Daily Gains Letter

economic indicators


Bears Becoming Bulls En Masse as Optimism Rises

By for Daily Gains Letter | Jan 15, 2014

Bears Becoming BullsIncreasing optimism is dangerous for key stock indices. Sadly, this is exactly what we’re seeing in the markets right now. It is very evident wherever you look. Stock advisors are saying, “Just buy stocks, and you will do alright.” Investors feel good about stocks. Those who were bearish on the key stock indices since the crash in 2008 and 2009 are also turning bullish—the bears are declining in numbers each week; it’s becoming especially difficult for them to keep their pessimistic stance these days.

One of the key economic indicators that I follow when looking at the optimism in key stock indices is called the Chicago Board Options Exchange (CBOE) total options put/call ratio.

This indicator, at the very core, shows the ratio of volume of puts and call options. When there are more call options, this ratio stands below one. When there are more put options than call options, the ratio stays above one. Currently, this ratio stands at 0.6—a level last seen in 2011. Since at least 2007, this ratio of call options to put options has reached this level only a handful of times, as you can see in the chart below.

CBOE Options Put-Call Ratio Chart

Chart courtesy of www.StockCharts.com

When call options increase, it means investors are bullish towards the key stock indices. When the put options increase, it means investors believe the key stock indices will experience pressures ahead. The current put/call ratio suggests investors are not worried.

Another indicator I look at to assess the optimism on key stock indices is margin debt—the amount of stock purchased on borrowed money. When margin debt is high, this shows that … Read More


Economic Indicators Pointing to Weaker Growth in 2014

By for Daily Gains Letter | Jan 6, 2014

Economic IndicatorsIf the stock market is an indicator of U.S. economic health, then 2013 was a stellar year. The Dow Jones Industrial Average closed out 2013 with a 26% gain. The S&P 500 was up 29%, while the NASDAQ Composite was up 34%.

Despite a stellar 2013, the crystal ball for the U.S. economy and Wall Street in 2014 remains murky. That’s because investors might have to actually consider the health of the U.S. economy this year. Now granted, the U.S. economy kicked into high gear last January after the federal government avoided the dreaded fiscal cliff. Thanks to some recent economic indicators, the start of 2014 has been more subdued.

Factory activity in China hit a three-month low in December. While Germany and Italy reported healthy manufacturing numbers, British manufacturing growth eased and France hit a seven-month low of 47.0 (scores below 50 indicate contraction). Here at home, the U.S. economy got a boost after it was announced that manufacturing hit an 11-month high in December of 55.0, up from 54.4 in November. (Source: Weisenthal, J., “This Manufacturing Report From France Is Just Plain Ugly,” Business Insider, January 2, 2014.)

To show it believes the U.S. economy is improving, the Federal Reserve recently announced that it will begin to taper its quantitative easing efforts this month. Instead of pumping $85.0 billion per month into the U.S. economy, it is going to purchase just $75.0 billion in bonds.

And to quell investors’ fears, the Federal Reserve said it will continue to keep interest rates artificially low until the unemployment rate hits 6.5% or lower—a target that probably won’t be reached until … Read More


How to Profit from the Market’s Change of Heart Toward Tapering

By for Daily Gains Letter | Dec 23, 2013

Market’s Change of Heart Toward TaperingInvestors are a surprising lot. Since May, any suggestions about tapering by the current Federal Reserve chairman, Ben Bernanke, or even one of the dozen district Federal Reserve economists, sent the markets reeling.

Back in May, just the whisper of a hint from the Fed that it might consider tapering its $85.0-billion-per-month bond buying program was enough to stop the bull market in its tracks. It recovered, of course, but only after Bernanke soothed the markets by saying he had no intention of pulling back on the Fed’s quantitative easing (QE) policy anytime soon.

The general fear, of course, was that any reduction in QE would translate into an immediate rise in interest rates. Having kept interest rates artificially low (near zero), the Fed made it cheaper for people to borrow. As a result, these artificially low interest rates are generally recognized as being the fuel that’s been propelling the stock market increasingly higher.

The Federal Reserve quashed those fears last week after announcing a $10.0-billion monthly cut in its QE strategy by telling investors it wouldn’t raise interest rates until unemployment hits 6.5%. By the Fed’s own estimates, the country will not hit this target until late 2014 to mid-2015. So, artificially low interest rates live on.

The assurance of cheap money kept the markets upbeat; so much so that the following day, the Dow Jones Industrial Average and S&P 500 opened at record highs, and the NASDAQ opened at a 13-year high.

