Think all is well—or at least OK—with the global economy? Don’t relax too much, as that doesn’t seem to be the case. As we all know, spending drives economic growth, whether it’s from consumers, businesses, investments, or governments. Without one part or another, there would be added pressure on other areas.
The United States recently saw a strong advance second-quarter gross domestic product (GDP) growth reading that pointed to relatively strong economic growth. But there are other signs that suggest otherwise.
Where I like to look is to the major multinationals and the spending on their goods in the global economy.
A pretty decent barometer on the global economy is consumer spending in restaurants, especially with fast foods.
Fast-food heavyweight McDonalds Corporation (NYSE/MCD), for instance, is struggling to find growth in the global economy, and that’s because spending from the other 99% is stalling.
The maker of the Big Mac announced that its comparable sales for its stores in the global economy fell 2.5% in July. The decline was highlighted by a 3.2% drop in the U.S., along with a massive 7.3% plummet in the Asia/Pacific, Middle East, and Africa (APMEA) regions. Only Europe edged slightly higher.
In its second quarter (ended June 30, 2014), McDonald’s reported a 1.5% contraction in its comparable sales in the U.S.
The reality is that the numbers clearly suggest a continued struggle to lure customers into stores. This is significant, as McDonald’s is a big buyer of products, such as beef, milk, chicken, and vegetables, so a decline in sales in the global economy means less demand for these products. This would translate into … Read More
It’s time for some more handholding as we watch the stock market come under some selling pressure. But we’re not surprised, are we? The reality is that the advance of the stock market into its fifth year looks somewhat weary, given that interest rates will be rising in 2015.
Higher interest rates translate into higher bond yields, and that’s not conducive to a higher stock market. The current 10-year bond yield is a mere 2.45%, so it’s not an immediate concern. Yet looking ahead, interest rates will be heading higher, and this could come as soon as the first quarter of 2015, rather than the previous estimate of mid-2015.
The strength of the advance reading of the second-quarter gross domestic product (GDP) growth at an annualized four percent was clearly enough to send some investors to the exits. The fear is that if the upcoming readings are strong, it could signal higher interest rates sooner. Of course, we still have to wait for the third and fourth quarters of 2014 before making a snap judgment on when rates will head higher.
The Federal Reserve has already reduced its monthly bond buying to $25.0 billion, and it’s likely to be eliminated altogether by the Fed’s October meeting. This is a given. Higher interest rates are the issue for the stock market.
In addition, there’s some nervousness towards China and Europe. The reporting of a weaker-than-expected HSBC Services China PMI of 50.0 in July is scaring the stock market. A weaker China is not good for the global economy.
In addition, we also have a potential recession in Russia, which could have … Read More
As we move towards the end of July, trading in the stock market continues to be murky and filled with obstacles and uncertainties. The S&P 500 is holding on to a small gain this year, but there’s still a sense of nervousness among investors in the stock market.
While the small-cap stocks segment of the stock market continues to be apprehensive, and with a slightly bearish bias with the Russell 2000 being negative on the year so far, I’m also seeing some warning signs emerging from the broader stock market and blue chip stocks.
The S&P 500 continues to fall short on numerous occasions as it approaches 2,000. The Dow Jones Industrial Average has failed to hold above 17,000 on four occasions. The failure in both of these situations is a red flag, in my view, which could be foreshadowing a potential stock market adjustment. Look, we may only see a correction of five percent or so, but it’s coming.
This is a time to be prudent and take some money off the table, just as institutional investors have been. In an article I read on Yahoo!, institutions divested $7.97 billion in exchange-traded funds (ETFs) in the last week, while retail investors rushed in, buying up about $379 million of equity mutual funds. (Source: Lewitinn, L., “Why is the big money dumping stocks?” Yahoo! Finance web site, July 27, 2014.) This move indicates that the professional money is taking some cash off the table, given the five-year bull market run and current hesitancy in the stock market.
In fact, over the past year, retail investors have been rushing into the … Read More
In my previous article, I talked about the vulnerability of stocks at this time, a disappointing economy, and what will likely be disappointing earnings.
On the weekend, I was thinking back to 2000, when the stock market came crashing down after a sizzling but unwarranted run-up in technology stocks and initial public offerings (IPOs). It wasn’t pretty, and while I don’t believe the stock market is priming for another major sell-off right now, I’m still nervous.
The DOW recovered to 17,000 on Monday, but if it fails to hold again, I would be wary. The failure of the S&P 500 to test 2,000 despite coming so close is also a red flag, based on my technical analysis.
Yet unlike 14 years ago, the current bull stock market, which is in its fifth year and looking weary, has largely been driven by the easy money the Federal Reserve has been pumping into the economy. The reality is that this third round of quantitative easing (QE3) will likely be dissolved by October and interest rates will be heading higher by mid-2015. As I said the other day, this will have a negative impact on the stock market.
