Hello Everyone,
Market Recap:
It seems like a broken record, but the markets continue their upward trek. As the economy continues to be healthy, and the employment numbers continue to stupefy pundits, the markets continue to show optimism by pushing stocks higher. We had a slight 3-4% decline in the markets like I thought and then a resumption of its upward trend. At this point, the markets are now fundamentally overvalued by about 6-8% depending on the metrics used in determining overvaluation.
Warren Buffet said on CNBC a few months ago that “if interest rates stay where they are at 1.58% on the ten-year government bond, the stock market is reasonably priced. If interest rates rise to 2.5% that no one sees now, then the markets are 10-15% overvalued. At these prices, the markets are slightly overvalued.” CNBC also said that in 2000 the markets were 80-90% overvalued and in 2007, the markets were 30-35% overvalued. Again, the stock market is about 6-8% overvalued.
Market Perspective:
Could the market go up more? Yes, but if the Coronavirus scares the populous from traveling and going out, then the economic growth can surely suffer for some time. The stock market could easily have a 10% correction if the Coronavirus inhibits spending and keeps people in their homes. The best sector would be technology or things that are delivered to your home like online purchasing companies. I am CAUTIOUS on this market, as I can see optimism with no regard to the Coronavirus.
Sector Performance:
One of the best sectors again in the stock market is the Large Cap Technology growth stocks, like Apple, Microsoft, Tesla, Amazon and more. Because of the massive size of these companies now, i.e., Apple and Microsoft each being $1.5 trillion, any increase in their prices has a significant influence on the markets. The NASDAQ went up 38% last year and why it’s up 10% this year. It was due in large part due to the large growth sector with stocks like Apple Computer going up 88% and Microsoft up 56% over the last year. These extremely large tech companies are pushing up the market. Most stocks are not doing that well this year. It’s large tech stocks for the most part pushing this market higher.
This year the market is doing the same thing with Apple 11%, Microsoft +18%%, Alphabet +14%, and Amazon +16% and more. When stocks are so large and they go up a significant amount they can skew the market averages, making people think the markets are doing better than they are on average, when in fact, the small and midcap stock indexes are up only 1-2%%. In conclusion, either the small and midcap stocks have to catch up or the large growth and technology stocks have to fade.
Proceed with Caution:
Going up without a correction is not a good thing for the markets especially when people are now throwing money at the market. It’s called FOMO, or the Fear of Missing Out. This sort of panic to throw money at the index funds shows me that psychologically people think the markets will continue to rise steeply. It’s called a MELTUP. That’s a concern to me somewhat. The rise might continue and I am still relatively bullish as I think the S&P could hit 3450 to 3500 later in the year.
At this point, if you are in or nearing retirement and have more than 65% of your money in equities, you may want to scale back your equity exposure to below that amount. Remember the old saying, “you don’t make it until you take it.” Also, markets go down a lot quicker than they go up.
Expert Opinion:
An excerpt from Fundamental Economist Dr. Robert Genetski: from Classical Principles.com:
“A sharp jump in reported infections in China was due to an improved technique for diagnosing the disease, not a new explosive outbreak. There was no similar spike in cases outside of China. Japan has the second most cases outside of China at 255. 218 of Japan’s cases are on a quarantined cruise ship. The large number on the ship shows how infectious the virus can be. The good news is that there has been no upward trend in the number of infections outside of China. They continue to average close to 15 a day.”
Stock Market Outlook
Stocks racked up another strong week with gains ranging from 1⁄4% on the Dow to 1 1⁄2% for the NASDAQ and Nasdaq 100. Increases brought the S&P500 to 7 1⁄2% above my estimate of its fundamental value. Although stocks are slightly overvalued, strong growth in the economy and earnings can send them higher. Investors should remain cautiously bullish. Maintain a high level of exposure to stocks in equity portfolios despite the likelihood of some correction.
Interest Rates
Interest rates remained relatively stable this past week. While further upward pressure can be expected when the economy accelerates, the Fed’s efforts to keep interest rates low will continue to hold them close to current levels.
With central banks around the world, creating liquidity, any correction in the bull market should be limited. Stay bullish on stocks.
Monetary Policy
The Fed continues to purchase securities, and banks continue to adjust their excess reserves to accommodate the demand for loans and investments. Monetary policy is sufficient to allow for an expansion in business activity this spring.
Some of the INDEXES of the markets both equities and interest rates are below. The source is Morningstar.com up until January 10th, 2020. These are passive indexes.
Dow Jones +3.36%
S&P 500 +4.89%
NASDAQ Aggressive growth +10.3%
I Shares Russell 2000 ETF (IWM) Small cap +1.35%
Midcap stock funds +1.81%
International Stock Markets -0.3 of 1.0%
Moderate Mutual Fund +2.2%
Investment Grade Bonds (AAA) Long duration +2.2%
High Yield Merrill Lynch High Yield Index +.95%
Short Term Bond +.69%
Fixed Bond Yields (10 year) +1.6% Yield
The average Moderate Fund is up +2.2% this year fully invested as a 65% in stocks and 35% in bonds and nothing in the money market.
Interest rates look stable going forward over the next 6 months
The first chart is the NASDAQ. Its largest companies are Apple, Microsoft, Google, Amazon and more. These stocks continue to get the bulk of the money. Because they are all over $1 Trillion, any increase to them skews the market averages on an equal weighted position. In other words, these 4 stocks are worth more than 15% of the market.
This is why, the markets are going straight up. Any increase in these stocks puts a large percentage increase in the average, basically it is because they are so large, and the Nasdaq and the S&P are market weighted indexes.
Notice the channel. There are 3 touches of the channel. This means that if those trend lines in Black are broken, it could mean the end of this rise. So CURRENTLY, a break and close below 9274 in the Nasdaq could mean the beginning of a correction. That is a 4% drop in movement before I would get concerned.
