Is The Correction Almost Over?

On this week’s show, Karl discusses the continued selling and whether or not the correction is coming to an end.  Also, have corporate profits peaked?

Transcription:

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Hey, everybody. Welcome to The Eggerss Report. It’s your investing playbook. Thanks for joining me. We appreciate it. This is the post-Thanksgiving edition of The Eggerss Report, and contemplated not doing one this weekend. But there’s so much stuff going on in the markets that decided to power through, and we’re going to continue to do this.

If you’d like to get ahold of us, 210-526-0057 is our telephone number. Our website is eggersscapital.com. E-G-G-E-R-S-S Capital dot com. We got a lot of good information on there. In fact, one of the things we put on this week on there was discussing really what everybody is watching. We’ll get into that in just a minute.

Let’s first give you a little rundown on what was moving this week and what the overall markets were doing. Markets got hit this week. Wasn’t a pretty week for the markets. It appears we are at least in this testing the October lows period, and I’ll kind of explain to you what we’re doing and not doing about it and what we’re seeing. But the markets were down almost 4% for the S&P 500. The NASDAQ was down over 4%, almost 4.5%. The Dow Jones down 4.5%. The Qs down 5%, so the biggest tech companies, the FAANG, Facebook, Apple, Amazon, Netflix, Google, really getting hurt this week.

Now, as far as the things that got hit the worst, as you would imagine, oil prices falling almost more than 10 … Oh, pretty much more than 10% this week. That got hit really hard, so because of that, all the energy stocks got hit. Now, oil’s down over 10%, just six or seven on Friday alone. Of course, Thursday, we had Thanksgiving. The markets were closed, and then Friday was a half day. But energy stocks really getting hit, and technology stocks. That’s primarily where it’s focused in on, but we did have also the cryptocurrencies getting hit. Bitcoin was down 20% this week, but pretty much a lot of selling across the board now.

If you look at what did work this week, which wasn’t very much, the airlines. Right? They benefit from lower oil prices, so the airlines, which we still like overall … We sold our airlines ETF, but we do own an airline in our Dividend Plus Portfolio and the home builders, which is interesting. In full disclosure, we own the home builders in our aggressive strategy. If you noticed, there was some bad news on really the home-building front this week, and the home builders managed to eek out gains, which may tell you something. Right? May tell you … When things tend to go up even on bad news, that may tell you it’s done going down. It’s washed out.

Gold managed a little bit of an up week. The gold miners were essentially flat, but here’s what’s interesting. Even bonds barely eked out a gain. Shouldn’t bonds really be rallying right now if things are just falling apart? To me, that’s a little bit of a tell, so let’s continue to watch how bonds react in this environment right now. We also saw overall kind of a mixed bag on commodities. Commodities still look very interesting to us longer term. They were down about 3%, kind of as a basket this week. It’s primarily due to the fact that oil was falling so much.

As far as each day what happened, Monday we came in. The Dow fell about 400 points, but it was interesting because it wasn’t indiscriminate selling. Really, a lot of things were green on the day, and I’m going to cover that in just a minute why that was. Tuesday, though, was a different animal. Tuesday was indiscriminate selling. Start to finish, the Dow Jones went down about 550 points. The FAANG stocks, F-A-A-N-G, continue to get hit. Oil fell 6.5, 7% that day. You saw semis and housing outperform. Then, as I mentioned earlier, cryptocurrencies just got trashed.

Wednesday, we had a nice little bounce-back. Markets were fairly strong. Oil bounced. It wasn’t a real big news flow week overall, but we did get weaker durable goods. So, of course, the bears jumped on that and said, “Aha, see? The economy’s getting worse and worse and worse.” But one thing that we saw, and it didn’t get a lot publicity, was the leading economic indicators continue to rise. That is something that has always, as far back as I can go, led to … When it rolls over, that tells you maybe a recession’s coming. It’s still making new highs, so interesting what’s going on there.

Thursday, the markets were closed, and then Friday, of course, markets tried to … Kind of a mixed bag again. A lot of things were green on the day, but overall, it was a day that pretty much still saw selling as Apple and companies like that … I mean, Apple was a stock that was sitting … It’s now down 26% from its high. Facebook, of course, is sitting down almost 40% from its high. Even Google, big strong Google, down 20% from its high. Netflix down about 39% from its high, and Amazon down 27%.

Here’s the thing though, what’s going on. This is kind of the big picture you need to understand is that we are seeing the unraveling of some of these very expensive stocks that, frankly, have been in some type of bubble. Right? Good companies, but they have not deserved or justified the valuations. We’ve been in a market that if you like the stock, you’ve used the product from the company, then you’ve liked the stock, and you went and bought it. I’m not saying you directly, but that’s what the mentality has been. So, we’ve seen these loved stocks in all different industries but a lot in technology, and that’s starting to come undone.

