The PIMCO 0-5 Year High Yield Corp Bd ETF Effective Volume study shows large players are piling in to the ETF in big numbers.
You might be thinking that with the Federal Reserve raising rates, bonds and bond ETFs like HYS are in big trouble. I disagree. There will always be a need for bonds in a portfolio. Anybody who is cash flow sensitive or has a need for principal at a particular date in terms of fulfilling a certain funding or a certain drawdown, fixed income is a far more predictable and less volatile asset class compared to anything in the equity markets. It offers peace of mind for those who really want some predictability in terms of outcomes and reaching their goals.
PIMCO 0-5 Year High Yield Corp Bd ETF Chart
HYS presents a decent setup opportunity with rising large players volume. There is a big accumulation going on in high yield bonds rights now. The Twiggs Money Flow supports the thesis that large players are accumulating HYS.
Prices have been consolidating lately. There is a resistance zone just above the current price starting at $101.31. Right above this resistance zone may be a good entry point. There is a support zone below the current price at $101.24, a stop order could be placed below this zone.
The stock market correction is likely going to push the S&P 500 to test its long-term rising trendline and support at 232.20. The bearish divergence on the Twiggs Money Flow likely signals that the pull back is not over yet.
A few traders have asked me if now is the time to buy or if they should wait on the sidelines while the market pulls back. We all know that history does not predict future price direction nevertheless, it is useful to know what has and hasn’t happened in the past.
Looking at the last 110 years of stock market price action, the data reveals that waiting for a correction when the market was expensive would have reduced investor returns significantly. The reason is that the term “expensive” is a subjective term. Even if you use a more objective approach of looking at the P/E ratio, the data still shows that staying out of the market for months or even years waiting for a correction is a losing strategy.
Where long-term investors get themselves in trouble is that the correction they are waiting for may occur at a much higher market level than it is at today. Also, sitting on the sidelines for months or even years runs the risk of the investor losing patience and ultimately capitulating to the Bulls and buying back in to the market at a much higher level.
Few investors believe markets efficiently follow a random walk even though it’s a key component of market theory.
Short Term Stock Market Correction
Timing a stock market correction for profits is best done using a short-term swing trading strategy. The idea is that you don’t want to try and catch a falling knife.
Looking at QQQ, the Russell 2000, and the S&P 500, over the last week, you can see that the Russell 2000 and QQQ are leading the S&P 500 lower:
The market is telling us that what happens in the FANG stocks and QQQ will likely dictate market direction on the S&P 500.
With the Twiggs Money Flow breaking below zero for the first time in 2017, I think a retest of the $136 support level is likely.
Right now being in cash is an excellent move. Continue to stalk your favorite stocks for a swing long entry. I wouldn’t be too quick to jump back into this market yet. Consider using stop limit orders as taught in the lesson here.
The main thing to watch out for is the Establishment ‘Defeat Trump’ propaganda in the WSJ, CNBC, CNN, and elsewhere. These media groups are so dishonest that some were even claiming that the stock market went up because Steve Bannon left the White House. That was the propaganda narrative with CNBC claiming that traders on the NYSE floor cheered as proof. First of all, those old left-leaning talking heads in stock exchange clothing walking around looking stupid on the NYSE floor are not representative of the stock market as a whole.
For the first time in our life-times, we have a President who is exposing the Establishment propaganda media in this country. There is a major information war going on right now.
As a trader, you can’t get caught up in the propaganda and the power struggle going on for control of public perception. You have to check yourself every day and make sure you aren’t making trading decisions based on propaganda. If you think the mainstream media is getting into your head too much, cancel your subscriptions like I did with CNBC Pro last week, and the WSJ and Barron’s the month before. Just turn it off because these propaganda machines are not going to help you make more money at stock trading.
Remember folks, markets mostly do random walks, especially during intra-day trading. No left-leaning propaganda media outlet can peer into the minds of millions of traders around the world and claim to know what they are thinking. These propaganda publications believe that perception is reality so if they can control the public’s perception, they can control reality.
The U.S. stock market is overbought, and the weak seasonal period is upon us. May through October marks the weakest 6 months of the year.
I don’t want to beat up on the mainstream media too bad so I’m not going to mention where I read the following bogus analysis:
Overbought markets look for excuses to sell off. Will Trump’s lack of leadership become an excuse for a big selloff in stocks?
