Bad News: People Are Saving More

With the market at what I consider to be a crossroads, I have dozens of setups I could show that are both bullish and bearish opportunities. But they can’t both be right, so at times like these I prefer to sit on my hands and wait for the market to show its hand before committing precious investment capital.  As such, I thought the latest from one of my favorite technicians, Tom McLellan would keep readers occupied until we have clarity on market direction. Readers should recognize Tom's name as I have used his teaching many times in the past so he requires no introduction. He always has an interesting take on topics and this one is no different. It’s a good read on savings rate and stock prices. Enjoy!

Bad News: People Are Saving More

Savers are masochists.  They deny themselves immediate gratification for the hope of future reward.  And more interestingly, they do this behavior more when the rewards are taken away.

Anyone who ever took Psychology 101 learned about what lab rats will do if you take away the food pellets.  They stop pressing the lever, and they lose interest.  But savers do not behave that way.  The Fed has taken away the incentive for Americans to be savers, through its Zero Interest Rate Policy, or ZIRP.  In response, people are saving more.  Go figure. 

During the 1960s and 1970s, when inflation was running ahead of interest rates, Americans displayed a rising rate of savings as a percentage of personal income.  They did this even though they were not adequately rewarded for that savings behavior.  Their savings lost value via inflation faster than it was made up for with interest income, which Congress naturally taxed and thus made the reward value even lower.  But they kept on doing it more and more anyway.

When money market funds were created in the mid-1970s, Americans were suddenly confronted with the opportunity to earn a more appropriate reward for deferring their compensation, and for instead saving their money.  But curiously, Americans did not do as B.F. Skinner would have suggested they would do.  They did not increase their savings behavior in response to the greater reward for doing so.  Instead, they started a long downward trend in the savings rate, saving less and less of their income even though they could earn more in real terms for doing so.  And that downward trend in the savings rate just happened to coincide with a secular bull market for stock prices.  

But since 2005 we are seeing the monthly savings rate data show an upward trend.  This change in behavior makes complete sense.  Baby Boomers are facing imminent retirement, and thus they are mounting a last-minute campaign to save up enough to live off of without eating cat food, or turning to their formerly helicoptered children for support.  At the same time, the “Millennials” or “Echo-Boomers” are just now moving out of their parents’ basements, and have not yet become a major economic force.  So the Echo-Boomers are not yet making up in consumption for what their parents are saving.  

In one way, it makes sense for individuals to save more even though they are rewarded less for doing so.  They know that they need to have a big enough pile to live off of, irrespective of how much interest they make off of that pile.  The loss of interest income (reward) acts as a perverse incentive to engage in that saving behavior even more.  It is as if a rat somehow knows that the food pellets are not going to be there in the future, and so rather than eating them, he “squirrels” them away in a safe place to eat later.  Hey, who says I cannot have mixed rodent metaphors?

One problem is that episodes of this behavior of people saving more tend to be associated with negative growth rate periods for stock prices.  That’s a bummer for stock market bulls.  So what you should do as a prudent bullish rat is to save your own food pellets while simultaneously encouraging your neighbors to eat all of theirs, and thus make the stock market indices rise.  Good luck with that plan. 

Bonds ... Where to From Here? Rev 2.0

Back in January I wrote about the US long bond forming a symmetrical triangle pattern. Because of their fickleness I was not confident on the direction it would take (I leaned to the upside) but the pattern suggested a 10% move, whichever way it broke. I took a lot of flak on my contrarian lean to the upside direction as everyone was confident future FEDs action would push rates higher (and bond prices lower)

Bringing this chart up to date you can see price did break to the upside and the move (from breakout to peak) hit its 10% target in just 5 short weeks. As Hannibal Smith from the A-Team used to say “I love it when a plan comes together”.

