued to garner a lot attention. We believe Q3 results were strong enough to justify the improved tone from corporate executives and support our expectation for mid- to high-single-digit earnings growth in 2017.
  • Soft Black Friday shopping weekend reflects shifting retailer behavior, not consumer weakness. The National Retail Federation (NRF) said shoppers spent 3.5% less over the four-day Black Friday weekend than they did in 2015. The NRF said the decline in spending was a function of earlier promotions and longer-lived discounts. The trade group maintained its 3.6% growth forecast for holiday spending. Within these sales totals, online sales were very strong, rising 18% year over year on Thanksgiving and Black Friday, according to Adobe, and more people shopped online than in stores over the weekend.
  • OPEC deal in doubt? Headlines are all over the place regarding the likelihood of a deal. Comments out of Saudi Arabia suggesting the oil market would balance itself in 2017 even without a deal, coupled with Iran’s continued push for an exemption, suggested a deal was unlikely. On the flip side, Saudi Arabia’s comments are likely intended to increase negotiating leverage, while Iraq has stated its desire to cooperate with other OPEC members to reach an agreement. This one is tough to call, but our bias would be to buy on weakness in the absence of a deal should oil prices return to $40 a barrel or lower.
  • S&P 500 scores more new highs. The week of Thanksgiving tends to have a bullish bias and that played out this year, as the S&P 500 gained all four days of the week to close higher by 1.4%, the third straight higher weekly close. Interestingly, this was the third consecutive election year that the week of Thanksgiving was higher all four days. In the process, the S&P 500 closed at a new all-time high four consecutive days for the second time this year (it did it in July as well), but the index hasn’t closed at new highs five straight days since November 2014. Speaking of November, the S&P 500 is now up 4.1% for the month, the second best November return going back 14 years. As another way to show how strong the market has been, the S&P 500 hasn’t violated the previous day’s low for an amazing 14 consecutive days, which is the longest streak since 15 in a row in November 2004.
  • Small caps continue to soar. The Russell 2000 (RUT), a proxy for small caps, is up an incredible 15 days in a row. This now ties the streak of 15 in a row from February 1996 for the second-longest win streak ever. The record is 21 straight green days in 1988. Lastly, the RUT has made a new high nine straight days for the first time since September 1997 and the last time it made it to 10 in a row was May 1996.
  • Here comes December. The upcoming month is full of potential market-moving events. Historically, December is a strong month for the S&P 500; since 1950[1], no month sports a better average gain or is positive more often. Still, with the first Federal Reserve Bank (Fed) rate hike of the year likely coming in the middle of the month, the potential for a volatile month is much higher. Factoring in a highly anticipated OPEC meeting, the November employment report, elections in Austria and constitutional referendum in Italy, and a European Central Bank (ECB) meeting – you have all the ingredients for some big market moves in December. We will take a closer look at all of these events, along with the Santa Claus rally.

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

MonitoringWeek_header

Monday

  • ECB’s Draghi Speaks in Brussels
  • OECD releases 2017 Economic Outlook

Tuesday

  • GDP (Q3 – Revised)
  • Dudley (Dove)
  • Germany: CPI (Nov)

Wednesday

  • Personal Income and Spending (Oct)
  • Chicago Area PMI (Nov)
  • Beige Book
  • Mester (Hawk)
  • OPEC Meeting in Vienna
  • China: Official Mfg. PMI (Nov)
  • China: Official Non-Mfg. PMI (Nov)
  • China: Caixin Mfg. PMI (Nov)

Thursday

  • ISM Mfg. (Nov)
  • Vehicle Sales (Nov)
  • Mester (Hawk)

Friday

  • Employment Report (Nov)

 

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples. This research material has been prepared by LPL Financial LLC. 

Is This 100-year Old Indicator Suggesting Market Strength?

The Dow Jones Industrial Average (Dow) gained for the sixth consecutive day yesterday and closed at a new all-time high for the third straight day. The Dow Jones Transports (Transports), meanwhile, had another big day yesterday and has been one of the top performers since the election. The Dow and Transports will forever be linked, as they are the two components to Dow Theory. Charles Dow created the Dow Theory in the late 1800’s, and it revolves around needing confirmation from both industrial and transports before establishing market direction. Think about it—if both the industrial and transports are strong, this likely suggests an improving economy. The flip side is if both are going lower, the economy is weakening.

Another way to look at the relationship between the two indexes is to compare them on a relative strength chart. When the ratio of the Transportation Index to the Dow increases, this means that transports are outperforming. We have found that when this ratio on a weekly chart moves above its 40-week simple moving average for more than three weeks, stocks tend to move higher over the next year. This signal triggered recently; the last time it happened was in late 2012, right before a huge equity rally in 2013.

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Looking at historical data going back to 1979, this signal triggered 20 times. Take note, we removed the two largest recessions over the past 20 years, as we don’t see any signs of a coming recession. The S&P 500 gained more than 9% on average six months later and was higher 80% of the time. Going out a full year, the S&P 500 has been up more than 16% on average and higher all 20 times.

