S&P 500 Earnings Rising, No Worries Until They Fall From Fed Hikes

S&P 500 earnings continue to rise and they are forecast to rise in 2018 as well.
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S&P 500 Falling Money Flow While Put Buying Is Rising

I’m holding the sideways market prediction path from last Saturday’s show. It’s so awesome that the market is so bullish that its beating the prediction BUT… you guys got to see this.
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S&P 500 Sideways Market Prediction Then Up

The S&P 500 is following the market prediction path fairly closely this week. The prediction was that markets would chop out and go sideways and then rise later in the month as traders front-run the start of the best 6 months of the year (November – April).
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Markets Outperform All Predictions This Week But Elevated Put Buying

Markets outperformed all of the predicted paths this week which really testifies to the bullish sentiment still prevalent in markets since Trump’s Presidential victory in November of 2016. The Parabolic SAR on the S&P 500 has even given a buy signal.
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Don’t Double Down On Wrong Prediction, Just Move On

Whether we are talking about individual stocks, the stock market, or the economy, when you’re wrong just admit it and then move on. The goal is to make money, not to be right 100% of the time so you can stroke your ego.

AM TV and Peter Schiff predicted that the Federal Reserve could not stop their monthly QE injections into the economy. Even though the Fed kept cutting the monthly injection all the way down to zero, alternative media outlets AM TV and Peter Schiff kept saying the Fed wouldn’t stop the monthly infusions because they couldn’t as the patient (the economy) would die. Peter Schiff then went on to say that the Fed was not going to hike rates in December 2015 but instead actually cut rates. The Fed increased rates a quarter point right on schedule. For all of 2016, Peter Schiff has been saying that the Fed isn’t going to hike rates again but instead reverse course and lower rates. In December of 2016, the Fed will likely increase rates another quarter point.

Most alternative media outfits think they have to be crazed perma-bears to get viewers. Maybe they do. Rather than AM TV and Peter Schiff admitting they were wrong about the Federal Reserve, they double down on their wrong predictions and do another “interview” together, check it out.

There are some really good points in this interview, don’t get me wrong. However, to be a successful traders and investor, you can never be a perma-bear. You can never be a perma-bull. You have to adapt and respond to market conditions. That adaptation means you have to be willing to admit when you’re wrong and then to just move on.

Folks, watch out for fear mongering. Fear drives viewership and video view counts on YouTube but being forever fearful is a great way to lose all your money at trading. Some parts of the economy will no doubt suffer under a Trump Administration and higher interest rates; however, higher rates will be good for other parts of the economy like Banking. A Trump Administration will be bad for multinationals and the Dow and parts of the S&P 500; however, Trump will be great for domestic businesses and the Russell 2000.

Small Cap Stocks Will Outperform In a Trump Administration

Small cap stocks are the place to be in a Trump Administration. Trump’s economic policies will negatively impact large multinational corporations like Apple. Small cap stocks are all about domestic companies.

Small cap stocks generate most of their profits inside the US, exactly where Trump’s economic agenda is targeting.

Since Election Day, small cap stocks on the Russell 2000 Index have surged 12.3%, far better than the 3.05% gain for the large-company S&P 500 stock index, and the 3.6% gain for the Nasdaq.

A massive amount of money is moving into small caps. The Russell 2000 has closed up for 14 days straight since Trump won the election.

3% GDP Growth For Q3 – What a Not Funny Joke

Both the Fed and Wall Street analysts are forecasting a 3% GDP growth rate for Q3. After yesterday’s release of many economic reports, I would put the GDP growth rate for Q3 at 1.5% at most. Let’s look at yesterday’s economic releases on the charts.

The NY Empire manufacturing index came in at -2%. That number is -84.53% lower than a year ago.

All the major components of the Empire manufacturing index are contracting.

The Philly Fed survey beat, coming in at 12.8 which is an increase of 455.6% from a year ago.

However, employment is still contracting.

Industrial production fell by -1.1 percent for the 12th straight month of contraction.

The Daily Shot makes the observation that the improvement early this summer was in part helped by utilities cranking on all cylinders to keep the air conditioners around the country running. As that contribution subsidies, we are back to the downtrend from the Spring.

Here is the manufacturing component of the US industrial production (year-over-year).

US retail sales fell in August and are continuing to slow.

Inventory growth continues to slow just like retail sales.

Most of the charts above, I went back five years on the data. Let’s look at what the S&P 500 has done over the last five years and compare performance.

The S&P 500 is up nearly +90% over the last five years while the U.S. economy fundamentals have deteriorated over that same time frame. Folks, that’s the Federal Reserve’s monetary policy propping up the stock market and creating a huge bubble in securities.

