Guest Video by Tim Knight
Guest Post by Chris Hunter
If the US stock market is overvalued, where are there bargains on offer?
Regular readers will know that we like Russia – where the news is nearly all bad and where, as a result, the stock market trades on a trailing P/E of 5.7 and yields 4.8%.
Let’s get the theory out of the way first…
There are all sorts of ways to complicate this, but as Warren Buffett put it:
Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
Nearly everyone pays lip service to this idea. Almost nobody invests this way.
Guest Post by Chris Hunter
One of the core principles we follow at Bonner & Partners is that “beta is boss.”
As Bill puts it:
Beta – the returns the market delivers – is much more important than alpha – the returns investors look for in excess of market returns.
Investment pros talk about “seeking alpha.” They mean choosing individual investments – usually stocks – that they hope will beat the averages.
Simply put, there’s a time to be in stocks… and a time to be out of them. Same goes for bonds. And commodities. And any other asset class you can think of.
In fact, one of the most important investing secrets you can learn is that these decisions matter most when determining your long-term wealth.
Most investors have no clue about the importance of beta. Instead, they spend most of their time thinking about how to get exposure to stocks, bonds, etc, not about whether they should own them in the first place.
As regular readers will be aware, US stocks (in general at least) are richly valued right now. And that means long-term returns are likely to disappoint.
So, what are the alternatives?
Thanks to my budding contrarian of a wife for forwarding this to me, here is what the locals are reading today here in Boston.
Morgan Stanley predicts stock market surge (Investment bank says S&P could crack 3000 by 2020)
Okay, now Channel 5’s got the story and the story is spreading out to the various corners of Main Street (cue the ‘maybe it’s time to invest again’ commercials from John Hancock).
“It’s irrefutable that the U.S. economy is in the best shape it’s been in fundamentally in well over eight years,” said Peter Kenny, chief market strategist at The Clearpool Group.
“Business cycles don’t die of old age,” Parker and Zentner wrote. “Business cycles tend to die of overheating (excessive hubris and debt).”
Translated: ‘We are myopic trend followers extrapolating bromides from a previous era of relatively normal monetary policy and were nowhere to be found when the latest up cycle actually began in Q1 2013.’
Using monthly charts I want to update more big picture views of where we stand in the financial markets. This is just a brief summary [edit; okay it's not so brief. In fact it had to be ended abruptly or else it would have just kept on rambling] and not meant as in depth analysis with finite conclusions.
I was listening to Martin Armstrong talk about his ‘economic confidence’ model and realized that the way he views gold is similar to the way I do (and very dis-similar to the way inflationists and ‘death of the dollar’ promoters do). I don’t love the way he writes, and I usually avoid these weird interview sites, but checked it out (linked at 321Gold) anyway and found him enjoyable to listen to.
Anyway, this prompted another big picture look at gold vs. the S&P 500 and as with the shorter-term views, the picture is not pretty.
Well, it is pretty if you have patience and no need to promote gold as a casino play. Gold will be ready when gold is ready and that will not be until confidence in policy making and by extension the stock market, starts to unwind.
Gold vs. SPX has meandered out of a long Falling Wedge (blue dotted) with 2008’s Fear Gap still lower. On the big picture the risk vs. reward is with gold over the stock market. But it is a funny thing about big pictures; they move real sloooow. A fill of that gap may not feel so good to anyone vested in an immediate conclusion to gold’s bear market vs. SPX.
Moving on, let’s look at some ratios of components of the stock market…
Updating the status of the 60 minute chart we observe the following…
- The anticipated resistance zone has been acheived.
- The gap and bottoming pattern measured target are higher.
- RSI is getting over bought (remember, this is just a 60 min. chart) so some disturbance can come about at the resistance zone.
- But the gap and 1980+ levels remain viable.
- Hey, it’s what the 60 min. chart says.
With the help of at least one MSM headline, the bounce looks to continue, as anticipated. Clicking the graphic yields the
bearish bullish story.
Here is how the S&P 500 closed yesterday, with a bullish looking flag settling down toward a visual support level that would be about a 50% retrace of the first up leg (again, this is a 60 min. view, not a daily, so everything’s compacted). The potential is that a bottoming pattern is still forming.
The more I look at it the more I think the bounce can exceed 1960, which was the upper end of the original target (we noted some details by daily charts in an NFTRH+ update). The market is down today but the 60 min. chart paints it as just the end of the first leg up.
In fact, if SPX holds the noted support line it could make a shoulder to a bottoming pattern (again, talking 60 min. view here) with a measurement up above the gap. Then to make things even more interesting, the bears would have to really think about things.
I continue to hold ‘bounce’ and fundamental longs, but with real interest being the gold sector as it attempts to make some signals that could transition the year long+ bottoming process into something else all together.
I am not interested in shorting SPY again until a) the market rolls over or more likely b) the upside objectives are hit and then signs of weakness or over bought hysterics ensue. Short gains this year have been good because I have given them short leashes in limiting losses and in decisively taking profits.
The market was supposed to bounce, it is bouncing (assuming today’s down is just a pause) and now the script needs to be managed to make sure it remains the script.
I went from feeling a little silly with the SPX 1950-1960 bounce target hanging out there (just asking to be mocked as the market dropped again on Thursday) to now seeing it as a near sure thing. This morning’s pre-market activity puts it at around 1940. What is 20 measly additional points to a stress relieved bull?
It would be a good idea to watch the RUT (and its bear flag) for early indicators. RUT spent last week grinding upward in the flag in a precursor to the broad market bounce to end the week, but it remains in a relatively vulnerable position if it remains below its MA 200.
Individual investors, newsletter writers and professional money managers all got very bearish (too bearish) with the routine hit that the markets took. This is now being adjusted. At 1960 SPX would offer resistance at the MA 50, the middle Bollinger line and a lateral cluster of traffic. To put a bear case back on we need to see a little bull bravado return to the scene.
 With the bulls becoming emboldened, I am taking a loss on the RUT short and waiting out the bounce objectives.
Let’s get the Dumb Headline of the Day over with right off the git go…
US Stock Futures Erase Loss as Ukraine Offsets Iraq
Ha ha ha… one geopolitical problem evens out the other and this has a net calming effect on the stock market.
If the market rallies it is because the S&P 500 has a would-be technical bounce objective to 1950-1960. I have refused to short anything (and am indeed long a couple things) in anticipation.
Also, did you notice gold take a U Turn?
 Up, down all around; gold, stock market… none of it means anything if it’s coming about due to emotional stuff in the media. Filter…