July 11, 2021
On my Bartometer in December, I thought the S&P 500 would reach 4200 to 4400 this year. The S&P is now at 4369. Am I worried that we are getting close to my target? Yes and no. Yes, if the Covid 19 Delta Variant starts to progress and yes IF the market breaks below a 10-month trend-line. Otherwise, I am still relatively bullish on the market that can continue higher as earnings continue to come in better than expectations. One Caution, my computer models again flashed a Daily, Short term SELL signal that is not confirmed. That means to watch the trendlines for a break to see if it confirms on the downside.
The stock markets continue to edge higher, confounding many analysts, and logically the market should not be higher now than it was when the economy was booming in 2019. The markets are defying logic and normal metrics of price to earnings and other metrics of valuation as it sees more growth ahead. The market usually rises over the long term based on Earnings and Interest Rates and now Earnings are great, and Interest Rates are low. This is a perfect scenario for the stock market. The valuation of the stock market is that it is 25% over valued, but earnings are coming in better than expectations, so targets are being raised higher. The Federal Reserve is also injecting liquidity and keeping rates low.
The fundamentals of the economy are good, although slowing slightly. I am still relatively positive unless 4200 to 4224 on the S&P doesn’t hold and we have a decisive Selloff. See the graph and explanation on third page.
House prices continue to inch higher. In my opinion, the real estate market will inch higher until the economy slows, or interest rates go over 3.5% on the 15 year and 3.9% on the 30 year. Right now, it still is a Sellers’ market, this soon will slow.
The energy market still looks good, as noticed by the gas prices and if interest rates rise soon then the financial sector which sold off over the last couple of weeks should turn around to the upside. If the stock market sells off from here, you may want to add more to your stock portfolio, if you have a longer-term horizon. Please call me for guidance in the allocation of your 401(k) and a strategy meeting with me if you have not spoken to me in 6 months. I have been liking the Value sector over the last 7 months, now the growth sector, is starting to look better for purchase.
Some of the INDEXES of the markets both equities and interest rates are below.
Dow Jones +14.99%
S&P 500 +17.1%
EQUAL WEIGHTED S&P 500 +16%
NASDAQ Aggressive growth +15%
Large Cap Value +14%
I Shares Russell 2000 ETF (IWM) Small cap +15%
Midcap stock funds +15%
International Index (MSCI – EAFE ex USA +9.4%
International Emerging Markets +7.5%
Financial stocks +25%
Energy stocks +42%
Healthcare Stocks +14%
High Yield Merrill Lynch High Yield Index +2.1%
Floating Rate Bond Funds +2.61%
Short Term Bond +.6%
Multi sector bond funds +1.9% Gold -5.2%
10 year Bond Yield 1.3 Moderate Fund +8.7%
Average Disruptor Fund Aggressive growth -2%
Moderate Mutual Fund Investment Grade Bonds (AAA) Long duration -1.86%
Classicalprinciples.com and Robert Genetskis Excerpts
Stock prices were mixed this past week. The Nasdaq 100 hit an all-time high Wednesday, fell 1⁄2% yesterday and ended the week up just over 1%. The Nasdaq was up slightly and the S&P500 and Dow were down slightly. Small caps lost 4%.
Good news on the economy continued. June business surveys show both manufacturing and service companies growing rapidly. Weekly employment data show the job market improving.
Monetary policy remains expansive. Monthly data from the Fed show the central bank purchased $172 billion in securities in June. How expansive will depend on how much of the new money banks have left at the Fed. That bank data won’t be released until later this month.
The economy has a lot of momentum. Strong surveys for new orders indicate rapid growth will continue at least through the summer and fall. Longer-term interest rates continue to behave as if inflation will not be a problem. The 10-year Treasury Note is down to 1.29%. In real terms, bonds provide significant negative returns.
Long-term interest rates remain well below their fundamental levels. As inflation becomes more apparent, the risk of holding longer-term bonds will also become more apparent.
A Look Back
The ISM business survey for service companies followed the Markit survey. Both surveys show service company activity remained strong in June, but not as strong as May’s hectic readings. With service business activity at 60 and new orders at 62, the service sector remains healthy.
As with manufacturing companies, the indicator for employment in the service sector was close to breakeven. The weakness in job growth from the business surveys is not consistent with the large increase in jobs from the payroll data.
Stock Valuation: S&P 500 25% Overvalued
Economic Fundamentals: Positive
Monetary Policy; Highly Expansive
Source: Classical Principles.com
The S&P 500
The S&P 500 is above. As you can see the index continues to rise in a nice channel pattern. Some may say it is a Rising Wedge as well. If you notice, the Trend-line and the 50 day moving average is supporting the upward trend. This means that the longer the trend holds, the more it falls if it breaks the trend. So, in this instance the 4200 to 4224 area or the trendline better hold on a close of the market. I do not want to see the S&P sell off and break the 50 day moving average or the Trend-line decisively. That could cause sellers to finally start selling the rallies and not buy the dips or sell offs.
The next indicator is the MACD or momentum indicator. When the pink line breaks to the upside above the blue line it is positive like now.
The SK-SD Stochastics line is overbought when it is over the 96 like it is now.
The indicator below is the RSI wilder Index. When it is over 70 it is considered overvalued and overbought. It is now.
On Balance Volume is an indicator showing volume and conviction of the move higher. It is not breaking out to new highs, showing me that the market is going up on lower volume.
Overall, the markets are getting flash Sells not confirmed, it means to reduce a little equity and to rebalance and watch the support levels so they are not broken.
Support levels on the S&P 500 area are 4250, 4200, 4050, and 3950. These may be safer areas to get into the equity markets on support levels slowly on the accumulation areas.
THE BOTTOM LINE:
I am still relatively Bullish on the market, but as you can see above, the market is getting overvalued. My target of 4400 on the S&P 500 is quickly approaching. The Value sector of the market and the mid and large value sectors are now fairly valued. Over the longer-term, technology, up about 15% should perform the best. Trendlines are very important. At this point, I would not want to see the 4200 to 4224 level broken convincingly on a close. That would make me get very cautious.
Best to all of you,
Joe Bartosiewicz, CFP®
Investment Advisor Representative
92 High Street
Thomaston, CT 06787
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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.