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What ‘the inside of the stock market’ is telling us



From Richard Smith, Founder, TradeStops:

Stan Druckenmiller is one of the best money managers of all time. He has a track record of better than 30% compound annual returns, over 30-plus years, with no losing years.

And Druckenmiller accomplished that track record while managing billions — which is harder than with smaller amounts — and made more money in down markets than up markets, which is harder still.

In a sit-down interview with Bloomberg, recorded a week before Christmas 2018, Druckenmiller explained one of his most important rules of thumb: Paying attention to the “inside of the stock market.”

Here is how Druckenmiller explained it in the Bloomberg interview:

If you look inside the stock market, the cyclical elements of the economy — particularly the front-end cyclicals — show a completely different picture than the defensive parts of the stock market.

… So that’s one of the things. The inside of the stock market — which is the best economist I know, and which I’ve used every cycle when I have invested — is saying there’s something not right here.

That may sound obvious now, but in the early weeks of December, it was prescient. So, what did Druckenmiller mean?

In the form of industries and sectors and bellwether companies, the stock market has multiple moving parts.

Some of those parts do better in “defensive” environments — when the economic outlook is negative or worsening — and others do better in healthy environments, when the economic outlook is positive.

When Druckenmiller says “the best economist I know” is the inside of the stock market, his point is that actual price movements are more useful than human predictions for gauging an economic outlook.

If the market is worried, that is a better guide than whether professional economists are worried — and vice versa if the market is upbeat.

Human economists and Wall Street analysts are notorious for falling behind the curve. They are too optimistic at the end of long bull runs, and too pessimistic at bear market bottoms.

Analyst predictions are also vulnerable to cognitive biases, like the desire to stick with herd consensus or please their clients with positive news.

The market itself, on the other hand, doesn’t care what anyone thinks. Price movement is a forecast mechanism that is too big to be manipulated.

A simple way to think about a market forecast — what the inside of the stock market is saying — is whether investors are moving towards cash or away from cash, as determined by what different parts of the market are doing.

At one end of the spectrum, “cash is king.” When investors move toward cash, the market is signaling economic pessimism. If a downturn or a decline in profits is coming, it’s better to have cash than investments that lose value.

At the other end of the spectrum, “cash is trash.” This happens when the desire to invest is high, the economic outlook is healthy, and asset prices are expected to rise.

Because markets and economies move in cycles, and economic conditions go from boom to bust and back again, the desire for cash swings like a pendulum over time. In boom times, cash is trash. In gloomy times, cash is king. Then the pendulum swings back again.

Heading into the new year, cash is in high demand. Over the past nine weeks, the Financial Times reports, U.S. money market funds saw $175 billion worth of inflows — a streak not seen since the 2008 financial crisis.

Four areas of the market that are extremely cash-like, besides money market funds, are U.S. treasuries, gold, gold stocks, and utility stocks.

  • U.S. treasuries are a deeply liquid “safe haven” asset. Investors buy them to reduce exposure to stocks, or if they fear hard times are coming. The value of USTs goes up as interest rates fall.
  • Gold is a kind of crisis insurance. It tends to go up when investors fear the outlook for paper currencies, or the possibility of central banks doing wild or dangerous things.
  • Gold stocks have long-term leverage to the price of gold, which makes them a kind of proxy for cash in scary times. Gold stocks did quite well in the 1930s and generate high returns in both inflationary and deflationary environments.
  • Utilities have a cash-like stream of payments because their main product — electricity to power homes and businesses — is always in steady demand.

All these areas of the market are doing well right now. In recent weeks IEF, the iShares 10-year treasury bond ETF, has been in a near-vertical rise.

At the same time, gold and gold stocks appear to have bottomed out, with gold stocks entering a new bull market trend (as we explained a few weeks ago). While December 2018 was a horrible month for most industries and sectors, it helped gold stocks extend their best rally in a decade or more.

Meanwhile utilities, while taking a hit in recent weeks, have held up far better than the rest of the market. XLU, the SPDR utilities ETF, hit all-time highs in December (while much of the market was tanking) and remains above its September 2018 lows, while many other areas of the market have given back all their 2018 gains and then some. As you can see, of the 11 S&P Sectors, Utilities is the only one that is not in the Stock State Indicator (SSI) Red Zone in the Ideas by TradeSmith Market Health tab.

This is the market telling us that “cash is king” right now — or is well on the way to being such.