Now, it’s not completely different than the rest of the market. It’s not as if the rest of the market’s doing fine, and it’s just those stocks going down. A lot of stocks are going down. But those stocks are underperforming a lot of things, but it’s been overall. But I think if you fast-forward a little bit, I think you’re going to continue to see some outperformance. On my Twitter account, which is @karleggerss, I did point out some of those things this week in terms of how gold’s been performing relative to the stock market. If you look at …

Foreign stocks have been really outperforming since the beginning of October. And again, it’s subtle. Okay? It’s been very, very subtle, but it is happening. Even things like commodities, since the middle have September, have outperformed the S&P 500, and gold, as I mentioned, has been one of those that’s been outperforming. So, are we seeing a rotation, or is this temporary? But FAANG stocks are really getting hit hard. Again, they were leading the way for such a long time, and those are really the stocks that, frankly, because of how big they are in the indexes, were kind of carrying the indexes for a while. So, we’ve seen that fall apart.

But you’re noticing some changes. I mean, even if we look at things like small caps, again, they really were underperforming from June all the way until October. They’ve started to kind of at least hold their own relative, again, relative to the Standard & Poor’s 500. So, as we’ve been saying on this podcast for months, the next bear market, if and when, or we should say when it comes, will look very different than the 2008 bear market. It’s going to look, we think, much more similar to the dot com bubble bust cycle, where there were winners and losers, not just losers. So, diversification in what you own’s going to matter quite a bit.

That’s something to potentially look forward to, but here’s what we’re seeing in the markets right now. Now this past week, we posted a blog article called What Everyone’s Watching. It was basically talking about the credit markets. What’s happening is you’re seeing oil sell off dramatically, 35% in a very short amount of time, which has happened in the past, by the way. Oil moves quickly. But every time oil’s kind of sold off like this, people tend to think, hey, we’re going to have some kind of credit situation. So, they look at the credit markets.

Now what they’re looking at is they look at what’s called the yield spreads. They look at treasury bonds, and they take that interest rate from high-yield bonds. That difference tells you if something’s happening or not, and it’s been very low. In other words, if it’s low, that tells you people are buying high-yield bonds. They’re not worried about anything. But if the spread gets really wide, people say, “Hey, there’s something going on.” In 2008, that spread went to about … I think it was 28%. It was crazy. Now we’re sitting at four, and people are saying, “Yeah, but look. It’s starting to pop up.”

In the last two years, spreads have been very tight. Everything’s been calm. It’s starting to tick up. I pointed out on there that we’ve seen spikes in the past, and the yield spread has gone to about 7.5% in 2011 and also in 2015. Those were a little higher spikes. Right now, we’re only at four. Okay? Now, can we get to seven? Sure we could. We don’t know where it’s going to stop, but a trick the fearmongers like to do is they zoom in on a chart. So, if you look at this chart in the last six months or even a year, it looks very dramatic because it’s starting to move. But if you zoom out like I did, and you go all the way from 2002 until now, you’ll notice the yield spreads are just now ticking up a little bit.

But each time they have, here’s the important thing, the stock market has struggled each time. ’08, which was dramatic. Then in 2011, stock market struggled. Right? It was a 20% drop back in 2011. Then in ’14 and ’15, and into ’16 by the way, stock market struggled again. So, it’s no surprise that the stock market is struggling right now. The bears would say, “Watch this because we are starting to see things fall apart in the credit markets, and that’s going to continue to take the stock market lower.” Again, we don’t know the future, but what we do know is that the leading economic index is still making highs, which is really, really important.

People are whining because the Federal Reserve has raised rates. And as we’ve said, the economy, based on the Taylor rule, interest rates should be higher. But it’s always not about what level they should be. It’s about where it’s come from. The fact that rates were so low for so long, any little bit of movement is uncomfortable, and the market is adjusting to that. The Federal Reserve has continued to raise rates. They’re around 2.5% right now. They say they’re going to raise them again in December and maybe four more times next year, and the market’s saying, “We don’t want you to do that.” Okay? Again, it’s not about the level because the economy should be able to withstand higher than 2.5% rates. It’s about where it’s come from, and so the fact that we were so low for 10 years, now that we’re at 2.5%, it feels really high.

But here’s something I saw different this week. If you noticed … Remember, President Trump has been saying, “Hey, Fed, stop raising rates.” Right? Well, we started to see, and I mentioned it I think last Friday, one of the Fed governors came out and said that they’re at neutral, which means hinting at we may be done raising rates pretty soon. Right? Chairman Powell in his comments last couple of weeks has said some things not as direct, but there was little clues, little hints in there that hey may be pausing, getting ready to pause.

So, will they raise rates again in December, and then pause? We’ll see. We haven’t seen any real progress on the trade talks. So, you got this overhang of some deceleration in the markets and the economy where it’s starting to slow a little bit, and you have the fed, who hasn’t given any indication yet, at least proof, that they’re going to stop raising rates. They’ve hinted, but they haven’t had any proof yet. Then, you have things like yield spreads creeping up, and you have oil prices falling. So, of course the stock market’s going to struggle.

But I have good news for you, which is we’re starting to see some positive divergences. What does that mean? What does positive divergences mean? That means the stock market itself has gone to new lows or is close to going to new lows. But if you look at some various indicators, they’re not. Again, we can look at things like, oh, I don’t know, the new lows, right, the highs and the lows and the advanced declines and all those types of things. What we’re seeing is that, to me, we’re getting a little bit of a positive divergence. Essentially, the stock market is pretty much back where it was back in late October, yet a lot of the things I’m watching are not. So, it could be setting up for a double bottom.

