In this month's post, we will try to answer the nagging question on so many minds today. Is this a new bull market or just a big bear market bounce?
Let's start with a bit of a primer on how we view markets. First, we are a technical shop. Yes, we look at some fundamental data (example, sequential GDP growth or decline), however we also believe the charts reflect all known information at any point in time from a fundamental perspective.
We use monthly charts the same way you might use a Google Maps satellite view to see the big picture on an area. Can you tell where this is?
We use weekly charts to determine trend or the intermediate term direction of the markets as reflected, below, for Apple Inc. and Sears Holdings Corp.
As you can see in our examples above, Apple is still in an uptrend. Sears (right) is still in a downtrend despite the recent bounce.
Finally, we use daily charts to determine short-term buy or sell timing and overbought or oversold conditions that could lead to market strength or weakness.
We will come back to this chart later for a deeper dive.
Is this a new bull market or just a big bear market bounce?
The short answer is that no one knows for sure. I could make the case that we could see a significant rally from here to new highs. Not necessarily as the start of a new bull market but as a final blow off top.
I can also make the case that this is just a bounce in a consolidation range that will eventually move higher or lower from the range. This is the case I will show you today and that seems to make the most sense to me now..
Since we are now in year ten of an economic expansion, typically you would assume the next move would be down, but in this managed economy anything is possible!
The big picture
The big picture is simple: We have entered a period of consolidation in the markets where it will trade in a large range or we are in a bear market. That is it. There are no other options!
That is not to say we cannot eventually leave this consolidation range and enter a new bull phase, but right now we just don't have the visual evidence to make that proclamation.
Let's take a closer look at the monthly S&P 500 index chart to see why I make this statement.
Notice how on this monthly chart, the last several times the lower MACD histogram (in blue) fell below its zero line, it either meant a consolidation phase as in 2015-2016 or a full blown bear market in stocks as in 2007-2008. It has never ever been anything else.
If you go back in history as far as we can chart, you only see these same two choices: consolidation or bear market. So we can narrow all options to these two things. It is not a new bull market as some would like you to believe, at least not yet.
I also want to point out that it is not uncommon to see a move down and then get a large bounce like we have seen in 2019. You can see a number of historical large bounces following the MACD histogram crossing its zero line to the downside such as in 2015, 2008 and even 2000 after that initial leg or move down.
If we follow the script from 2015-2016, we will likely test the prior highs and then retest the 2018 lows in a large vacillating range until we break either higher or lower from the range.
If we follow the 2007-2008 script, this bounce in the markets will eventually lead to lower equity prices as the bear market really gets rolling.
So which is it? Lets focus on some shorter term charts to see if we can find an answer.
The Trend is Your Friend!
Traders have sayings like "the trend is your friend" or "don't fight the trend." It is true, it is very tough to make money when you are not aligned with the trend.
So what is the trend of the markets?
Below, we see a weekly chart of the S&P 500 index. What it shows is that we are in a bullish or upward trend on intermediate term basis.
A couple of interest points:
1) We are very overbought. The candle that formed at the end of last week can be a reversal candle (called a Doji in Japanese Candlestick trading) and I would not be surprised to see us finally pull back and give up some gains here. We have drawn out this possible pullback in blue dotted lines to the right of the actual market data.
2) When the lower chart window MACD histogram moves above its zero line, we typically have at least one thrust higher, followed by a pullback and a final thrust higher. You see this visually in the histogram forming several humps as I call it with a lower dip in between when it is above the zero line. It is possible that is what is happening here and that might portend a retest of the 2018 highs also drawn in the blue dotted line.
3) The big question in our minds is "what happens as we approach the old highs?" Obviously, there are two choices: 1) we break to new highs or 2) we bounce lower from without making new highs. At this point, no one knows what will happen if we retest the 2018 highs.
How do I know the market is not going to just take a nose dive and move substantially lower when it starts to correct? First, most market participants seem much more comfortable that I relying on Central Banks for direction and at the moment they are telling us all is fine! Second, the black and red moving averages that surround the MACD indicator at the bottom of the chart are still widening. If they were ready to cross that might be a whole different scenario! A widening set of MACD moving averages generally mean there is continued upside in the stock or index.
The Short Term View
Finally, let's take a short-term market view. Again we will focus on the broad S&P 500 equity index.
