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Buy, Sell, Or Hold In This Volatile Market?

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The Dow Jones Industry Average and the S&P 500 both saw record highs last Tuesday while the FTSE was at a ten month high.

Dividends are paying record lows at the moment, and so investors are turning to high-quality stock options for better money-making opportunities.

This article goes through the different factors you should consider when deciding whether to hold, buy, or sell.

S&P 500 chart

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As you can see from the chart above, there has been a breakout to a new high (green label).

A measured continuation upwards will extend our new range by around the same amount as that of the prior range: our target of the move is around 2448, which would represent a move of around 15%.

It has to be said that the prior range had held for a very long time, and the market tried several times to break through the initial resistance.

Classical technical analysis indicates that, in this sort of breakout, there should then ensue a period of high confidence among investors and traders.

Alternatively, this could be indicating that tradition is just that: tradition, and it is no longer up to date and needs revision.

It may no longer be as relevant as it once was.

We are all familiar with false breakouts which have become increasingly common.

This is because, thanks to faster sharing of expertise in the information age, almost everyone is aware of this technical analysis, and thus everyone is trying to game it, or at least enough are that its truthfulness is diluted.

So we could conclude that based on the chart alone we cannot guarantee a period of high investor confidence.

Peaks and Troughs

Earnings prove to be the most important determining factor affecting whether a market will rise or fall in the long run.

And as we and everyone else has noticed, they have been declining for the best part of the last few years, as recorded each quarter.

The graph below shows the relationship between earnings and stock returns:

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In fact, this quarter doesn’t look like it is going to be an improvement at all.

We say this because the last few months have seen one of the record-lows in terms of pre-announcements.

This tells us that earnings in the second quarter of 2016 will be near trough levels, or directly at them.

Historical technical analysis tells us that it pays well to buy aggressively in cases of earnings being near or at trough-like levels.

The difference with the current case is that the market is not actually at an all-time high.

Normally when earnings are as low as trough levels or near trough levels, it is the case that the market figures show it to be at a record high.

Looking at earnings alone would indicate that there is more reason for the S&P chart to read at 1600, instead of 2100 that it is at.

Thus, don’t hold your breath waiting for a strong correlation between earnings season commencing now and the market’s direction in the medium or long term.

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It’s the economy

When talking about economic indicators in relation to stocks, we break them down into three categories:

  • Leading economic indicators
  • Coincident economic indicators
  • Lagging economic indicators

Leading are the most important and are thus the focus of the article.

The ones we’ve looked at from 23 different countries neither back up claims of a bull market nor do they those of a bear market.

Sentiment and feeling

Whilst you might feel it in the air, sentiment is better observed through plowing through droves of emails, social media, analysts’ writings, trading data, and announcements.

These combine to form what we call sentiment indicators.

Having looked at these sentiment indicators, it’s clear that the current market sentiment is firmly in the negative camp.

This is actually bullish for the market.

A situation of negative market sentiment ensures there are plenty of market participants waiting on investment who represent money-making opportunities; it also means there is plenty of cash lying around.

Should the market continue rising as it currently is, money-holding managers who, regardless of sentiment are always aiming to beat benchmarks, will buy into the market leading to a further rise.

Valuation of the stock market

At the moment and in absolute terms, the market right now is trading at a higher valuation, and so it does not, for the moment, merit a further rise.

Conversely, if we compare it to the relative price of bonds and treasuries in that market, it is very affordable.

Having said these, we would advise not to look at valuation excessively as it does not shed much light on what decision one should take with regards to allocating investments in a shrewd manner, at least not for the near to medium term future.

Central banks and the geopolitical sphere

The geopolitical risks coming up are numerous.

They include:

  • The future of the European Union, or at least Britain’s unfettered access to its markets, after the British voted 52% to 48% to leave the political and economic union: economic union is still possible but no negotiations have begun, and most experts see a retention of tariff-free economic ties as unlikely
  • The South China Sea: an international tribunal recently ruled China’s actions there illegal, and its claims dispute with the Philippines over, and island ruled in the Philippines’ favor
  • The potential election of a populist candidate, Donald Trump, who has promised a myriad of radical economic reforms, tax cuts, and wildly protective measures
  • Currencies fall
  • Central bank policies including zero to negative interest rates in an attempt to stimulate growth.