Charts provided by AIQ Systems:
The next chart of the NASDAQ Advance Decline Line. Notice as the Nasdaq is reaching new highs, it is doing it on fewer and fewer stocks. It means the rally is narrow. Not a great sign. It’s a watching point.
Charts provided by AIQ Systems:
The next two charts are Money Flow and On Balance Volume. Both look good and confirming the upside.
The biggest concern is that although my computer models are at a BUY-HOLD. The Nasdaq is at the upper band top and it’s a narrow rally.
Charts provided by AIQ Systems:
A Support or support level is the level at which buyers tend to purchase or into a stock or index. It refers to the stock share price that a company or index should hold and start to rise. When the price of the stock falls towards its support level, the support level holds and is confirmed, or the stock continues to decline, and the support level must change.
– Support levels on the S&P 500 area are 3340, 3263 area, 3210, and 3186. These might be BUY areas.
– Support levels on the NASDAQ are 9588, 9299, 9160, and 8975.
– On the Dow Jones support is at 28,692, 27783 area, and 27385 Breakout and 200 days moving average.
– These may be safer areas to get into the equity markets on support levels slowly.
– RESISTANCE LEVEL ON THE S&P 500 3450.
THE BOTTOM LINE:
The market is somewhat overbought and about 6-8% overvalued at this time. There are now some cracks in the dam showing as explained above, but my computer systems are still at a Buy-Hold for the market direction. The markets are rallying on large-cap growth and technology stocks and watching the other smaller to midcap companies up only slightly with international stocks declining. Either we start to see the small and midcap stocks begin to rally or the market could begin to fall. The S&P could hit 3450 later in the year. Earnings could potentially grow 5 to 7% or more this year and that is why there is the possibility that the S&P 500 could reach 3450+ in 2020, a much smaller rise in the stock market than in 2019 but hopefully, a decent return, with obvious no guarantees expressed or implied. The Corona Virus COULD put a scare in the market that could put the travel industry and restaurant industry and more on hold, dropping earnings. The Federal Reserve could be more accommodative if this happens.
Best to all of you,
Joe Bartosiewicz, CFP®
Investment Advisor Representative
5 Colby Way
Avon, CT 06001
860-940-7020 or 860-404-0408
SECURITIES AND ADVISORY SERVICES OFFERED THROUGH SAGE POINT FINANCIAL INC., MEMBER FINRA/SIPC, AND SEC-REGISTERED INVESTMENT ADVISOR.
Technical Analysis is based on a study of historical price movements and past trend patterns. There is no assurance that these market changes or trends can or will be duplicated shortly. It logically follows that historical precedent does not guarantee future results. Conclusions expressed in the Technical Analysis section are personal opinions: and may not be construed as recommendations to buy or sell anything.
Disclaimer: The views expressed are not necessarily the view of Sage Point Financial, Inc. and should not be interpreted directly or indirectly as an offer to buy or sell any securities mentioned herein. Securities and Advisory services offered through Sage Point Financial Inc., Member FINRA/SIPC, an SEC-registered investment advisor.
Past performance cannot guarantee future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Please note that individual situations can vary. Therefore, the information presented in this letter should only be relied upon when coordinated with individual professional advice. *There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.
It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.
The price of commodities is subject to substantial price fluctuations of short periods and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated, and concentrated investing may lead to Sector investing may involve a greater degree of risk than investments with broader diversification.
Indexes cannot be invested indirectly, are unmanaged, and do not incur management fees, costs, and expenses. Dow Jones Industrial Average: A weighted price average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. S&P 500: The S&P 500 is an unmanaged indexed comprised of 500 widely held securities considered to be representative of the stock market in general.
NASDAQ: the NASDAQ Composite Index is an unmanaged, market-weighted index of all over the counter common stocks traded on the National Association of Securities Dealers Automated Quotation System (IWM) I Shares Russell 2000 ETF: Which tracks the Russell 2000 index: which measures the performance of the small capitalization sector of the U.S. equity market.
A Moderate Mutual Fund risk mutual has approximately 50-70% of its portfolio in different equities, from growth, income stocks, international and emerging markets stocks to 30-50% of its portfolio in different categories of bonds and cash. It seeks capital appreciation with a low to moderate level of current income.
The Merrill Lynch High Yield Master Index: A broad-based measure of the performance of non-investment grade US Bonds MSCI EAFE: the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australia, and Far East Index) is a widely recognized benchmark of non-US markets. It is an unmanaged index composed of a sample of companies’ representative of the market structure of 20 European and Pacific Basin countries and includes reinvestment of all dividends.
Investment grade bond index: The S&P 500 Investment-grade corporate bond index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of the US corporate debt issued by constituents in the S&P 500 with an investment-grade rating. The S&P 500 Bond index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap US equities.
Floating Rate Bond Index is a rule-based, market-value weighted index engineered to measure the performance and characteristics of floating-rate coupon U.S. Treasuries, which have a maturity greater than 12 months.
Money Flow; The Money Flow Index (MFI) is a momentum indicator that measures the flow of money into and out of a security over a specified period. It is related to the Relative Strength Index (RSI) but incorporates volume, whereas the RSI only considers
SK-SD StochasticsWhen oversold stochastic moves up through its MA; a buy signal is produced. Furthermore, Lane recommends that the stochastic line be smoothed twice with three-period simple moving averages: SK is the three-period simple moving average of K, and SD is the three-period simple moving average of SK.
Rising Wedge; A rising wedge is a technical indicator, suggesting a reversal pattern frequently seen in bear markets. This pattern shows up in charts when the price moves upward with pivot highs and lows converging toward a single point known as the apex.