The mainstream media is actually talking about a stock market correction as if it is some type of external beast that thinks for itself and makes up excuses. Reality check: you and I are the markets. People that work at institutional trading firms and hedge funds are the markets. Are you looking for an excuse for the market to sell off? I’m not either. Nobody is. We’re just reading the charts, analyzing the fundamentals, weighing external news events, and making our decisions. Nobody is searching under desks and looking everywhere for excuses to sell out of their positions. Especially not some make-believe entity called Overbought Markets.
Did you notice the Establishment propaganda “Trump’s lack of leadership…”? You can criticize the President on a lot of things but one thing you can’t criticize him on is a “lack of leadership”. President Trump is a strong leader with strong ideas and a vision on which he is moving to execute those ideas. Get in his way and “you’re fired”. Trump demonstrated his very strong leadership skills for over a decade on the hit-show The Apprentice. President Obama isn’t even in the same ballpark as President Trump when it comes to having strong leadership skills.
The main factors influencing a short-term stock market correction right now are: the speed of Fed rate hikes and balance sheet reduction, North Korea, the debt-ceiling, the economy, and the speed at which the Trump America First agenda is moving forward. Anything outside these main themes is likely Establishment propaganda by powerful groups battling to control public perception and thus reality.
The dollar did a big drop today after the FOMC announcement left rates unchanged. The Federal Reserve said the reduction of the balance sheet will begin relatively soon. I think relatively soon means September 2017.
The Fed seemed to indicate that “gradual” policy tightening will continue.
The Federal Reserve will begin winding down the stimulus program it embarked on to save the economy from the financial crisis. As expected, the Fed unanimously declined to raise interest rates.
The Fed predicts inflation will stabilize around the Committee’s 2% objective over the medium term despite inflation being below 2% in the near term. The Fed said they continue to expect “gradual increases in the federal funds rate”.
Fed Announcement Pushed Down the US Dollar
What the drop in the US dollar is telling us is that the Federal Reserve is dragging its feet. Just a few months ago, the Fed suggested we would get a rate increase in September. Instead, the Fed has backed off of that and now is toying with the balance sheet. The Fed seems to be telegraphing that it wants to slow down on tightening if inflation and wages don’t play out the way that they expect. I think the low inflation rate and low wage growth is really bugging the Fed because inflation should not be this low, at this time, in the economic cycle. Without a threat of runaway inflation, I think the Fed now feels that there’s no reason to rush another rate hike. This is all dovish which explains why the US dollar took a big dump today.
The FOMC announcement suggests they will begin quantitative tightening (QT) in September as they begin rolling off the $4.5 trillion portfolio of bonds it has accrued on its balance sheet, largely in the years after the crisis and the Great Recession. Balance sheet reduction is really the new QT as explained here.
The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the market evolves as expected.
The Fed also offered a bit more information on the balance sheet reduction strategy. Having ballooned to $4.5 trillion thanks to QE, the Federal Reserve has already announced a strategy of gradually limiting the reinvestment of proceeds of maturing assets. The question has been the timing. This statement suggests it will begin “relatively soon”, whereas previously they had merely stated it will start this year. I think traders are pricing in a balance sheet reduction to start either in September or October. Efforts will entail allowing a restricted level of proceeds from the bond portfolio to run off. The program will begin at $10 billion per month and increase to $50 billion. Fed officials estimate that once the program has run its course, the balance sheet will probably still exceed $2 trillion.
Chair Janet Yellen and many others have suggested that the balance sheet runoff should not be disruptive to markets, though it’s possible that QT may push up rates if demand for the bonds the Fed is rolling off are not absorbed by private markets and central banks in other countries. However, we do not see any sign of that happening yet.
The other big focus in Wednesday’s FOMC announcement was the Fed’s perspective on inflation. The core personal consumption expenditures index has dropped away from the central bank’s target for the last four months. The softer inflation figures together with the probability of a September balance sheet reduction means that December is likely the next month the Fed will consider hiking rates.
General inflation, excluding energy and food prices, has declined and is running under 2%.
Fed Board Chair Janet Yellen told Congress that temporary variables like prescription drugs and cheaper cellphone programs were behind the inflation downturn.
Markets didn’t expect the Fed to increase rates at this meeting. Dealers from the fed funds futures market are assigning about a 50-50 chance the central bank does one more rate hike before the year’s end.
