Five Charts to Start the Week
"It's a Bull Market, You Know"
Some quick reminders before we get into it since there are more of you reading this now than there were last week. First, this is my diary on the market. It is in no way shape or form investment advice. These are the conversations that I am having with myself as I take in all that is happening in the market while trying to square it with the prevailing narratives and fundamentals. I do this to give some clarity to my thoughts. If you like what you are reading, please consider passing it along to others who might like it as well.
Next, if you have an opinion, I would love to hear it, especially if you disagree with something that I am thinking. I promise you that after starting in this business as a summer intern at the New York Stock Exchange when I was 16 years old, I have extremely thick skin.
Finally, nothing I write here should be considered investment advice. It is highly likely that I have a different timeframe and risk profile than you do.
Every third Sunday I write our weekly note for clients of Chaikin Analytics where I run through and opine on all that I am seeing in the market across asset classes. This week, I kept thinking about the all the data points that would have served as a perfect excuse for the market to go lower. COVID remains a concern with many “experts” expressing the view, over the past few weeks, that we could be entering a stage that could actually be worse than the initial weeks of the pandemic. Then we heard from Pfizer and how they are expecting to ship one half the the doses that they had anticipated in 2020. Finally, on Friday, we learned that the US economy added 245,000 jobs in the month of November, far fewer than had been estimated. With that we also found out that the unemployment rate moved lower only because there was an increase in the number of people who have just stopped looking for a new job.
Then I thought about one of the books that I mentioned in these pages last week and I wrote the following paragraph:
“Well, it’s a bull market, you know.” That line comes from the great book Reminiscences of a Stock Operator and is spoken over and over again by a character named Partridge who is described as a legend of the office. He is an older gentleman with years of experience which taught him to not fight the tape. Essentially to swim with the prevailing tide. We know that COVID cases are on the rise again. We know, according to Pfizer, that getting a large amount of the vaccine to market may pose some logistical and manufacturing hurdles. We also know that right now, sentiment is on the extreme side of bullish. Yet the equity markets continue to move higher. There will always be a reason or reasons for concern that the market is about to turn, but zooming out, there are also many reasons to think that it isn’t. For now, the trend is to the upside. It is confirmed by increasing participation across market caps, styles and geographies (this is not just a trend in the US, our note from November 15th highlighted improving trends across the globe). Rather than guess at when the bear case is going to play out, we prefer a strategy of riding the upside until there is evidence in the market, not the news, that it is coming to an end because…it’s a bull market, you know.
Investors, especially those with a view that extends beyond the next few months, are looking past the near-term headwinds. It’s not that they are being ignored. It is simply a matter of seeing the world as being better six months from now than it is today. This is a highly debatable topic but I am willing to bet that most people’s views on the “state of things” are more a function of their emotional reactions to what they are hearing / seeing now…investors are forward looking.
This is actually extremely hard for me. I am skeptic by nature and I tend to have a bearish leaning. I have my opinion on why this is and it is largely a function of the early experiences in my career. I started working full time at the New York Stock Exchange two months before the popping of the internet bubble and the major bear market that followed. Then there were the 9/11 attacks only a few blocks away. Then the accounting scandals that brought down companies such as Enron and WorldCom. This all happened within the first two years of my career. So, I developed a generally bearish tilt on the world. Add in the fact that my first big winning trade was actually on the short side (betting that something would go down in price) and I was imprinted.
This is why I turned to technical analysis and it is the first part of building my views. Price does not lie. Price has never had to be restated like sometimes happens to company’s financial reports. Think about how many times the GDP report is revised before we have a “final” number. This happens with a lot of other economic data as well. Focusing on price first lets me see what is, rather than what my bearish bias wants to believe. From there I can turn to the fundamental side of the process to find the best businesses and themes to own.
And, as I go through hundreds of weekly charts over the weekend, I have no choice but to agree with Mr. Partridge. “It’s a bull market, you know.” Here are five charts that I think support my view:
The Value Line Arithmetic Index is a measure of how the average stock in the market is performing. No one name, like Apple or Google has an outsized influence on this index. After going nowhere for more than two years (red box) it just recently broke to new highs.
The Van Eck Vectors Semiconductors ETF (SMH) is actually accelerating to the upside. I talk about semis a lot. So much so, that I think Dara is learning about them simply through osmosis. I have written about how the amount of semiconductor content that touches our lives is only going increase. If semis are doing well, chances are, so is the market. At this point the only knock is how stretched they are to the upside. They could use a short rest.
The iShares Core Dividend Growth ETF (DGRO) seeks to track the investment results of an index composed of U.S. equities with a history of consistently growing dividends. If investors have confidence that companies are going to continue in crease their payout to shareholders, that’s likely a bullish signal. DGRO close the week at a new, all-time high.
Fallen angel high yield bonds are part of the overall high yield universe but unique in that they were originally issued with investment grade ratings and later downgraded to non-investment grade, or high yield. The fact that this fund is trading at all-time highs, signals a lack of stress in the credit markets currently. Another name for high-yield bonds is junk bonds. Credits in companies which are at a higher risk of not paying back the money they borrow. Signs of trouble tend to show up in the high yield market first. The ETF that tracks these fallen angels is the Van Eck Fallen Angels High Yield Bond ETF (ANGL), and is trading at an all-time high.
Finally, the US dollar is breaking down. The dollar is a haven asset. I have been of the view that a new bull market is just beginning and that COVID marked the climactic end of a two plus year bear market for most risk assets. The dollar bottomed in early 2018 and made a high right at the start of the start of the pandemic (green box). Since then the US has printed an exorbitant amount of money. With that, the dollar has weakened since March and is on the verge of visiting those 2018 lows. If investors are willing to flee the safety of dollars, it likely means they see better opportunities in other assets. That’s ultimately bullish for those willing to take on risk.
Charts like these make it hard for the skeptic in me to win the debate that is constantly raging in my head.