Winning?

First off, this post is not about politics so don’t send me your political views. I learned the hard way a long time ago, politics and the markets don’t mix so I do my best to avoid them at all costs. Not only is it a distraction from making money and keeping focus, but also it does nothing to provide any edge. So why on god’s green earth should investors pay it any attention if it is not a path to greater returns?

The markets are the final arbiter of policy and politics and the chart of US Steel, X, is telling a very compelling story. It’s not something we all did not already know or at least surmise. Tariffs, in most situations are counter-productive, especially to the people/organizations they are most trying to help.

Trump announced tariffs on steel imported to the US on March 8, 2018. Since that time, the price of the United States’ largest steel producer has fallen more than 70%.

What is not clear is if US Steel has benefitted in some way from the tariffs … what is very clear is that US Steel’s investors have not. Further proof that politics and the markets don’t mix.

Anything is Possible

I love analogs. I am not talking vinyl albums vs. CD’s but rather the possibility of repetition in current market action based upon a period in the past. A new and interesting example is in the chart below. It’s pretty self-explanatory but in case it doesn’t jump out at you …  the bottom chart is a look at the price movement of the SP500 during the 2006 climb to its all-time high (at that time) and includes part, but not all, of its decline to its 2009 bottom. You can see the failed breakout in July 2007, which was followed by a quick, sharp decline, ending in August. From August’s bottom, the SP rallied to a point just slightly above July’s high and then turned tail, reversing course. That October failed breakout turned out to be the beginning of the long, 15-month 50%+ decline to March 2009’s bottom.

The top line is what the SP500 has done from 2016 to the present. Note the similarities of the initial breakout, followed by a quick, sharp decline and then a rally to new highs. Where we sit today, the SP500 has followed an eerily similar course as 2007. We just fell under May’s breakout level,

 What the chart implies is that if markets repeat (they often do follow similar paths) and if we follow the 2007 analog, we are in for a really tough market in the months ahead.

Unlike analog music, I find market analogs to be something much more interesting to view than listen to.

Near-Term Weakness

The chart of the SP500 index shows US stocks are in a short-term precarious position. After getting rejected at October 2018’s prior highs, the index has fallen 5% from its peak, made a lower high and now lower low and sits in between the 50 and 200-day moving averages. The head and shoulders pattern is just way to obvious, but if it should break the pattern’s neckline (2800) and not find support at the 200 dma, it’s first downside target is T1.

In the short term, investors need to be aware of the potential for a bigger drawdown, while traders should tighten stops and/or have a hedge(s) for the high probability of continued near-term weakness

Divergences

We all know by now divergence is when price and an oscillator are not confirming (making higher highs together). In the example below, you can see back in September of last year the US SP500 index made a higher high (1) while its momentum (upper pane) made a lower high (2). We also know that when divergence occurs, there is a high probability of a pullback/correction. We all know what happened next, the SP500 fell to its December, Christmas eve low, a 20% correction.

Since that low was made, the price of the SP500 has rallied back and made a new, higher high (3). What should have investors concerned is that, price momentum has made a … lower high (4). The same thing that happened last year. Notice how, in both divergence instances, the indexes price was above a bullishly aligned, rising 50 (green line) and 200 (red line) moving average which is indicative of a “strong bull market”.

The higher probability outcome when divergences occur in “strong bull markets” are they turn into just “pullbacks” (buying opportunities) and NOT reversals. So, the fact we are seeing broad market divergence at the same time we are entering normal weak summer seasonality, I expect it’s likely we see another pullback in the coming weeks/months. As such, It’s likely not the end of the bull, rather just a normal (yes, 20% is considered normal) correction.  How big of one, is the $64,000 dollar question. Unfortunately, divergences don’t tell us the magnitude of any potential pullback but rather just of the increased probability of one occurring.

DomiNick's

A little history - Tom Monaghan and his brother, James, purchase "DomiNick's," a pizza store in Ypsilanti, Mich in 1965. They borrowed $900 to buy the store from the previous owner. A year later, James traded his half of the business to Tom for a Volkswagen Beetle. In 1965 Tom renamed the business "Domino's Pizza, Inc". Ten years after that, Amstar Corp., maker of Domino Sugar, instituted a trademark infringement lawsuit against Domino's Pizza. It took another 5 years before the courts finally ruled the pizza maker did not infringe upon the sugar maker’s trademark. The rest, as they say, is history.

What does this have to with investing you might ask. Come on, admit it you’ve seen the those ridiculous headlines about how much money you would have if you would have only put $10k into Google when they went public back in July of 2004. The answer to that question today is something north of $20M (assuming you just bought and held). A nice, tidy some most of us might be able to squeak by on 😊. Well, it just so happens Dominos went public one month earlier than Google did in 2004 and as you can see in the chart below, which the better investment has (so far) turned out to be (blue=Dominos, red=Google)

Dominos would have turned that $10k into $40M+. Outpacing Google’s return by almost 100%, Dominos has been the better investment. Sometimes the best investments come from places you least expect.