In assessing the economy, the FOMC announcement showed that the committee held to its assessment that action was rising moderately so far this year. On inflation, the statement removed the word “somewhat” from June’s verbiage and said simply that inflation was running “under two percent,” a subtle tweak which nonetheless probably signifies officials are somewhat more cynical about reaching their mandated objectives.
Average hourly wage growth was stuck around 2.5 percent. Other inflation measures are even lower, with the Fed’s preferred estimate, the personal consumption expenditures index, at 1.4 percent.
Looking further ahead, we are still on with the prediction for two rate increases in 2018, anticipating reasonable 2-2.5% GDP growth over the next year and a likelihood that inflation will slowly return to target, helped by a tight labor market and the possibility of a gradual uptick in wage growth.
If you have any thoughts on the FOMC announcement feel free to comment below.
Here is the full FOMC announcement.
Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.
The JOLTS Job Openings report showed U.S. companies posted fewer job openings in May but hiring picked up and people are quitting their jobs — both bullish signs for the economy.
New government statistics show American companies have made progress filling their record number of job openings, as hiring rose in May while the amount of job openings in the labor market dipped to just shy of 5.7 million.
JOLTS Job Openings
There were broad increases in professional, retail, and business services. That narrowed the gap between job openings and hiring, which had raised concerns of a skills mismatch in the market.
JOLTS job openings dropped 5 percent in May to 5.7 million, the Labor Department said Tuesday. Meanwhile, hiring rose 8.5 percent to just under 5.5 million.
The hiring rate rose two-tenths of a percentage point to 3.7 percent.
The Bureau of Labor Statistics’ monthly JOLTS job openings report — an acronym for Job Openings and Labor Turnover Summary showed openings in May dropped off to the lowest level since January.
The job openings dip in May shows further evidence that the economy is hitting the wall of maximum employment.
This JOLTS job openings report is a sign the market at 4.4 percent unemployment is nearing full employment when almost all people who need a job have one and the unemployment rate mainly reflects the normal churn of people that are temporarily out of work. Usually when unemployment drops this low, companies have to offer more pay. I think faster wage growth is coming.
As the bull economy ages, there is going to be fewer available jobs out there simply because companies have hired all the workers they need for now.
Hiring, meanwhile, surged north of 5.4 million to the highest level the market has seen since December 2015. Substantial upticks in hiring from business and professional services, and educational services, resulted in 25,000 and 121,000 more employees than the month before.
The JOLTS report is among the data watched by Federal Reserve officials as they track both inflation and the labor market.
Quits are typically regarded among analysts as a sign of optimism that employees feel good about their choices.
The amount of people quitting their jobs has increased 7.1 percent to 3.2 million. People usually quit when they either find a new job, often at higher pay, or are convinced they will be hired elsewhere. Quits gauge workers’ willingness to depart present positions in search of higher wages. Coupled with increased hiring across sectors, the equally broad-based increase in the quit rate bodes well for continued wage gains.
Average hourly earnings have failed to break above 2.5 percent on a year-over-year basis. Economists say a growth rate of between 3 and 3.5 percent in salary is needed to bring inflation near the Fed’s 2 percent target.
Layoffs were also up in May at nearly 1.7 million, tying March for the second-worst month so far this year. That’s still a respectable level at this stage in the economic recovery, but layoff upticks were seen across many different industries such as education and health services. Still, current job growth is more than enough to absorb the uptick in layoffs.
On Wednesday, the Fed said banks such as JPMorgan Chase & Co and Bank of America Corp, had passed the second, more demanding part of its yearly stress test. The results demonstrated that many haven’t only built up adequate capital buffers, but improved risk management processes too. Charts of the best bank stocks to buy now are below.
It was the first time in years of annual “stress tests” that each bank assessed by the Fed won approval for its capital strategies.
Fed Governor Jerome Powell, who’s acting as regulatory guide for the U.S. central bank, said the process has inspired all the largest banks to attain good capital levels.
The Fed on Wednesday announced the results of the second round of its yearly stress tests. Those permitted to increase dividends or repurchase shares contain the four largest U.S. banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo. These large banks are the best bank stocks to buy now.
Following the results today, numerous banks quickly jumped in with announcements of dividend boosts and share buyback plans.
The second part of this seventh annual check-up tested the banks to decide if their existing plans for paying out capital to shareholders would still let them keep lending if hit by another financial crisis and serious recession.
Banks have a total of approximately $1.2 trillion in capital reserves as of the fourth quarter of this past year, an increase of $750 billion over 2009. They’re expected to pay out to shareholders 100 percent of the net revenue during the next four quarters, compared with 65 percent in the same period last year.
