Momentum Wins! US Markets Remain in Uncharted Territory

Value investors that look at company fundamentals have to be scratching their heads this morning as they watch the markets. Momentum traders who only care about following very short term trends must love the markets today. At the end of June, 10 and 12 month simple moving averages told us to stay invested in stocks, bonds, and REITs. The markets send signals and the simple moving average is showing us that the beginning of July was not the month to sell equities. How long can this rally from March 2009 last? The market has still not had a monthly close over 2130, but today's US Employment report almost guarantees that the shorts getting squeezed along with momentum trades will help the market climb the wall of worry over 2130 (until this happens the market peaked in 2015). Doug Short has illustrated that the markets are not cheap (link 1 , link 2 and link 3), but like other periods of overvaluation -this condition can last longer than investors expect and expensive markets frequently become more expensive. Jill Mislinski writing for Advisor Perspectives with Doug Short shows us that this market is in uncharted territory. Jill writes, "Never in history have we had 20+ P/E10 ratios with yields below 2.5%."John Hussman who has been waiting for this bubbly market to pop for years summed it up this way on his latest weekly commentary:

Much of America has still not recovered from the violent consequences of the last yield-seeking bubble the Fed engineered. Now the Fed has engineered another, and has drawn nearly every pendulum to an extreme. We expect $10 trillion of “paper wealth” to be wiped from the U.S. equity market over the completion of this cycle, because it is not “wealth” at all. From an investment standpoint, the value of any security is inherent in the long-term stream of cash flows it will deliver to investors over time. Artificially jacking up financial securities through reckless monetary policy doesn’t change the cash flows that those securities will deliver over time; it only converts future expected return into past realized return, leaving nothing but risk on the table for years to come. Central bank intervention is not a benefit to long-term economic prosperity. It is the head of the snake.

By John P. Hussman, Ph.D.

President, Hussman Investment Trust, Source

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

Post Brexit Simple Math

During the past twelve months the S&P 500 has been in a range between 1810.10 and 2132.82. Given the earnings recession in the US, the extreme currency fluctuations, the significant decreases in global stock markets since last year, my take is the S&P isn't even worth purchasing until it is below 1970. Here is the simple math 2132.82-1810.10=322.72, which defines the range of the market. Taking 322.72 and dividing the range by 2 shows me the 50/50 risk reward point. 322.72 divided by 2 equals 161.36. 1810.10+161.36=1971.46. My simple math given this weakening economic environment is that I have little to no margin of safety at any S&P values above 1971. If you purchase the market at 1971 or lower and anticipate that it can eventually get back to the old high then you have ~8% upside and if it the market retests the lows there is about 8% downside. To get a 25% return to old highs the market needs to retreat to 1706. Going down to this level also completes a 20% correction in the market from the 2132.82 highs. Bottom line: market buy zone in my mind, using my simple math, is 1704 to 1971 and if the market breaks 1690 we could be in for an extended bear market. Let's see how this plays out. The asset classes continue telling a defensive story with increases in gold, utilities and the long US treasury. Value has also started doing better than growth, highlighting the growth slowing story. Wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

The State of Retirement in America

Today, many Americans rely on savings in 401(k)-type accounts to supplement Social Security in retirement. This is a pronounced shift from a few decades ago, when many retirees could count on predictable, constant streams of income from traditional pensions (see “Types of retirement plans,” below). This chartbook assesses the impact of the shift from pensions to individual savings by examining disparities in retirement preparedness and outcomes by income, race, ethnicity, education, gender, and marital status.

Source: Economic Policy Institute, PDF

Company Profits Going to Buybacks and Dividends not Capital Spending

Source: WSJ

June Market Update - Make or Break Time for Market

As readers of my blog know, I like following moving averages for the market. At the end of May the 12 and 10 month moving averages suggested to be invested in stocks not cash. Furthermore the 5-month moving average crossed above the 12-month moving average for the first time since September 30 2015.

As we discussed in the April Market Update, momentum can beat fundamentals. Currently the low interest rate environment is forcing investors to seek return from expensive stocks. At some point this relationship will break. In the current bull market the levels on the S&P to watch are 2130, 2150 and 2200. Monthly closes above those levels will reinforce the momentum trade and could push this market closer to the 2007 overvaluation levels (of course not coming close to the overvaluation we saw in 2000). As I've said a few times be careful deploying capital into this market and remember we'll probably have better entry points as we complete this business cycle. Consider this a good time to raise some cash.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

Retire into Happiness

If we combine "social connections," "having purpose" and "mental stimulation," these softer variables account for 65% of the most pressing losses retirees face in their post-work lives.

Read the article to learn more about the difference between what pre-retirees and post-retirees need from retirement.

Thinking About Money