In addition, the rising flow of capital into the stock market by retail investors is also a red flag that has generally been followed by selling in the past.
What you have are investors who have sat on the sidelines, waiting for a major stock market correction that really hasn’t materialized in five years. This group sees people making money in the stock market and decides they need to jump in with little regard as … Read More
The S&P 500 traded at an intraday record on Tuesday, but it’s not time to relax and take it easy, as was the situation for the past few years since the Great Recession.
It’s time for some hand-holding again. While the broader market has edged higher, I continue to see some nervousness and selling pressure in the small-cap and growth elements of the stock market. The Russell 2000 is holding above its 200-day moving average (MA), but it’s tenuous.
As has been the case in the past years, the direction of the Federal Reserve is helping to support the stock market. Since taking over for the former Fed chairman Ben Bernanke, Janet Yellen appears to be just as, if not more, dovish than her predecessor, and this pleases the stock market.
The reality is that the Fed has said it will likely not begin to increase the historically low interest rates until sometime in 2015, and even then, it will likely only be a small increase. The central bank wants stronger jobs creation and economic growth.
The disastrous first-quarter gross domestic product (GDP) contraction of 2.9% was horrible despite blaming some of the poor results on the winter. A closer look shows declines on spending across the board that negatively impacted the GDP growth. The contraction in durable goods spending in May also supports the continued fragility in the economy and stock market.
The problem is that investors have minimal options for investing compared to the stock market. While the risk is prevalent, it’s clear investors are willing to assume some of the risk, but not to the same degree … Read More
My stock screens have been displaying up signals over the past few days, but I’m still somewhat apprehensive about the most recent stock market rally—and you should be too.
The stock market appears to be edging higher again after the S&P 500 closed above 1,900 at another intraday high on May 23. And while there is some buying support on the stock market charts, I still question the sustainability of any strong upside moves at this time, given the lack of any new catalyst. The reality is that the absence of any leadership and continued concerns towards technology and growth stocks suggest the stock market remains vulnerable at this time.
Where I’m sensing the most risk continues to be the technology sector and small-cap stocks, despite some current relief buying.
Some technical analysts might argue that the move of the Russell 2000 back above its 200-day moving average (MA) is positive; however, I would question the lack of mass stock market participation, given the lighter volume and the questionable and flat investor sentiment, based on my technical analysis.
The chart of volume on the NASDAQ (below) shows how weak the trading volume has been since mid-March, when it was above the 50-day and 200-day MAs. Note the downside bearish crossover of the 50-day MA (blue line) below the 200-day MA (red line) as indicated by the blue oval.
Chart courtesy of www.StockCharts.com
The NASDAQ and Russell 2000 remain below their respective 50-day MAs. Their failure to recover this key technical level is a red flag.
Also what concerns me regarding the NASDAQ is not only the presence of a bearish … Read More
The housing market has enjoyed a boom that’s lasted several years as prices have ratcheted upward toward the 2008 highs, prior to the subprime mortgage meltdown. Now, while the housing market has been fairly steady with above-average price appreciation potential in homebuilder stocks, I still think we could be headed for some issues on the horizon.
Some would argue that the housing market is coming off a strong April, with the housing starts reading at 1.07 billion, well above the consensus 975,000 and the 947,000 in March. Building permits, which are an indicator of demand down the road, were also strong at 1.08 billion, compared to the 1.0 billion consensus estimate and March’s 990,000.
While the readings look pretty good, a deeper look into the housing market suggests we could be headed for a housing crisis down the road. Mortgage rates are rising, which is affecting demand in the housing market. Higher mortgage rates also hurt those looking to renew their mortgages, especially those who are already really tight with payments.
The Federal Reserve created an artificial marketplace of low mortgage rates by buying bonds and mortgages over the past few years, but that is, of course, changing, as the central bank moves towards eliminating all of its monthly bond purchases. The result will be higher mortgage rates in the housing market down the road, especially as interest rates begin to rise in 2015. Trust me when I say that this will hurt the housing market.
A report by real estate firm Zillow is foreshadowing the potential problems to come in the housing market. According to the company, the so-called … Read More
The best way to make money in the stock market at this time is to avoid growth and technology stocks while you take some profits off the table.
The reality is that, despite the failure of the Dow Jones and S&P 500 to hold after establishing new record-highs last Tuesday, the stock market wants more reasons to bid stocks higher. The first-quarter earnings season saw about 70% of the S&P 500 companies beat earnings-per-share (EPS) estimates, but the results were largely based on lowered estimates by Wall Street.
Investors took the opportunity to take some profits following the rally last week. This indicates to me that there’s definitely still some vulnerability in the stock market.