US Government All In On Consumer Growing Stronger

The U.S. government is pulling out all the stops on the idea that consumers are strengthening, and that GDP will surge higher in the second half of 2016.

Below is the latest Real Personal Consumption Expenditures released on Monday.

Personal income also continues to grow…

Growing real personal consumption and income has led to an upward revision in Q3 GDP…

If the economy is going to strengthen by so much in Q3, why hasn’t the Fed raised interest rates? A whopping six years after the Great Recession supposedly ended, why are rates still at emergency low levels?

Traders have been lied to for so many years by the U.S. government, the Federal Reserve, and Wall Street, nobody knows what to believe anymore. For example, every year Wall Street analysts and the Federal Reserve do a rain dance in the mainstream media to the tune that the economy will strengthen in the second half of the year. It has not happened.

We have five consecutive quarters of falling earnings. How can the economy be strengthening when sales and hence earnings are falling for most S&P 500 companies?

There is so much dishonesty going on about the fundamentals of the U.S. economy that I prefer to weight my analysis more on technicals. Fundamentals are what the “smart money” is saying. Technicals are what the “smart money” is doing.

Real GDP Per Capita Shows Rocky and Unstable US Economy

The real GDP per capita shows just how rocky and unstable the U.S. economy continues to be since the Great Recession.

Most stock traders know what real GDP per capita is, but let’s quickly review for anyone who doesn’t.

GDP is the market value of all finished goods and services, produced within a country in a year. There is nominal GDP and real GDP. Nominal GDP is a mirage because it’s calculated based on the dollar amount of finished goods and services. Inflation, the difference between a loaf of bread at $0.25 in 1970 and $2 in 2016, skews GDP. According to GDP or nominal GDP, if the entire economy consisted of that one loaf of bread, then GDP grew by eight times or 800% between 1970 and 2016. That’s not right because the same one loaf of bread was produced and sold so the GDP should show zero growth.

Real GDP attempts to remove the inflation mirage by using a fixed set of prices, such as the prices from 2009, to calculate GDP.

The other skewing factor of GDP is population. There are a lot more people today than in 1950. To remove the skewing effects of the population from GDP, we can divide GDP per person or per capita.

Below is a chart of real GDP per capita.

The grey areas on the chart above mark past recessions. Notice that whenever the percentage change from a year ago (Y axis) falls below zero, there is a recession. Real GDP per capita declines during recessions. Now let’s zoom in on the chart above so you can better see the terrifying reality of the economic recovery after the Great Recession.

The shocking truth is that the U.S. economy has almost gone into a recession twice since the Great Recession. In Q3 2011, the percentage change year over year (PCYOY) of real GDP per capita dropped to 0.419% narrowly avoiding a recession. In Q2 2013, the PCYOY fell to 0.306% just narrowly avoiding a recession once again. We are currently on a move down that began in Q1 2015 with declining earnings of S&P 500 companies. Whether the zero line holds, this time, remains to be seen.

Economic Reality

The mainstream media and the Federal Reserve have woven a tale of economic improvement since the Great Recession that is completely absent of the fact that the U.S. economy has almost gone into a recession twice since the recovery began. Worse, the GDP has been contracting since the beginning of 2015, and we are currently heading for another test of the zero line. Perhaps the mainstream media and Federal Reserve think that the public doesn’t need to be spooked by this reality. However, as amateur stock traders and investors, we need to know just how unstable the economy is.

New Job Hiring Slowdown Is Emerging

Traders continue to pile into stocks on the jobs report for June that showed 287,000 jobs created. The mainstream financial media is running with the 287,000 jobs created headline number, but is this the entire jobs market picture?

Below is the 3-month rolling average of non-farm payrolls.

In other words, when we zoom out and look at the larger time frame trend, job creation is slowing. Does that single uptick in the 3-month rolling average chart above really justify a breakout of SPX to new all-time highs? Of course not.

Another chart that shows a big problem with the labor market is the number of Americans who are not in the labor force but want a job.

Notice that the number of Americans who are not in the labor force but want a job remains at a historically high level.

The mainstream media asserts that there are lots of job openings and employers are having trouble finding the labor to fill those open positions. The chart below adds some much-needed context to that assertion.

The chart above shows that the average duration of unemployment is very high relative to historical averages. In other words, it’s taking people an incredibly long time to find a job because there are not many jobs available.

For years, some of the best paying jobs were in the energy sector. The next chart shows employment in the US oil & gas industry plunging lower thanks to Saudi Arabia.

We also hear from the mainstream media that Amazon and online shopping is why the Retail sector is in so much trouble. If that were true, we would expect jobs in the trucking industry to be rising as all that online stuff people bought was shipped around the country. In reality, we have just the opposite.

As stock traders, we have to question everything we hear and read in the mainstream financial media because they will lead us right off a cliff.