Despite Monday's Retest, April Should be a Strong Month

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April 3, 2018 - by Louis Navellier

 

The S&P 500 has now retested its lows three times and bounced back, but NASDAQ had yet to test its February 8 lows - until yesterday. I know yesterday felt like a stomach-churning roller-coast ride, but all that's happening is that NASDAQ is retesting its February 8 low of 6,777. Several of the leading tech stocks are being hit hard, including most of the FAANG stocks, as well as the "driverless car" problem hitting Tesla and Nvidia (which I'll discuss later on). As a result, NASDAQ may continue to test its lows later this week, but many tech stocks are also set to post strong first-quarter earnings in the upcoming weeks. Until then, the market is not always liquid, so these "air pockets" can emerge. 

One encouraging point is that the market picked up in the last two hours on Monday - that's the opposite of the past two weeks, when the market tended to fall off sharply in the last two hours of the trading day. Yesterday, the Dow was down 750 points around 2:00 pm, but it rallied nearly 300 points in the last two hours.

Looking forward, April is seasonally a very strong month. According to Bespoke Investment Group, April is the strongest month over the last 50 years, with an average 2.04% gain. Over the last 20 years, April has done even better, averaging +2.39%, but in those years April ranks #2 to October, which averaged 2.49%. 

Looking backward, the first quarter was volatile but essentially flat, with the S&P 500 down 1.2% and NASDAQ up 1.0%, but April should look better. As trading volume perks up in April, I expect stocks to surge due to an onslaught of stunning first-quarter sales and earnings announcements, beginning soon!

 

Some Welcome Good News Turns the Market Around

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March 13, 2018 - by Louis Navellier

Last week, the S&P 500 rose 3.54%, the Dow rose 3.25%, and NASDAQ set a new all-time high. There is no doubt that buying pressure by institutional investors in fundamentally superior stocks was behind last week's strength, which bodes well for quarter-ending window dressing in the upcoming weeks.

The Friday jobs report gave the market a big boost, pushing the Dow up 440 points after the Labor Department announced that 313,000 payroll jobs were created in February, substantially above the consensus estimate of 205,000. Also bullish was that December and January's payrolls were revised up by a cumulative 54,000 jobs, so an average of 242,000 jobs have been created in each of the past three months. The labor force participation rose to 63% in February, up from 62.7% as more workers continue to enter the labor force. As a result, the unemployment rate remained at 4.1% for the fifth straight month. 

The news that North Korea would suspend nuclear testing and hold talks on denuclearization with the U.S. is also welcome news; but the hopes of a successful resolution is premature, since previous talks with North Korea have come to nothing. However, President Trump has put the U.S. in a strong negotiating position with its increasing military buildup and sanctions, so there is hope of an eventual successful resolution, even though almost all experts (including President Trump himself) are skeptical.

Top Themes for The Week (02/04/2018)

Source: WALLACHBETH

1. US EQUITY MARKET SELLOFF DYNAMICS

Last week's 4% equity market selloff was accompanied by a spike in interest rates, volatility, and correlation. Those who followed our recommendation to be long VXX until it is solidly above $30 saw a quick 19.1% gain this week and those who positioned for higher SPX implied correlation with reverse dispersion trades or correlation swaps discussed in our 2018 outlook, also saw large gains with 3-month  SPX Top-100 implied correlation going from 22.7% to 32.6% on the week. The graph below shows S&P e-emini futures (ES1) in white, I-Path S&P 500 VIX Short-term futures ETF (VXX) in orange, and the 10-year yield index (TNX) in green over the last 5 days:

 Source: Bloomberg

Source: Bloomberg

Among the characteristics of this selloff were:

