On this week’s show, Karl explains how the stock market finally broke out of a trading range but did so without the usual enthusiasm. Is that a problem?
Karl Eggerss: Hey, welcome to the show everybody. Thank you for joining me. My name is Karl Eggerss, this is The Eggerss Report, 210-526-0057 is our telephone number. Our website is Eggersscapital.com E-G-G-E-R-S-S capital.com. Lot of information on there, and I do want to point you to a place on there that will help you out. It’s completely free. If you go to Eggersscapital.com there are three big, round buttons right there. One of them says Financial Planning. If you click on that, what you’re going to see is a free Track Your Finances Tool. What you do is you sign up, you can link your accounts or you can manually put them in, very, very safe. Doesn’t show transactions or anything like that but it does give you a snapshot. If you link your banks or credit cards, things like that, it will actually look back for three months and break down where you’re spending your money.
So it’s very, very helpful. So you can click on that, it’s totally free. You can set goals, it’s got a budget, all kinds of interesting things. So make sure you check that out. Again it’s Eggersscapital.com, and you can just go to Eggersscapital.com/tool and it’ll take you straight there. Of course, you’ve got the blog on there, we have all the podcasts, et cetera. We are on Facebook, Eggerss Capital Management. We’re on Instagram, if you like pictures and charts, Eggerss Capital Management. We’re on Twitter, it’s just my name, Karl Eggerss, and @etfcharts. What else are we on? Oh, of course we’re on, for the podcast we’re on Spotify, we’re on iTunes and other places. So, make sure you go look at that information, and if you need help from us, again 210-526-0057.
Well, the big question right now is, are we out of the woods? Right? Are we out of the woods? Because as I posted some pictures this week, the Dow Jones, the S&P, the Russell 2000, a lot of these things are breaking out, and they’re not at new highs, but they are breaking out from their downtrend. Now, what does that mean? Well, you know we made all-time highs in January. In late January we started with this hotter than expected, or better than expected jobs report and that got people thinking. Maybe this Federal Reserve is going to raise rates like they say they’re going to continue to do. All of a sudden everybody woke up and said, “Maybe that’s not such a good thing.”
The stock market had a very violent, quick sell-off. In fact, a lot of it was due to some of these volatility based investments, and ETFs and products. The market really sold-off 12% in just a few trading sessions. Then it got back about 75% of that loss in early February only to start falling back down again. In early April, lo and behold, it tests the 200-day moving average, and it tests the February lows, and it did it successfully. Guess what? After the April rally, it failed again, and lo and behold you start looking at the charts and you’re going, “Wait a second, every time we rally, it’s not as strong as the previous one,” and now what we have is a situation with lower highs. Every time it rallies, that high is lower than the previous high from a few weeks ago, and you have this pattern.
Everybody’s waiting, “Is this is going to breakdown or is it going to break up?” So far this week, it broke up, or out as they call it, and that is a good thing. Is it clear? Are we ready to just say, “Okay, we’re ready to go, the worst is behind us.” The answer is, “Maybe, maybe we are.” The reason I’m not giving you definitive answers, because some of my longer term indicators are still flashing a yellow sign if you will. We’re still heavily invested in stocks, we have not changed our posture in a meaningful manner, but what we did do was, during the April rally, we did lighten up a bit on some things. We’ve been watching this, wanting it to really decide, investors to decide, one way or the other, which way this market was going.
Things are settling down, I mean the worst performing asset this week was pretty much the volatility index. Again, if you’re sitting there looking, saying, “What wasn’t working this week?” Well, volatility. Volatility coming down is one indicator we look at, and we got some indicators set up that are calibrated in such a way where volatility needs to go down, and stay down for awhile, and it’s heading that direction. All things being equal, we could get the green light again pretty soon. Now, warning here, this breakout that we saw, wasn’t a real violent breakout where you see it on tremendous volume, and everybody’s really excited about it. It was lethargic. Having said that though, it is going in the right direction if you are long and if you are wanting it to go up, it is doing that.
