Sunday, August 25, 2013

Market Technicals Improving

The last few trading days have seen the market technicals improve. The S&P 500 Index has, at least temporarily, successfully bounced off of its 100 day moving average. This bounce has occurred at a level that has been important during this bull market run. The RSI and the Money Flow Index have both turned higher from depressed levels as well. The importance of the MFI was discussed in a post we wrote in mid May, A Tired Bull Market. Additionally, the On Balance Volume Indicator has bounced off support. It is the trend of the OBV Indicator that is important.

From The Blog of HORAN Capital Advisors

A couple of recent articles have noted the strong negative market sentiment, here and here, and sentiment indicators are contrarian measures, so may be the market is due for a recovery going into the end of the year. Certainly, there are some headwinds that need to be overcome, i.e., the debt ceiling debate in the U.S., the elections in Germany in September and the Fed's taper timing. Nonetheless, selling pressure may have eased in the near term.

A Shift In Sentiment And An Improving Europe: The Week Ahead For August 25, 2013

Investors seem on edge as the equity market continues to digest gains achieved so far this year. The recent market weakness seems to have investors on edge with some of the below article links noting this shift in investor sentiment. This type of indicator tends to be a contrarian one. Economic climates outside the U.S. seem to be stabilizing if not improving, specifically in Europe and the U.K.
  • Pick-up In Euro Area Growth Is Good News, But... (AlphaNow)
  • Flash PMI Reports across Europe to confirm eurozone economic recovery is real (Business Insider)
  • Avoiding danger is no safer in the long run than outright exposure.  The fearful are caught as often as the bold.—Helen Keller (Systematic Relative Strength)
Patience May Well Win the Retirement Race.

Thursday, August 22, 2013

Individual Investors Turn Bearish

Before today the S&P 500 Index has decline nearly 4% (still up over 15 % year to date) and individual investors have turned bearish on the market. Today, the American Association of Individual Investors reported individual investor bullish sentiment declined to 29.0 this week from 34.5% in the prior week. This is the lowest level since the last week of April when bearish sentiment was reported at 28.3%. Since April the S&P 500 Index is up 4.1% on a price only basis. As the below chart shows, the bearish sentiment level is one standard deviation below the indicator's long term average. Individual investor sentiment indicators tend to be a contrarian signals.

From The Blog of HORAN Capital Advisors

Sunday, August 18, 2013

Who Let The Bears Out? Articles For The Week Ahead, August 18, 2013

It has been some time since I have seen so many market strategist laser focused on the fact the market has topped out and appears to be rolling over. It isn't a frequent occurrence when strategist make perfect market timing calls. Certainly there is a great deal to worry about as we move into the second half of August and then the notoriously poor market months of September and October. Jackson Hole is this week, Fed tapering remains on the table, approaching elections in Germany in September, the need for Congress to deal with the debt ceiling all of which are enough to knock the life out of the bulls. Of concern to many, and rightfully so, is the fact this market seems to have moved higher unabated since the end of the financial crisis. Below are a few of the articles we have reviewed in advance of the coming week.

  • "Risk free" rate does not mean you won't lose money in your Treasury portfolio. (Business Insider)
    • China's air pollution deterring tourists and businesses. (Forbes
    • Euro area economic data continues to improve (stabilize). (AlphaNow)

        Saturday, August 17, 2013

        S&P 500 Earnings Above Or Below Trend?

        One market factor frequently mentioned regarding current S&P 500 earnings is they are far above historical trend. An example is from a recent article on the Zero Hedge website titled, Why Stock Prices Are More Stretched Than You Think: A Tale Of 3 P/E Multiples. A common discussion then leads to commentary that earnings will revert to their trend and in this discussion that means a decline in earnings. The earnings chart referenced in this commentary is the one below (updated 8/18/2013). As can be seen in the below chart earnings are above their long term [exponential] trend line. However, the below chart [is using an arithmetic scale on the y-axis] does not properly account for the percentage change in earnings. The Zero Hedge author's technical notes can be found here.
        From The Blog of HORAN Capital Advisors

        As can be seen in this next chart that displays earnings using a logarithmic scale, earnings are actually below their long term trend line. With a logarithmic scale [on the y-axis], the distance on the chart from $10 to $20 is the same as $100 to $200. The percentage move in both cases is the same and if one is looking at earnings growth, using a logarithmic scale is important.