  1. Initial complacency, relatively low skew, and volatility selling earlier in the week where VXX was sold down to $28 as S&P seemed to initially stabilize), probably exacerbating the vol super-spike on Friday.  VIX options volume printed at an amazing 4.34mm contracts on Friday with 597k of the Feb 25 calls and 533k of the March 25 calls trading and the VVIX was up 18.7% on the day.  Volatility spreads such as the VXN/VIX and VXXLE/VIX had already closed at wide levels (6.44 and 8.32) going into the week and collapsed to 3.35 and 5.90 given the bigger vol demand for the VIX.   
  2. Bad response to rising interest rates/inflation fears, especially after the FOMC minutes and the higher than expected average hourly earnings Friday. 
  3. We had bad earnings reactions in several high-profile US names (AAPL -4.3%, GOOGL -5.3%, XOM -5.1% on earnings) as well as Europe which offset the positive news from AMZN (+2.9%). 
  4. The Nunes memo that questions the methods the FBI and Justice Department used to get a warrant to wiretap Carter Page was another negative Friday. 
  5. Underperformance of cyclical and high-beta sectors. The 6.5% rout in Energy (XLE) in the past week was an example of an exit from cyclical sectors that included Materials (XLB -5.7%)  and Semiconductors (SMH -4.7%) challenging the consensus view going into this year of positioning for "synchronized global growth." We had made a high conviction call for clients to get out of the high-beta factor two weeks ago and this worked well with SPHB (S&P high beta) underperforming SPLV (S&P low volatility) by another 169 bps on the week in addition to last week's 90 bp underperformance. 
  6. Healthcare had a sharp selloff, with XLV down 5.1% on the week. On Tuesday, Express Scripts, Cigna, Anthem, Mylan, and United Healthcare were all down over 3% after AMZN said it will work with BRK/B and JPM to form a non-profit providing healthcare to their employees with a goal of cutting cost. The escalating cost of healthcare was discussed by Warren Buffett and is making the electorate angry ahead of the mid-term elections, and it can again re-surface as a popular topic. Several healthcare analysts incorrectly defended the stocks that were down but we took the other side this week. If Amazon, for example, offers healthcare to their prime members at a discount and gets even a small percentage to sign up, this could be extremely disruptive and affect healthcare valuations. This week we will get a fair amount of high profile healthcare and biotech earnings with Bristol Myers on Monday, Gilead and Allergan on Tuesday, GlaxoSmithKline, Humana, and Sanofi on Wednesday and Regeneron, Alexion, CVS, and Cardinal Health on Thursday. 
  7. No asset class to hide as bonds, commodities, and real estate sold off with equities with increasing cross-asset correlation adding to the increase in stock correlation to increase portfolio risk. This can become problematic for those relying on diversification instead of explicit hedging for risk reduction in their portfolios, including balanced funds and risk-parity strategies, as well as any advisor implementing a strategy exclusively with long positions in ETFs. Also note that high yield (HYG) was down more in price than intermediate treasuries (IEF). 

S&P futures have broken below their 20-day moving average for the first time since November and broke down below support in the 2,760 area. If there is no bounce on Monday, or a very weak bounce to a lower high,  the next support level to target could be as low as 2,698/2,701 on continuing long liquidation (see chart below).  If there is a bounce in S&P, expect a quick pullback in the VIX/VXX from elevated levels.

 Source: Bloomberg

Source: Bloomberg

 

2. THE VIEW OUTSIDE SPX/US EQUITIES

Friday's average hourly earnings data actually steepened the US Treasury 5s/30s yield curve, which was a break with the prior strong flattening trend. The 19 bp rise in 10 year yields on the week was much higher than anything we could have imagined in any scenario and the bond market seems to have over-reacted to the actual news. We believe FOMC members are still set for a central scenario of three hikes this year and will not over-react to one employment number. Those who follow the Fed know that it has started to seriously look at the VIX and does not want to de-stabilize the system.  Adding to worries, the CBO said last week that the U.S. may run the risk of default without a debt-ceiling increase in the first half of March. T-bills maturing March 8th have had a risk premium priced into them and have yielded more than longer-term bills, creating a "hump" in the short-term yield curve.  

The rise in interest rates has hammered "income" areas of the market such as XLU, VNQ, USMV, and IYR which saw net outflows last week. These, along with other more "safe" and low volatility areas in the US seem better risk/reward here relative to high beta, cyclical, and international exposures. 

