Stocks rallied on Friday after a slow start to the day. Intel's earnings disappointment created a mixed start because investors were also celebrating the better than expected 3.2% GDP number that we got before the opening bell. So, after some initial selling of stocks like Intel, Micron, UPS, and Facebook, the dip buyers shook it off and did their thing. The Dow ended the day up 81-points with the S&P 500 and small caps performing even better percentage-wise. Bonds were also up on the day (yields down.)
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The first quarter GDP was very much stronger than expected and there were several reasons and excuses at the ready in case it wasn't including the weather and the government shutdown. So that's probably why we had such a good response from investors. On the other hand much of that 3.2% GDP was as a result of things like inventory building which may not continue into quarter #2, and that's why the estimates for Q2 GDP are actually near 2.0. Of course no one expected 3.2% so perhaps we'll be surprised again.
Some stocks were getting pounded, like Intel, as I mentioned, but rather than selling everything, it seemed investors just wanted to move that money into other sectors, rather than raise cash. I suppose this can be considered a sign of complacency.
We're seeing some weakness in the Asian markets recently, and last year weakness there preceded weakness in our market by a few weeks. Also, the dollar is near a 52-week high and that could weigh on earnings for the larger global U.S. stocks going forward.
Like any market, there are usually good arguments on both sides of the bull / bear spectrum. I have been way too bearish this year for what we eventually got this year, but we have to keep looking forward and just because stocks have gone up longer than I expected, doesn't mean they automatically continue to go up.
I did some digging this week and I now have a mixed view of the market, with some conflicting analysis. I have talked about how historically overvalued I believe stocks are based on price / earnings ratio when adjusted for margin. There are many other reasons as well. Now this is a longer-term view meaning it doesn't mean stocks have to fall today or this week. Short-term, there are some issues which I will get into below, but it's this next chart that makes me think that technically, the bull market could keep going. But again, a bull market doesn't mean we can't get a 5%, 10% or 15% decline in the short-term.
This chart shows a 20 year chart of the S&P 500, and of course that includes the dot com bubble bursting and the financial crisis bear markets. The NYSE Summation Index can be a good indicator of how strong a rally is or isn't, and when it shows strength like we have been seeing early this year, the bull market could stick around a while. As you can see below, each time it neared that 1250 level, where it was earlier this year, it can mean that the prior low was a significant low, and the bullish trend tends to continue for a long time afterward. Again, that doesn't mean stocks go up up every day, every week, or every month. There are some significant pullbacks during those summation triggered bull market runs.
So, I do have a better feeling about stocks for the next perhaps year or more, but of course I can't shake those historically overvalued figures we also see. That said, for the short-term there are some significant warnings signs out there, despite the recent good action.
Semiconductors have led this market higher this year with some companies seeing big gains in 2019. However, between Micron (top left), which has put in a series of peaks, and Intel and Xilinx (bottom left and top right) which fell apart last week, we saw a big change in character in the semis last week. I added UPS in the bottom right to show another significant breakdown that could be troubling.
Microsoft and Facebook had good reactions to their earnings, but these kind of gaps up can be considered exhaustion gaps that are hard to sustain. We see them in the charts above and below. On Facebook's chart we did see a big gap up after 1st quarter earnings (late January) and it basically moved almost sideways for 2-3 months after that. This may be a sign of fatigue when both of these companies created negative reversals at last week's highs. Sorry - they may be tough to see.
The Russell 2000 small caps' chart in the top left below looks to be consolidating nicely, and that can precede a breakout to the upside, but it may also just be a brick wall, similar to what we see in Copper (top right) which is either in a consolidation phase, or it is about to give up after several failed attempts to move above 3.00.
The XLE energy sector ETF broke below some meaningful short-term support last week and Friday's low hit support that really needs to hold or the longer-term trend gets broken. The HYG High Yield Corporate Bond fund on the bottom right looks primed for a breakout, which would be a bullish sign for stocks, but if those other multiple top charts that we see above are any indication, it could be also be a double top.
The Shanghai Index in China has been hot this year after bottoming in early January, but it has been rolling over more recently and may be something to watch.
That wouldn't be as meaningful if Japan and Hong Kong weren't also showing some signs of fatigue at recent highs after possible exhaustion gaps.
I mentioned Copper's recent struggle, which is considered to be very economically sensitive, the same with UPS, and the XLE Energy Sector, and now we see the yield on the 10-year Treasury failing at the 50-day EMA again and breaking below the short-term support line. These are not great economic signs of strength, and the fact that yields fell after the 3.2% GDP was announced was very odd. Something isn't right.
The AGG (Bonds / F-fund) was up nicely, and as I said above with yields, it was rather surprising to see bonds rally (yields fall) on that strong GDP number. Things that make you go, hmmmm.
