Equities - Stocks Ramp Further
Equities - This has been an amazing summer for stocks. The party kept going on Wednesday.
The S&P 500 was up 0.57% and the Nasdaq was up 0.99%. Amazon stock was up 3.4% which gives it a market cap of $932 billion.
Amazon announced it will be unveiling a free ad supported video service which will compete with Roku. Roku’s stock fell 4.9% on the news. The service will be developed by its IMDb subsidy. It will be shown to the 48 million people who use Fire TV.
Apple stock was up 1.49%, pushing the tech sector to year to date gains of 17.04%. The VIX fell 2% to 12.25.
The S&P 500 is now up 8.99% year to date. I came into the year expecting gains between 5% and 10% which means it is fast approaching the high end of my range.
Telecom was the worst sector as it was down 0.76%. Consumer discretionary was the best as Amazon helped it increase 1.12%.
Equities - Euphoria Is Here
I think the market is in another euphoric run like January. My perspective has always been that euphoria will never get to the January peak again this cycle.
We need earnings to improve for stocks to go up as multiples should contract or remain stable.
Because I think the market won’t get as overbought as it was early in the year, I think we are near the limit that this run can achieve.
As you can see from the chart below, the 14 day RSI for the S&P 500 is 69.76 which is slightly below 70. This signals the market is overbought.
The indicator is the highest since January. However, the January peak was much higher as it hit the mid-80s.
The CNN Fear and Greed index is even more bearish as it is at 78 which signals extreme greed. This is just a couple points away from the peak in January.
Another signal euphoria is here is seen in the Investor’s Intelligence poll.
59.6% of investors are bullish and only 18.3% are bearish. The survey rarely shows bulls over 60% which means there’s little room to push higher.
You can see the record the market achieved in January. The NDR crowd sentiment poll is at 69.2 which is close to historic extremes.
The NDR daily trading sentiment composite is at 66.7%. This is below the 75% mark which is where extremely bullish markets have peaked at.
I’m very bearish on stocks for the short term which I consider to be 1-3 months from now.
Equities - Good News Justifies Appreciation
To be clear, the stock market’s rally is justified which means there’s no reason for a big correction.
Stocks just need to take a breather. The most positive recent news is that President Trump believes America and Canada will make a trade deal by Friday.
He said, "I think Canada very much wants to make the deal. It probably won't be good at all if they don't. We gave until Friday and I think we are probably on track. We'll see what happens."
Canada’s foreign minister Chrystia Freeland said “Our officials are meeting now and will be meeting until very late tonight. Possibly they'll be meeting all night long. This is a very intense moment in the negotiations and we're trying to get a lot of things done very quickly."
We will know very soon if a new version of NAFTA will be enacted over the next few months. If the deal breaks down, Trump could enact an auto tariff on Canada.
The concept that once one deal is made, others will follow is holding strong.
The next deal to look out for will be with Europe. Each day the possibility of a global trade war diminishes.
That’s great news because trade growth has slowed in 2018. I don’t think trade deals are a huge positive for growth, but they do take away a potential black swan.
Without this big risk, there isn’t much uncertainty for investors heading into the end of the year.
Equities - Big Gains Coming
I’m bearish in the near term because stocks are extended. However, I’m open to positive indicators to see where I can go wrong.
Stocks have been up 9 years in a row from Labor Day to the end of the year. The table below shows the power of momentum.
When the stock market has been up more than 5% heading into Labor Day in the past 20 years, the market has been up every time from Labor Day until the end of the year.
The average returns are 6.95%. However, when the market has been up less than 5%, the average returns were only 1.34%.
Obviously, every year is different, but there isn’t a major negative catalyst which can bring the market lower. I have previously discussed how the mid-term elections shouldn’t be concerning.
Equities - Great Earnings Season
Q2 earnings season is almost completely over, but there are still a few firms which haven’t reported yet.
The results continue to justify rising stock prices. With 492 firms in the S&P 500 reporting earnings, 81% beat EPS estimates for 26.67% growth. Also, 75% topped sales estimates with 10.39% growth.
The revision rate on Q4 earnings estimates is disconcerting, but investors still are focused on how great Q2 was for now.
It’s incredible how wrong the bears were when they said stocks would fall because the earnings growth rate peaked.
Equities - Conclusion
The stock market has amazing momentum right now which has stampeded over the bears’ hopes for a correction.
The key to avoid the stampede is to only go bearish when stocks are extremely overbought.
Stocks should be up because earnings are up big. I am making the claim that stocks are extremely overbought.
Since stocks will probably only fall about 5%, I can’t be wrong for long or else the trade will lose money.
If Canada agrees to a trade deal, the stock market will probably ramp even higher. Negotiations are suddenly becoming positive catalysts as we look to potential future deals.