        From The Blog of HORAN Capital Advisors

        Nearing the end of Q2 earnings reporting season, we would like to see a higher rate of growth in company earnings. However, Q2 earnings are expected to increase 4.7% for the quarter and this is higher than the 2.9% expected prior to the Q2 earnings season. Additionally, Thomson Reuters reports 67% of companies beat earnings expectations which is higher than the long term average of 63%. From a revenue perspective, 53% beat revenue expectations, below the 61% long term average, but higher than the 48% average over the past four quarters.

        For investors then, when evaluating charts, pay attention to the scale being utilized in the chart graphic.

        Insight Into The Rise In Company Cash Levels

        In a research report earlier this year, the Federal Reserve Bank of St. Louis provides some insight into why companies continue to hold higher levels of cash. The increasing cash level trend has been underway for over thirty years so the higher cash trend likely is not simply due to economic uncertainty. The research report looks at both absolute cash levels as well as cash as a percentage of corporate assets. This cash level issue is important for investors as cash is essentially an asset that generates little if no return in the short run for a company and hence its investors: especially in light of the current low interest rate environment.

        From The Blog of HORAN Capital Advisors

        From The Blog of HORAN Capital Advisors

        Several factors are cited in the report that provides insight into a company's desire to hold higher cash. One factor cited is the change in the composition of companies, i. e., today companies are more focused on research and development (R&D). This transition has occurred through the growth in the information technology and the pharmaceutical/medical device industries. These industries rely heavily on R&D in order to develop new products.

        The other factor driving corporations to desire holding more cash is a policy one. This policy issues relates to the differing tax regimes pursued by countries around the world. For U.S. companies, the additional taxes owed on repatriated earnings leads company managements to leave cash in lower taxed countries. The research report provides detail around this issue.

        As noted below in a portion of the report's conclusion, the undesirable impact of tax policies could be constraining the growth potential of the U.S. economy.
        There is a structural factor, the increasing importance of multinational corporations, that seems to be important because of the current taxation of the income generated abroad that domestic corporations bring back to the U.S. Here, fiscal policy may be playing an undesirable role, and its modification in the coming years could boost domestic investment and help overcome the slow recovery from the Great Recession.

        There is also another role for fiscal policymakers in the near future. Although the magnitude of the effect is not clear, it seems that designing and communicating a long-run plan to deal with the increasing fiscal deficit would reduce uncertainty about future taxes, reduce abnormal cash holdings and potentially favor private investment.


        Why Are Corporations Holding So Much Cash?
        Federal Reserve Bank of St. Louis
        By: Juan M. Sánchez and Emircan Yurdagul
        January 2013

        Thursday, August 15, 2013

        A Look At The Market's Technicals

        What follows are a few thoughts on some of the technical factors influencing the market advance since the financial crisis. A couple of the factors, the Fed's involvement via quantitative easing and the increase in algorithmic trading, seem to be having a larger influence on the market of late. Institutional investors/traders have a heighten interest in the Fed's open market operations as the Fed activity does seem to influence the equity market's direction. Investors/traders seem to be focused on the Fed's monetary operations and follow this activity via the Fed's open market schedule. The Fed forecasts its activity via its open market schedule that is published at the beginning of each month. For August the schedule indicates the Fed has large Treasury purchases scheduled for Thursday and Friday of this week--not surprising since it is an option expiration week.

        In addition to Fed activity, technical chart pattern setups have been influencing the market as well. Institutional investors, and more specifically technical traders, are following chart pattern setups that trigger their trading activity. Beyond chart pattern setups, algorithmic trading programs are capable of trading on news flow such as Twitter tweets. A recent example is Carl Icahn's tweet that he accumulated a position in Apple's (AAPL) common stock and the resulting rise in Apple's stock price.

        The market pullback over the last two weeks, although small in relation to the market's year to date advance, has triggerred a head and shoulders bearish pattern setup that began its formation in July as evidenced by the below chart from The Kirk Report. This technical setup shows a downside target for the S&P 500 Index at 1,650. The chart is an example of the type of information traders are following that influences their trading activity.

