It’s a bear market

The S&P 500 broke primary support at 4170 to confirm a bear market. A Trend Index peak at zero warns of strong selling pressure.

S&P 500

The Nasdaq 100 similarly broke support at 13K, confirming the bear market.

Nasdaq 100

Dow Jones Industrial Average, already in a primary down-trend, confirmed the bear market with a break below 32.5K.

Dow Jones Industrial Average

The Transportation Average lags slightly, testing primary support at 14.5K. Follow-through below 14K would be the final nail in the coffin.

Dow Jones Transportation Average

A plunging Freightwaves National Truckload Index warns that we should not have long to wait.

Freightwaves Truckload Index

Conclusion

All major US stock market indices now warn of a bear market. Weak retracement, to test new resistance levels, should not be confused with a buy-the-dip opportunity.

S&P 500

Stocks: Winter is coming

GDP grew by a solid 10.64% for the 12 months ended March ’22 but that is in nominal terms.

GDP

GDP for the quarter slowed to 1.58%, while real GDP fell to -0.36%. Not only is growth slowing but inflation is taking a bigger bite.

GDP & Real GDP

The implicit price deflator climbed to 1.94% for the quarter — almost 8.0% when annualized.

GDP Implicit Price Deflator

Growth is expected to decline further as long-term interest rates rise.

10-Year Treasury Yield & Moody's Baa Corporate Bond Yield

Conventional monetary policy would be for the Fed to hike the funds rate (gray below) above CPI (red). But, with CPI at 8.56% for the 12 months to March and FFR at 0.20%, the Fed may be tempted to try unconventional methods to ease inflationary pressures.

Fed Funds Rate & CPI

That includes shrinking its $9 trillion balance sheet (QT).

During the pandemic, the Fed purchased almost $5 trillion of securities. The resulting shortage of Treasuries and mortgage-backed securities (MBS) caused long-terms yields to fall and a migration of investors to equities in search of yield.

The Fed is expected to commence QT in May at the rate of $95 billion per month — $60 billion in Treasuries and $35 billion in MBS — after a phase-in over the first three months. Long-term Treasury yields are likely to rise even faster, accompanied by a reverse flow from equities into bonds.

S&P 500 & Fed Total Assets

S&P 500 breach of support at 4200, signaling a bear market, would anticipate this.

Conclusion

Fed rate hikes combined with QT are expected to drive long-term interest rates higher and cause an outflow from equities into bonds.

A bear market (Winter) is coming.

A slow-motion train wreck

Facebook parent Meta’s shares fell 20% after hours as it said revenue growth will slow, partly because users were spending less time on lucrative services. (WSJ)

Meta Platforms (FB)

Facebook lost about half a million global daily users in the fourth quarter of 2021 compared to the previous quarter, according to the quarterly earnings report of Meta, its parent company. That might not seem like a major drop relative to its under 1.93 billion total daily active users, but it represents a low point for a metrics-driven company whose user base long grew at a rapid pace across its different apps. The statistic shows how Meta has struggled to stay relevant to younger users, many of whom are drawn to competing apps like TikTok. (Vox)

Facebook/Meta’s dissapointing performance is not an isolated problem. Tesla (TSLA), the darling of retail investors — trading at 22 times sales and 93 times forward earnings — is also staring into the abyss. Breaking primary support at 900 last week, TSLA quickly recovered — indicating a false break — but is again testing the 900 support level. Trend Index peaks below zero warn of selling pressure. Breach of support at 900 for a second time would confirm a primary down-trend. Initial target for a decline would be 600 — a 50 per cent fall from its recent peak of 1200.

Tesla (TSLA)

Jesse Felder shows how precarious the market situation is, with the median price-to-sales ratio at a record 3.5 times. Compare that to the Dotcom bubble, with a peak of just 2.0.

Median Price to Sales ratio

Warren Buffett’s favorite market valuation metric of market-capitalization-to-GDP is not quite as alarming, when you compare to the Dotcom peak in 2000, but nevertheless sounds a grim warning.

Market Cap/GDP

We consider MarketCap/GDP to be the most accurate long-term valuation metric available. By focusing on total stock market valuation relative to output, it avoids distortions caused by the financial trickery of stock buybacks and fluctuating profit margins caused by factors like the current supply chain issues.

Conclusion

This is like watching a slow-motion train wreck. The worst I have seen in nearly forty years in financial markets. The Fed may be able to postpone a market crash by several months but the eventual outcome is inevitable. The draw-down has the potential to be truly eye-watering, overshadowing the Dotcom Crash and Global Financial Crisis.

We are overweight Gold (including gold miners), defensive stocks, and key commodities and underweight high-multiple growth stocks.

Robinhood results warn of bear market

Robinhood Logo

More bear market signals, this time from stock-trading app, Robinhood. A favorite among retail traders, with more than 22 million funded accounts, trading boomed during the pandemic when stuck-at-home retail traders sought to trade with funds from government stimulus payments. Now stimulus is fading and the retail trading app faces sharp declines in trading activity.