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Based on all of these, a bearish stance is advisable.

Final word: what to do?

These aforementioned factors, along with the latest in market modeling (which we won’t go into as the jargon is mind-boggling) dictate that a prudent middle path should be taken.

Hold on to existing strong positions, hold large amounts of liquidity, and make investments in particular situations.

Up until now, we would have produced a more bullish conclusion, but Brexit and its immediate effects on sentiment have made everyone more conservative.

We would advise 28-38% cash or treasuries in your portfolio right now with some low-costing hedges.

Get on the upside without too much risk.

Lots of cash means an ability to get in on those opportunities when they pop up.

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Economy

Stocks Plunge Again, Jobless Claims Surge to New Record

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Stocks Plunge Again, Jobless Claims Surge to New Record

The stock market started the second quarter the same way the first quarter ended, with significant losses across the board.

The Dow Jones Industrial Average, S&P 500 and Nasdaq all slid 4.4% yesterday as investors braced for more bad news about the spread of the coronavirus and historical jobless claims due to the outbreak.

President Donald Trump warned that a “very, very painful” two weeks lie ahead for the country as it faces a rapidly spreading COVID-19 outbreak that is approaching 200,000 cases here in the US.

With uncertainty over how long the country will be shut down in an attempt to slow the spread of the virus, it’s becoming virtually impossible to predict how the market will perform going forward.

“Everything hinges on how long we are in this shutdown,” said Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle Investments, in an interview. “We don’t know how long the shutdown may last, so it’s hard to predict what U.S. growth will look like.”

Adding to the misery on Wall Street, this morning’s initial jobless claims report showed that a record 6.6 million Americans filed for unemployment insurance last week.

That dwarfs the then-record 3.3 million new filings reported two weeks ago, and brings the total claims to nearly 10 million in the last two weeks due to the coronavirus outbreak.

For comparison, today’s numbers were almost 10 times higher than any previous report prior to the coronavirus outbreak.

Excluding the last two weekly reports, the highest week for claims was 695,000 in 1982. And as miserable as the job market was during the Great Recession, the highest number of jobless claims during that period was 665,000 in March 2009.

“We’ve lived through the recession and 9/11. What we’re seeing with this decline is actually worse than both of those events,” said Irina Novoselsky, CEO of online jobs marketplace CareerBuilder.

The lone bright spot in the markets is oil, as the price surged 10% after President Trump mentioned the possibility of a truce in the price war between Saudi Arabia and Russia.

West Texas Intermediate (WTI) futures jumped $2.11/barrel to $22.42 on the seemingly good news.

“Worldwide, the oil industry has been ravaged,” Trump said during a media conference on Wednesday. “It’s very bad for Russia, it’s very bad for Saudi Arabia. I mean, it’s very bad for both. I think they’re going to make a deal.”

Trump added he expects both countries to end their price war within a “few days” meaning they will slow production and bring prices back up.

The president also invited the heads of US oil companies like Exxon Mobil and Chevron to meet with him at the White House to potentially discuss how Washington can help the companies get through the current crisis as they face bankruptcies and massive layoffs.

“I’m going to meet with the oil producers on Friday. I’m going to meet with independent oil producers also on Friday or Saturday. Maybe Sunday. We’re going to have a lot of meetings on it,” he added.

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Economy

Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

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Next Wave of Stimulus Could Be $2 Trillion Infrastructure Bill

“Phase 4” of the government’s economic stimulus plan could include spending up to $2 trillion on improving America’s infrastructure.

The bill already has bipartisan support, and could be voted on as soon as April 20th when representatives of both the House and Senate return to Washington, D.C.

During his 2016 campaign, President Trump said he would make improving America’s roads, bridges and airports a top priority during his time in office.

“The only one to fix the infrastructure of our country is me – roads, airports, bridges,” Trump tweeted on May 12, 2015. “I know how to build, [politicians] only know how to talk!”

While previous attempts to pass a major infrastructure bill have failed, both sides seem willing to try again in an effort to help America’s economy rebound from the coronavirus outbreak.

House Speaker Nancy Pelosi, who is often at odds with the President, said she is “pleased the president has returned to his interest” in the issue. She called an infrastructure proposal “essential because of the historic nature of the health and economic emergency that we are confronting.”

