Not Just the Fed’s Balance Sheet That’s Changing

(Excerpt's from AAII’s Charles Rotblut journal Sept. 21 2017 on the results of the September Fed meeting.)

Federal Open Market Committee (FOMC) announced its plan to unwind its balance sheet. Starting next month, the Federal Reserve will stop reinvesting $6 billion of proceeds from maturing Treasury securities and $4 billion proceeds from maturing agency debt and agency mortgage-backed securities. The dollar amounts will be gradually rising each month, subject to adjustments as warranted. By not reinvesting the proceeds of maturing bonds, the central bank is effectively reducing demand for those bonds. The effect of this on the credit market will be the subject of economic studies and textbooks for decades to come. Fed officials are going to have to be sensitive to any ripples in the credit markets and adjust accordingly. To predict how things will turn out is to make a big guess. It’s an uncertainty, but it’s a well-telegraphed uncertainty and so far the bond markets have not shown signs of fear about it.

The FOMC also updated its forecasts for economic growth, keeping the annual long-term projection for GDP expansion at 1.8%. Interest rates were left unchanged and expectations for how rates will be raised next year trended downward. 

All of this is occurring as Fed Chair Janet Yellen’s term will expire in February. President Trump will have four Federal Reserve Board vacancies to fill once vice chair Stanley Fischer steps down in October. The sheer number of personnel changes could alter future monetary policy from what it would have been. Yellen’s approach has been dovish.  Whether the president’s appointees to the Federal Reserve will be comparatively more hawkish or dovish remains to be seen. 

Trump has relied heavily on borrowing. This would suggest a preference to keeping interest rates low. As long as inflation remains at tame levels, the economic data would make it hard to justify a shift to a significantly more hawkish monetary stance.

A Couple of Worthy News Sites

 

In addition to the obvious business news sites that investors seek out for stock information like Google Finance, Yahoo Finance, Reuter’s and Bloomberg, there are also smaller less known sites that offer very good insight into stocks.  Here are two that I like. 

The Wellesleys News

http://thewellesleysnews.com/ 

Screen shot above shows the home page.  They update frequently during the day and categorize their stories according to the menu you see in black across the top of the page for Business, Consensus &  Forecast, Sector Snapshot, Trending Equities, and Top Yields.  Each section gives you a list of articles related to that topic.  This is a good place to check on watch list stocks as well as keeping current on the companies in your active portfolio.

The Cerbat Gem

Market News and Analysis

hhttps://www.thecerbatgem.com/category/headlines

Screen shot above shows the home screen.  Note the menu across the top just underneath the logo.  That separates articles by category much like Wellesley site.  I especially like the M&A section and Analysts’ Updates.  Both of these sites are worthy of bookmark space.  Another thing these sites are useful for is discovering good companies that may not turn up on other screens that you run to select stocks to research.

3/25/17 Barron’s Picks and Pans

(BZ Newswire) --

This weekend's Barron's takes a look at a long-suffering media company poised for a turnaround.

Other featured articles offer the prospects for a solar power outfit with a strong balance sheet and a lender in a sweet spot of high growth.

The outlooks for a chip maker riding a tailwind and a consumer electronics giant with a respectable dividend yield are also examined.

"Viacom Flips the Script: Stock Has 40% Upside" by Robin Goldwyn Blumenthal makes the case that long-suffering media company Viacom, Inc. (NASDAQ: VIAB) is tracking a new course toward a turnaround. See how a new CEO is shaking things up, shifting priorities and reinvesting in the company. The stock has risen since he took up the reins but still looks cheap, according to Barron's.

In "Dark Clouds May Be Lifting for SolarEdge," Andrew Bary suggests that shares of Solaredge Technologies Inc (NASDAQ: SEDG), which makes optimizers and inverters, could rise by 40 percent or more in the next year. See why Barron's thinks that, with its strong balance sheet, the solar power outfit offers staying power until the industry comes back in vogue.

Jack Willoughby's "Why Silicon Valley Bank's Stock Could Rise 25%" takes a look at whether this lender to venture capitalists and startups is headed into a sweet spot of high growth. Discover why Barron's believes SVB Financial Group (NYSE: SIVB) is poised for several years of rapid earnings growth that dwarfs expectations for most other banks.  

While the growth cycle at Micron Technology, Inc. (NASDAQ: MU) could be extended, it won't last forever, according to "Micron, Up 170%, Could Move Higher. But Be Wary" by Tiernan Ray. The current market conditions for Micron are proving extraordinarily favorable, though the CEO announced his retirement last month and the company has yet to name a successor.

