Stocks May Be Down, But They Aren't Out

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August 24 – Stock Market Overview

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Stocks May Be Down, But They Aren’t Out – At Least Not Yet

Investors did a pretty good job of wiping out about $700 billion in market cap from the S&P 500 on Friday. I’m not sure what the correct multiple should be for what amounts to roughly $165 billion in tariffs per year. Of course, that is assuming that all $550 billion in China exports to the US goes to a 30% tariff rate. However, the sell-off seems a bit overdone to me.

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The Road To Nowhere

Whatever the case, the S&P 500 is now down about 1% from its January 26, 2018, levels, and about 6% off its all-time high. I think the more important number here is the 1% because it signifies just how the market has gone nowhere over the past 21 months.

It isn’t the lack of performance that is exhausting; it is the volatility.

Bollinger Bands

I usually don’t reference Bollinger Bands much, but I love to use the Bollinger Bands width as a measure of volatility. Naturally, when the bands are expanding volatility is rising, and when the bands are contracting volatility is falling. The good news is that the Bollinger bands current width is at the upper of the historical range. It would at least suggest that volatility is likely to settle down.

RSI

Meanwhile, the RSI is still generally trending higher, since the December lows, another positive for the longer-term. But it does also suggest that there could be just a bit more downside over the short-term.

Percent of Stocks

Also, the percent of stocks in the S&P 500 above their 200-day moving average is right around 50%. Which, as you can see from the chart below is a pretty significant level.

VIX

Also, it is worth noting that VIX never got to levels that we saw at the beginning of the month.

Yields

Additionally, the 10-year bond stayed above its previous lows.

Gold and TLT

Meanwhile, Gold failed to make a new high, and the TLT has now made a lower high.

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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

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Risk Aversion Trade?

It would all kind of continue to suggest that the risk-off trade is still slowly unwinding. Friday was a snapback of sorts. But again, I continue to believe that the reason for the S&P lackluster performance over the past 21 months and below average PE ratio is a result of the trade war. Therefore, the trade war has been effectively priced in.

Earnings Trends Are Healthy

From everything I can tell, trends for earnings continue to remain stable. Since June 4, when I first started modeling my own S&P 500 earnings estimates, 2019 estimates have dropped 1% to $162.90, while forecasts for 2020 have fallen by almost 2% to $179.68. Over that same time, the S&P 500 is up by about 1.6%, and the PE ratio for 2020 is up to 15.85 from 15.3. From a valuation, perspective equities should still be attractive.

Some companies will be impacted by a continued trade war more than others. However, it is hard to equate precisely what the effect on the market should be. If history serves as a guide, past tariff news has primarily been digested in a swift move lower, followed by a recovery in prices.

As long as valuations remain attractive, equities should have an underlying bid.

Additionally, the spread between the S&P 500 dividend yield and the treasury yield has widened some more as well. Again, over time, this should be supportive of equity prices as well.

Of course, we will need to monitor all these levels mentioned above closely on Monday. But the sell-off on Friday seems to be reasonably normal. While the good news is that nothing seems to have moved into a new trading range.

-Mike

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.

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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.