GDP Shows A Big Jump.  That’s Good, Right?
2Q GDP just came in at a very impressive 4.0% quarterly annualized growth.  Meanwhile, the 1Q was revised up to -2.1% from -2.9%.  
This shows that the month-over-month gain from 1Q to 2Q was a staggering 6.1%.  That is quite the move.  
Looking back in history, the last time we saw a jump like that was 6.6% in 2Q 2000 from 1Q 2000.  That wasn’t exactly the best time to be long stocks now was it?
Before that?  2Q 1982 showed a jump of 8.7% from 1Q 1982, right ahead of a huge historical 18-year bull market.  
My take is simple, the horrible weather early this year should put an asterisk next to anything from the 1Q.  Tough to conclude much here other than the economy continues to improve, even as the Fed slows QE.   Permalink

GDP Shows A Big Jump.  That’s Good, Right?

2Q GDP just came in at a very impressive 4.0% quarterly annualized growth.  Meanwhile, the 1Q was revised up to -2.1% from -2.9%.  

This shows that the month-over-month gain from 1Q to 2Q was a staggering 6.1%.  That is quite the move.  

Looking back in history, the last time we saw a jump like that was 6.6% in 2Q 2000 from 1Q 2000.  That wasn’t exactly the best time to be long stocks now was it?

Before that?  2Q 1982 showed a jump of 8.7% from 1Q 1982, right ahead of a huge historical 18-year bull market.  

My take is simple, the horrible weather early this year should put an asterisk next to anything from the 1Q.  Tough to conclude much here other than the economy continues to improve, even as the Fed slows QE.  

Consumer Confidence Is High, Is That A Good Thing?
Consumer Confidence for July just came out and it was really good, up to 90.9 - the highest since October 2007.  
Digging in a little more, it was up +6.7% from June’s 85.2 level.  This was the largest monthly change since December 2013.  Also, the 5.7 point monthly jump was the highest since December 2013 as well.  
What has me worried is above I see October 2007 and December 2013.  October 2007 was right at a major peak in equities, while December 2013 lead to a flat 1Q in 2014.      
You see, higher Consumer Confidence doesn’t always mean higher stock prices.  I’ve used the chart above for years now, saying the fact Consumer Confidence is making a series of lower highs and staying historically low is very bullish for equities.  
The reason is it sets a much lower bar for the expectations and this helps make most news look ‘good’.  Take a look at earnings last year.  Earnings really weren’t that great, but expectations were so incredibly low.  That’s how earnings could grow just 6% in ‘13, yet the SPX gain 30%.
Now to see Consumer Confidence finally spiking higher, my contrarian bells are ringing some.  I like the fact the two major peaks were 145 in 2000 and 115 in 2007.  That current level of 90 could have plenty of room to run higher, but when things are rosy isn’t always the best time to be a super bull.  I’m still bullish yes, but check this off as a concern.   Zoom Permalink

Consumer Confidence Is High, Is That A Good Thing?

Consumer Confidence for July just came out and it was really good, up to 90.9 - the highest since October 2007.  

Digging in a little more, it was up +6.7% from June’s 85.2 level.  This was the largest monthly change since December 2013.  Also, the 5.7 point monthly jump was the highest since December 2013 as well.  

What has me worried is above I see October 2007 and December 2013.  October 2007 was right at a major peak in equities, while December 2013 lead to a flat 1Q in 2014.      

You see, higher Consumer Confidence doesn’t always mean higher stock prices.  I’ve used the chart above for years now, saying the fact Consumer Confidence is making a series of lower highs and staying historically low is very bullish for equities.  

The reason is it sets a much lower bar for the expectations and this helps make most news look ‘good’.  Take a look at earnings last year.  Earnings really weren’t that great, but expectations were so incredibly low.  That’s how earnings could grow just 6% in ‘13, yet the SPX gain 30%.

Now to see Consumer Confidence finally spiking higher, my contrarian bells are ringing some.  I like the fact the two major peaks were 145 in 2000 and 115 in 2007.  That current level of 90 could have plenty of room to run higher, but when things are rosy isn’t always the best time to be a super bull.  I’m still bullish yes, but check this off as a concern.  

Here Comes August, Get Ready

Here comes August.  Getting right to it, August has been the second worst month (to June) over the past decade and second worst month (to May) the past five years.