        From The Blog of HORAN Capital Advisors

        Additionally, the S&P 500 Index close of 1,661 on Thursday is just above the index's 50 day moving average of 1,656. The 50 day moving average price and the bearish S&P head and shoulders target of 1,650 will be important levels in the trading days ahead. As we have noted in prior posts, the money flow index is one indicator that can identify reversals in momentum. As the below chart notes, the MFI has turned higher.

        From The Blog of HORAN Capital Advisors

        The recent market pullback has occurred on lower volume as detailed in the above chart. This is not atypical for trading activity in the summer as vacations seem to be the focus for traders. Additionally, some of the overbought market conditions have been reduced when one looks at the percentage of stocks trading above their 50 and 150 day moving averages.

        From The Blog of HORAN Capital Advisors

        Somewhat surprising during this market decline is the VIX continues to trade below 15. The website VIX and More recently published an article showing the market corrections since 2009. In all of the declines noted in the article, the VIX rose above 18 at least once.

        From The Blog of HORAN Capital Advisors

        A couple of events on the horizon that could perpetuate the decline then,

        Tuesday, August 13, 2013

        The Wall Of Worry

        L.A. Little of the Technical Analysis Today website provided the below summation of the state of the market at the end of today under his Trade Chatter column. Little's conclusion is more uncertainty is likely to increase market volatility in the weeks ahead.
        "The market always worries - or shall we say the traders and investors that comprise the market always worry. Worry, worry, worry - if you have money on the line then worry becomes part of your DNA.

        This morning retail sales print stronger than expected and immediately the worry is the Fed will pull QE in September or at least start shutting down the program. Let's worry shall we.

        I don't mean to sound nonchalant about the possibilities but Wall Street (read investors and traders) do not like anything that resembles uncertainty and with everyone of the belief that quantitative easing is the only reason this market is at these highs, well you can understand the reason for worry.

        I can remember a time not so long ago where "bad news" was good as was" good news". It almost feels as if we are shifting to "good news" is bad as is "bad news". The glass is half empty - not half full.

        The next few weeks look to be challenging as the uncertainty is set to grow - not diminish. Elections in Germany, QE going away, budget battles looming, etc. You can see the uncertainties growing and that is likely to bring volatility and pressure on these markets. That pressure is actually needed for it will lead to tests that let us measure and measurement is how we determine what is next."

        H/T: The Kirk Report

        Sunday, August 11, 2013

        Readings For the Week Ahead: August 11, 2013

        Starting this weekend, on Sunday, we will attempt to provide links to a few articles we read last week and article links we believe our readers might find of interest for the week ahead. Below are the links for our initial list.

        • Investors maintained their fascination with equity funds, but also added to bond funds. (AlphaNow)
        • Acquirers want in on Europe's cellphone operators. (Dealbook)
        • Evaluating an immediate annuity. (Kiplinger)
        • Apple (AAPL) expected to unveil next iPhone at September 10th event. (AllThingsD)
        • 51% of the Fed's QE reserves have ended up in foreign banks. (Zero Hedge)
        • 12% of the unemployed are teenagers. (WSJ)

        Sunday, August 04, 2013

        Pension Underfunding Increases

        In spite of strong equity market returns over the last four years, company pension fund underfunding continues to increase. For the year ending 2012, the underfunding amount increased to a record level of $687 billion. S&P Dow Jones Indices reports,
        "...the amount of assets that S&P 500 companies set aside to fund pensions and OPEB amounted to $1.60 trillion in 2012, covering $2.29 trillion in obligations with the resulting underfunding equating to $687 billion, or a 70.0% overall funding rate."
        From The Blog of HORAN Capital Advisors

        From The Blog of HORAN Capital Advisors

        Howard Silverblatt of S&P notes in the report that younger workers will need to take more responsibility in saving for their own retirement as companies have shifted more of the retirement funding burden to employees. Beginning to save early is critical in order for younger workers to take advantage of the power of compounding.


        S&P 500 Companies Post Record Level of Pension Underfunding
        S&P Dow Jones Indices
        By: Howard Silverblatt, Senior Index Analyst
        July 31, 2013