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Could this newfound strength from the transports be telling us the economy could be set for strong improvement as we head into 2017? It very well could be, and this could be another reason to expect the equity bull market could possibly continue as well.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. Stock investing involves risk including loss of principal. Because of its narrow focus, specialty sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average Index is comprised of U.S.-listed stocks of companies that produce other (non-transportation and nonutility) goods and services. The Dow Jones Industrial Averages are maintained by editors of The Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents the market sectors covered by the average. The Dow Jones averages are unique in that they are price weighted; therefore, their component weightings are affected only by changes in the stocks’ prices. This research material has been prepared by LPL Financial LLC.

Any Bulls Left?

The number of bulls is dwindling. In periods of extreme market volatility such as we have experienced in recent weeks—and Friday, January 15, 2016, in particular, when the Dow was down over 500 points at one point before paring losses—we find it helpful to try to take some of the emotion out of our investment decisions. As difficult as that can be at times, this approach can help us reduce the chances of selling at the bottom, even though the natural reaction for many is to panic and hit the sell button.

One way to help measure how close to the bottom stocks may be is to use sentiment indicators to identify extremes in bullishness and bearishness. When the bulls are all washed out, in theory, there are few sells left to put more pressure on stocks. In this case, extreme bearishness can be viewed as a contrarian indicator and may signal that selling could be near an end.

Technical analysis can also help identify key price levels that may signal breaks in either direction. These tools can give us an idea of when the selling might stop and a reversal might ensue. An objective look at some data can be reassuring and help us make better investment decisions.

A closer look at sentiment indicators suggests most of the selling may be behind us. We haven’t seen full panic—or capitulation—but we have gained some confidence that the upside opportunity for stocks may outweigh the downside.

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FEW BULLS LEFT

The latest American Association of Individual Investors (AAII) survey indicates an extreme scarcity of bullish investors, even more extreme than was observed in the summer of 2015. In fact, based on the latest AAII survey, bulls are as scarce as they were in 2009 and 2003, the last two major market bottoms. The reading of bulls during the latest week came in at 18%, the lowest level since April 2005. Bears have spiked as well, up to more than 45%, the most since April 2013.

Using weekly data, the eight-week moving average of the bulls is below 26% [Figure 1]. For comparison, this was the lowest since March 2009 during the depths of the financial crisis. The only other time it was less than 26% over the past 20 years was March 2003. This extreme level of bearish sentiment may suggest a lack of new sellers and that stocks may be nearing a bottom.

DERIVATIVES POSITIONING

Another way to assess investor sentiment is by looking at the ratio of bullish to bearish positioning in the derivatives market. Recently, positioning in the derivatives markets has become much more bearish, according to data from the Chicago Board Options Exchange (CBOE). Coupled with the action in the AAII sentiment poll, this shows how dour most view the stock market currently. From a contrarian point of view, this could be a sign that a bottom may be near.

ASSESSING TECHNICAL DAMAGE

We can also use more traditional technical analysis to assess how likely it is that stocks are nearing a bottom. Over the past few weeks, the S&P 500 Index has incurred some technical damage, with the index now testing its August 25, 2015, low at 1867. From a technical perspective, a sustained break below the 1867 support level would establish a lower low, indicating the downtrend may continue.

Conversely, a bounce off of the 1867 level would indicate stabilization by setting up a higher low, increasing the potential for a short-term bottoming process.

Another form of technical damage occurred on January 8, 2016, when the shorter-term moving average (50 periods) crossed below its longerterm moving average (200 periods) on the daily price chart (which some refer to as a “death cross”). This is the second time this cross has occurred over the past six months—the first occurred on August 28, 2015, very close to the stock market lows of August and 2015 [Figure 2].

Since 1980, the S&P 500 has experienced 16 of these crosses. In 11 of those instances, the S&P 500 was higher 3 months later, with an average gain of 4.7%. The numbers improve after 6 months, with gains in 10 out of 15 instances, and an average gain of 7.4%. And over 12 months, stocks are only down if accompanied by recessions. This indicator has provided many false bear market signals over time and often indicated the approach of a rebound.

CAPITULATION?

Evidence of “capitulation,” essentially marking investors as throwing in the towel, can also signal the end of selling may be near. When the S&P 500 Index was at 1867 on August 25, 2015, many technical and sentiment stock market indicators were at extreme levels on heavy trading volume and were characterized by some as capitulation. This essentially means investors have all headed for the exits, leaving no one else to sell (in theory) and signaling a potential tradable stock market bottom.

The Relative Strength Index (RSI) can assess capitulation by measuring the depth of oversold conditions. A greater frequency of steep declines over a period (in this case we use 14 days) coincides with a low RSI. The RSI at just over 18 on August 24, 2015, was considered extremely oversold, compared with the recent low back on January 8, 2016, at 29. Holding this level would be considered a higher low, indicating the potential start of a short-term bottoming process and increasing the possibility that stocks move higher.