In Johanna Bennett's "Apple iPhone, Dividend Buzz Can Keep Stock Hot," see why one key analysts says that even with Apple Inc. (NASDAQ: AAPL) shares near an all-time high, investors should expect another 20 percent gain. While Apple is trading near its highest price-to-earnings multiple in five years, there is much to like, including a respectable dividend yield.

Keep up with all the latest breaking news and trading ideas by following Benzinga on Twitter.

Arnold Van Den Berg: "Experiential Wisdom on Value Investing" | Talks at...

Arnold gives a very interesting talk on his experience as a value investor and as the talk goes on he provides some very good information on current status of the Market, how to look at one indicator of market tops and market bottoms as well as 2 areas of opportunity he sees in today's market.  Worth the hour it takes to listen

Market Forecast Study TD Ameritrade

Below is an article copied from TD Ameritrade’s Ticker Tape that is a newsletter added to daily by TD Ameritrade for it’s clients.  It illustrates a very useful study that can be added to your charts in the Think or Swim platform.  Yes, you must have a TD Ameritrade account to make use of this platform.  Although, paper traders can open a TD account and do not have to fund the account (you can have a zero balance) and still download the platform and open it in “Paper Money” and practice trading.  You can add to your learning of how this works in real time by catching David’s daily Market Forecast video on YouTube.  You do not need to have a TD Ameritrade account to view these daily recaps.  Here’s the article:

Market Forecast: Stocks Break Winning Streak with Tight Range

By David Settle, Curriculum Development Manager, Investools

September 9, 2016

After closing higher for five straight months, the S&P 500 finished August with one of its quietest months ever. This is not typical for the last month of the summer where volatility tends to increase.

Last year in August 2015, the S&P 500 suffered a five-day losing streak that totaled 229 points, or a 10.9% drop. In comparison, the broad market index stayed in a 46-point range all month this August, which is roughly just 2% of the index’s current value.

Needless to say, it’s been a quiet August that has investors looking ahead to presidential elections, potential Fed rate hikes, and a favorite football team’s kickoff.

Let’s break down the market posture using the Market Forecast technical indicator.

S&P 500: Calm Before the Storm?

The first thing that jumps out from the S&P 500’s Market Forecast charts (see figure 1) is its elevated Market Sentiment (orange). If you look back over the past year, stocks tended to get choppier when the long-term sentiment indicator rose above the 80^th percentile. In fact, notice the intermediate line (green) has already fallen late this month as stocks consolidated in a tight range. Again, you’ll notice periods earlier this year where the intermediate line fluctuated up and down more with Market Sentiment at current levels, rather than maintain a persistent higher position above 80.

  

FIGURE 1: HIGH MARKET SENTIMENT LEVELS.

High levels in Market Sentiment can lead to more up and down moves in the Intermediate line. Image source: the thinkorswim® platform by TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results

What Do These Lines Mean?

As you can see in the Market Forecast chart, there are multiple lines that oscillate within the same parameters but at different speeds. This is one of the benefits of using this particular technical indicator. It provides investors with a multi-timeframe look at the same index at the same time, without having to change the chart settings and flip back and forth. Not only does this help you save time, but it also provides a glimpse at how the lines interact with each other. As most of you may be new to the Market Forecast, let’s chat about what some of these lines mean.

The momentum line (red) is the fastest of the four lines. It can fluctuate day to day. Because of this, it typically doesn’t provide good opportunities for divergences or other common technical patterns. But, since its calculations incorporate the relative size of the day’s range compared to previous days, the momentum line does have value when you see extreme spikes higher or lower, especially when these spikes go against the prevailing trend.

The near-term line (blue) is the second short-term sentiment indicator. It can produce new lows between 1-3 weeks apart. You can see how this could be helpful when looking for short-term bounce opportunities. You’ll also notice the near-term line’s lows in bullish trends tend to form above the 20^th percentile. And, its peaks form at the higher end of the chart. The opposite is true in bearish trends. This can be helpful when looking for signs that trends may be changing. In fact, the near-term line dropped below the 20^th percentile for the first time at the end of August (see figure 2). Its subsequent peak failed to get back to the top of the chart, which confirms the intermediate (green) trend change to bearish for the first time since late June.

 

FIGURE 2: NEAR-TERM LINE SHOWS WEAKNESS.

The Near-term line has been showing bullish highs and lows over the past two months until the end of August. Image source: the thinkorswim® platform by TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

After five straight months of positive returns, the S&P 500 took a historic breather during August. Over the past few years, stocks have been choppy after the end of summer, before riding a bullish wave into year-end. You can use the Market Forecast technical indicator to help determine a posture for stocks and other asset classes and decide how to position a portfolio accordingly. In upcoming monthly articles, I’ll show you how. In the meantime, check out my daily educational videos on how to apply the Market Forecast by clicking the link below.

