Chart Of The Week
We have recently been struck by the tremendous valuations being awarded to companies that have never turned a profit. Tesla, Spotify, Workday, and Square all sport market caps above $25 billion based not on their recent earning power (which is zip), but on the hopes that they will one day move well into the black.
Tomorrow is the Minnesota season-opener for muskies, but the fanatics who chase them are likely disappointed that it comes a few days after an event that’s known to trigger these beasts: the full moon. The screenshot is from our $9.95 “iSolunar” iPhone app, and shows that Saturday merits only a “three fish” day (out of a possible “four fish”)—based on the moon’s fading illumination.
Last week’s piece challenged the now popular view that new highs for the Russell 2000 are a decisively bullish factor for the stock market in the near term. To our surprise, we found that market returns during periods of well-defined Small Cap leadership are significantly lower than when Smalls are laggards.
The Russell 2000 closed above its January 26th high on Wednesday, and well beforehand bulls had seized upon the secondary stocks’ leadership as evidence that all is right again with both the U.S. economy and stock market...
Analysts are still coming to terms with the impact of the big corporate tax cut, as shown by the dispersion still existing across S&P 500 EPS estimates in 2018. But they should also be watching the line item that’s contributed the most to the breakout in profit margins above historical levels: interest expense...
Yields on 10-year Treasury bonds have still not breached the 3.00% level that many believe will stick the proverbial “fork” in the secular bond bull market that began in 1981. That could well in happen in the next few weeks, but we believe it’s important to step away from the daily fray and reflect upon the damage that’s already been done.
For at least the last year we have argued that late bull market conditions would tend to reward momentum strategies over mean-reverting ones. That’s played out not only during the market’s melt-up phase, but also (to our surprise) during the recent two-week air-pocket, at a time when we would have expected to see at least a temporary setback in the ratio above.
We’ve participated in this year’s upside market surge, while at the same turning a bit wistful in remembrance of a simpler and saner stock market era—an era when one could buy more than a third of the Leuthold 3000 stock universe for less than 14x earnings. Yes, that’s the comparative period of stock market sanity that existed in late February 2000, just days before the NASDAQ Composite made its historic bubble-era peak.
Tax cuts, a strong economy, and daily stock market records have lifted measures of investor sentiment to levels not seen in two decades. But sentiment is only a slightly better timing tool than valuations (which is not saying much), and there’s plenty of room for excitement to build before a final top is at hand.
With the northern U.S. stuck in a deep-freeze, there could hardly be a worse time for the nation’s utilities to fail. But conventional chart work suggests that is exactly what’s happened. The Dow Jones Utility Average fell below its 40-week moving average last Friday, dropping the simple four-indicator model, shown in the chart, into third gear after it had spent most of the year with “four on the floor.”
In 2010 and 2011, we were sometimes chastised for not paying more attention to exploding federal deficits, which at the time were running between 8% to 10% of GDP. We argued that a substantial share of these budget shortfalls was cyclical in nature, and would eventually be reversed by an improving economy.
While this year’s rally has been a broad, “equal opportunity” affair, some of the weakest relative action we’ve observed has—oddly enough—been among equal-weighted stock market indexes. Equal-weighted indexes for Large, Mid, and Small Caps are all trailing their cap-weighted counterparts year-to-date, and the gap for the S&P 500 is now almost 400 basis points after an especially bad October.
With the Major Trend Index positive and the market about to enter the seasonally most bullish part of the calendar, we’ll offer both a trendy sector and a contrarian one for allocators looking to cap off an already good year. Specifically, we’d recommend heavy exposure to both the Information Technology and Financial sectors, which rate #3 and #1 in the October Group Selection (GS) framework.
From a purely technical perspective, the bull market has hardly been lacking for feathers in its cap. Yet it earned another one on Tuesday when the DJIA Smart Money Flow Index (SMFI) broke out to a new bull market high (Chart 1), erasing a “non-confirmation” that had stood since March 1st. This index thereby joins the broad list of market bellwethers—chronicled in the last Green Book—that have participated in the parade of new highs.