Stocks Strong, But So Are the Red Flags

Monday, November 2, 2015

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Stocks Strong, But So Are the Red Flags

By Mike Burnick

(Mike Larson, editor of the Safe Money Report, is on assignment in Europe. Mike Burnick, editor of Martin’s Ultimate Portfolio and Ultimate Stock Options, is filling in.) Market Roundup Dow +165.22 to 17,828.76 S&P +24.69 to 2,104.05 NASDAQ +73.40 to 5,127.15 10-YR Yield +0.04 to 2.19% Gold -$7.40 to $1,134.00 Oil -$0.45 to $47.02 Stocks began the month of November right where they left off October, in rally mode, even as more warning signs emerge. The S&P 500 Index jumped 8.3% in October — the best monthly gain in four years — and the blue-chip index tacked on another 0.94% today. The rally leaves investors scratching their heads about what’s next because the rebound has seemed to defy both gravity and reason, in spite of plenty of red flags signaling caution. First, the economic data has been dreadful. Starting with the disappointing September jobs report that missed expectations by a mile, there has been a long list of negative reports one after another. The foundation of the housing market shook last week with new home sales falling to the lowest level in over a year as consumer confidence missed expectations … Even weak new home sales couldn’t dampen the rise in equities. Factory orders slipped 1.2% last month, continuing a nearly unbroken string of disappointing data on the industrial sector. In fact, all five regional Federal Reserve surveys are sub-zero, signaling broad based contraction … And third-quarter GDP rose at an anemic annual rate of just 1.5%, below expectations and less than half the 3.9% growth rate during the second quarter. Second, corporate profit results have been nothing to cheer about either. Even as stocks zoomed higher last month, 53% of stocks in the S&P 1500 have reported sales falling short of estimates, and profits are on track to decline over 2% year-over-year. What’s worse, negative earnings guidance regarding fourth-quarter prospects is beating positive guidance by more than 2-to-1 this quarter, which tells me the profit picture isn’t about to get better anytime soon. And here’s the latest red flag that’s especially troubling. While the S&P 500 Index is surging higher, the S&P Buyback Index (blue line) struggles below its 200-day moving average and could break below recent lows. Third, a major prop under stock prices for the past several years is slipping: stock buybacks. On Friday, CNBC reported that stocks with the highest buyback ratios have been lagging behind the overall market, as you can see in the graph above, just like small and mid-cap stocks are doing. Look, share buybacks have been a major support for stocks in recent years. In fact, reducing shares outstanding is the main factor holding down P/E ratios, by making up for anemic earnings per share growth. Otherwise, this market would already look richly valued. What’s even more troubling is that similar negative divergences in the performance of the S&P Buyback Index happened twice before: just before the market peaks in 2000 and again in 2007. Yikes! Are you seeing red flags in the market? Or are you optimistic and just riding along with the stock surge? Add your views to the conversation by clicking here. Good investing, Mike Burnick Our Readers Respond Mike Larson will return from Europe tomorrow and review your comments over the past couple of days and respond to as many as possible. Click here to join the conversation on today’s subjects or any others from last week. Other Developments of the Day ● The mystery deepened over the tragic crash of a Russian charter airline over the weekend. All 224 aboard were killed. Company officials ruled out human error or technical issues, which raised the concern over whether terrorism could be blamed in the crash of the plane bound for St. Petersburg from the Egyptian resort of Sharm el-Sheikh. But Metrojet officials also dismissed claims by the Islamic State that it shot down the plane. They said a blurry video supposedly showing a missile strike on the plane appeared to be fake. The black boxes from the plane have been recovered and experts from Russia, France, Germany, Egypt and Ireland were participating in the investigation. The U.S. has offered to help as well. ● Already? Yes, the holiday selling season is getting underway. Amazon said it had launched a “Countdown to Black Friday” sale, with discounts on electronics, video games and other items. “We didn’t want you to wait until the day after Thanksgiving for Black Friday deals, so we kicked off the savings a little early,” Amazon said on its website. “We are counting down to the big day with even more deals, all day, every day.” ● Sprint Corp. (S) became the first U.S. wireless carrier to sign a direct roaming deal with the Telecommunications Company of Cuba (ETECSA), the U.S. company said. No further details about costs and policies were immediately available. The market could be substantial, Sprint said. More than 3 million people from around the world are expected to visit Cuba this year. Within 10 years, that number is forecast to grow to more than 5 million annually. If the crash of the Russian airliner turns out to be from ISIS terrorists, will the Russian military become more involved in battling the group? Do you plan to increase the amount of Christmas shopping you do this year with online sellers? Or will you stick to the old way – browsing and buying in brick-and-mortar shops? Do you think more commerce with Cuba will pay off — both for Americans and Cubans? Share your views with your fellow readers. Jump to the website to add your comments. Best wishes, The Money and Markets team

Mike Burnick, who has over 25 years of professional investment experience, is the editor of the Ultimate Stock Options newsletter and associate editor and trader of Martin’s Ultimate Portfolio. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also held the position of investment research analyst and Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.

The investment strategy and opinions expressed in this article are those of the author’s and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.