Investment Strategy Published by Raymond James & Associates

Transcription

1 Published by Raymond James & Associates Andrew Adams, CFA, CMT, (727) , July 18, 2018 Charts of the Week : "Charts of the Week" Predicting the future is hard. We have all seen the limitations of statistical models and betting markets across many different areas in the past few years from politics to sporting events but the financial markets are one area in particular where predictions often feel like dart throws. To be sure, even well-aimed darts can sometimes miss their target, as a great article from Charlie Bilello at Pension Partners illustrated last week. In short, his note discusses the very depressing recent forecast for stocks and bonds by the renowned asset manager GMO, which expects a negative 2.2% per year from U.S. large caps and just 1.9% per year from U.S. bonds over the next seven years. Based on that dreary outlook, we might as well all just throw our money into cash and go hide under the bed until 2025! The problem, however, is that seven years ago, GMO had a very similar forecast for the financial markets a paltry 2.7% from U.S. large cap stocks and 2.8% from bonds and yet that ended up being quite far from the mark in the case of the stock market. In actuality, U.S. large caps returned 13.2% per year (10.5% above their forecast), and U.S small caps returned 12.0% instead of the 0.1% that GMO expected. Whoops! The point is not to pick on GMO, which undoubtedly employs people smarter than me to make these calls, but we believe trying to predict what the financial markets are going to do over an extended period of time is a futile exercise in the first place. There are just too many variables that factor into the global economic machine to have any expectation of precision, so we d rather follow the overall trend and adjust as needed as new information arrives instead of relying on sophisticated models built on a number of assumptions and averages. These types of forecasts generally compare the current state of the market to some normal average environment and then expect investors to make rational, math-based decisions. Yet, the issue is that stock market environments are rarely normal and average, and investors are rarely, if ever, rational. It also ignores the fact that people (and, more importantly, institutions) typically invest based on what they need out of the market, not what experts say they can get out of the market. Pensions, for instance, are perhaps the dominant investor in today s marketplace, and they are still targeting returns in the realm of 7-7.5% per year, on average, to make up for what is too often an already underfunded plan. There is absolutely no way they have any hope of achieving that target without investing heavily in the stock market, which has helped keep demand high regardless of the limited expectations (not to mention many individuals have little hope of retiring without strong performance out of stocks). Keep in mind, too, that while there are many good-intentioned analysts and strategists making market calls (like GMO), there are also those who create the illusion of expertly predicting the future of world markets when really they just enjoy being pessimistic contrarians. They would rather be right while everyone else is wrong than actually make money in the markets, yet many of them have no problem making money for themselves by scaring people into subscribing to their newsletters or investing in their fund. Fear sells; boring bullish arguments don t, and these perma-bears are very well aware of that fact. We spend a great deal of our time responding to their frightening predictions when asked about them by our clients and have done so regularly during the entirety of this bull market. They never go away because the potential concerns never go away. As we often tell our audiences during presentations, If you re waiting for all the risks to go away, you re never going to own stocks again, and, paradoxically, the real time to worry is probably when there appears to be little to worry about. It s the snake you don t see that usually bites you, not the snake that has a thousand scary articles written about it. And we think it s safe to say that there remains plenty to worry about at the moment based on the prevailing sense of unease afflicting the market. Despite the concerns, though, the S&P 500 continues to climb the wall of worry, breaking out yesterday to its highest point since February 1. The NASDAQ is back to new all-time highs, as well, and the Value Line Geometric Index (roughly the median stock in the market) is only about 1.50% from its all-time high. This latter point is important for anyone who still believes it s only the FAANG stocks lifting the market. Obviously when the largest stocks in cap-weighted indices are doing well, it s going to exaggerate the returns of those indices, but, to repeat, this is NOT a narrow market where only a handful of companies are rising. And with that, here are the Charts of the Week International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

2 S&P 500 Last 5 Sessions (5-minute chart) International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

3 The Market Matrix Since last week, the S&P 500 and NASDAQ have pulled back a little compared to their 10-day moving averages, but both remain a tad overbought in the near term. The NASDAQ has crossed into slightly overbought territory overall, though it is still not as extended on the upside as it s been at times over the past few years. The S&P 500 and Russell 2000, meanwhile, continue to trade fairly neutrally compared to their major moving averages. THE MARKET MATRIX S&P 500 NASDAQ Composite Russell 2000 Price % Above/Below 10-Day Moving Average 1.17% 1.59% 0.03% Price % Above/Below 50-Day Moving Average 2.40% 3.80% 1.77% Price % Above/Below 200-Day Moving Average 4.68% 9.83% 7.69% Relative Strength Index (RSI) (Overbought = ~70; Neutral = ~50; Oversold = ~30) Overall Near-Term Opinion Neutral Slightly Overbought Neutral White = Neutral; Yellow = Slightly Overbought; Red = Very Overbought; Dark Green = Slightly Oversold; Bright Green = Very Oversold Note: Overbought/Oversold levels may vary for each index based on historical volatility Source: TC2000; Raymond James research; as of 7/17/18 International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

