Predicting Market Trends Scottsdale AAII December 2018 The Miller Report A newsletter that discusses market trends
Three E-co-no-me-tri-cians Go Hunting Why did God create economists? To make weather forecasters look good! A mathematician, an accountant and an economist apply for the same job Three e-co-no-me-tri-cians go hunting and come across a large deer What will U.S. growth be for 2019? It depends.
Bull Markets Don t Die of Old Age The current bull market is the 2 nd longest in history. At over 3,561 days (as of 12/8/18) and counting. Gaining approx 273%. The longest being the 1987-2001 bull market lasting 4,500 days while gaining 582%. What could go wrong? I know, I know a bull market doesn t die of old age, but let s be realistic. It s time to be concerned about this very mature bull. And please notice the use of the word concern rather then worry. Worry is negative. Nothing good comes of worry. It changes nothing. Concern on the other hand is positive. It never hurts to plan for the future. To be ready, just in case. Being prepared. Understanding data trends helps us be prepared for future market moves.
Where is the Market going? Dow Theory Today Production vs. Distribution Transports lead the Industrials. Between dates of 8/27/18 and 9/17/18 there was a cluster of 7 tremors. Most alarming was the 4 tremors during the week of 9/10. That is serious disagreement. 4 tremors is a rare occurrence in itself, and to make it worse 3 were down. Transports were clearly sending a warning shot across the bow of the Industrials. (Show worksheet) To the contrary, between the dates of 11/12/18 and 11/23/18 there was 5 tremors. 4 were up. Another clear sign of the Transports leading the Industrials. Currently Agreement down. No tremors this week. Tuesday ex. Transports pulled down How do you find tremors (Ripples)? They are daily contradictions of the DJIA and DJTA. An indicator of possible change of direction.
Where s the Market going Dow Theory (cont) Tremors/Ripples/Disagreement DJ Averages
Where is the Market going? Dow Theory Today 4 tremors down 7 tremors down 4 tremors up 13 tremors up Heavy Volume? Past 8 yrs market had been rising on declining volume.
7 Tremors Down September 2018 Show worksheet
Excel representation of Tremors Show worksheets
4 Tremors Up November 2018 Show worksheet
Excel representation of Tremors Show worksheets
Where is the market going, cont (Hat Trick/Triple Dow) Ind/Trans/Util All-Time highs
Robert Shiller s CAPE ratio Present Stock Valuation Crossed 1929 Peak (Shiller s 10-Year Cyclically-Adjusted Price-Earning Ratio) 16.7 Average
Is it a broad movement? Breadth Daily advances declines totaled and added to the previous week. Reflects the thirst for all financial assets. (Common stock, CEF, REITS, Preferred) Reached all-time high of 504,221 week of 8/20/18. Breadth double-crowned in the next 4 weeks. While DJIA was hitting an all-time highs. Watch
Market Top or Bottom? 52 week Hi/Los (Lab 4) Currently = 0.2 to 1, highs. See below.. Fewer highs in market reaching new highs is a sign of market top. More highs confirmation. Fewer lows in a market reaching lows is a sign of market bottom. More lows confirmation. Extreme bottom week of 10/29 slowly rising since.
Market Top or Bottom? NYSE Margin Debt: (Don t point the finger at China) All time high in January 2018 at 665,716. Surpassed July 2007 high (381,370) in April 2013. Current October is 607,645. Watch for crown!
Market Top or Bottom? Options CBOE Volatility Index (Fear Gauge) Calculated from prices of S&P 500 index options. Expectation of movement 30 days out. A low VIX implies investor complacency. But not necessarily that the market is going down. Other eco indicators must be watched. i.e. Employment, consumer spending and Manufacturing. Currently = 23.2. Buy the spikes. Historical avg 19. Hit an all-time intraday low of 8.56 on Nov 24, 2017. VIX futures higher Mind the gaps.
Market Top or Bottom? Options continued Long term trend of VIX Can remain low for longer than you can afford to keep losing money buying protection. Larwrence McMillan
Market Top or Bottom? The Equity-Only Put-Call Ratio The equity-only put-call ratio the daily sum of all puts traded on all stocks divided by the sum of the all calls traded on all stocks on the same day is a reliable indicator. The ratio is printed each week in the Striking Price. When the ratio peaks and begins to fall, that is usually a good time to buy stocks. The chart on this page shows one peak, end-june 2013. When bearish put volume was extremely heavy, compared with bullish call volume. Both were excellent times to buy stocks. The ratio has fallen since July s peak. When the ratio puts in a bottom and begins to climb it is usually a good time to sell stocks.
