Saturday, March 28, 2020

Record Week on Wall Street

Stocks rallied sharply this week, bouncing off panic-driven lows that had recently saw liquidations in almost all asset classes, save for the dollar and bonds.

The advance/decline line in my stock universe expanded to 149-16.  Only one company was oversold.

The S&P fared well however International stocks outpaced the US as the dollar fell back as the Federal Reserve and US Government continued to add massive amounts of liquidity to maintain the fragile economic system, currently locked down due to the pandemic situation.

In various sectors, Utilities did the best bouncing  11.5%.

The chart of a Utility ETF XLU illustrates the effectiveness of taking on a position at or below a long term upward trending moving average such as the 250 week exponential average.  Another favorite average is the 40-month moving average.

Energy continued to lag however, it also eked out a normally respectable 4.4% gain.

REITs and Corporate Bonds outperformed, illustrating the powerful perceived effects of the stimulus package.  Boeing also rose sharply leading the Dow average.  Boeing rose some 66 points or 20% after dropping from recent dizzying highs exceeding 400 down to below 100.

What a beautiful top that formed prior to the fall.  No surprise here.  Prices are consistent with prices years ago.  I'm not sure that we are out of the woods yet on this so I'm not recommending any buys.

Over much of the past 10 years or so, we've had many V-shaped bottoms in the market.  Some are suggesting that now is the time to buy however I prefer to sit on the sidelines.

Historically, stock prices are still expensive.  I was looking at one really beaten down company as the chart looked compelling.  Then looking at the P/E ratio, I saw that it was at 15, despite the huge fall.  Back in the old days, a 15 PE ratio was a sell.  Will we see stocks fall to bargain prices like with a 4 to 6 PE?  Will we see stocks with price to book value under 1?  Thinking what were historically "cheap" prices, I pulled back in my thoughts of nibbling on stocks, choosing instead to continue building cash and trying to continue acquiring gold and silver.

A main indicator for me to start buying is my Size indicator.  This is my terminology although not technically correct.  I call it Size as it is the size of a standard deviation unit.  I look at it as a price moving away from the trend line at a faster pace than the trend line is expanding.  In other words, it shows the momentum of the price move.  As this indicator continues rising, I don't want to be bucking the trend.  When Size reverses, price will either regress to the trend line or catapult to the opposite extreme.    Size has only reversed on a 4-week time frame.  10, 20 and greater time frames show continued downside momentum.

Some that I follow have long suggested that we will go through some cycle that would include significant deflation, followed by hyper-inflation.  And so I look at what is occurring in the debt markets.  Seems that real estate and other asset prices will only come down as debt gets defaulted on.  Let's face it, over the years, the asset bubbles have been fueled by massive levels of debt.  Once the "house of cards" begins to tumble, one would expect massive liquidations.

I have believed this for so many years now and find myself in the perfect position to take advantage of such a situation.  But will it actually happen?  The massive stimulus package passed yesterday adding $trillions to maintain the system holds off defaults, for the moment.

But there is deflation if we know where to look for it.

Crude oil is at prices not seen in decades.  No one wants to touch it as international oil producers can't come to production agreements to pump up prices.  Gasoline prices fell to under $0.50 during the week.  Of course most never benefit that much as the tax burden on gasoline is now many times the actual price of the product.

I will be spending more time in the days to come looking at oil stocks that might survive.  I had recently purchased some OXY and XOM seeing prices fall to levels that screamed BUY in my world.  But the realities of debt have continued to weigh heavily on some of these companies so to get it right, one needs to delve into the area of actual financial analysis to figure out who has the best chance of coming out of this alive.

I do recall back in 2009, I just couldn't imagine that the banks would survive.  A term came up this week special investment vehicle for use in the current stimulus package.  Back in 2009, I was too aware of the special vehicles banks had to hold their riskiest assets.  Accounting for these entities did not have to be added to their financial statements.  I do believe that these entities still exist and remain the ticking time bomb in the banking system.  Anyway, the point is, bank stocks were at deep discount and I spent more time arguing with proponents of buying bank stocks than actually accumulating any.  What a mistake.  Even Bank of America and Citicorp, two that I was certain would fail, are still hanging in there going strong.  I had even rejected a job offer from Citi at that time fearing that they would fail.

Ha Ha, in the world of Fib retracements, BAC rallied to a .618 retracement level.  Perhaps my thoughts a decade ago will come true.  I always sucked at market timing but my analysis has usually played out correctly.

Another area to look at in the deflation game is commodities.

This is GSCI Commodity Index GSG.  Need to do more research.  Not sure if it is a leveraged vehicle or is a true reflection of commodity prices.  The thought is this, we are in deflationary times and there may be incredible bargains out there if one knows where to look.

Inflation has to be on the horizon.  Even hyper-inflation.

The money supply continues up and is sure to start moving parabolically as the Fed and Government appear to be merging to stave off the disaster that some see as inevitable.  As the old saying goes, a few trillion her, a few trillion there, before you know it, we are talking about real money.

And if doubling the money supply has no effect on the dollar or interest rates, surely stimulus packages of $10 trillion will soon be forthcoming.  We've got to find someplace to go with our dollars.

I welcome any comments, especially by trained economists who might have a professional insight into what is happening.  These are serious times and we must be prepared.

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