Implied yields in short-term cash management strategies such as SPX boxes and rev/cons continue to be attractive with very short times to expiration, especially for those who fear interest rate and credit spread risk and we have been active in this space. For example, the March SPX 1000-point box traded last week at an implied 2.19% annualized yield for a 46-day instrument guaranteed by the OCC compared to a 2.14% yield on 2-year notes and a 1.78% yield on NEAR (I-Shares Short Maturity Bond). 

We view the Nunes memo as another step in the escalation of US political risk. The rout in precious metals after Friday's inflation data seems excessive to us, especially in SLV (-4.6% on the week) and GDX (-5.9%) for which higher political risk, higher volatility, and bad news on bitcoin (CBOE Bitcoin futures -22% this week)  should eventually offset the negative impact of higher real interest rates. In addition to positioning long SLV and GDX in ETFs, buy/writes and OTM call ratio spreads can be considered with the recent uptick in implied volatility on OTM calls in metals and commodities in general.

In Europe, Deutsche Bank (ADR: DB), a name in which we had continuously recommended being long volatility, was down 12.4% after revenues were the lowest in 7 years. Note that 5-day and 20-day historical volatility in DB was 73.9% and 41.3% versus the DB March 18 puts coming into the week at 33.9% implied vol, highlighting the opportunities in US-listed options on ADRs, which we believe will continue.  Despite the DB rout, the SX7E (Banks) is still at the highest relative level versus the SX5E since August, as Italian and Spanish banks have rallied and many have been rotating to sectors benefitting from higher interest rates and not hurt too much by the stronger euro. 

Other European fundamental news has also been negative this week including Siemens which was down over 6% in 2 days. The German DAX which was considered a poster-child of “synchronized global growth” and a large over-weight in many portfolios because of their over-weight to Europe is now down 1% YTD, badly lagging SPX as we expected in our 2018 outlook and EWI and EWP were also down hard after a prolonged rally. 

Other areas in international markets that had been over-weighted and crowed going into 2018 on are also lagging SPY, including a selloff in EEM, down 5.8% on the week and INDA down 7%.

 

www.wallachbeth.com

An Old Adage for an Out-Of-Date Way of Retirement Planning

Maybe you’ve heard this old retirement planning rule of thumb before? Take your age and subtract it from 100. The remaining number represents the percentage you should have invested in equities. Your age then is what you should have in bonds. So if you’re 45, your portfolio should be 65% equities and 45% in fixed income holdings.

As rules of thumb go, it’s not the worst. It’s straightforward and very easy to follow. And, frankly, if an investor has no other guidance, at least it has them thinking about a glide path, whether they know it or not.

The problem is, like many old adages, it’s just that, old, and not truly responsive to the challenges of today’s markets or adequate for the realities of today’s investors. There are many factors that should have us all looking very closely at the efficacy of this dated thinking.

First, people are living longer and working well into their ‘golden years.’ Some are doing so out of a personal desire to keep working and are fortunate to be healthy enough to do so. Others, however, must keep working out of financial necessity to not touch their retirement savings or take Social Security too early.

Second, and this relates to that last group, many investors are playing catch-up in their retirement savings. There are myriad reasons for this, from crippling medical bills or a costly divorce to wiped out portfolios from the Great Recession or just a late start on a savings and investment plan. Regardless of the reason, the reality is that many 50-60 year-olds may need to look at their investments as if they were decades younger.

Third, those fixed-income positions may not be as safe and secure as many believe. We’ve seen just in the past week-plus since the election  of a new U.S. President that the bond market can and does move quickly. And, as our friends at Beaumont Capital Management  (sub-advisor on the Cavalier Tactical Rotation and Global Opportunities funds) have written about, “Bonds Have Bear Markets Too! ” The clouds may be gathering over the bond market now and those closest to retirement age, with the largest portion of their portfolios invested bonds, could be most vulnerable to sizeable losses.

