Investments

A Contrarian Indicator

Here's the theory behind the magazine cover indicator. By the time a something’s success or failure reaches the cover page of a major publication, it is so well known that it is fully known by everyone and those who want to capitalize financially have already done so. For example, once all the good news is out and a company makes the cover of business week, the stock is destined to underperform. The reverse holds for negative stories. It doesn’t have to just be about businesses, it can be about social themes too … remember the 2007-08 housing boom.

An academic study by three finance professors at the University of Richmond put the magazine cover story indicator to the test -- specifically as it focuses on coverage of individual companies. The professors culled headlines from stories in Business Week, Fortune, and Forbes for a 20-year period to examine whether positive cover stories are associated with superior future performance and negative stories are associated with inferior future performance. "Superior" and "inferior" were determined in comparison with an index or another company in the same industry and of the same size.

Here's what the professors found. The research supported the use of magazine cover stories as a contrarian indicator. The most negatively portrayed companies managed to beat the market by an average of 12.4%, whereas the outperformance of the media darlings fell to just 4.2%. The conclusion? Positive stories generally indicate that the stock's price performance has topped out. Negative stories often come right at the time of a turnaround.

The study confirms that it is better to bet against journalists than alongside them. It would be easy to jump to the self-congratulatory conclusion that journalists are incompetent. But that conclusion misses the point. Journalists aren't writing cover stories to make investors money. They are writing cover stories to sell magazines. And "hot topics" sell. But it also means that when a company or financial trend is featured on a magazine cover, the chances are that the trend is already widely known, and universally accepted.

With that in mind, this weeks Business Week cover should raise some eyebrows….

san ramon CFP Bloomberg business week cover 4-22-19.png

Just because the Government’s measured “version” of inflation, CPI, has been in stall speed for years, doesn’t meant it will always be. Additionally, and most importantly, not everything tracks the inflation rate. Health care is a great example as it has been rising almost 2x the annual “measured” inflation rate. For a what that means over time, take a look, and try not to laugh, at the hospital bill below for what it cost to have a baby in 1958. I think the total bill would be less than the cost than the charge of 2 ibuprofen in today’s medical reality (those that have had a recent surgery can attest to what I say)

investment advisor weath management inflation 4-22-19.jpg

The Bullish Case

Strongly trending markets don’t care about P/E ratios, inverted yield curves, the Presidents latest tweet or most everything else for that matter. Which is why it pays to watch price movement only and put everything else on "ignore". The semiconductor index, SMH, has always been my canary in the coal mine. It tends to lead stocks both up and down which is why it is a critical reticle into the US stock market and investors willingness towards risk. If its price is in an uptrend, risk is on and investors should be long stocks, very long. Of course, the opposite is also true. With that in mind let’s take a look at a price of SMH and see what it may be telling us.

san ramon cfp NAPFA invstment advisor smh 4-17-19.png

After falling, like the rest of the market to its Dec 24th lows, price rallied impulsively higher, with only a few small, minor pullbacks before testing the prior high (resistance/overhead supply) made in June of last year (red horizontal line). After pulling back 4 days, price resumed its move higher eventually gapping above that prior level of resistance on high volume (~40% greater than average daily volume). The gap was the first sign and when confirmed with high volume let us know institutions (almost $1B traded on that breakout day) were buying. I don’t need to repeat it but higher probability profitable investments come in the direction of the current trend and when institutions are accumulating. Both of which the current chart of SMH is signaling. For those already in this ETF, the good news is you now have a very clear, simple and well-defined exit plan. If price in the short term cannot hold above the recent breakout, that would be an ominously bearish signal warning it’s time to take profits and watch from the sidelines.

Sure, the market is richly valued, sure it is overbought on virtually every level but the semis are telling us buyers are in control. Don’t fight the trend.

$8 Trillion

Global bond yielding less than zero (yes, that means lenders are paying the Government to let them hold their paper) now exceed 8 Trillion dollars. In total, there are 18 countries with negative bond yields ... in the 10th year of one of the largest global economic expansions no less.

San Ramon CFP  investment advisor 4-15-19.png

Central banks only tool left in their toolbox in an attempt to counter slow or negative growth is to stimulate the economy by lowering interest rates. At some point all that want to borrow have done so and keeping rates so low harm only those who require bond income (retirees). With this going on since the 2008-09 crash and not having the desired effect one has to wonder why continue and then immediately brings to mind this quote

The definition of insanity is doing the same thing over and over again, but expecting different results – Albert Einstein

You need to look no further than the chart above to the reason why I am a firm believer Europe is winning the race …… to the bottom and the next economic crisis will begin from that region of the world.

Q1 2019 Charts on the Move Video

Impressive moves from Christmas eve lows have the worlds stock markets very extended.. Typcially, prior highs act as formidable resistance, will they again? Or, will this be the mother of all rallies that ignore those levels and slice right through? Something to ponder as you listen to my most recent charts on the move video.

https://youtu.be/jZ_m4tYgOAk

Sideways, Up or Down?

When the US stock market is in consolidation and the trend is in question, I like to pay particularly close attention to the message small cap stocks, IWM, are sending. The main reason is because small caps tend to lead the overall market and can provide an early warning both in/out of consolidation and at beginning a new trend. As you can see in the chart of IWM below (bottom pane of ratio of sp500 index to small cap stock index), the small cap index started to decline first at September’s stock market peak and rallied greater than the broad market from December’s low.

san ramon napfa investment advisor fee only cfp IWM - 3-27-19.png

The market loves symmetry and as you can see in the middle pane of IWM price movement, the rally from December’s low, the index stopped rising at the same point it failed in the past (look left). At that point, small caps have not only lagged the overall market but started to consolidate (red shaded area) in an attempt to digest December 24 oversold rally’s gains. Notice also, how the falling 200-day moving average acted as resistance as the index failed in its two most recent attempts to move above it. This is normal behavior of stocks in a downtrend. Because of symmetry, I would expect the index to chop around in the consolidation zone for at least a week or more before we know which way we are ultimately headed.

Bulls want to see the consolidation zone hold and the small cap index rally back above the blue horizontal, preferably on larger volume. This would allow the 200 day-moving average to catch up and turn higher. A break higher the first upper target is back at last August’s highs. Beyond that, a much higher target, based upon the inverse head and shoulders pattern, is some 40 points above where we closed yesterday. Bears want just the opposite … a flush down to the bottom of consolidation, followed by a rug pull on greater volume. That downside target would be a retest of last December’s low.

Either way and whichever way it resolves, the overall US stock market will likely soon follow suit.