The outperformance of cash-like safe haven assets is even easier to see when compared to front-end cyclical areas of the market like autos, transports and industrials.

For example, the First Trust Global Auto Index Fund, symbol CARZ, is an ETF focused on the big global auto makers — names like Toyota, Honda, Daimler, General Motors, Ford, BMW, and so on.

As you can see from the CARZ chart below, the market’s opinion of global autos has been negative for quite some time. The auto outlook is dark and getting darker, a sign of pessimism for global growth expectations.

Transports, industrials, and homebuilders are telling a similar story. The Dow Jones Transportation Average has declined sharply in recent weeks, with bellwethers like FedEx issuing profit warnings.

Price action in bellwether industrial names like Caterpillar (CAT) and Home Depot (HD) has the same message.

And none of this touches on what’s going on with Apple, China, and big tech in general — a discussion for another time (perhaps soon).

In sum, the “inside of the stock market” is the best economist Stanley Druckenmiller knows, and Druckenmiller is one of the best money managers of all time. Right now, the market is forecasting investor gloom and a transition towards cash and cash-like assets.

On the long side, assets like gold, gold stocks and utilities still top the general attractiveness list.


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Charts show steady investor optimism, more upside for stocks




The stock market rally that began 2019 has not yet run its course, even with Tuesday’s Washington-induced surge, CNBC’s Jim Cramer said after consulting with technician Carley Garner.

“The signs suggest that this market can have more upside before the rally exhausts itself,” Cramer recapped on “Mad Money.” “Eventually the market will become too optimistic and stocks will peak, but we’re not there yet.”

Garner, the co-founder of DeCarley Trading and author of Higher Probability Commodity Trading, has an impressive track record. In mid-December, one week before the Christmas Eve collapse and subsequent rebound, she told Cramer that pessimism was peaking and stocks were due for a bounce.

But now that the S&P 500 has gained over 15 percent since those midwinter lows, it’s worth wondering the reverse: what if optimism is approaching its peak?

Lucky for Wall Street, Garner says it’s not. She called attention to CNN’s Fear and Greed index, which uses a variety of inputs to measure what CNN sees as investors’ chief emotional drivers.

Right now, the index sits at 67 out of 100, signaling more greed than fear, but still “a far cry from the extreme levels where you need to start worrying,” Cramer explained. When the major averages peaked going into the fourth quarter of 2018, the index hit 90, and according to Garner, “we usually don’t peak until we hit 90 or above,” he said.

Add to that the fact that only half of professional traders and investors polled for the most recent Consensus Bullish index said they felt bullish; the recent downtrend in the Cboe Volatility Index, which tracks how much investors think stocks will swing in the near future; and that, historically, this is a good time of year for stocks; and Garner sees more momentum ahead.

The S&P 500’s technical charts seem to uphold Garner’s theory. Its weekly chart shows fairly neutral readings for two key indicators: a momentum tracker called the Relative Strength Index and the slow stochastic oscillator, which measures buying and selling pressure.

“Even if the S&P 500 keeps climbing to, say, … 2,800 — up 2 percent from here — Garner doesn’t anticipate either the RSI or the slow stochastic [to] hit extreme overbought levels,” Cramer said, adding that the technician could even see the S&P climbing to 3,000 if it breaks above the 2,800 level.

If Garner is wrong and the S&P heads lower, she said it could trade down to its floor of support at 2,600, and if it breaks below that, fall to 2,400. But that scenario is highly unlikely and, if it happens, would be a buying opportunity, she noted.

The S&P’s monthly chart told a similar story, Cramer said. The index is currently trading at 2,746, between its “hard ceiling” at 3,000 and its “hard floor” of 2,428, he said, which means it’s “basically in equilibrium.”

“To Garner, that means going higher is the path of least resistance for the S&P,” the “Mad Money” host said. “Once the S&P climbs to 2,800, or perhaps … to the mid-2,900s, that’s where Garner expects things will turn south and the pendulum will start swinging in the opposite direction.”

“Remember, … Carley Garner has been dead-right, and the charts, as interpreted by Carley, suggest that this market still has some more upside here,” Cramer continued. “But if we get a few more days like this wild one, she thinks we’ll need to start worrying about irrational exuberance. For now, though, she thinks we are headed higher, and I agree.”

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What Jeff Bezos’ private life means for investors




Daniel Ek, chief executive officer and co-founder of Spotify AB.