We can also look at the percent of S&P 500 companies above their 50-day moving average to assess capitulation. On August 24, 2015, this measure stood at 8.2, an extremely oversold, capitulation-like reading, compared with the more recent low of 12.7 on January 8, 2016. Again, should this level hold, it would suggest the start of a potential short-term bottoming process and, hopefully, a subsequent rebound in stocks. We may not have seen full-blown panic, but we have gained some confidence that the upside opportunity for stocks from here may outweigh the downside.

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VALUATIONS

Another way to gauge sentiment is valuations, one of the more common worries about the ongoing bull market. The latest stock market correction has brought stocks down to a reasonable forward (next 12 months) price-to-earnings ratio (PE), below 15, down from more than 17 back in March 2015 (based on Thomson-tracked S&P 500 consensus estimates). On a trailing 12-month basis, at 15.8, valuations are in-line with the average since 1950 and slightly below the post-1980 average.

While valuations alone do not drive our investment decisions, especially in the short term, they can help entice buyers when stocks fall, especially at such low interest rate levels [Figure 3]. In fact, the dividend yield for the S&P 500 at 2.37% as of January 15, 2016, is higher than the yield on 10- year Treasury bonds at 2.03%. Corporate America, outside of the challenged energy sector, remains in very good shape and, we believe, is in good position to grow profits in 2016 despite the drags from the energy sector, a strong U.S. dollar, and slower growth in China.

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WHAT ABOUT FUNDAMENTALS?

Technical analysis and valuations can provide some reassurance that a market decline might be nearing an end, but fundamentals are another key piece of the story. We continue to watch a number of fundamental indicators that might provide early warning of a potentially larger bear market decline. Look for an update on some of our favorite leading fundamental indicators in this publication over the coming weeks.

CONCLUSION

As difficult as it is in periods of heightened volatility, we encourage investors to stick with their plan. The natural emotional response is to sell everything and go to cash, but that is rarely the right decision. Technical analysis tools can help inform our decisions, in addition to valuations and fundamentals. Technical indicators, like valuation and fundamental indicators, are not perfect, but the convergence of extreme bearish signals indicate selling may be near an end.

For more information please see the source link below. 

(Source: LPL Financial)

Here’s One Bear Market Sign You’ve Never Seen Before

Provided by Wikimedia
Provided by Wikimedia

It’s a bearish sign that so many advisers are declaring that we’re now in a “stock picker’s market.”

That’s because fewer and fewer stocks participate in a bull market as it approaches its top. Advisers therefore find it increasingly difficult to identify stocks that will keep up with the market, much less beat it.

By telling their clients this is a “stock picker’s market,” these advisers think they are distinguishing the investment environment from other periods in which the majority of stocks participate in the market’s major trend. Little do they appreciate that, in effect, they are also declaring the bull market to be getting extremely long in the tooth.

That’s because the degree to which stocks move together in unison is a function of the market cycle. In bear markets the vast majority of stocks do so, whereas in bull markets stocks tend to march to the beat of their own drummer. It’s at market tops, therefore, when stocks’ moves in step with the overall market tend to be at the lowest point.

Such as it is now. Last week, even as the broad market averages rose to within shouting distance of their all-time highs and some secondary averages actually did so, just 7.2% of stocks on the New York Stock Exchange hit new 52-week highs. A slightly greater percentage of stocks — 7.3% — hit new 52-week lows.

To illustrate the extent to which virtually all stocks suffer during market declines, in contrast, take October 2008. That was the single-worst month of the 2008-2009 bear market, when the Wilshire 5000 Index  dropped 17.6%.

International stocks, which advisers often recommend as portfolio diversifiers, failed to provide any protection, with the MSCI EAFE Index  tumbling 20.2%. Even traditional hedges such as gold failed to provide significant insurance: The London Gold Bullion price fell 17.4% in October 2008.

In contrast to the situation that prevailed in 2008, there’s been a significant divergence recently between the returns of these three asset classes.

In true contrarian fashion, the majority of advisers not only fail to appreciate this pattern, they get it precisely wrong. At the bottom of bear markets, after finally “discovering” that stock picking doesn’t provide much protection against a huge drop in the overall market, they declare that it’s a “stock market” rather than a “market of stocks.” Of course, that’s just when they should be redoubling their efforts at stock picking.

Just the reverse situation applies at market tops: After belatedly realizing that stocks are not necessarily moving up and down in lockstep with the overall market, they declare it to be a “market of stocks” rather than a “stock market.” That’s just when they should be focusing on the risks to all equity positions that a major bear market would represent.

Keep this in mind the next time your adviser announces that we’re now in a “market of stocks.” You may want to use this occasion to switch to a more contrarian-oriented adviser who can better protect you in a bear market.

Written by Mark Hulbert of MarketWatch

(Source: MarketWatch)