4 The Breadth Box Perhaps the only real cause for hesitation we have come across this week is that, while the major averages appear to be breaking out, we re not seeing the same kind of breakout in market breadth. All of our weekly indicators fell from their levels of last week, and while it s not too concerning since they remain strong overall, the lack of upward thrust does possibly decrease the chances of the buying stampede taking hold. This will be something to watch over the coming days since we want to see both the indices and breadth push higher together. THE BREADTH BOX This Week (7/17) Last Week (7/10) 4 Weeks Ago (6/19) Current Percent of 5-Year Range* NYSE % of Stocks Above 50-DMA 58.44% 65.70% 62.27% 61% NASDAQ % of Stocks Above 50-DMA 57.21% 62.82% 69.03% 67% NYSE % of Stocks Above 200-DMA 58.44% 60.72% 57.06% 66% NASDAQ % of Stocks Above 200-DMA 57.82% 59.17% 60.10% 73% U.S. Stocks New Highs New Lows (5-Day Total) % NYSE Bullish Percent Index 59.97% 60.22% 61.89% 70% NASDAQ Bullish Percent Index 60.76% 61.12% 64.13% 75% S&P 500 Average % Below 52-Week High 12.0% 11.8% 12.3% Russell 3000 Average % Below 52-Week High 15.6% 14.8% 15.7% * 100% would be the highest point of the last 5 years, 0% would be the lowest point in the last 5 years, and 50% is the mid-point of the 5-year range ; Bloomberg; Raymond James research International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

5 S&P 500 Timing Chart The S&P 500 has returned to the upper band two standard deviations above the 50-day moving average. This band is typically only exceeded during the strongest of uptrends, so it will be interesting to see how the index reacts in the near term. The S&P 500 is not otherwise stretched to the upside, which could mean the index still has enough internal energy built up to power it higher. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

6 S&P 500 Breaks Above Resistance, but Not Completely in the Clear Yesterday s session was a win for the bulls, as the S&P 500 definitively broke above the resistance zone around 2800 that had been giving it some trouble. The index rallied right up to a more minor resistance level around 2815 after the break, and this level is one of a few minor hurdles now standing in the way of a new all-time high. Not a lot of trading has taken place at these prices, however, so there shouldn t be heavy selling pressure here, but 2815, 2840, 2851, and 2872 will be the most likely levels of resistance. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

7 NASDAQ Breaking Out, but Remains at Upper End of Channel Earlier this year, we drew attention to a confluence of long-term resistance levels on the NASDAQ s chart, and that resistance zone helped keep a cap on the tech-heavy index s performance. Now, though, the NASDAQ looks to be breaking above at least one of these resistance lines (the one going back to the 2000 peak) and is hitting new all-time highs at the same time. The index does still remain at the very upper end of the channel it s been in going back to 2010, so to see significantly higher prices in the near term, it will have to break out above the top of this trading range. However nothing is stopping it from hugging the upper end of this channel like it did back in either. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

8 Not Just FAANG Contrary to the popular narrative, it s not just a handful of stocks doing everything for the NASDAQ. Even the NASDAQ 100 Equal Weight Index, which isn t disproportionately distorted by the returns of just the big tech stocks, is now breaking out to a new all-time high. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

9 Tech Breaking Out, Too Not surprisingly, the Technology sector appears to be accelerating a bit to the upside and has now broken out to a new all-time high and above the resistance line that has capped it since March (top green line). We continue to advise heavy exposure to tech until the market gives us a reason not to. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

10 The Median Stock in the Market Getting Closer to New Highs Once again, we have witnessed a gradual recovery under the surface of the market since the February low and now the median stock in the market, as represented by the Value Line Geometric Index, is within ~1.5% of a new all-time high. We continue to believe the action so far this year is consistent with a consolidation/pause within a secular bull market rather than a major market top. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

11 Financials Continue to Behave Well Off of Support The Financial sector isn t completely out of the woods yet, but it continues to make progress off of the critical support zone that we have drawn attention to in weeks past. Now, the sector is back in a pattern of higher highs and lows over the near term, and its performance has also stabilized against the S&P 500 (lower panel). All good signs for both the group and the broad market. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

12 Health Care Quietly Breaks Above February/March Highs We have not written much about the Health Care sector this year, mostly because there has been little to say about it until recently. Within the last couple of weeks, though, it appears to have accelerated to the upside and is now in a clear uptrend when compared to the S&P 500 as a whole. Health care still has a way to go before it challenges its late January high, but the technical action is positive, and the sector is worth a look. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

13 Biotech Close to Major Breakout Too The recent strength in Biotechnology has helped the broader Health Care sector, and now the NASDAQ Biotechnology Index is close to breaking out to its highest level since The index remains around the middle of the trading channel that has mostly contained it the past few years, as well, meaning it could have some decent upside potential if it breaks out since there s not much obvious resistance standing in its way after that. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