Best Bank Stocks To Buy Now
Bullish Pocket Pivot pattern on June 28, 2017. Feels a little like chasing at this level. I would prefer to wait for a consolidation move before taking a swing long entry.
Powerful breakout move but chasing breakouts is a losers strategy. I would prefer to wait for a pullback at least a consolidation period before taking a long entry.
I like the sideways consolidation pattern in Bank of America. We also had a bullish Pocket Pivot signal on June 28, 2017.
Wells Fargo has major resistance at $55. An entry above this level is prudent. The Twiggs Money Flow is just starting to round up so it has less of a chasing feel to it.
I will keep hunting for the best bank stocks to buy now.
The stock market today is about half the size it was in 1996. In the U.S, the number of stocks has fallen by half in the past 20 years, from 7,322 to 3,671 last year according to a report from Barron’s (link above).
Stock Market Today Is Half the Size Thanks To the Fed
I know, it’s every bloggers favorite past-time to lay blame for everything at the foot of the Federal Reserve. But folks, if the shoe fits…
Ultra low interest rates means that companies have access to plenty of low interest loans. With a lot of money sloshing around at the corporate level thanks to years worth of QE, why would a company want to go public and deal with the headaches of regulatory compliance?
Companies are also choosing to exit public markets at a vastly greater clip than the number that are joining the public marketplace. The number of initial public offerings in the U.S. has declined by almost 90% annually in the past 20 years.
According to Pantheon and others, what’s left in the public marketplace isn’t as fast growing as the universe of publicly traded stocks from past decades.
That explains why finding the next Walmart, Amazon, Google, or Netflix in the stock market today just became a lot harder. Do you think that’s an exaggeration? Think again.
The United States economy is teetering, despite what the stock and job markets are saying. The US economy is consumption-centric. Growth in the current recovery has focused on three sectors that have fed through to consumption in its various forms: autos, energy, and financial services.
The scariest set of financial indicators to emerge in decades reveals what is crushing the dreams of record numbers of young, middle-class and older Americans.
While nationwide unemployment is down to 4.3 percent, policy experts and economists are warning of disturbing signals in the economy.
As any industry veteran can tell you, those on the sell-side are the second-to-last to surrender to a downturn in economic activity. A 401K Advisor or money manager will not produce negative forecasts when their most important objective is keeping its customers completely invested in risky assets.
United States Economy
The Citi Surprise Index shows a big disconnect between the economy and Wall Street.
The disconnect will not last for long as the chart above shows. Either the economy improves a lot over a short period of time, else the stock market comes plunging down to earth. It’s easier for the stock market to come down than it is for the Federal Reserve and republicans to somehow get this economy going, a feat that has remained elusive for the last 8 years.
Debt is what has kept the United States economy going for the last 8 years. Debt placed a floor under and then helped commercial property reach for the skies. Debt kept dying retailers alive. Debt also caused back-to-back years of record car sales.
Salaries for the typical American worker have hardly grown for decades, well-paid middle-class jobs are disappearing, and lots of the new jobs are from the low-wage service sector.
Consumers are being crushed by high healthcare costs and it partially explains why the American population grew at a small 0.7 percent this past year, the lowest rise since the Great Depression. As Russ Zalatimo of HudsonPoint Capital said, the tendency around recessionary times is that the birth date really drops like we are now seeing.
Bank of America Merrill Lynch stated autos are headed for a “decisive downturn” that will trough in 2021 at about a 13-million-unit annualized rate, down from last year’s blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers aren’t quite as grim, also reduced its revenue forecast, recognizing that the best days of this cycle have come and gone.
With the Trump White House scrambling to advance different measures to fuel economic growth – tax reform, infrastructure spending, maintaining jobs from fleeing abroad, some analysts say more radical steps are desperately needed.
Manufacturing isn’t just dead, say analysts. But it’s no longer dominated by smokestacks and rudimentary assembly. There are about 360,000 jobs in US manufacturing that are vacant and not being filled and companies are saying, “We need people to fill them.”
Meanwhile, retailers are currently choking on their debt as profit margins implode. Restaurants today employ 10.6 million individuals.
According to the Tax Policy Center, Trump’s tax reform could cause overall tax cuts of $6.2 trillion over the next ten years.
Losses on securities backed by automobile loans are piling up even as the unemployment rate has hit 4.3 percent, the lowest since 2001.