Robinhood shares tank 15% after it loses active users, forecasts weak revenue

Robinhood gave a bleak revenue forecast for the first quarter of 2022 on Thursday as its latest earnings report showed a decline in active users. The newly public brokerage anticipates first-quarter revenue of less than $340 million, down 35% compared with 2021…..Monthly active users fell to 17.3 million last quarter from 18.9 million in the third quarter. (CNBC)

ASX signals a bear market

The ASX 200 broke support at 7200, signaling a primary down-trend. The declining Trend Index has warned of fading buying pressure for several months. Expect retracement to test the new 7200 resistance level but respect is likely and would confirm the primary down-trend.

ASX 200
The largest sector, Financials, similarly broke support at 6250 and we expect retracement to test the new resistance level.

ASX 200 Financials
The ASX 300 Metals & Mining Index encountered resistance at 6000 but remains in an up-trend. Another test of 4750 is likely.

ASX 300 Metals & Mining
The All Ordinaries Gold Index retreated this week, under the weight of a broad equities sell-off, but a rising Trend Index continues to flag buying pressure.

All Ordinaries Gold Index
Gold priced in Australian Dollars continues to trend upwards, the recent shallow trough having respected support at 2500. Target for the advance is 2800.

Gold in Australian Dollars
Conclusion

The ASX 200 breach of support at 7200 warns of a bear market; retracement that respects the new 7200 resistance level would confirm. Financials also warn of a bear market, while the Metals & Mining sector is likely to test support at 4750. The All Ordinaries Gold Index is retreating to test support at 6000 but this should present a buy opportunity as the Australian Dollar price of Gold continues in an up-trend.

S&P 500: Small caps diverge

The S&P 500 ($INX) remains bullish, with Trend Index holding above zero for over a year indicating tremendous buying pressure.

S&P 500

Narrow breadth is our main concern, with the Russell 2000 small caps ETF (IWM) diverging from the S&P 500 ($INX).

S&P 500 & Russell 2000 Small Caps

Conclusion

The market is growing risk-averse as the Fed starts to taper. But financial markets are still awash with cash.

M2/GDP

Buying is likely to be concentrated in the heavyweights.

Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (FB), and Microsoft (MSFT)

Small caps could possibly accelerate into a down-trend but reversal of large cap indices is unlikely with so much liquidity.

Doug Kass | 50 laws of investing

Doug Kass wrote these 50 laws, incorporating many of Bob Farrell’s 10 rules, in an article in Barron’s. Doug is founder and president of Seabreeze Partners, with more than 45 years experience in financial markets.

  1. Common sense is not so common.
  2. Greed often overcomes common sense.
  3. Greed kills.
  4. Fear and greed are stronger than long-term resolve.
  5. There is no vaccine for being over-leveraged.
  6. When you combine ignorance and leverage – you usually get some pretty scary results.
  7. Operate only in your area of competence.
  8. There is always more than one cockroach.
  9. Stocks have a gravitational pull higher – over long periods of time equities will rise in value.
  10. Long investing generates wealth.
  11. Short selling protects wealth.
  12. Be patient and learn how to sit on your hands.
  13. Try to get a little smarter every day and read as much as humanly possible – an investment in knowledge pays the best dividends.
  14. Investors sometimes think too little and calculate too much.
  15.  Read and re-read Security Analysis (1934) by Graham and Dodd – it is the most important book on investing ever published.
  16. History is a great teacher.
  17. History rhymes.
  18. What we have learned from history is that we haven’t learned from history.
  19. Investment wisdom is always 20/20 when viewed in the rearview mirror.
  20. Avoid “first-level thinking” and embrace “second-level thinking.”
  21. Think for yourself – those who can make you believe absurdities can make you commit atrocities.
  22. In investing, that what is comfortable – especially at the beginning – is most often not exceedingly profitable at the end.
  23. Avoid the odor of “group stink” – mimicking the herd and the crowd’s folly invite mediocrity.
  24. The more often a stupidity is repeated, the more it gets the appearance of wisdom.
  25. Always have more questions than answers.
  26. To be a successful investor you must have accounting/finance knowledge, you must work hard and you have to be keenly competitive.
  27. The stock market is filled with individuals who know the price of everything but the value of nothing.
  28. Directional call buying, when consumed as a steady appetite, is a “mug’s game” and is often a path to the poorhouse.
  29. Never buy the stock of a company whose CEO wears more jewelry than your mother, wife, girlfriend or sister.
  30. Avoid “the noise.”
  31. Reversion to the mean is a strong market influence.
  32. On markets and individual equities… when you reach “station success,” get off!
  33. Low stock prices are the ally of the rational buyer – high stock prices are the enemy of the rational buyer.
  34. Being right or wrong is not as important as how much you make when you are right and how much you lose when you are wrong.
  35. Too much of a good thing can be wonderful – look for compelling ideas and when you have conviction go ahead and overweight “bigly.”
  36. New paradigms are a rare occurrence.
  37. Pride goes before a fall.
  38. Consider opposing investment views and cultivate curiosity.
  39. Maintain a healthy level of skepticism as you never know when the Cossacks might be approaching.
  40. Though doubt is uncomfortable, certainty is ridiculous and sometimes dangerous.
  41. When investing and trading, never let your mind dwell on personal problems and always control your emotions.
  42. ‘Rate of change’ is the most important statistic in investing.
  43. In evaluating the attractiveness of a company always consider upside reward vs. downside risk and ‘margin of safety.’
  44. Don’t stray from your investing and trading methodologies and timeframes.
  45. “Know” what you own.
  46. Immediately sell a stock on the announcement or discovery of an accounting irregularity.
  47. Always follow the cash (flow).
  48. When new ways of earnings are developed – like EBITDA (and before stock-based compensation) – substitute them with the word… “bullshit.”

