Trends within the markets are often the most reliable indicators of upcoming asset price movements. From Larry Livingston to today’s data driven world, “the trend is your friend” has made and saved many investors money. In this weekly report, Global View Capital Management, along with its research partners, lay out some of the most important market trends for investors.
The Dow Jones Industrial Average (DJIA) has pushed to the top of our market trends rankings, but just missed Dow 20,000. Probably the minute we publish this column, it will reach a nice round number!
As you can see in the chart below, there has been a bit of a plateau. However, the 200 day and 20 day exponential moving averages are still pointed upward. This is a good sign. A bit of early year selling seems to be wearing off and the rally could continue soon.
Is C.R.A.P. Leading the Market?
According to a recent article by William Watts at MarketWatch, low quality stocks have been leading the market:
“C-R-A-P, as defined by Fundstrat’s Tom Lee, stands for computers, resources, American banks and Phone companies. But a blog post by Eric Bush at Gavekal Capital finds that investors have also been honing in on companies with less-than-stellar fundamentals as they’ve bid up stocks, helping push the S&P 500 to a string of records.”
The article also notes that higher debt, lower profit companies have been the leaders. This is concerning to us as it often portends a correction on the horizon as greater fools disappear. The mitigating factor however is likely the lower taxes and less regulation most expect to be passed soon. By many estimates, lower taxes could raise the profitability of corporations by as much as 20% or more. If that’s so, then there is room for the stock market to rally even as ratios improve.
The idea that the Fed will continue to normalize interest rates is still a dominant one. Higher interest rates are good for bank lending and insurance company balance sheets. With that, the financials remain near the perch for our rankings.
Thus far, banks are leading insurance companies. The Dow Jones Total Bank Index is doing better than their Titans 30 Index. This means regional and smaller banks are performing better than the giant banks.
A sustained period of higher rates would benefit insurance companies. However, insurance companies, need to overcome years of low portfolio returns, which will take time.
Even oil is condemned to a long-term decline in use, the community is still the most traded single product in the world. While many are uncertain about the future of the oil price, it is clear that there will be more drilling in the U.S. soon.
The deep water oil decline rate is starting to accelerate which is putting pressure on oil prices at an organic level. As we’ve noted before, there was also a cancellation of over a trillion dollars worth of new deep water development, which means the decline won’t be completely replaced. On top of the likely permanent decline in deep water oil production, OPEC has a short-term oil production cut in place.
The combination of declining deep water oil and temporary OPEC cut means that oil supply and demand will probably balance this year. That means that U.S. shale producers are likely to bring online some of their DUCs over the summer. DUCs are drilled but uncompleted wells that require finishing.
Longer-term U.S. shale and OPEC will be the global swing producers for oil. Neither the U.S. under President Trump, nor OPEC want to leave assets stranded in the ground. That will play out well for oil and gas equipment and services companies which will help both groups continue to take market share from deep water oil.
The energy services index is rising to near the top of our charts as a result of anticipation of what we described above. According to Ned Davis Research, the service and equipment companies are the most levered to rising oil prices.
Market Trends Rankings
Below is our weekly Market Trends Quickview. This report tracks the asset classes that are doing best and worst. Please sign up at the top of the page to receive this report in your email box each Tuesday afternoon.
The money market investment option is still ranking about in the middle of the pack. This means that there are substantial investment opportunities for better gains than the money market. It did rise a bit in the past week, which does signal some skepticism of this market.
When the money market ranks very high, it means that risk has risen and the money market is a more desirable option for risk management purposes. Investment categories that rank below the money market option are generally not advised to be invested in.
This Friday we will publish our annual letter. Please take some time this weekend to come back and read it.
Contact us with any questions or to discuss how our approach to tactical asset allocation can help you control risk and take part in opportunity.