Additional evidence that the United States economy is teetering is becoming more and more apparent in credit card delinquencies. Experian reported that the domestic bank card default rate climbed to 3.53 percent in May, a four-year high. There are even nascent signs that families have started to struggle to make their mortgage payments.
David Stockman contra corner man, was interviewed by Boom Bust where he warned of the enormous storm coming that will slam into Wall Street. My notes from the interview are below.
I think the odds by the day are raising that we’re going to truly have a government shutdown. Expect the mother of all debt ceiling crisis. The market is utterly unprepared and it really is the black swan event that’s about ready to take Wall Street by surprise.
They have not even started on the budget resolution for 2018. Because you will need reconciliation to pass any tax bill, without a budget resolution, there’s no tax bill.
We’re likely to have a downturn, likely sooner than later, and the market is dramatically overpriced. I’d say sixteen times earnings given all the headwinds.
The Fed is now finally going to start to shrink its balance sheet and not simply a small bit but by $2 trillion within the next a couple of years. The S&P 500 could drop -1,600 points with that all staring us in the face. There is an enormous air pocket between the dream that prevails on Wall Street and the reality of the economy.
Without a clean bill, you are having an enormous fight over what is quid-pro-quo to raise the debt ceiling. That isn’t going to end easily. It is likely to end in a complete breakdown like we saw in 2011. They’re not going to have the ability to deal with it.
We are in the midst of the biggest political train mess in modern history. We still have no stimulus, no tax bill or infrastructure. I am sure they would like to pass something but they don’t have the consensus to do so.
The market today is trading at 25 times S&P 500 earnings that would be $100 a share of earnings for the period ending in March. That represents a tiny growth from $85 a share back in June of 2007, some ten years ago. We’re about 1.2% earnings growth over the last decade. Why would you pay 25 times earnings to get one percent increase after a tepid expansion of 100 months that is close to the end of its life because of Fed rate hikes?
David Stockman contra corner man has made a name for himself by always being the contrarian to whatever is the current market consensus. Rather than be a straight up contrarian and get your timing wrong, the better way is to just watch the yield curve. When the yield curve goes completely flat or inverted, we will be months away from the next recession. Until then, keep your eyes on the catalysts that could bring the market down sooner like the subprime auto loan mess and the debt ceiling, but run with the Bulls.
Below is the full interview of David Stockman contra corner man and Boom Bust from RT News:
The Federal Reserve shouldn’t be tightening policy with the evidence so clear that it’s falling well short of its inflation mandate. The interest rate policy is wrong because their math is wrong.
Right now the Fed’s inflation goal is 2 percent. Why so low? Fed rate hikes are keeping inflation too low and possibly will lead to the next recession.
Central bank officials are being too vigilant against an inflation problem that doesn’t currently exist.
When the next downturn hits, there will not be much of an inflation safety margin against deflation.
The US has had interest rates at near zero for nearly seven years. When the next recession hits, rates will fall back to zero again like they do during almost every recession. Is the central bank’s interest rate policy meant to keep rates stuck near zero for 7 years? No. So the logic behind a 2 percent target is wrong. If a 2 percent target doesn’t get rates high enough to keep them away from zero, then maybe a 4 percent one will.
Capital expenditures are very low, so most of the increase in debt was returned to shareholders, either in the form of M&A or stock buybacks. The increase in debt suggests that companies find borrowing cheap because interest rates are low. So money is easy, but demand is not very strong. Demand for products will continue to fall as the Fed hikes rates and makes borrowing more expensive.
Interest Rate Policy Is Too Tight at 2 Percent Inflation Target
Credit-card users, home-equity borrowers and homeowners with adjustable-rate mortgages, auto loans, all will likely see their monthly payments rise as the Federal Reserve’s interest rate hikes ripple on the other side of the economy.
The flattening yield curve seems to be saying rates are nearing a peak. The decelerating inflation rate as well as the slowing loan origination markets are signaling that Fed policy is a bit too tight. If policy is already too tight now, when the Fed begins reducing its balance sheet in a few months things will get even tighter.
You can think of the yield curve as a gauge for how far away the Fed is from completing its rate hike cycle. The fed funds rate is currently around 1.16%. The two-year is 1.35%. This suggests the market thinks there is one more rate hike coming. But the five-year is at 1.77%, which suggests the market doesn’t think interest rate policy will reverse in the coming years.