Two Bonus Rules

  1. Favor pouring over balance sheets and income statements rather than spending time on Twitter and/or wallstreetbets.
  2. Always pay attention to what David Tepper and Stanley Druckenmiller are thinking/doing. (Trade/invest against them, at your own risk). 

Bob Farrell | 10 rules for investing

Bob Farrell

Bob Farrell wrote these 10 rules after spending more than 50 years on Wall Street. He is dead today but his rules still apply, even in the current bull market euphoria.

  1. Markets tend to return to the mean over time.
  2. Excesses in one direction will lead to an excess in the other direction
  3. There are no new eras — excesses are never permanent
  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
  5. The public buys the most at the top and the least at the bottom
  6. Fear and greed are stronger than long-term resolve
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
  8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
  9. When all the experts and forecasts agree — something else is going to happen
  10. Bull markets are more fun than bear markets

Hat tip to Lance Roberts at Real Investment Advice.

Recent breakouts

Our recent breakout scan returned a number of promising stocks for review.

Australia

Orica (ORI) – rising Trend Index indicates buying pressure. Follow-through above 14.50 would complete a double bottom reversal.

Orica (ORI)

Canada

Precision Drilling (PD) – Trend Index trough above zero indicates strong buying pressure.

Precision Drilling (PD)

UK

Metro Bank (MTRO) – not a conventional breakout but rising Trend Index indicates buying pressure.

Metro Bank (MTRO)

USA

Marathon Petroleum (MPC) – Trend Index troughs above zero indicate strong buying pressure.

Marathon Petroleum (MPC)

More Breakouts

Spirit of Texas Bancshares (STXB) – shallow trough is a bullish sign. Trend Index holding above zero indicates strong buying pressure. Breakout above 25.00 would signal a fresh advance.

Spirit of Texas Bancshares (STXB)

CURO Group Holdings (CURO) – Trend Index trough above zero indicates strong buying pressure.

CURO Group Holdings (CURO)

Curtiss-Wright (CW) – Trend Index trough above zero indicates strong buying pressure.

Curtiss-Wright (CW)

Acuity Brands (AYI) – Trend Index troughs above zero indicate strong buying pressure. Follow-through above 200 is bullish.

Acuity Brands (AYI)

Apollo Gloabl Management (APO) – Trend Index trough above zero indicates strong buying pressure.

Apollo Global Management (APO)

Williams Companies (WMB) – Trend Index trough above zero indicates strong buying pressure.

Williams Companies (WMB)

Home Bancorp (HBCP) – shallow trough is a bullish sign. Trend Index trough above zero indicates strong buying pressure.

Home Bancorp (HBCP)

APA Corp (APA) – Breakout above 24.00.

APA Corp (APA)

Occidental Petroleum (OXY) – Breakout above 33.00.

Occidental Petroleum (OXY)

Shallow corrections and Trend Index troughs above zero indicate healthy buying pressure.

A word of caution: the above stocks are selected on the basis of technical analysis and do not consider fundamentals like sales, earnings, debt, etc.
Please do your own research. They are not a recommendation to buy or sell.

Recent Breakouts

Our latest scan for breakouts turned up only one candidate in the ASX 300:

Computershare (CPU)

Computershare (CPU) jumped after release of its annual report on Monday. CPU has grown via global acquisition to become the world’s leading provider of share registry services, which constitutes around 60% of group EBITDA. The remaining 40% largely comprises mortgage administration services in the United States and United Kingdom.

Russell 3000

The Russell 3000 yielded a few more promising candidates, concentrated in a few sectors:

Entertainment/Recreation/Gambling

Sea World (SEAS)

MGM International (MGM)

Caesars (CZR)

Vail Resorts (MTN)

Banking

Zions Bancorp (ZION)

First Foundation (FFWM)

Level One Bancorp (LEVL)

Semiconductors

Microchip (MCHP)

Brooks Automation (BRKS)

Others

Evolution Petroleum (EPM)

Progress Software (PRGS)

Arthur J Gallagher & Company (AJG)

Nexstar Media (NXST)

Look for a strong Trend Index (or Twiggs Money Flow), holding above zero, and shallow corrections.

Please note: no evaluation has been done of fundamentals like sales, earnings, debt, etc.

Quote for the Week

The two most powerful warriors are patience and time.

~ Leo Tolstoy