Investor Sentiment (Insiders Transactions) This week: Buys = 27.6 mil (Up 43% prev week mil.19.3. Low of 2.8 mil 1/16/2014) Sells = 285.4 mil (Up 32% prev week mil. 217.0 mil. High of 690 mil 5/17/2018) While never a great timing tool, heavy corporate-insider selling is a warning sign worth heeding (300 mil is moderate selling). And buying is a positive sign. Week of 11/19 second highest buying for the year at $76 mil. A ratio over 30 watch out. It was 58 week of Jul 19. 28 week of 9/20. All previous peaks followed by pullback.
Investor Sentiment cont AAII Index AAII is typically a contrarian indicator at extremes. Bullish Bearish = 7.4. You guys are now more bullish. Consensus Index 57% last week, 55% two weeks ago and 56% three weeks ago. High readings are signs of Mkt tops. Low readings Mkt bottoms. Rising Conference Board Consumer Confidence Down to 135.7 from 137.9 last month. High readings are a sign of complacency. 90 indicates a healthy economy. All-time high 144.7 reached in 2000 Irrational exuberance? Highest reading in over 18 years. Déjà vu 2007, 1999, 1989, 1978?
Investor Sentiment cont
Market Sentiment Delta Mkt Sent Measures the position of 3,600 stocks relative to an intermediate-term (75 days) moving average crossover (MAC) point. When greater than 50% of the stocks followed are above this point, the market is bullish, and equities are attractive. When the indicator is below 50%, risk is elevated, and stock exposures should be reduced. This week: 33.6. Still very bearish but rising. Reduces exposure to bad months. While keeping most of good months. Sell mid-july 2008 Buy April 2009 Sell early-august 2011 Buy mid-october 2011 Sell October 7, 2018 Wait for buy signal
US Treasury Yield Curve (Bills, Notes & Bonds) What s the difference: Bills, Notes & Bonds? Inverted curve (Sept 2006 - May 2007): Banks were broken! Perfect indicator 8 for 8. 2yr 10yr spread and recessions (Currently 0.13) Beyond the point of no return! 7 yr is sweet spot of curve. Why? Medium credit risk (likely hood of payback) and medium duration risk (erosion by inflation). Steepest part of the curve. Short end rising. And a flatter curve gives banks less incentive (NIM) to take on lending risk. Which damps growth! Fed unwound $333 million ($0.33 trillion) this year. Stay tuned. This is the true test.
US Treasury Yield Curve 10yr 2yr spread (blue) vs Federal Funds Rate (red) Natural market behavior disrupted by unconventional monetary policy Over due for a recessionary cycle How will Fed fight back without going negative (Normally 4 to 6 basis pts in quiver) Current 2-10 spread.201
US Treasury Auctions Auctions have doubled since 2007 at $2.4 tril 2017 auctions $6.1 trillion previous all-time high! 2018 auctions set all-time high! Over $7 trillion Why haven t actions declined if recovery is doing so well?
Federal Reserve Balance sheet down to $3.9 trillion The Fed has embarked on six such reduction efforts in the past in 1921-1922, 1928-1930, 1937, 1941, 1948-1950 and 2000. Global Debt Euro Zone (ECB) China (PCB) Japan (BOJ) $5.2 Tril $5.1 Tril $4.9 Tril
Unemployment (U3) And Is the low U3 a good thing for the outlook of the market? October 3.7 lowest in 49 years.
Who s fooling who? Employment-Population Ratio Labor market is stuck in the mud. Why? Employment-to-population ratio vs. Unemployment rate The ratio is a better measure of proportion of workers that are working as opposed to not working. And reflects the overall lack of job creation. It is the ratio of the Total Working Age of the Labor Force currently employed divided by the Total Working Age Population The headline Unemployment rate always stirs the debate of whether it changed because more people were actually working or dropped out of labor force. Participation Rate Debate Prime Workers leaving!! Employment-to-population ratio eliminates this issue by going straight to the bottom line, measuring the proportion of potential workers that are actually working. And helps explain why the U6 is stubbornly high. Randy Forsyth, an all inclusive measure whose denominator doesn t discriminate among those seeking work or not. Permanent Damage
Employment-Population Ratio cont 32 year low of 60.6! Full Employment? I don t think so. Since 1975 the avg Emp-pop ratio is 64.1 when U3 = 3.7
7 Canaries in the Coal Mine? Cont Subprime Auto Loans rise. Missing payments and underwater Falling sales Subprime Auto-Asset-Backed Securities soar! déjà vu? Credit Acceptance shenanigans. One of this year's largest issuer. Accusations of misconduct Student-Debt picture darkens. $1.5 trillion total debt. More than 1 million students go into default each year. Credit Card debt exceeds $1 trillion in 2018 Existing/Pending/New Home Sales down. Commercial Realty flashes warning signs! Bonds backed by commercial RE loans have weakened significantly. CMBS de ja vu! Prominent real estate firms are reducing their holdings. A sign that 8 yr bull market is ending. Loan Growth is falling in YOY numbers
And Finally The Barron s Trump Index
The Miller Report A newsletter that discusses market trends