She added “I think we come back April 20, God willing and coronavirus willing, but shortly thereafter we should be able to move forward.”

The Democrat’s proposal is part of a five-year, $760 billion package that includes money for community health centers, improvements to drinking water systems, expanded access to broadband and upgrades to roads, bridges, railroads and public transit agencies.

The plan designated $329 billion for modernizing highways and improving road safety, including fixing 47,000 “structurally deficient” bridges and reducing carbon pollution. It also aimed to set aside $105 billion for transit agencies, $55 billion for rail investments such as Amtrak, $30 billion for airport improvements and $86 billion for expanding broadband access.

“I could provide the legislative language in very, very short order for this package. It’s the funding that’s been holding us up, and if the president insists on funding, then I believe that Senator McConnell and Leader McCarthy will move on this issue,” said Democratic Rep. Peter DeFazio of Oregon, who chairs the House Transportation and Infrastructure Committee.

During an appearance on CNBC yesterday, Treasury Secretary Steven Mnuchin said he is talking with Congress about a potential infrastructure bill.

“As you know, the president has been very interested in infrastructure. This goes back to the campaign: The president very much wants to rebuild the country. And with interest rates low, that’s something that’s very important to him.”

He added “We’ve been discussing this for the last year with the Democrats and the Republicans. And we’ll continue to have those conversations.”

Earlier this week President Donald Trump said he wants to spend $2 trillion on a massive infrastructure package.

He tweeted that “With interest rates for the United States being at ZERO,this is the time to do our decades long awaited Infrastructure Bill. It should be VERY BIG & BOLD, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country! Phase 4.”

“The president very much wants to rebuild the country, and with interest rates low, that’s something that’s very important to him,” Treasury Secretary Mnuchin added.

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Economy

Stocks Will Head Lower, Warns Billionaire Bond Investor

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Stocks Will Head Lower, Warns Billionaire Bond Investor

Billionaire bond investor and DoubleLine Capital founder Jeffrey Gundlach is the latest Wall Street veteran to warn that the worst is yet to come for stock prices.

He joins famed investor Jim Rogers, who said on Tuesday that he expects the market to stay elevated for a while, but ultimately another stock market route is on the way.

“I expect in the next couple of years we’re going to have the worst bear market in my lifetime,” Rogers said in a phone interview.

Gundlach may not be as bearish as Rogers, but he did say earlier in March that there was a 90% chance the United States would enter a recession before the end of the year due to the effects of the coronavirus pandemic.

In the short-term Gundlach said during a webcast on Tuesday that he believes that the lows we saw in March will be eclipsed in April due to the uncertainty around the coronavirus outbreak and when we can expect the number of new cases to slow.

“I think we are going to get something that resembles that panicky feeling again during the month of April,” while adding “The low we hit in the middle of March, I would bet that low will get taken out.”

Mark Hackett, chief of investment research at Nationwide agrees with Gundlach and warns that there is compelling evidence that nearly every bear market has a few rallies before plunging lower.

“Last week’s double-digit gain for markets was a welcome relief rally, though market bottoms are rarely as clean as this one has been. In 2000/01, there were four rallies of greater than 20% before ultimately reaching a bottom, and in the financial crisis, the S&P 500 had a false breakout of 27% before hitting a bottom.”

Gundlach also said that any projections that the US economy will quickly recover once the spread of the virus slows were too optimistic and that the hopes of a quick recovery were causing the markets to act “somewhat dysfunctionally.”

“We will get back to a better place, but it’s just not going to bounce back in a V-shape back to January of 2020,” he said.

Gabriela Santos, JPMorgan’s global market strategist agrees with Gundlach that we aren’t going to get the quick “V-shaped” recovery that most are predicting.

She believes that we’ll start a slower “U-shaped” recovery once coronavirus infection rates peak.

“A ‘V-shape’ I think we should unfortunately discount at this point, because even when infection rates peak for COVID-19 around the world, what the China experience is teaching us is even though the government begins to relax some social distancing guidelines, individuals themselves are still very careful about how exactly they go back to their day to day lives,” she said.

“So demand was quick to shut down, but it’s actually much slower to come back online,” she added. “The better analogy here is a U. There’s a very sharp drop in activity in the first half, there’s a bit of a stall in the second, and then in 2021 is when that strong rebound begins.”

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