Bellwether retailer Wal-Mart Stores Inc. (NYSE/WMT) reported soft results that suggest the global economy is still hesitant to spend after the company fell short on revenues and EPS. And to make matters worse, the company also revised its second-quarter estimates to below consensus. Clearly, the retail sector is struggling, and this will impact gross domestic product (GDP) growth.
On the charts, technology and growth stocks are risky. The Russell 2000 fell back below its 200-day moving average (MA) after failing to hold for the second time in just over a week.
We are seeing some selling capitulation in the small-cap area of the stock market and it could grow deeper.
Companies in the technology sector, specifically the high-momentum stocks, also remain under pressure, helping to drag the broader stock market lower. I don’t expect this to change anytime soon, so this is an area that you need to avoid, liquidate, or protect with put options…. Read More
The three-day buying streak last week offered some optimism that maybe the worst was over for the stock market, but my technical analysis of the charts indicates otherwise.
While blue chip and large-cap stocks are holding up fairly well, this cannot be said of the technology, growth, and small-cap segments of the stock market.
I previously discussed the stock market risk with high-beta stocks, but there are some warning signs on the charts that foreshadow a potential sell-off in the NASDAQ in the weeks ahead.
This stock market index had been down nearly 10%, which is the technical reversal point, but the NASDAQ managed to rally and is currently down only about seven percent.
The index is back above 4,000, but failure to hold would be the third time the NASDAQ failed to do so above this level, which would be a red flag for pending weakness in the stock market.
Take a look at the stock market chart of the NASDAQ Composite below.
As I indicate on the chart, there could be a bearish “head-and-shoulders” formation in development. Note the right shoulder (as indicated by the short blue horizontal line) followed by the head (as shown by the second short horizontal line).
The way this could play out is if the NASDAQ can hold near the current level of around 4,000, it could subsequently rally back to around 4,250.
At this point, if the index fails to extend higher towards 4,350 and falters, then we could see another downside move back towards 4,000 (as shown by the long blue horizontal line in the chart below). Failure to hold here … Read More
I’m starting to receive more questions regarding the state of the stock market and whether it’s simply a bout of profit-taking or the set-up of a deeper stock market correction.
First of all, panicking is not what you want to do. Yes, we are seeing some selling surfacing, but that doesn’t necessarily mean you should go and dump stocks.
After the year we had in 2013 and the fact that the bull stock market is in its fifth year and devoid of a major question despite the advance, it would not be a surprise to see some selling.
Also, with bond yields beginning to rise, we will see a reduction in the assumed risk and will likely see a shift of capital into bonds and away from the stock market as yields rise.
The reality is that the stock market is already seeing a decline in the assumed risk in 2014. Technology stocks and small-cap stocks are no longer the stars of Wall Street this year.
We are seeing a lack of market leadership and extreme selling on the momentum stocks, which clearly is a red flag. The concern is that the drop-off in the momentum stocks is significant and could likely extend lower since the rise was euphoric.
Instead of seeking added returns, we are seeing a move towards safety as traders are shifting capital to blue chips and large-cap stocks that are better equipped to withstand a stock market sell-off and have largely proven themselves over decades.
On the charts, the NADSAQ and Russell 2000 are down more than two percent in April versus a less than one-percent … Read More
The first quarter, by all accounts, was a dud, especially if you were invested in blue chip stocks as the Dow Jones Industrial Average retracted 0.74% in the quarter.
Yet March also saw some shifting of capital from higher-risk assets into blue chips and large-cap stocks, as the NASDAQ and Russell 2000 underperformed with declines of 2.53% and 0.83%, respectively.
But the muted gains in the first quarter do offer some hope heading forward, especially if the stock market can attract some leadership and if the economic outlook and jobs numbers can improve. For instance, the S&P 500 led the way in the first quarter with a 1.32% advance (or a 5.28% advance on an annualized basis). By comparison, in 2013, the index had already surpassed this level of advance by March.
Given the muted results to date, we could see much better gains in the quarters ahead, but much will depend on several variables that currently cast a cloud over the stock market.
First, the Fed is continuing to cut its quantitative easing and the consensus is that the bond purchases will dwindle to zero by year-end. While this is discounted by the stock market, traders are more concerned about when the Federal Reserve will begin to increase interest rates. The early thoughts are for rates to rise sometime in the first half of 2015.
Yet Fed chairwoman Janet Yellen gave the stock market a lift on Monday after suggesting the central bank would do whatever is necessary to make sure the economic renewal and jobs growth continue unabated. Now, this could imply that the bond buying could continue … Read More
Increasing 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.
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
Unless you have been living in a bunker over the past few years with no access to the Internet, you likely know of the increasing significance of cloud computing in what I consider the next phase of the technology advancement, based on my stock analysis.
Cloud computing is simply a way for companies to store applications, solutions, or data, and allows users to easily access these materials from anywhere.