I won't sum this up but rather let you decide what all this means because there is a lot to consider. I use my trading system to determine what to do, and while we had a nice year last year, this year the market has been much stronger than my system (TSP Talk Plus) suggested it would be. That's why I wanted to get under the hood to see if I could find some clues as to why this market is acting better than I thought possible, but if it meant anything going forward.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
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The first quarter GDP was very much stronger than expected and there were several reasons and excuses at the ready in case it wasn't including the weather and the government shutdown. So that's probably why we had such a good response from investors. On the other hand much of that 3.2% GDP was as a result of things like inventory building which may not continue into quarter #2, and that's why the estimates for Q2 GDP are actually near 2.0. Of course no one expected 3.2% so perhaps we'll be surprised again.
Some stocks were getting pounded, like Intel, as I mentioned, but rather than selling everything, it seemed investors just wanted to move that money into other sectors, rather than raise cash. I suppose this can be considered a sign of complacency.
We're seeing some weakness in the Asian markets recently, and last year weakness there preceded weakness in our market by a few weeks. Also, the dollar is near a 52-week high and that could weigh on earnings for the larger global U.S. stocks going forward.
Like any market, there are usually good arguments on both sides of the bull / bear spectrum. I have been way too bearish this year for what we eventually got this year, but we have to keep looking forward and just because stocks have gone up longer than I expected, doesn't mean they automatically continue to go up.
I did some digging this week and I now have a mixed view of the market, with some conflicting analysis. I have talked about how historically overvalued I believe stocks are based on price / earnings ratio when adjusted for margin. There are many other reasons as well. Now this is a longer-term view meaning it doesn't mean stocks have to fall today or this week. Short-term, there are some issues which I will get into below, but it's this next chart that makes me think that technically, the bull market could keep going. But again, a bull market doesn't mean we can't get a 5%, 10% or 15% decline in the short-term.
This chart shows a 20 year chart of the S&P 500, and of course that includes the dot com bubble bursting and the financial crisis bear markets. The NYSE Summation Index can be a good indicator of how strong a rally is or isn't, and when it shows strength like we have been seeing early this year, the bull market could stick around a while. As you can see below, each time it neared that 1250 level, where it was earlier this year, it can mean that the prior low was a significant low, and the bullish trend tends to continue for a long time afterward. Again, that doesn't mean stocks go up up every day, every week, or every month. There are some significant pullbacks during those summation triggered bull market runs.
So, I do have a better feeling about stocks for the next perhaps year or more, but of course I can't shake those historically overvalued figures we also see. That said, for the short-term there are some significant warnings signs out there, despite the recent good action.
Semiconductors have led this market higher this year with some companies seeing big gains in 2019. However, between Micron (top left), which has put in a series of peaks, and Intel and Xilinx (bottom left and top right) which fell apart last week, we saw a big change in character in the semis last week. I added UPS in the bottom right to show another significant breakdown that could be troubling.
Microsoft and Facebook had good reactions to their earnings, but these kind of gaps up can be considered exhaustion gaps that are hard to sustain. We see them in the charts above and below. On Facebook's chart we did see a big gap up after 1st quarter earnings (late January) and it basically moved almost sideways for 2-3 months after that. This may be a sign of fatigue when both of these companies created negative reversals at last week's highs. Sorry - they may be tough to see.
The Russell 2000 small caps' chart in the top left below looks to be consolidating nicely, and that can precede a breakout to the upside, but it may also just be a brick wall, similar to what we see in Copper (top right) which is either in a consolidation phase, or it is about to give up after several failed attempts to move above 3.00.
The XLE energy sector ETF broke below some meaningful short-term support last week and Friday's low hit support that really needs to hold or the longer-term trend gets broken. The HYG High Yield Corporate Bond fund on the bottom right looks primed for a breakout, which would be a bullish sign for stocks, but if those other multiple top charts that we see above are any indication, it could be also be a double top.
The Shanghai Index in China has been hot this year after bottoming in early January, but it has been rolling over more recently and may be something to watch.
That wouldn't be as meaningful if Japan and Hong Kong weren't also showing some signs of fatigue at recent highs after possible exhaustion gaps.
I mentioned Copper's recent struggle, which is considered to be very economically sensitive, the same with UPS, and the XLE Energy Sector, and now we see the yield on the 10-year Treasury failing at the 50-day EMA again and breaking below the short-term support line. These are not great economic signs of strength, and the fact that yields fell after the 3.2% GDP was announced was very odd. Something isn't right.
The AGG (Bonds / F-fund) was up nicely, and as I said above with yields, it was rather surprising to see bonds rally (yields fall) on that strong GDP number. Things that make you go, hmmmm.
I won't sum this up but rather let you decide what all this means because there is a lot to consider. I use my trading system to determine what to do, and while we had a nice year last year, this year the market has been much stronger than my system (TSP Talk Plus) suggested it would be. That's why I wanted to get under the hood to see if I could find some clues as to why this market is acting better than I thought possible, but if it meant anything going forward.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
