A Happy Thanksgiving.
At Thanksgiving tables this year, many of us probably gave thanks that the bull market still goes on. October’s wild ride seems almost like ancient history as the S&P 500 and major market indexes (Dow and Nasdaq 100) seem to be solidly back in the black.
One thing I’m thankful for is to be able to begin a subscription to Lowry’s Market Trend Analysis. Lowry’s is a highly informative, well researched weekly stock market publication that mainly serves larger institutions. Unfortunately they have been priced way out of my budget until recently.
The current bull market is now over 6 years old. Friday’s Lowry’s analysis details the stark weakening of the internals of the market. To quote: “… over the past 18 months, the S&P 500 Index has risen [substantially]. However, during that same time, the % of stocks rising to new 52-week highs has dropped from 27.81% to just 7.48% on Nov. 25th. And, during the past 88 years, such extensive periods of what might be described as old age fatigue have only been found in advance of major stock market trend reversals”.
They continue: “But, the stocks no longer making new highs are minor problems compared to those stocks that have already begun to roll over into their own bear markets. For example,
as of Nov. 26th, with the S&P 500 Index at an all-time new high, 14.9% of the S&P 400 Mid-Cap Index components, and 27.7% of the S&P 600 Small-Cap Index components were already down more than 20% from their 52-week highs. But, the components of the S&P 600 Index are the hand-picked jewels of the small-cap world. If we look at a broader list … the % already down by 20% or more from their highs is much closer to 40%. And, since small-caps make up almost 50% of the issues in our … universe of domestic common stocks, these numbers cannot be ignored”.
The message is that markets move in broad cycles as do economies. Eventually larger “bear market” losses ensue. This bull cycle began back in March of 2009. Fortunately the process of breaking down happens by degrees, leaving evidence such as the above. I hope to be prepared with our models. The bottom line on the stock market so far in 2014 is that large companies have done well but the “average” stock has not.
It’s Been Fun Filling Our Cars Up
There are other somewhat concerning developments. You may have noticed the price of gas has been falling. What’s going on is the price of oil has actually cratered. When the price of a commodity falls it is generally a good thing – like the discovery of a new technology. In this case it has something to do with new energy discoveries and technologies in the US. HOWEVER, it can cause a real disruption in the near term. Many companies have lost money, people will lose jobs and stocks will fall. If the Keystone pipeline were already built it would not be profitable to use it. Canadian shale oil simply cannot be drilled profitably at these prices.
Part of the equation for oil is supply but part of it is also demand. Europe and Japan are in recession and Chinese economic growth has stagnated. The emerging markets have languished with some exceptions. So while the US economy has shown positive signs and some modest growth, it does not function in a vacuum. When industry slows, oil consumption slows. Slowing economies can act like a contagion.
We can’t know exactly what is over the next hill but I do like our strategy, which focuses currently on larger company stocks, some bonds and some “alternatives”. These alternatives, like the fund with symbol PHDG that I discussed in the last blog, are designed to be less correlated with the stock market while retaining good return expectations in their own right.
If you would like to discuss your account or investment strategy, please contact me…….