Let's go back to the chart I showed you at the beginning of this post and let's notice a couple of things that might point to the market's next short-term move.
First, we have reached the next area of resistance (in yellow) where prior market moves have stalled. So far we appear to be stalling here as well.
Second, Friday's price candle did a common retest of the prior day's highs and also is reflecting a possible reversal candle know as a Doji in Japanese candlestick trading.
A word of caution, this market has already taken out level after level of what we call resistance getting to Friday's close, it could do so again. Also, this market is really being driven by Central Bank liquidity, U.S. China trade news and corporate share buybacks so it may not heed traditional technical levels depending on what is said, agreed to or implemented in the coming days by those aforementioned Central Bankers or our elected officials in Washington.
However, at this time, we believe there is a chance the markets pull back here. If you were to ask for a price target for the pullback, I would guess that we might hit the bottom of the risk range at 2700 before we bounce higher.
The U.S. markets appear to be in a period of consolidation at present. We would expect it to move within a large trading range from the December lows to the November 2018 highs.
They will eventually exit the range and this will either start a bear market move lower or the next bull market leg. If it is the latter, it will probably be a historical blow off to the upside leg that could mean big profits on the way up.
On an intermediate and short term basis, we expect the markets to pull back and then move higher, eventually retesting the prior November 2018 highs. Whether it then breaks to new highs or rolls over and retests the December 2018 lows at that point is really anybody's guess. I would tend to thing the latter, but in this managed market anything is possible.
I hope this has helped you see the markets over three different time periods.
I would love to hear your comments and feedback. Was this too much information or too technical? Did you enjoy it? Do you differ in your perspective? Feel free to leave a comment below.
As a multi-family office, we work a lot with family governance. Family governance is a catch all for helping organize the planning, management and decision-making structure for the family’s business and estate related entities. This includes the appropriate succession, education and involvement planning process for future generations.
Governance is the soft side of the total financial solution that we provide to clients. It takes experience and it takes patience. Lots of patience!
The diagram below represents the three independent and overlapping parts to this process.
The critical difference in the family governance process vs. the corporate governance process in most public companies is the involvement of the family. Yes, I know there is usually a founder in most public companies, but over time their interests usually decline, and nepotism is not tolerated.
With the typical family, nepotism is to be encouraged and we are dealing not just with the business of governing entities, but the past bias and experiences that the family brings with them to the process.
Let’s say Dad encouraged his sons to be very competitive towards each other growing up. Dad has now passed on but the two sons, as part of the management and governance of the family entities, continue to undermine and one up the other due to this learned behavior. This creates dysfunction in the governing process and lengthens the time and effort of the advisor to get something done that moves the family towards its desired goals.
The Key to The Process
We believe the key to the process are strong family vision, mission and value statements that are reinforced across generations by the current family leaders. This strong set of family statements then is the basis for everything the family does going forward.
In the Christian faith, we many times ask ourselves “what would Jesus do?” In the family context everything and every decision that is made should fit within the family vision, mission and values statements. This means how businesses are run, estates are planned, the types of giving that is done and how future generations are educated within the family unit.
This single purpose allows the family to stay agile. Staying agile is the ability to rapidly adjust to change by adapting from an initial stable state. In English, this means the family must be an adaptable unit that uses the family statements to traverse an ever-changing world and family dynamic.
In the diagram above, we see most families tend to use a top down structure in their family communication and governance (left). However, to maintain agility, a better structure might be one where family leaders direct and are involved giving and receiving feedback from those family members involved in teams within the family structure.
Some of these teams may have more formals structures such as the defined management for a family business and others may have a more informal structure, such as that of a family council that involves generations currently not involved in more formal structures.
The key to maintaining an agile family is communications.
Communication and Education
For the family to effectively overcome the “shirtsleeves to shirtsleeves in three generations” curse that tends to affect 70%+ of all families, communications and education are a must. Effective communications can be as simple as a monthly conference call or a bi-annual family meeting.
We believe what we bring to the table is the ability to help direct and facilitate these meetings so that everyone is heard, business is accomplished and there is a framework in place to encourage each successive generation to be a part of the governance process.
Ideally within this process is an environment where younger generations are encouraged and nurtured towards a time where they take the mantle of leadership. We see all too often, however, that the family instead tends to criticize those younger generations for their lack of knowledge or experience without laying out a path for them to gain the very experience they lack. This further creates family conflict and dysfunction, which hurts the family’s ability to stay agile, and thereby, perpetuate its wealth and its mission/vision past the third or fourth generation.