3 Items to look for in a Stock

This is an excerpt from an article on Motley Fool regarding Google stock but the 3 items in the list below are valid and can be used when looking for very strong companies.  I have not worked out a stock screen yet to see if I can incorporate these 3 items into a screen but will be looking to do so.  I especially need to look at item 3 below to better understand what that means.

The Motley Fool | 2016-08-13T18:04:00Z

No book has had a more profound impact on my investing than Nassim Taleb's Anti fragile. It argues that the entire world can be broken into three categories:

• The Fragile: things that break as soon as stress is applied -- like a glass falling off of a table.
• The Robust: things that stay absolutely the same under stress -- a rubber ball falling from the same table.
• The Anti fragile:things that become more powerful when stressors are introduced -- think of how your bone heals back stronger than before after it's broken.

We want our portfolios to be as anti fragile as possible. But we often fail at this. That's largely because we are suckers for the narrative bias: We tell ourselves a story about a company: how its sales will grow and its products will revolutionize the world, and we invest accordingly.
I created a compelling narrative for the first stock I ever wrote about for The Fool six years ago. Since then, that stock has trailed the market by a whopping 172 percentage points!
By viewing the investing world through an "anti fragile" lens, I eliminate the narrative bias by focusing on three attributes:

1. Lots of cash and lots of customers: cash gives companies options during downturns -- outspending rivals, buying back stock, or acquisitions. Debt does the opposite. And by having lots of customers, a company doesn't run the risk of losing an outsized portion of business if a client walks away.
2. Management with skin in the game: When the people running the company have their own skin in the game -- via shares of the company's stock -- their long-term interests are aligned with ours. That benefit compounds when founders are running the company, as they often view it as a literal extension of themselves.
3. A barbell approach:This means having two sides to your strategy -- on one hand you have a business segment that has a wide moat. On the other hand, you take lots of low-probability, low-risk, high-reward bets -- a trait otherwise known as "optionality".

What is the Top Down Style of Investing?

The idea behind top down investing is that in the S&P 500 it is divided into sectors and within each sector is a number of industries.  As the economy moves through it’s different cycles between expansion and contraction, certain industries become more attractive than others and they tend to attract more investors (more money flowing) into them.  This tends to make that sector outperform the S&P benchmark while those sectors out of favor will underperform the benchmark. 

The screen shot above is from my think or swim platform that allows me to look at the sectors by performance compared to SPY (S&P benchmark) Notice the columns on the right.  This one is sorted by 10 day performance and shows currently (mid July 2016) that Biotech (an industry) is out performing the SPY by about 3% in the past 10 trading days while Utilities (sector) is underperforming SPY by around 2%.  I use 10 day performance for short term trend trades and 3 month for intermediate term trends

The concept I learned is the saying that “a rising tide floats all boats” which means that most stocks within an outperforming industry will outperform the S&P.  This is usually indicated on the charts by an uptrend.  The length of the uptrend to look at depends on the type of investing you are doing.  If you are a short term investor the uptrend does not have to be months long.  If you are an intermediate term investor you want the uptrend to at least show a small rise in the 30 day moving average and pointing up.  It’s not an exact science and this method is only intended to give an investor an “edge” in picking up trending stocks.

So, with that in mind, in order to find stocks that meet top down style we can run a screen.  FinViz at http://finviz.com has a pretty decent free screener.  See the screen shot below.

You do not need to register with them to run screens but do need to register to save them.  It is free to register and is well worth the time to do so.  To save a screen after you have set it up, just click the down arrow in “My Presets” (upper left corner) and give it a name.  You can adjust this screen to suit yourself but the ones I use are highlighted in yellow.  I like a stock to be over $1 in price with an analyst recommendation of buy or better.  I also like average volume over 200,000 to insure I can get in and out of a trade quickly.  In order for a growth stock to grow, earnings need to be improving so I look for those that grew earnings by at least 10% this year and projected earnings growth of 10% next year.  Additional test on earnings is improving earnings and sales quarter to quarter.  I like to add the current ratio of over 1.5 because I like to know that a company can cover it’s current liabilities with it’s current assets.   I save this screen setup with the name of “TopDownInvesting(addSector)”  

With this criteria mentioned above, today I am getting 172 results.  But, I’m looking for strong sectors or industries.  So I need to add a criteria in one or both of the items marked in red in the above screenshot.   Materials is one of the strong sectors over the past 10 days so by changing the sector to Basic Materials (screenshot below) I get 7 results.

I can easily switch from one sector to the next to get the stronger stocks in any particular industry.  Adjusting any of the criteria up or down will of course change the number of results.  For example, if I changed Current Ratio to “Any”  I would get 13 results.  Any screener you use though is just that.  It’s a screener.  It does not say “buy me”.  You must look at and evaluate each stock before making a decision.