Akio Kon | Bloomberg | Getty Images

Daniel Ek, chief executive officer and co-founder of Spotify AB.

Cramer said Wall Street has misread Spotify‘s latest earnings report and guidance, and that misunderstood stocks like these give investors an opportunity to make some money.

he called out stock analysts like Everscore ISI’s Anthony DiClemente who have downgraded the equity over concerns about subscriber growth.

“I think this is lunacy,” said Cramer, who has been bullish on the music streaming platform since it went public last April. “It’s like the market just doesn’t know how to read this company or its quarterly guidance. In my view, Spotify is very much on the right track.”

The stock was rocked after a seemingly mixed quarterly earnings released Wednesday, Cramer said. After Spotify reported lower-than-expected sales, tight cash flow and conservative guidance across the board including subscriber growth, shares sold below $129 at one point in Thursday’s session.

But Cramer noted that the company beat expectations on operating profit and gross margin, which was 120 basis points higher than was asked for.

“I think the sellers were missing a lot of context here and the context is something I like to talk about a lot and it’s called UPOD. They under promise … and then they over deliver,” he argued. “At this point, CEO Daniel Ek and his team have established a track record of giving cautious guidance—under promise—and then beating it—over delivering.”

Spotify’s guidance includes planned investment costs and the company could “become the premier platform for podcasts,” a hot market for hard-to-reach millennials, Cramer said.

Click here to read Cramer’s full take.

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Charts show investors ‘can afford to be cautiously optimistic’




Investors can afford to be “cautiously optimistic” at this point in the stock market’s cycle, CNBC’s Jim Cramer said Tuesday after consulting with chartist Rob Moreno.

Moreno, the technician behind and Cramer’s colleague at, sees a convoluted path ahead for stocks. After calling the December bottom, Moreno noticed that the Nasdaq Composite’s late-2018 decline was about a 24 percent drop from peak to trough.

That’s important because, in a bull market, stocks tend to see “periods of consolidation — pauses in a long-term bull run,” Cramer explained. “To [Moreno], the decline here looks very similar to what we saw from the Nasdaq in 2011, 2015 [and] 2016,” three consolidation periods of recent past.

If he’s right, that could be bad news for the bulls, who may have to wait at least seven months for stocks to break out of their consolidation pattern, during which they tend to trade in a tight range, Cramer warned. But Moreno still sees some opportunity for investors.

“If you believe his thesis about the market — that we’re in a consolidation period, one that will last until September — then you can afford to be … cautiously optimistic right now,” Cramer said on “Mad Money.”

Part of Moreno’s confidence came from his analysis of the S&P 500’s daily chart, which also included the support and resistance levels from its weekly and monthly charts.

Even after a 16 percent rally from its December lows, Moreno saw more room to run for the S&P based on its Relative Strength Index, or RSI, a technical tool that measures price momentum. The RSI, he explained, hasn’t yet signaled that the S&P is overbought, and the Chaikin Money Flow, which tracks buying and selling pressure, shows big money pouring in.

“Moreno thinks that these new buyers are the kind of investors who won’t be panicked out of their positions by short-term volatility,” Cramer said, adding that the technician sees about 3.5 percent more upside for the S&P before it hits its ceiling of resistance at 2,818.

But if the S&P manages to trade above its ceiling of resistance and return to its October highs, Moreno expects a “synchronized reversal” in the stock market that could crush the major averages, the “Mad Money” host warned.

“At least until September, Moreno says you should be a seller if the averages approach their October highs — that’s around 2,930 for the S&P 500,” Cramer said. “Eventually he expects a breakout from these levels, but it won’t happen any time soon.”

So, what’s the right move for investors? According to Moreno, not all is lost. He still expects to see strong gains — a roughly 7.5 percent move — before the current rally peters out. But he doesn’t want buyers to get too trigger-happy, especially considering the months of sideways trading he’s predicting for 2019.

“Until [September], he expects the market to trade in a fairly wide range, with the S&P bouncing between 2,350 and 2,930. For now, we’re headed higher, but he says you should use these key levels as entry and exit points until the consolidation pattern finally comes to an end later this year and the averages resume their long march higher,” Cramer said. “Even if he’s right and this rally will lose its steam after another 7.5 percent gain, that’s still pretty good, but I am very wary and it makes me want to do some selling after this run.”

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