This is an area where a family council can help involve these younger generations while encouraging an ongoing dialogue with Generation one or two elders. I have also seen where Generation three and four have been involved on investment committees or even allocated a part of an annual foundation gift to start to involve them in the family’s business.
Building an effective family governance forum is an evolving process. By definition, family governance entails embracing a broad range of perspectives, multiple generations and people who have other things going on in their lives. It can be difficult to maintain the momentum.
Family members who work in the business and are used to more direct and efficient process can find this process frustrating. The process of building a family business governance system requires patience, perseverance in the short-term. It also required agility, open communications and creativity.
Most families find the long-term result of a stronger family and aligned systems produces a rewarding outcome for both the family and its enterprises. The most successful of these families see their wealth and family ideals perpetuated well past the third generation.
The new year is upon us and it is unlikely 2019 will be anything like 2018. However, each year we do our best Carnac The Magnificent impression and try to forecast the possible winning investment themes for the coming year.
Our track record is a bit fuzzy, just like my memory of the Tonight Show when Johnny Carson was the host, but we still persevere.
Here are our five investment themes for 2019:
Let’s take them one at a time quickly.
Short is the New Long!
No this isn’t some forecast about the latest fashion trend, although that may be more interesting to many of you. In case you didn’t know, short (or shorting) refers to selling (stocks or other securities) in advance of acquiring them, with the aim of making a profit when the price falls.
The simplest example is the investor who borrows 1000 shares of General Electric (GE), he sells the borrowed shares and then hopes to buy them back at a lower price at a time in the future and return the shares to its owner, thereby pocketing the spread.
We believe 2019 will be the year that stock markets finally trend lower with a series of lower highs and lower lows. We may see some kind of rally in the first quarter of 2019 following the fourth quarter sell off, but we believe the trajectory of Federal Reserve interest rate hikes and balance sheet reductions will continue to put a strain on U.S. growth (and consequently world growth) and thereby be reflected in lower equity prices.
Hey, we have not had a recession in over ten years, we are due!
In a recession, stocks tend to trend lower and those who short stocks (as opposed to buy and hold stocks, called being “long”) tend to win.
Cash is King
Cash has been trash for the past ten years. Leverage has been the place to be with historically low interest rates and a slow growth economy.
Now with markets, both stock and then ultimately economic, headed lower, cash will be a much better store of value. This stable store of value will also allow smart investors to cherry pick the deals that will likely be available when markets finally bottom in 2020 or 2021.
Interest rates are still historically low, but a low return on cash still beats a negative return any day!
Gold and Silver Will Challenge Three Year Highs
Gold has been headed higher and silver recently broke above prior trading levels and it appears that precious metal in general want to move up.
Many times precious metals do move up at the beginning of a stock market trend change.
So logically, if we look at the above chart it would make sense that precious metals (gold in the chart) would challenge recent highs at 1370 and maybe move much higher depending on the severity of the economic decline.
Fixed Income is Back!
Interest rates moved higher for three quarters of 2018 and this was a negative for fixed income, but now with the economy expected to cool, we believe rates will continue to moderate or at least chop sideways.
This should be good for fixed income securities as lower interest rates mean rising fixed income prices.
A flight to safety may also increase demand for fixed income securities as cash has to go somewhere once it is removed from the equity markets.
So far in the fourth quarter sell off this has held true, however, rates have not declined as much as I would have expected so this could change as soon as economic growth returns to the system. In English this means we believe rates will decline with the markets, but could start rising again as soon as the predicted Bear Market subsides.
Trend Followers Will Have a Massive Year
It has been a tough ten years for the trend followers who primarily use managed futures. This group outperformed all other manager types in the Great Recession of 2007-2009, however, they have had a rough go of it the past ten years, as you can see below.
We believe this manager group which trades financials, commodities, currencies and more will have a fantastic 2019.
Why? Because we believe there will be a solid trend to the downside and little the government can do to stop it once it get’s rolling.
These guys know how to short and have the models to give them the sell signals to execute them. 2019 could be a very good year for them!
Well there you have it, our top five investment themes for 2019. We hope you and your family have a Happy New Year!