Now weakness in August is nothing new, as it is also one of just four months to average a loss going back to 1950.  In fact, the next two months are the only two months to average a back-to-back loss for the SPX.  

Lastly, we all remember how great last year was, but did you know that August was also one of just two months to see losses in 2013 (June being the other).  In fact, it was the biggest monthly drop of the year at -3.13%. Not to mention it also had some huge drops in 2011 and 2010, this month is one to be wary of if you ask me.  Here are all the recent returns.  

Do I think this bull market is still alive?  Yes, absolutely.  But you can’t argue with seasonality and that says be careful over the next two months.  

Are You Confused Yet?

So is sentiment a screaming buy, as everyone is still way too skeptical of this rally?  Or is everyone in love with stocks, suggesting we are nearing a monumental peak in equities?  Or could it be both?  

Looking at the Investors Intelligence poll (also known as the US Advisor’s Sentiment Report) we are seeing some historic levels of bulls.  Now remember, this is a poll that looks at over 100 independent newsletters and is used in a contrarian fashion.  

We recently saw a string of more than 60% bulls in five out of six weeks, which is very rare.  In fact, the previous times we saw that many bulls were late ‘13 ahead of a flat 1Q and before that was near the 2007 peak.  

Going back to 1970, check out the returns on the SPX after the bulls come in greater than 60%.  Across the board underperformance and just a +3% average gain in the SPX over the next year.  

So newsletters are extremely bullish and this has major contrarian warnings with it.  What about the average investor?  This is where things get very interesting.  If you look at the American Association of Individual Investors (AAII) poll, there is actually no excitement at all with new highs happening.

Bulls on this one came in just under 30% this week, the lowest level since early May.  

Going out further, the 8-week moving average is still no where close to former peaks.

What is really fascinating though about the AAII poll is those that voted neutral have been off-the-charts high recently, as it came in at over 40% this week.  In fact, it has been above 40% nine times so far this year.  It hasn’t been above 40% before this year since 2005!

Sure, neutral isn’t bearish - but my view is this shows the average investor still isn’t very interested in equities here.  That’s a good sign for the bulls.  

Now check out the returns after the AAII comes in over 40% neutral.

This time we have extremely bullish results across the board!  Nearly a mirror opposite of the Investors Intelligence poll.  Confused yet?

These are just two polls and there are lots of other ways to measure sentiment, I’ll agree.  But I find it fascinating the difference in opinion and this only adds to the overall confusion for so many.  In the end, I still think we have too many betting against this rally and price action continues to support higher prices the rest of the year, as I discuss here and here.  

Good luck trading and thanks for reading.  

Breaking Down New All-Time Highs

With the SPX just a few points away from another new all-time high, I thought it’d be interesting to take a closer look at all-time highs.  

Here’s some fun trivia for you.  On September 3, 1929 the SPX closed at 31.30 and didn’t close back above that level until September 16, 1954.  That is just over 25 years or 9,144 calendar days for those scoring at home.  Makes me feel kind of bad for complaining the SPX hasn’t hit a new all-time high since July 3 or 12 trading days recently.  

So far this year, the SPX has made a new all-time high on a closing basis 25 times.  Here’s a nice chart of all the years since 1950.  

Here are the actual totals in all the years.  That 25 so far in 2014 is right about in the middle, a long ways from the record of 77 in 1995.

Now the logical question is this - is making a new all-time high bullish?  Seriously, we’ve been making a lot of new highs the past year, yet all I’ve heard is reasons to expect the market to come crashing back down.  Too far too fast, overvalued, inflation, small caps lagging, bonds leading, weak 1Q GDP print, Fed printing money, etc.  You name it and we’ve probably heard why this market was doomed.  Yet, all it does is make new highs.  

Going back to 1970, the SPX has seen 618 new closing all-time highs.  Here’s how it does after.

Up to three months out there is slight underperformance, but six months and out the SPX actually performs better after a new high than the average return.  In other words, new highs aren’t anything to be scared of - history says they are a good thing.  Don’t be scared of heights is a better way to put it.  

Thanks for reading and good luck in your trading.   

Are Earnings Firing A Warning Shot To The Bulls?