More than likely, though, what’s going to happen is we’re going to break to new lows. Fear will spike because we have not seen the volatility index spike way up. That’s the missing ingredient here. Then, we would reverse. Again, look for that reversal day, and/or look for a couple of days that are just like, as I’ve called them, rip-your-face-off rallies where we have two back-to-back days that literally make you feel like what was I worried about? I should’ve been buying everything hand over fist. Right? We haven’t seen that yet.

Now, after the election, we did see a 550 point day, right, up. I mentioned this earlier in the week or last week on the podcast. Two Fridays ago, we did sell in what we call our contingent core, which is something that’s meant to be in the market most of the time. But if we start seeing some things that we don’t like from a technical perspective, that money goes on the sidelines. That money’s been on the sidelines since two Fridays ago which, according to my calendar, would’ve been the 9th of November. So remember, we had the initial selloff. We had the real strong rally. But at the time, I said, “I don’t like some of the things I’m seeing with the quality of the rally,” and it made me believe that we were going to start pulling back. And some of our longer-term indicators were turning negative, so we said, “Hey, that money belongs on the sidelines.” That’s what we have been doing and waiting for an opportunity to get that money back invested, but we’re being patient right now as things continue to settle out.

Now again, and I know some of you listening are saying, “So, what does that mean? If Karl says he sold some out in one of his strategies, is that a strategy that I should have?” Again, some of you have money that’s long-term money. We’re not talking about that money. I mean, if it’s long-term money, it should be in the market. If it is trading money, you’re going to trade this. You’re going to trade that. Could depend day to day, right? But there’s also …

By the way, there’s another chunk of money, which is your safe income oriented money. But the chunk of money I’m talking about is money that is in or out of the market at times. So, it’s kind of, hey, I want to reduce risk a little bit, and I’ve got some indicators to help me do that. That’s the money we’re talking about here. This is not full-blown bear market, get out of everything. This is trying to be opportunistic and get a better entry point. And again, we’re still seeing some positive things happening here. Overall, I mean, again, the economy has been decelerating lately. It’s slowing down. But what’s happening is most everybody is going, “It’s going to continue to get worse. The housing market, autos, all this stuff’s going to just get horrible.”

We just don’t see that happening, but I do think this strong dollar is something you need to watch because the dollar really does drive a lot of the rest of the markets. As the dollar moves, it kind of tells you where some other things are going. The dollar’s been strong, so what does that mean? The dollar’s strong, the Fed raising rates … That’s a tough concoction for earnings, so the bigger the companies … You got these big, large conglomerates based in the US. The strong dollar hurts them, so I think we’re going to see earnings coming down a little bit, the expectations. The market’s pricing that in right now, so some of this really makes sense what’s going on.

Does the economy continue to get worse and worse and not just decelerate but go into a recession? Obviously, it could. We don’t see that, and we still see overall that the bull market that we’ve been in is not over yet, but we are going through a correction. I mean, that’s clear. Whether people call a 9.9% move not a correction and a 10.01 a correction, that’s nonsense. We’re going through a correction, no doubt about it. Things have been really hit in certain areas, so we need to wait and see. But again, I do think there’s some interesting things going on.

Look, watch oil. I commented the other day, I think it could be starting the bottoming process. Now, that may be a bold call. It may not be a bold call because it’s been pounded, so at some point, it’s going to bounce. But watch as it’s going to new lows in the past few days, again, some of these indicators we look at are starting to ease a little bit. At some point, people will start to cover their shorts if they’re short, and it’s probably been a little bit overdone this move. It’s been a pretty nasty move in oil.

All right. I’m going to keep it short this week. I just wanted to give you an update on the markets that, look, we’re looking for a capitulatory … Is that a word? Capitulatory? We’re looking for investors to capitulate, and we are seeing the bears as bearish as they’ve been since the beginning of ’16, which is a good sign. But we haven’t seen the VIX really spike up yet, the volatility index, so watch for that maybe in the next couple days and see if that changes. If it does, we could get to a trading low here over the next few days.

Hey, don’t forget we have our YouTube channel. If you haven’t checked it out, go check it out. It’s youtube.com/karleggerss. On there, you’ll see videos that we do periodically on all kinds of things about helping to reduce your taxes, about social security, about pensions, estate planning. All of that is on there, so let us know what you think. Put a comment on there. Give us a thumbs-up, whatever, and we’re always happy for you to share all of this information. Again, a little shorter show this week, but I did want to get you an update on what we see going on in the markets right now. Have a wonderful rest of your holiday weekend. Take care everybody.

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This show is for entertainment only, and information provided by the host, guest, and this station should not be deemed as advice. Your investment decision should be based on your own specific needs. You should do your own research before you make those decisions. As president and CEO of Eggerss Capital Management, Karl Eggerss may hold securities mentioned in the show for himself and his clients. Just don’t buy or sell anything based on what you get from radio or TV. Use your own judgment or get yourself a trusted advisor.

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