Overbought to Oversold
By Vaughn Woods
After more than two months of an overbought setting the overbought/oversold oscillator is back to oversold territory by a pinch. This scenario may become more pronounced though at this time volatility measures are very tame.
With the markets somewhat exhausted on the buy side it is easy to predict a short-term correction of 5% before moving forward. A correction of greater magnitude could ensue if investors are given sufficient evidence to believe a U.S.-China trade deal is all but dead. However, those betting on such a scenario are just as likely to be wrong-thus the shorts are very quiet just now. Moreover, if they do become emboldened the Federal Reserve and the President are likely to talk the market back up.
In fact, our current Federal Reserve/U.S. President combination may be the most stock-market friendly twosome of all time. I state my case on the speed with which the Federal Reserve Chairman changed course after the December sell off. It may be no coincidence that President Trumps’ cries for lower interest rates, followed by a “dinner” with Mr. Jerome Powell, Federal Reserve Chairman, brought about a quick softening in the hawkish rhetoric coming from the Fed.
Others will point to the Fed’s change in rhetoric as nothing more than softer data coming out of the U.S., Europe, and China. This view however is unsettling because it suggests the President had better data earlier than the Federal Reserve. The good news for the world is that our U.S. economic system is much more responsive, effective, and resilient than Europe’s only tool for righting a possible recession, that is, the European Central Bank, which has guided the European economy to three years of stagnation.
In addition, this week the head of the European Central Bank, Mario Draghi, announced still more bond buying in a program we know as quantitative easing. This plan has forced the Euro lower, interest rates lower and European saving rates further into negative territory before accounting for taxes and inflation; both of which are as real in Europe as here in the U.S.
A broader picture tells the comparison story. Since the lows of the global financial crisis which bottomed both in the U.S. and Europe in March of 2009 stocks are up over 300% in the United States as measured by the S&P 500 vs only some 64% as measured by the Euro Stoxx 50.
So is this a good time to enter the European market? Well, for the investor seeking dividend income and low capital appreciation Europe looks relatively cheap. To illustrate, the SPY (U.S. based S&P 500 Index; an ETF) sports a dividend of almost 2% per annum. In contrast, the Euro Stoxx 50 ETF (FEZ) provides a yield of some 3.2% as of this writing. In addition, some analysts believe an end to the U.S. vs. China trade war may help Europe more than the U.S.
For these reasons our portfolio posturing remains respectful of European and Latin American value while overweighting the U.S. and vigilant to all downside risk using gold and cash as hedges.
Thank you for your continued faith and trust in me, Robert, and staff as we daily monitor and manage your investment portfolio. We are at a point in this economic expansion (now year 11) in which questions of maturity can take on more importance. Nevertheless, recall that the longest U.S. economic expansion prior was 9 years in length and as such some people decided to exit the U.S. stock market in 2017. As a reminder, in March of 2017 the S&P 500 stood at some 2380. As of this writing the same index stands at 2731. This does not include dividends which have averaged over 2 percent per annum. Another factor that clearly has longer term economic expansion implications is the recent tax cut and the fed’s decision to stop raising interest rates. Both of these policy measures may extend this economic cycle especially if a trade agreement can be reached with China. We may all know more shortly, possibly as early as late March, if a provision including intellectual property violations can be agreed upon as President Donald Trump and President Xi Jinping are planning to meet.
Strangely if an agreement can be reached between two of the world’s largest economies a period of confidence building among investors can ultimately lead to euphoria. It is euphoria that kills economic expansions. Whereas just now skepticism is the mood on the street and skepticism provides a tension that holds prices from becoming too overbought or oversold.
Vaughn Woods, CFP,MBA
Vaughn Woods Financial Group
2226 Avenida De La Playa
La Jolla, CA 92037
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided her is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA00232.