News on a few key economic indicators released last Thursday, the day after the Federal Reserve’s announcement, probably didn’t hurt either, as these indicators suggested the … Read More


Why These Particular Markets Will Be More Attractive to Investors in 2014

By for Daily Gains Letter | Dec 17, 2013

Investors in 2014The U.S. stock market rally has been on a solid run this year, thanks in large part to the Federal Reserve’s $85.0-billion-per-month quantitative easing policy—well, that and some solid economic indicators. But the question remains: will the momentum continue into 2014?

It all depends on whether or not the U.S. stock market rally follows the laws of physics. For example, when it comes to momentum, an object will continue unless force is applied against it, either a huge amount of force all at once or an applied force over a given period of time. On the other hand, the more momentum something has, the harder it is to stop.

The fuel that has helped propel the U.S. stock market rally over the last number of years could be flickering out. Thanks to better-than-expected employment and retail numbers and strong preliminary gross domestic product (GDP) numbers, many think the Federal Reserve will start to taper its quantitative easing strategy sooner than later.

The end of easy money, some think, could put a cramp in the stock market’s four-year-plus rally—or at least make it run a little more slowly in 2014 than it did in 2013. Whereas the S&P 500 is up roughly 25% year-to-date, analysts think it will grow by as little as six percent and as much as 11% in 2014. This means that the S&P 500 will experience another year of record-highs in 2014, but not quite as bullish as 2013. (Source: “Here’s What 14 Top Wall Street Strategists Are Saying About The Stock Market In 2014,” Business Insider web site, December 13, 2013.)

Those looking to outpace the … Read More


U.S. Misery Index Falls to Four-Year Low

By for Daily Gains Letter | Dec 16, 2013

U.S. Misery Index 2If you think you can judge a book by its cover, then you must believe the U.S. economy is doing really, really well. After all, consumer confidence is up and misery is down. However, looking past the cover, the pages of underlying economic indicators suggest the average American investor should be a little concerned.

But first, the good news! The U.S. Misery Index has fallen to a four-year low. The Misery Index is calculated by adding a country’s unemployment rate to the inflation rate, the logic being that we understand what stubbornly high unemployment mixed with the soaring price of goods translates into—misery.

The higher the score, the more miserable we are. For example, in August 2008, when the U.S. stock markets started to tank, the Misery Index stood at 11.47; when President Obama came to office in January 2009, it registered at 7.83; during the debt ceiling crisis in the summer of 2011, the index topped 12.87. Over the last three consecutive months, it’s been on the decline. In July, it came in at 9.36 and in October, it was 8.3. (Source: “Misery Index by Month,” United States Misery Index web site, last accessed December 13, 2013.)

According to the widely followed Thomas Reuters/University of Michigan preliminary December consumer confidence index, consumer confidence rose to 82.5—the strongest reading since July. In November, consumer confidence was 75.1, according to the index; economists were predicting a reading of 76.0.

Why the increased optimism? American consumer confidence levels are improving thanks to the better-than-expected drop in November unemployment, improved non-farm employment numbers, and strong preliminary gross domestic product (GDP) results. Stronger-than-expected consumer … Read More


Four Ways to Profit from Declining Consumer Confidence

By for Daily Gains Letter | Sep 26, 2013

Consumer ConfidenceIt’s a simple scientific principle: what goes up must come down. Well, the same principle applies to the stock market. As we know, the stock markets have kept near their record highs for most of this fiscal year. However, the Conference Board announced on Tuesday that its consumer confidence index slipped to 79.7 in September, down from a revised 81.8 in August and below the 80.0 estimate. Tuesday’s consumer confidence numbers also represent the weakest reading since May.

The consumer confidence numbers shouldn’t be a total surprise to anyone who has been paying attention to U.S economic data. Even though the U.S. unemployment rate dropped to 7.3% in August from 7.4% in July, most of those jobs were in low-paying industries. Also, more and more Americans left the workforce because they were tired of looking for work.

Stubbornly high unemployment means consumers are increasingly pessimistic about finding work. Coupled with stagnant wages, weaker consumer confidence means Americans will probably cut back on spending as we head into the all-important holiday season. It’s not the best fuel for the world’s largest economy, especially one in which consumer spending makes up about 70% of all gross domestic product (GDP).

But again, this can’t be a surprise to Wall Street, either. Thanks to weakening consumer confidence numbers, S&P 500 companies have been warning investors all year long that they can’t meet projections. During the first quarter of 2013, 78% of S&P 500 companies issued negative earnings-per-share (EPS) guidance, while 81% issued negative guidance during the second quarter.

Ahead of the third quarter, 88 companies (82%) have issued negative EPS guidance. This worsening trend … Read More