Because the fundamental backdrop has not changed and this move was “contrarian” it is important, once a move has completed its projected move, to take some (if not all) chips off the table and review the charts for clues about what may lay ahead.  To do this, I find it best to shorten your perspective and look at a daily chart.

No matter the chart I see patterns and this is no different. The current setup has the appearance of a bull flag. It became overbought (RSI momentum in upper pane) and needed to unwind that condition which it has and still remains in the bullish zone. The red 200 day moving average has begun to slope upwards. As such, I would be interested in this security if price breaks above the upper blue boundary of the flag as the upside pattern target is another 8-10% higher. To confirm a break, I would like to see it occur on higher volume.

If, on the other hand, prices breaks down below the lower blue flag boundary or if it doesn’t break higher within the next 5-10 trading days, all bets are off.

February’s Charts on the Move

The oversold, divergent rally began as expected and is still in full force as we close out the month of February.  The charts are pretty clear on the message they are sending. If you aren't, take a listen to my latest video at the link below and get my take on where i think we go from here.

https://youtu.be/KL4TEO8nwg0

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No More Tears

With virtually every stock market around the globe either already broken down or sitting precariously on a ledge of support there are times when it makes sense to press down on the gas pedal of risk but this is not one. Scouring hundreds of charts this week I could find little on the long side (plenty of shorts though) that interest me except for a scant few, one being Johnson and Johnson (JNJ).

It’s likely everyone has heard of JNJ and have used one of their products in their lifetime (Tylenol, Listerine, Bandaid, Visine and Baby Shampoo to name a few). An American bellwether, they continually rank as one of America’s most trusted and admired companies from their first product release in 1886.

Unlike most stocks, instead of faltering and creating a lower high after last September’s correction, its price has powered higher and is sitting just a few pennies under its all-time high. In addition to constructive price movement it has formed a cup and handle pattern, the (red) 200 day moving average is positive and RSI momentum (in upper pane) is above the mid line and rising. These are all signs of bullish strength.  In a positive investment environment I would be a buyer on a confirmed break above the red horizontal resistance line. I am convinced though if the broader markets were to continue to exhibit weakness and go on to establish lower lows, JNJ would be drug down alongside.

I could be wrong and JNJ powers higher while the broad market chops around trying to find a trend or declines. A nimble trend following trader should find this setup potentially very attractive. But if your main goal is to preserve wealth, I have learned in conflicting situations like these, the odds favor those who sit on their hands and demonstrate patience. Sure, sitting on your hands may have you forego potential profits. But when the broad market decides it’s time to turn higher there will be plenty of opportunities and you will have a rising market as a tailwind rather than a falling one in your face. 

Another 5 Weeks, Another 10%

Back on Jan 10th I posted about the coming potential for a 10% move in bonds, warning of a breakout from a symmetrical triangle pattern. The big question was which way it was going to break, higher or lower. My expectation was higher but was waiting for confirmation on a breakout.

We got the confirmation I was looking for just a few days later as prices broke out to the upside. Here we are just 5 weeks later and the pattern target was been met.  For those following along with me, congratulations 10% moves in bond prices don’t happen that often especially in such a short time period.

So now what? The chart below is a 25 year look at 30-year US Treasury bond prices.  What should become immediately obvious is the defined (blue) rising channel price has traded within during the entire past quarter century. A very profitable strategy has been to sell at the top of the channel and buy at the bottom. While it does not look like much, a move from one side to the other can be more than a 25% which, in the context of a “safe” bond investment, makes it much more volatile than investors expect.

Normally this would be a slam dunk decision on what to do with my TLT holding especially considering Friday closed with a very bearish weekly shooting star candle. But with the backdrop of central banks around the world lowering interest rates into negative territory, the potential for a sustained move to the upside is possible. Could this be the ultimate flight to safety as foreign investors use Treasury bonds as a safe haven in an attempt to avoid a local currency meltdown? Or, will the top of this channel hold once again as it has over the past 25+ years? I know what I will do, how about you?