The SPX is currently making another new all-time high and (right or wrong) many of the overseas fears have been removed thanks to a strong earnings season so far.  Driving the gains is the fact revenue has been great this quarter, a pleasant change from the past few years.

Thanks to earnings data from my pal Brian Gilmartin, check out the chart below.  Earnings continue to move higher, confirming the new highs in the SPX.  Not much wrong with this picture.  BTW, if you aren’t reading Brian’s blog you are missing out, no one is better at putting a real world look at what earnings are doing and how they matter.  

That chart above looks pretty correlated and you’d be right, as earnings and the SPX sport a 91% correlation.  

So is it really that simple?  Earnings matter, absolutely, as they drive longer-term trends.  Still, in the near-term, anything can honestly happen.

With some more data from Brian, check out the year-over-year earnings growth and the SPX annual returns.  You’ll find some years had good earnings growth with poor SPX returns, and vice versa.  My favorite example is last year gained just 5% earnings growth, but the SPX soared 30%.  It gained a similar 6% earnings growth in 2002 and the SPX tanked 22%.  

Using the 2014 estimate of total SPX earnings of $117.41, the SPX sports a P/E ratio of 16.8.  Going back to 1985, the average P/E has been 17.9.  Yes, the 1990s were an outlier, still the chart below is worth sharing.  Maybe things aren’t as stretched as most think?  

Earnings are just a part of it to me.  Paying attention to the technicals and sentiment also matter.  When you add it all up, I continue to think things look good for the bulls here.  

Why The Second Half Of The Year Should Be Strong

So after six months, the SPX was up a very impressive +6.05%.  I was part of this CNN strategist poll at the start of the year  and the average strategist was actually looking for just a 6% gain on the entire year back then.  So we’re already there, what happens now?  To me, it looks like we could have a strong second half of the year, here’s why.

Turns out, the first half of the year gives a very good clue as to what might happen during the second half of the year.  If it is strong, then the end of the year is strong - and vice-versa.  Sure sounds simple, but sometimes that is a good thing.  Given this year turned in a rather strong +6.05%, things should continue to favor the bulls going out the rest of the year.

Going back to 1950 on the S&P 500 (SPX), the second half of the year is a little bit stronger than the first half.  

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But if the first half of the year is up, then the returns improve the second half of the year.  Likewise, if the first half of the year is negative, the second half does significantly worse.

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Now check this out.  Considering the historical average first half is +4.16%, when the first half of the year beats the average (like 2014) - again things look very bright for the bulls.  Notice both the average and median have drastically improved, but the standard deviation has dropped as well.  Can’t complain there.  

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Want more proof the first six months matter for the next six months?  What happens when the first half is very poor and drops 5% or more?  Yep, you guessed it, very poor returns and a huge jump in the standard deviation.   

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Lastly, check out a +10% first half of the year and what the remaining six months does.  These are the strongest returns yet, suggesting strength indeed does equal strength.  Now ‘87 is even included in this data and things still are pretty darn good considering that 18.7% drop is in there.  I also show the returns taking out that data point.  

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I noted last week that when the SPX gains 5 months in a row this tends to lead to strong returns going out up to a year.  Today’s study along with that one only confirm my beliefs that this bull market is alive and well.  

TGIF

Remember earlier in the year when Tuesday was the king?  At one point it was up 15 of the first 17 weeks of the year.  Then a funny thing happened, everyone noticed and started talking about how great Tuesday was.  Since then it has been down 7 of the past 11.  

We saw something very similar last year.  The first half of the year Tuesday was extremely strong, then it tapered off the second half of the year.  Now what is interesting is last year Friday was the strongest day the second half of the year and that is happening once again here.

Here are all the days of the year and what they’ve done so far in 2014.

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In fact, Friday is up an incredible 9 days in a row currently.  Going back to 2000, this is now tied for the second longest winning streak.  

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(Update - Friday was higher, so this is now up 10 weeks in a row)

My take is this, think back to the Financial Crisis or any other time we’ve had meaningful weakness the past few years.  Holding over the weekend was the last thing anyone wanted to do.  Friday afternoon would see some vicious sell-offs, as the masses would sell first and ask questions later.  This is the sign of a weak market, well, today we’re seeing the exact opposite.  

