“Hey Jeff, what does 614.15 points mean?” . . . a portfolio manager (PM) asked me yesterday
Yesterday a PM asked me, “Hey Jeff, what does 614.15 points mean?” My response was, “I have no idea.” She said, “That’s the number of points the D-J Industrial Average (INDU/20404.49) has traveled since a week ago yesterday. Surprisingly, despite last Monday’s Dow Delight of some 183 points, the senior index resides nearly 247 points below where it was five sessions ago (-118.79-113.64+183.67-138.61-59.44 = -246.81). Indeed, “To everything – churn, churn, churn. There is a reason – churn, churn, churn. A time to win, a time to lose, a time to stand around and be confused” (The Byrds). Yet participants should take heart because our models are turning (turn, turn, turn); and, turning toward a more positive tilt. Verily, it has been since the last week of January, where our models turned cautious for the first time since they “flipped” positive the week before the presidential election, suggesting there was going to be a decent rally no matter who was elected. Unsurprisingly, since late-January we do not see where much money has been made in the equity markets. To be sure, the S&P 500 (SPX/2338.17) was trading around 2340 in mid-February and yesterday it closed at 2338 . . . indeed, “churn, churn, churn.” Granted the SPX did not give us the telegraphed pullback into the targeted 2270 – 2280 zone, but in this biz you take what they give you. And, it appears what “they” are giving us is best described by Washington insider, Greg Valliere, who writes:
By early summer, economic growth will be well above the lame first quarter pace. The labor market will be tight, with wages moving higher. The threat of geopolitical crises may have subsided. President Trump, still controversial, will continue to benefit from a weak opposition. And the long slog toward tax reform will be underway. Is this a prescription for rock-bottom interest rates? We don’t think so.
To this interest rate point, our pal Doug Kass (Seabreeze Partners) writes this, “On Monday I made what I believe to be a strong case that all fixed-income products should be sold, post haste: Bonds may represent one of the most expensive asset classes extant; Barring a recession, bond holders are almost guaranteed losses over the next decade.
While we tend to agree with Doug’s views, we think rates will go up so slowly investors will have the opportunity to rebalance their fixed income positions and ameliorate losses. As we said about stocks given the Dow Theory “sell signals” of 9-23-99 and 11-21-07, “Don’t let ANYTHING go too far against you!”
So as we wrote in Monday’s letter:
The “polarity flip” we thought would occur last week arrived and as anticipated, it was to the downside. It should also be noted that our measurement of the stock market’s “internal energy” levels are almost back to a full charge, implying if the downside gets going there is enough energy for a decent move. If that is the case, the strongest “energy flows” should come early this week suggesting the potential for a trading bottom late week. Also suggestive of a trading bottom are the Volatility Index, the CBOE Put/Call Ratio, and the sentiment readings.
Monday’s rally made that “call” look wrong-footed, but it doesn’t look so wrong-footed now. Get your “buy lists” ready because a rally may be in the cards . . .