14 Copper Nearing a Bottom? Copper has had an interesting last couple of months. First, it appeared to experience a major upside breakout in early June, but since then it has collapsed straight down to retreat back to where it was almost a year ago. The trade war chatter hasn t helped commodities overall, but copper looks to be one of the major victims of the concerns. The metal should have some fairly major support right underneath it, though, in the $2.70-$2.75 zone, which can hopefully help boost it back up. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

15 Major Opportunity in Emerging Markets Emerging markets have been another clear casualty of the trade war, as the investing world has wanted little to do with them in recent months. However, we think EM may have now been beaten down to levels where it s worth taking a shot at a possible rebound trade. Not only has the MSCI Emerging Markets Index pulled back to a zone with a history of importance (~ ), but the recent low looks to have found some support right at the 38.2% Fibonacci retracement of the 2016 to early 2018 move. You still need to be careful since the trend does remain down going back to January, but it does appear to be a quality opportunity for more aggressive traders and investors. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

16 Important Investor Disclosures Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) Non-U.S. affiliates, which are not FINRA member firms, include the following entities that are responsible for the creation and distribution of research in their respective areas: in Canada, Raymond James Ltd. (RJL), Suite 2100, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) ; in Europe, Raymond James Euro Equities SAS (also trading as Raymond James International), 40, rue La Boetie, 75008, Paris, France, , and Raymond James Financial International Ltd., Broadwalk House, 5 Appold Street, London, England EC2A 2AG, This document is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. The securities discussed in this document may not be eligible for sale in some jurisdictions. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Investors should consider this report as only a single factor in making their investment decision. For clients in the United States: Any foreign securities discussed in this report are generally not eligible for sale in the U.S. unless they are listed on a U.S. exchange. This report is being provided to you for informational purposes only and does not represent a solicitation for the purchase or sale of a security in any state where such a solicitation would be illegal. Investing in securities of issuers organized outside of the U.S., including ADRs, may entail certain risks. The securities of non-u.s. issuers may not be registered with, nor be subject to the reporting requirements of, the U.S. Securities and Exchange Commission. There may be limited information available on such securities. Investors who have received this report may be prohibited in certain states or other jurisdictions from purchasing the securities mentioned in this report. Please ask your Financial Advisor for additional details and to determine if a particular security is eligible for purchase in your state. The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. Persons within the Raymond James family of companies may have information that is not available to the contributors of the information contained in this publication. Raymond James, including affiliates and employees, may execute transactions in the securities listed in this publication that may not be consistent with the ratings appearing in this publication. Raymond James ( RJ ) research reports are disseminated and available to RJ s retail and institutional clients simultaneously via electronic publication to RJ's internal proprietary websites (RJ Investor Access & RJ Capital Markets). Not all research reports are directly distributed to clients or third-party aggregators. Certain research reports may only be disseminated on RJ's internal proprietary websites; however such research reports will not contain estimates or changes to earnings forecasts, target price, valuation, or investment or suitability rating. Individual Research Analysts may also opt to circulate published research to one or more clients electronically. This electronic communication distribution is discretionary and is done only after the research has been publically disseminated via RJ s internal proprietary websites. The level and types of communications provided by Research Analysts to clients may vary depending on various factors including, but not limited to, the client s individual preference as to the frequency and manner of receiving communications from Research Analysts. For research reports, models, or other data available on a particular security, please contact your RJ Sales Representative or visit RJ Investor Access or RJ Capital Markets. Links to third-party websites are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any third-party website or the collection or use of information regarding any website s users and/or members. Additional information is available on request. Simple Moving Average (SMA) - A simple, or arithmetic, moving average is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Exponential Moving Average (EMA) - A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. Relative Strength Index (RSI) - The Relative Strength Index is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

17 International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small-cap stocks generally involve greater risks. Dividends are not guaranteed and will fluctuate. Past performance may not be indicative of future results. Investors should consider the investment objectives, risks, and charges and expenses of mutual funds and exchange-traded funds carefully before investing. The prospectus contains this and other information about mutual funds and exchange traded funds. The prospectus is available from your financial advisor and should be read carefully before investing. Not approved for rollover solicitations. For clients in the United Kingdom: For clients of Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Investment Services, Ltd.: This report is for the use of professional investment advisers and managers and is not intended for use by clients. For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom. For clients in France: This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in Code Monétaire et Financier and Règlement Général de l Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients. For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers. For institutional clients in the European Economic Area (EEA) outside of the United Kingdom: This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted. For Canadian clients: This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements. Proprietary Rights Notice: By accepting a copy of this report, you acknowledge and agree as follows: This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client relea sable research This report and its contents are the property of Raymond James and are protected by applicable copyright, trade secret or other intellectual property laws (of the United States and other countries). United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. No copyright claimed in incorporated U.S. government works. International Headquarters:The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida