One Should Never Short A Dull Market
Sign up here to receive Ken South's Views From the Tower market update each week via email.
Click HERE to subscribe to Ken South's Views From the Tower YouTube Channel.
Visit the Tower 68 Blog page HERE
With only 30, or 6%, of the S&P 500 firms having reported earnings through Friday, they are off to a pretty good start. Some information technology firms had a strong start while some of the big banks had mixed results. The table below shows that 74% of companies reporting through Friday are already beating estimates. This is a far cry from what was expected after the first major hurricane and the much-feared frozen business sector in front of our contested election in three weeks.
We caution you to not read too much into the probability of the election going one way or the other for the Presidency or House or Senate. In our view once the results are in, company management?should adjust their strategies for the expected policy implications. The markets tend to be pretty smart and reflect exactly what the outcome is going to be. The strange thing is that the media will guide the public to expect one outcome and the markets tend to reflect something different. I believe that the who, what, and when is great cocktail party conversation, but that it is much more important to follow the bouncing ball than listen to the talking heads.
Last week the markets registered their 45th new high of the year, clearly not a market showing insecurities about going higher. Given that the earnings from big banks last Thursday and Friday seemed to reflect very little slowdown in forward progression for corporate America, not only did earnings come in higher than expected, but it seemed to telegraph that these Q3 numbers are not focused on only the Magnificent 7 tech companies, but breadth is expanding across small-caps, mid-caps, emerging markets and a variety of sectors.
What really caught my attention this last week was the action out of the US Dollar and interest rates. If longer-term rates (10-30 year) are rising, then the US dollar should be getting stronger as buyers across the globe want to take advantage of higher rates in the face of expected economic slowdown and falling inflation. But even more important was the action of short-term interest rates versus long-term interest rates. The short-term interest rates are the ones affected by the action of the Fed, which was a 50-basis point cut. But I pay more attention to the 10-30 year as these rates are an overt reflection of the current and expected strength of the economy. The money seems to be investing for continued economic resiliency, not economic slowdown or any kind of a landing.?
Last week’s inflation data showed price pressures stronger than?expected and caused some to pare back their expectations of further easing by the Federal Reserve this year. The Consumer Prices came in a bit softer, but the Producer prices came in firmer than expected. Quite possibly this would imply that the prices paid for goods and services have flattened out a bit with demand growth slowing, but the producers are continuing to see strong demand and they, on the other hand, have kept prices rising steadily. In our view the effects of the two recent storms that hit Florida, North Carolina, Georgia, and Tennessee could support one more rate cut this year. This is yet to be seen by the action out of the labor market in the weeks to come.?
While the election- now less than a month away- could provide some domestic policy risk near term for the markets, it is our view that it will likely have less effect in the near term than some may?think. If money were to think that this election is such a hornet's nest, I believe that the market would already be reflecting this- and this isn't happening. History, in our experience, has shown that monetary policy, economic conditions, corporate revenue earnings growth generally carry more weight in terms of the direction of markets. Below are the bullet points of what hand we are currently playing:
Unlike earlier this year, when returns were driven primarily by the mega-caps, participation has been better during the market's recent leg up. As evidenced by the AAII (American Association of Individual Investor) polls of bearish investors being at a recognizable low, there has been no slowdown or narrowing of participation of sectors to imply that this current advance could be getting tired.?
This makes me then sort of make a list of pluses and minuses to have specific measures to look for to tell me if strength should remain or if the problems that are feared are starting to materialize and have weight.
The positives?continue to revolve around the following:
The number of negatives have been growing though...:
In the end, these reasons for a "breather" or a "pullback" could be realistic, but as yet, are not confirmed by a market that has shown any sign of being tired. According to my friend, Ari Wald, the title of this week's report, “Never Short a Dull Market,” is attributed to the renowned?analyst and commentator, Mark Hulbert. The key point is that equities are behaving in a manner consistent with what we'd expect to see in an ongoing advance. For the S&P, once the 5,650 level was broken and new highs ensued, by Ari's analysis, measures toward 6,200 is the height of the prior projection range based on the breakout.?I don’t say this to mean that this level is expected immediately, but rather that this is the next “target” for the market.
August and September have been roller coasters. The S&P 500 went down and up big to ultimately finish September at new all-time highs on a closing basis.... the sharp drops did not trick our Timing Indicators, which remain positive. September ended, and "the markets are now entering the best 18 months" of the decade- September 30th of the 4th year is a special time. Over the following 18-month timeframe the market has risen 100% of the time, going back to 1904.... every mid-decade for over a century this is a period from September 30th of the 4th year (2024) to the March 31st of the 6th year (2026) that has been profitable in all twelve such periods."?
The current bull market is 'middle aged', now 24 months old, so it is not outlandish to think that it could persist for another 18 months. This is particularly true if the economy avoids a recession altogether?while the Fed begins an easing cycle. There will certainly be times when the broad markets stub their toe, but as for the ultimate expectation, should historical precedent prove once again consistent, we are still on track for further advances.?I keep on focusing on the liquidity available that should me drawn to where it expects to be treated best. I’ll leave you with what I feel is the most important chart to keep on hand today. There is still $6.42 Trillion in cash in Money Market Funds.
The ending of this week marks an important high point for many cycle studies of market action. This could mean that it is time for a breather. If it is, we will act accordingly. If you should have any questions, please don’t hesitate to contact us so we can make sure you are allocated as you feel most comfortable.
-Ken South, Newport Beach Financial Advisor
>>>Get Ken's Weekly Market Commentary Delivered In Your Inbox!<<<
Click Here to Subscribe to email delivery, or Here to Subscribe to Ken's YouTube channel.
-
-
-
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal.
The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Check the background of your financial professional on FINRA's BrokerCheck.
--
The financial professionals with Tower 68 Financial Advisors are registered with, and securities, financial planning, and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
The LPL Financial registered representative(s) associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.
Kenneth H South CA Insurance Lic # 0A75043. State of domicile is CA and principal place of business is 610 Newport Center Drive, Suite 1520, Newport Beach, CA.