Buying Friday is a sign of confidence.  We’ll have a down Friday eventually, but bigger picture I find this type of action encouraging as it shows the bulls are still in control.  If we start seeing some big drops on Fridays, it could be a clue the bears are coming out of hibernation.  

The Streak Without A 1% Move Is Over. Now What?

And it’s over.  The SPX finally had a 1% move today, as it dropped 1.18% over global unrest.  

In the end it was 62 days in a row without a 1% move, which ranked as the 16th longest streak since 1950.  

So what happens after these streaks end you ask?  Looking at the top 15 streaks, here are the returns.  Doesn’t look too bullish to me.  

This got me thinking, today ended with a 1% drop.  Does that matter?  Sure looks like it.  Check out the horrible returns on the other 11 streaks that ended with a 1% drop.  Negative 1, 3, 6, and 12 months later on average.  Whoa.  

Here are all the instances.

So what about if the streak ends with a 1% up day?  Well, only four returns, but much more bullish.

Here are the returns on all four. 

So there you go.  One of the more talked about streaks is finally over and the future returns don’t look too good.  Thanks for reading.  

Interview With Benzinga - Talking Markets And Sentiment

I did an interview with Benzinga yesterday and we touched on a lot of important subjects.  It was a lot of fun and I hope you enjoy it as well.  

A quick summary of things discussed:

  • The CBOE equity-only put/call ratio is signaling a warning
  • Investors intelligence bulls >60% and historically that isn’t a good thing
  • Seasonality is a worry - August and September are the two worst months the past 30 years
  • Why Russell 2000 (RUT) could keep underperforming
  • '14 isn't like '87 because the big trade in the options market isn't nearly as bullish as it was in '87
  • Low volume isn’t bearish, as most volume has moved to futures and options

Be sure to listen to the whole interview below.  

Barry Ritholtz Interviews Jeff Gundlach

I just listened to Barry Ritholtz interview Jeff Gundlach in the very first Masters in Business series at Bloomberg.  If the rest of the interviews are anywhere close to this first one, we’re all in for a treat.

I’m a big fan of using sentiment in my trading, Jeff and Barry had some great discussions on market sentiment - here are a few of my favorites.

  • Jeff noted in March ‘09, the Daily Sentiment Index (DSI) of bulls on the SPX was just 2%.  Compare that to the 93% we saw coming into 2014.  One was a generational buying opportunity, the other was a flat 1Q.
  • 67 of 67 economists coming into 2014 were looking for higher interest rates.  Of course they’ve now gone down and long-term Treasuries are the top performing asset class.
  • Coming into 2014, the DSI on gold was just 3%, with gold and gold shares being left for dead.  Again, gold is now one of the top performing non-traditional assets classes in ‘14. 
  • Barry pointed out that near its peak, 92% of the ownership in Apple (AAPL) was institutional. Who’s left to buy?  
  • In 2012, Schwab put out a research piece that found the two biggest holdings were Apple (AAPL) and Gold (GLD).  This of course was right before both had massive corrections.
  • Jeff added that by the end of 2013, all of the massive inflows to gold funds from 2011 and 2012 were reversed.  So entering 2014, you had removed most of the froth on gold and only strong hands were left holding.
  • Lastly, Jeff gave this awesome summary of how he uses sentiment.  Using sentiment can be dangerous, as sometimes people get in way too early.  And we all know that the synonym for early is wrong.  You have to wait for it to be very, very extreme.  

Be sure to take a listen to the whole interview below.  You won’t be disappointed.  

One Chart That Scares Me Part 2

Back on June 26, I noted the One Chart That Scares Me - the CBOE options equity put/call ratio.  

Below was the chart I used back then.  As I said at the time, as long as it is trending lower, this is bullish.  The big concern was how low things had gotten.  In other words, how potentially complacent options traders had become.  A move higher from these low levels could produce some troubles for the bulls - as this ratio tends to trend inversely with the equity prices.  

So here’s the updated chart.  

This is still the one chart that scares me, but I’ve added the Russell 2000 to things.  Clearly the ratio turned higher from the very low levels, with potentially a lot of room to run higher now.  Turning to the RUT, it just had its worst week in nearly two years - I don’t think this is a coincidence.  Also check out the potential double top in price up around that 1200 area on the RUT.  Not end of world stuff, but some potential cracks in the armor here.  

Pay attention and good luck in your trading.