The growth estimates are staggering. My stock analysis indicates that we are seeing cloud start-ups springing up everywhere, almost as rapidly as the time it takes to register a company name. Simply the use of the term “cloud” in a company’s name or business description has the ability to drive buyers to the stock, according to my stock analysis.
But as my stock analysis suggests, while the estimates of the potential size of the cloud computing market vary, one thing that’s for sure is that the size of the market worldwide will be massive. In fact, the value of the cloud market could be a staggering $270 billion by 2020, according to Market Research Media. (Source: “Cloud Computing Market Size – Facts And Trends,” CloudTweaks web site, July 7, 2012, last accessed January 10, 2014.) However, in the report, Forrester predicts the cloud market will be valued at around just $55.0 billion this year and will reach $241 billion by 2020. That’s massive growth, and while these are only estimates, my stock analysis notes that the potential is nonetheless enormous, so you want to have some exposure to the cloud computing market.
And while there are some major players in cloud … Read More
This year, Christmas will bring joy to many investors with the stock market now nailing gains in excess of 30% for the NASDAQ and Russell 2000. Even if you are a more conservative investor buying DOW and S&P 500 stocks, your wallet still got bigger.
What has surprised me this year has not been the advance as much as the ability of the stock market to avoid a sizable stock market correction. The S&P 500 retrenched about 6.5% in May and June after the Federal Reserve first uttered the word “taper.” Yet the downcast mood didn’t last that long, as traders quickly entered the market and bought on the weakness. This has largely been the pattern this year, where any sign of weakness was followed by buying.
Chart courtesy of www.StockCharts.com
Now I’m not a pessimist, but I do believe in market adjustments along the way. At the beginning of the year, I predicted the stock market would move higher, but not at the rate and size we saw. Maybe a 15% upside, but definitely not 30% plus.
Record after record, the stock market appears to be looking to higher ground. I remain bullish at this time, especially if consumers decide to up their spending. Yet there’s still the lack of revenue growth in corporate America that hopefully could correct itself as we move into 2014.
At this point, you really should look to realize some profits, especially on your big winners, prior to the year-end tax season. To counter some of the gains, I suggest you also divest some of your dogs in your portfolio. Look, we all make … Read More
Well, unlike many retailers, it looks like Starbucks Corporation (NASDAQ/SBUX) knows how to boost sales—at least momentarily. The company managed to sell 1,000 limited edition metal gift cards at $450.00 a pop via Gilt.com in a matter of seconds. Apparently, this high level of demand and consumers’ reactions to the rare gift card were a repeat of last year, when the company offered a similar product.
Now, this gimmicky kind of sales strategy, while working for Starbucks, likely won’t work for many other companies in the retail sector. Instead, I think these companies could face a margin squeeze over the final weeks of the year, which have proved critical for the retail sector in the past.
The problem is that the retail sector didn’t report strong results on Black Friday and the subsequent key shopping days, despite retailers’ attempts to attract consumers by pulling out all the stops, including longer shopping hours (earlier store openings, later closings), heavy advertising, and steep discounts.
Of course, the operators in the retail sector will soon need to clear out their winter merchandise, and that means great discounts for consumers ahead but pressure on sales margins for the retailers. The end result will likely be sales and earnings coming in lower than expected. And this means we could see more retailers hurting when they present their fourth-quarter results.
For the retail sector, the next few weeks will be a battle between the retailers for consumers’ limited spending dollars. This means that heavier discounting to clear inventory will likely take place.
As an investor, I would be hesitant to buy retail stocks at this time. … Read More
It isn’t a hidden fact that investors can make money when stock prices go down. One way to do this is by shorting shares of companies that investors believe won’t perform well because profits will be lower, sales will be stagnant, and so on and so forth.
No doubt, short selling is beneficial when stock prices are falling, and it certainly lets investors make money; however, if the stock prices go in the opposite direction, investors can be in for a long period of misery—their losses can even be more than 100%. In addition, in order to short, investors need to meet a certain amount of capital requirement in their portfolio.
Instead of just short selling a stock and putting up the capital, thereby exposing themselves to greater risk, investors can make money when the stock price is falling by using an option strategy called the “bear put spread.” This option strategy provides investors with a limited-risk, low-capital option.
Consider this: Google Inc. (NASDAQ/GOOG) trades well above $700.00. To simply short 100 shares of this company, investors require a significant amount of capital.
At the very core, a bear put spread requires investors to buy a put option strike price above the current stock price, in anticipation of stock prices falling, and a write/sell put option at a lower cost than the current stock price. One key aspect investors must remember is that these two put options should have the same expiry date.
Suppose ABC, Inc. is trading at $30.00 per share now, but an investor believes that the stock price will decline. So, instead of short selling, he/she decides … Read More
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