More Fundies

I get a lot of questions regarding my posts on investment fundamentals. I think the consensus believes I don’t care about fundamental data. The fact is that can’t be further from the truth. My problem with fundamentals and why I don’t use them solely is that they do not provide buy or sell signals. In my process, technical information must first trigger a signal and then be confirmed by fundamental data.  For example if a stock is breaking out of a bullish pattern, if the fundamentals don’t confirm the breakout, there is little need to commit investment capital since without it, the probability of a long-term successful investment decreases. In the short term (such as when day trading, scalping or short term swing trading), all bets are off and fundamental confirmation is worthless.

For the record, I do watch fundamental data which is why I am posting this next chart.

San Ramon fee only CFP retirement planning investment advisor 8-16-17

As you can see we have now reached the second highest level of the price-to-sales ratio of the SP500 stock index over the past 25 years.  The only time in which the ratio was higher was at the end of the internet bubble in 2000. Notice how that prior peak in the ratio took 2 years to eventually resolve to the downside. The fact is in today’s market, on virtually every (fundamental and technical) metric I watch, not just the price-to-sales ratio, the US stock market is way over-stretched. But until technicals (price data) provides a sell signal, we need to not fight the trend and accept the fact the markets can continue get even more stretched. At tops and bottoms fundamentals mean little, emotions and feelings drive the markets, not common sense.

Are Fundamentals Supportive of Current US Stock Levels?

“Signs of enhanced momentum in the global economy have recently emerged. Global GDP growth has picked up to an annualized rate of over 3¼ percent since the middle of 2016, with a rebound in industrial production, global trade and investment.” – OECD Global Economic Outlook (June 7)

With more than 90% of the companies in the SP500 having reported results for Q2 here are the results:

Earnings -  Q2 the blended earnings growth rate for the S&P 500 was 10.2%. For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 8.5%. For companies that generate less than 50% of sales inside the U.S., the blended earnings growth rate is 14.0%.

Revenue - The blended sales growth rate for the S&P 500 2017 is 5.1%. For companies that generate more than 50% of sales inside the U.S., the blended sales growth rate is 4.7%. For companies that generate less than 50% of sales inside the U.S., the blended sales growth rate is 6.0%.

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What drove the out-performance of S&P 500 companies with higher global revenue exposure? At the sector level, the Information Technology and Energy sectors were the largest contributors to earnings and revenue growth in Q2 for companies with less than 50% of sales inside the U.S.

Buy Buy Buy

It seems those writing newsletters and also (coincidentally, wink, wink) sell gold never seem to change their story.   

All kidding aside, I do realize there will likely be sometime in the future where gold (and other precious metals) could, once again, be worthy of more than just a portfolio hedge or a diversification tool. As such, I like to occasionally check in with the metals to see if there are any new clues or setups in the making. In today’s look, I am reviewing the ratio of US stocks (SP500) to the price of gold. When looking at ratio charts it’s always best to keep things simple and not overcomplicate the analysis. So in this case, when the long-term ratio is rising buy stocks, when it’s falling buy gold (I told you it was going to be simple). A different (lower risk) approach would be to create a pairs trade of buying SP500 and holding an equal amount of gold short.

san ramon independent certifited financial retirment planning advisor CFP wealth manager - sp500 to gold 8-9-17

As you can see the ratio bottomed back in the second half of 2011. Of course we did not know that was “the bottom” until much later in our rear view mirror. In fact from 2009-2013 there was really NO advantage of holding one over the other as they were performing virtually the same (hence the sideways choppy consolidation of the ratio). That all changed in early 2013 when the ratio created a higher high (a break above the blue horizontal line). From that point on, stocks became the better investment and continue to be to this day. This will change someday but since it has not happened yet nor I do I know when it will, watching this chart and waiting until the ratio turns down and eventually forms a lower high and lower low will be my signal. My guess is it could be longer than we think because market trends tend to last for many years and this one is relatively new. Until the trend changes, those wanting the greatest returns would do best to keep their gold investment to a minimum and maximize their exposure to equities (SP500). Gold bugs and metals newsletter writers on the other hand, know that one can never own enough of the shiny stuff so it’s a great time to buy, buy, buy.

Snap Back?

In spite of the buzz that surrounded Wall Street’s must have IPO, SNAP, was a horrendous IPO for initial investors. The price peaked on March 3rd, just one day after it opened and been falling ever since. In fact it lost almost 60% (peak to trough) leaving the early adopters holding a much lighter bag. What is really interesting is that the low made in price is exactly the average age of the apps user base. Coincidence? You be the judge J

For those looking for a short-intermediate term trade or a patient investor who wants to own SNAP long term, the chart is presenting investors an interesting setup.  As you can see yesterday’s close created a hammer candlestick on very large volume indicating a potential bottom is in place. For confirmation, you need to see follow through on the next day which is exactly what happened as price gapped higher and again on above average volume. Armed with this technical setup and combined with the fact RSJ momentum has created an oversold, (positive) divergent low we have an almost ideal, low risk-high reward buying opportunity.  With no real resistance until price reaches the first upside target at the bottom of the first gap (a 35% + rise) and a stop just below Thursday’s hammer candle low, substantially exceeds the desired 3:1 reward to risk ratio I want to see before committing investment capital. If SNAP really has legs and glides right through the lower gap, the next target would be the upper gap, some 80% from its bottom.   

San ramon fee only CFP certifited financial planning independent investment advisor - 8-7-17 - snap

In spite of the compelling upside potential, because of the limitations restrictions SNAP management has built into the company’s public shares, I have no interest in owning them long term. As such, I view any investment in SNAP as a short term rental.

July 2017 Charts on the Move Video

With the markets and investors apparently lulled into a bullish induced coma (not unlike what happens to Homer Simpson when he sees doughnuts), seasonality tells us to expect more of the same for August. Instead with the extreme levels of complacency,  extended price levels, this would be an ideal time for investors to revisit their management plans ... justin case.  

My July highlights in the video link below.