We are entering sell in May, and go away, right? So far that’s not working, because May is doing pretty well, but there’s also a phrase on Wall Street known as, “Never short a dull market.” What does that mean? Well, we’ve got all these big things behind us now, I mean we had our airstrikes, and market kind of yawned, and that went past us. Meeting is set for North Korea, denuclearization. Freed hostages essentially, people being held captive in North Korea to come back, that’s behind us. Feds said, “We’re not going to raise rates this time,” that’s behind us. We’re entering this low lull right? Where it might get pretty quiet on the news front, and it just seemed like a very boring week, but the saying says, “Don’t short a dull market.” This is a dull market right now.
I was talking to somebody the other day, and as typical, when I’m out somewhere, somebody says, “What do you think about the market? How about this market? What are you doing, what you buying, what are you selling.” And they said, “What do you think about this market?” I said, “It’s kind of boring right now.” He said, “Boring?” I said, “Whoa, whoa, not in 2018, but in the last few weeks. The market hasn’t been boring in 2018, it’s been rather volatile in 2018, but in the last coupe of weeks it’s been rather boring. Every time it starts to rally, it sells off and gives it back, and vice versa. As it starts to go down, people buy the dip.” If this holds true, this rally that we’ve seen, and which is been about five or six straight days now for the major indices.
Somebody may come in Monday morning and sell this big heavy hitters, and say, “You know what? We’re still in this trading range, and we’re going to go ahead and sell because we’re near the top.” Maybe we do that for a couple of days, and people are asking me, “Hey, do you think this is going to breakout?” I said, “Yes I do, but it also wouldn’t surprise me to see a sell-off and come back into this range.” We’re past earning season, that’s another thing, we’re wrapping that up. What’s next right now? Again, we’re getting some inflationary data, there’s just not a lot in the very, very short term going on. Again, this market did though, do some good stuff this week.
I mean, look, at the end of the day we’ve been saying this, we’ve been pretty adamant in this. That the market is still in a bull market. If you’re wondering, “Well then why would you lighten up at all a few weeks ago?” The answer is because we stick to our models, and our strategies, and some of our strategies call for being in stocks all the time. We’re going to try to determine which are the best ones. Some of our strategies are meant to reduce volatility, so as volatility is picked up in recent months, we’ve reduced that based on some of the trading, and some of the various investments we own. It depends on what you’re trying to accomplish. If we get the indicator to go back in, great, but again, keep in mind that the models that I’m talking that are heavier on cash, maybe have 20% cash. We still have 80% invested, we’re not talking about being overly concerned.
We still believe and have believed that we’re in a bull market. Are there things to be concerned about? Or the reasons why we don’t have full margin and pulling equity out of our house to go buy stocks, yeah there’s a lot of issues going on. This is still a bull market, we have good earnings, solid job market, low interest rates, and inflation’s under control right now. That’s the bottom line, earnings are going up. As I’ve been saying the last few weeks, I think investors were watching and wondering, “What’s next? Okay we know things have been good in the rear view mirror but what’s coming up in the future?” Maybe they see good things.
Look, technology has been really interesting, technology which was the leader, and then started to sell-off. Especially when you had the Facebook situation, and you even saw Google selling-off. Amazon sold-off a little bit, Apple was selling-off. All those things were selling-off, and lo and behold, guess what? Facebook is now back up to where it was, really, early March, before all this drama. Facebook, just from the middle of March, to really the end of March, in about seven trading days, Facebook fell 18%. Since that time, it is up 24%, so it’s as if that whole saga never happened, according to stockholders.
That’s been a big move, but that in conjunction with Apple’s earnings and Warren Buffet saying he likes Apple, and you’ve got Amazon continuing to do the things they’re doing. Netflix is still hanging out near it’s highs. Technology has come back, and it said, “We’re not dead yet. We’re not ready to give up the lead here.” Now, what’s interesting about this market is you look at what’s working, and what’s joined in. Hey, take a look at Energy, I mean just since the beginning of April, just the plain jane energy ETF, XLE, is up over 16%, almost 17% during that time. Almost back up to its January’s highs.