Some advice may be timeless, and useful across the ages. The “Subtract-your-age-from-100” portfolio rule of thumb may not be one of them. Our industry must look at these old ways of thinking and test them against the realities of today’s volatile and uncertain markets, and the often challenging situations of today’s investors.

 

©2018 Cavalier Investments, LLC is a Registered Investment Adviser.
Information and recommendations contained in Cavalier’s market commentaries and writings are of a general nature and are provided solely for the use of Cavalier its clients and prospective clients. This content is not to be reproduced, copied or made available to others without the expressed written consent of Cavalier. These materials reflect the opinion of Cavalier on the date of production and are subject to change at any time without notice. Due to various factors, including changing market conditions or tax laws, the content may no longer be reflective of current opinions or positions. Past performance does not guarantee future results. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. However, Cavalier does not warrant the accuracy of this information. The information provided herein is for information purposes only and does not constitute financial, investment, tax or legal advice. Investment advice can be provided only after the delivery of Cavalier’s Brochure and Brochure Supplement (Form ADV Part 2A&B) and once a properly executed investment advisory agreement has been entered into by the client and Cavalier. All investments are subject to risks. Investments in bonds and bond funds are subject to interest rate, credit and inflation risk.

Are You Prepared for the ‘Great Wealth Transfer’?

Possibly the single largest wealth transfer in history is now under way. And as a result, so is one of the greatest shifts in wealth management.

The Baby Boom Generation has started to pass along its accumulated assets to their children and grandchildren, a process that will continue for, at least, the next few decades. When done, an estimated $30 trillion  in wealth will be transferred from one generation to the next.

With this tremendous movement of assets comes a challenging moment for many financial advisors. The key is earning the loyalty of that next generation, be they Generation X or Millennial heirs, because if recent studies are correct, most children will promptly fire their parents’ advisors.

According to an InvestmentNews survey , 66% of children fire their parents’ financial advisor after they inherit their parents’ wealth.

While the perception is that Gen Xers may be more inclined to drop their parents’ advisors than Millennials, a recent CNBC article  notes that “Millennials most certainly don’t want to use their parents’ financial advisor, due to issues of relatability. Every child wants to rebel a bit.”

Not only are their Baby Boomer clients growing older, but the financial advice industry is aging as well, and many younger heirs and their parents’ advisors may have a hard time relating across the generational divide. On top of relatability issues, many of those heirs may also want to enhance their wealth management experience through a combination of self-directed digital tools, while still having access to human advisors.

Some advisory firms have taken steps to meet this challenge by hiring younger advisors and adding robo-advisor platforms with lower minimums. Others have begun building relationships with the adult children of clients by having them participate in family meetings and helping them work through their own financial issues, like managing student loan debt and buying their first home.

Whether an advisor’s clients represent an older or younger generation, it is important to uncover the expectations of both parents and their adult children. Now is the time for advisors to take on the opportunity to learn more about each generations’ wants, needs, and goals, improve their service to existing clients, and make themselves more attractive to the next generation of clients.

 

 

©2018 Cavalier Investments, LLC is a Registered Investment Adviser.
Information and recommendations contained in Cavalier’s market commentaries and writings are of a general nature and are provided solely for the use of Cavalier its clients and prospective clients. This content is not to be reproduced, copied or made available to others without the expressed written consent of Cavalier. These materials reflect the opinion of Cavalier on the date of production and are subject to change at any time without notice. Due to various factors, including changing market conditions or tax laws, the content may no longer be reflective of current opinions or positions. Past performance does not guarantee future results. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. However, Cavalier does not warrant the accuracy of this information. The information provided herein is for information purposes only and does not constitute financial, investment, tax or legal advice. Investment advice can be provided only after the delivery of Cavalier’s Brochure and Brochure Supplement (Form ADV Part 2A&B) and once a properly executed investment advisory agreement has been entered into by the client and Cavalier. All investments are subject to risks. Investments in bonds and bond funds are subject to interest rate, credit and inflation risk.