The question is not why the market sold off today, but why the market jumped yesterday after Trump escalated the trade war. We all know trade wars are good for the stock market, right?
Frankly, the SP500 will not become interesting until it decisively breaks out of it primary price channel. Now that unsustainable parabolic move at the beginning of the year was very interesting. And we note how nicely it re-entered the price channel.
When the SP500 breaks decisively below its lower price channel which also happens to be its 200-day moving average it will get decidedly more interesting. So when will it breakout?
So when will the next break out happen?
… Just kidding. But I would not be surprised to see it trading below the lower price channel later in the Summer or Fall. We are seeing many signs that proceed a bull market tops. Please remember, market tops take time and rarely does a market just roll over and crash without losing momentum first. And this market has momentum.
Unfortunately most of the momentum appears to be due to corporations eating their seed corn by engaging in reckless and massive stock buybacks to pad CEOs cashing out their own personal shares (stock options). When CEOs say buybacks “add value” one wonders to whom.
Please take a close look at the next graph provided by Bank Of America – I want you to understand who is buying this year.
How do we know buybacks are used for CEOs cashing out?
How do I know CEOs are cashing out into these buybacks? Because the Securities Exchange Commission (SEC) says so and frankly I am not a fan of this wall street self-regulating organization. But I do like the chart one of their (soon to be fired) commissioners presented.
Note the increase in CEO (insider) selling within 8-days of their announcing their corporation is going to engage in stock propping buybacks. For some reason this is legal…
…okay we know the reason.
Soon-to-be-fired commissioner Robert Jackson goes on to ponder why this obscene practice is taking so long to correct stating…
But there are no limits on boards and executives using the buyback—and the safe harbor—as an opportunity to cash out. I cannot see why a safe harbor to the securities laws should subsidize this behavior.
Each day when I arrive at work, I’m reminded that the SEC’s mission is to protect investors [cough], ensure a level playing field in our financial markets [COUGH, COUGH], and encourage capital formation… Investors deserve to know when corporate insiders who are claiming to be creating value with a buyback are, in fact, cashing in.
I’ll let you know when he has been fired…
…unless he wrote this as a I-told-you-so for the record since he was just sworn in on 11 January 2018. Not that I am cynical after 20 years of watching wealth extraction and the SEC revolving door with wall street.
Back to the stock market
During 2017 the US dollar was falling against other currencies. This means foreign revenue and profits get a boost from the exchange rate. Thirty-eight percent of the SP500 revenue and about half of its profits are international. So SP500 earnings got a nice boost in 2017. But then almost precisely to the new year, the dollar began to rally and the market finally figured it out in late January.
The TSP S fund has less direct exposure to international revenue and has benefited in 2018 so far as investors adjust allocations. The TSP I fund has been hit by two forces – the slowing rest-of-the-world economy and currency risk as the dollar rallies.
We also see a large divergence with the SP500 starting in May.
While Trump’s tariff war is adding to the pain in international markets, the main culprit is the Federal Reserve’s mission to finally end emergency monetary policies. Note the emergency ended long ago, but the already-rich liked watching stock prices go up and below inflation rate interest rates for speculating and buying real estate.
I labeled the above chart “Early stages” so you do not think this is an imminent crash warning. Remember, market tops take a lot of time (except 1987). I see a little bit of 2014 in today’s indicators… and a little bit of 1987.
Our primary indicator is still in the safe zone which means a huge market draw down is not likely at this time. But it can change quickly. Many of the indicators I follow are trading sideways not to far above support. I can see the potential for a cascading event. Luckily we have a President who does not like to rock the boat.
What about the solid US economy
The solid US economy IS the problem along with rising US deficits! Both require higher interest rates. Rising interest rates are what is putting pressure on international markets and ultimately will hit the US stock market. Currently we see a flight-to-safety into US financial assets which counters the Federal Reserve’s attempt to tighten policy.
This bull market was driven by extreme monetary policy not the economy. If you are following my posts (hint, hint) you know the economy and corporate profits can not catch up to the market’s prices. So we simply can’t treat investing today like it’s our grandfather’s stock market as the financial media wants us to.
Please read The Best TSP Allocation and Strategy if you haven’t already which provides our baseline view of the TSP funds and allocations. There is much more of course. But some basic information beyond the basic portfolio diversification marketing propaganda goes along way.
Invest safe, invest smart.
Michael H. Bond
TSP & Vanguard Smart Investor provides support to serious and reluctant TSP investors with warnings of deep market corrections based on indicators that usually proceed large market draw downs. Our goal is to prevent a transfer of wealth from TSP participates to wall street.