If you look at things like, what were some of the biggest winners this week? Railroads, up almost 6%, I think they’re up six days in a row. Pharmaceuticals up 5%, Biotech up 5%, Aerospace Defense 4.5%. I mean financials, there are things, broad based, working right now. Those were your leaders for the week, and so you got this broad based move. What I’ve been watching for is, are we going to see something sell-off like technology, so we get these rolling bear markets where is tech going to be the next thing, and maybe Energy takes the lead.
Well Energy is taking the lead, but technology is saying, “I’m right there with you.” Now on the down side, what got hurt this week. As I mentioned, volatility went down, Bitcoin went down, Utilities got hurt, other then that there wasn’t a lot that was really down a lot this week. It was a pretty good week, it just wasn’t internally just a, “Wow what a strong intense rally.” It was a mediocre, it was as if, and I’ve used this analogy before; you’re in a pool, you’re holding a ball with air in it underneath the water, and guess what happens when you let go? It comes up to the top.
If I let go, and release some of the pressure, it’s going to automatically come up. That’s what the stock market feels like, it feels like there’s an equal amount of buying and selling in April. Sellers probably had a little bit of the advantage, and maybe they’re saying, “Do I really want to short this market? Is this a market that is easy to short? Maybe I go short some individual stocks, but do I want to be betting against this stock market?” It’s as if they said, “No, not really.” While there wasn’t a lot of demand for stocks, there wasn’t hardly any selling pressure. Sellers seem to be giving up, and the second part of that is we would like to see a lot of demand. Now, can we make money in this type of market? Absolutely, not only trading things, but also if it just floats up you could still just be long.
It would be nice to have this intensity behind it. We didn’t really see that this week, and again we’re nitpicking a little bit, because again, all in all, very good week for the markets when you look at top to bottom. It was a good week, I mean the Dow Jones was up 2.5%, not a bad week right? Merging markets finally broke out a little bit, because they were working their way down because of a strong dollar. It was a good week, on balance, again if you’re sitting on the sidelines, you’re going, “Okay what do I do now? Do I get in?” That’s what keeps a bull market going. Still a good stock market, again not making dramatic moves, and I would say also if you are highly concentrated in bonds, you’re continuing to struggle. I mean a flat week mind you, but down over 3% for the year, the broad stock market down about 3%.
I think, it’s probably good transition to discuss this, people come in all the time and ask me, “Hey, I’ve got this X, Y, Z income fund, and it hasn’t been doing much. What should I do?” I explain to them, and I’m going to explain to you. If your goal is to simply have lower volatility than the stock market, and have some income, you naturally go to income funds. Income funds are generally going to be bond funds, and more than likely, they’re very traditional types of bonds. Meaning, when interest rates go up, the bond prices go down. One way to mitigate some of that is to not own that, and go own your own bonds and shorten the maturities, or own different types of bonds or whatever. Another way to tackle it is to say, “Can I achieve the same thing without having to put up some interest rate risk?”
What does that look like? Again, we’re talking about your non-stock market money. We’ve already decided what your allocation is going to be, but just because it’s not in stocks, does not mean it has to be in bonds. It can be, in what we would just call income, unfortunately the mutual fund industry uses income and says, “That’s bonds.” Most of the time they’re just buying bonds. It’s diversified, but interest rates go up, your bond funds going to go down. You can build your own portfolio that achieves a similar type of yield, maybe more, but takes out the interest rate risk. How do you do that? Well, there are funds, there are ETFs, you could do it yourself, and basically you are owning things that benefit from rising rates.
One of the biggest misconceptions is people look and say, “Well, can I just own the TIPS ETF, because if inflation picks up, that will protect me.” That’s not the case, at least these particular ETF is not built that way. What happens is, it’s very interest rate sensitive. Now, it’s flat on the year, compared to traditional bonds but you would think, “Well wait, I’ve been hearing inflation’s picking up, so how come I’m not making money?” Because TIPS, again, are treasury securities. There still going to move opposite of interest rates, so you have to overcome that with a lot more inflation.
Again, looking at your portfolio, and saying, “What else is out there?” How about instead of owning bonds, you own some real estate for income purposes. How about lending instead of lending to corporations for nothing. How about lending to individuals, or lending to groups of people. There’s lots of ways to do that. What happens is, you end up having something that’s not as interest rate sensitive, and has probably a higher combined yield. A lot of people don’t know this, but if you buy AGG for example, which is called the iShares Barclays Aggregate Bond Fund. It’s an ETF, it represents the entire bond market. If you buy that, you are having a, what they call, a longer duration than you use to. To get the same yield, people; bond fund investors or bond fund managers, have had to buy longer maturity bonds. With that comes more interest rate risk. To get the same amount of income for you the investor, they have to take more risk, so be careful of that.
Which brings me to my other point about working your way up the risk scale. We’re working on an article that we’re probably going to publish early next week, and it’s an indicator that we’ve been watching. What’s interesting about it is right now, what’s happening is it’s almost as good as gets in the bond world, from a credit standpoint. We like to watch credits spreads, so before you click stop on the podcast, this is very, very important, because not only does it affect your bonds, your bond mutual funds, but it can affect your stocks, as well your stock mutual funds. What happens is, you monitor how much … If you were to go buy a junk bond, or a high yield bond, how much does that pay you? You get a certain percentage, and it’s going to be more than if you were to go buy a treasury bond, because it’s a riskier asset.
What happens is, if people start buying those high yield bonds, because they need the yield or they’re really comfortable with the environment, and the economy, those interest rates start to go down. We watch the spread between high yield bonds, and these treasury, and it’s pretty tight right now. What does that mean? What happens? Well, you’re not getting compensated a dramatic amount to go buy some of these high yield bonds. What happens is, if that’s the case, and people stop buying, and credit spread start to widen, you could get hurt. We’ll start with the stocks, you can get hurt in the stock market, usually when credit spreads widen out, the stock market sells off.
Almost the bigger issue, is people buying preferred stocks or buying certain types of closed-end bond funds, or certain types of high yield assets, without truly understanding what they’re buying. They see an interest rate and they say, “Boy, look at that thing pays 8%, 9%, or 10%, or 11%, boy that’s great.” What are you really risking though? And a lot of times your principal could fall 30% pretty quickly in a matter of months, and it dwarfs any type of income you would’ve received.
We’ve seen that a lot when credit spreads widen, and so were watching that, and we’re not calling for them to widen, but they are very tight. If they go out of range, they’re on the lower end right now, and so we need to continue to watch that, because that is something that could really hurt people. Remember, what’s happened in this environment we’ve been in, is traditional, yield seeking investors that want income, have been going out the risk scale too much, instead of owning CD’s and money markets, they go out, “That’s not getting it done, how about I go buy a bond fun, or a high yield bond, or a closed-in bond fund that pays so much more, so great.”
They’re putting their principal at risk. How about people who are in the bond market, and their advisor said, “You don’t want to be in that old bond market,” and they don’t offer them any alternative other than the stock market. “But don’t worry mam, we will put you in conservable utility stocks, they don’t ever go down. And real estate, public real estate investment trusts, they never go down.” Well, real estate investment trusts have fallen, just really, this year. They’ve fallen about 6%, but they peaked in the summer of ’16, and they’re down about 8 to 10%. How about utilities? Utility stocks, they peaked in, probably November of last year, and so far they’re down about 12% from their high.
How about consumer stable stocks? These would be your Clorox, Procter & Gamble, Cocoa-Cola, these companies that they’re not really cyclical, it’s just like clipping coupons that pay you a nice dividend. 16% it’s fallen since it’s high in ’18. These are the things that are getting hurt right now, because investors are starting to figure out that they have some risk there and they may be selling those. Let me remind you of something else, interest rates have risen, so some people on the fringe are going, “You know what? Maybe I should go buy that 2% CD.” And yes some of you listening are saying,” I’ll take a 2% CD with no risk.” You’re leaving what you were in the last couple of years, that is happening. As interest rates continue to rise, it’s going to happen, more and more, and more.
Again, if you need to look at your portfolio, and you need help in that arena, let us know. That’s what we try to do, is try to not change people’s risk perspective, but try to increase their yield, find them things that they don’t typically have access to, or don’t know about, or aren’t educated about. We try to solve those issues, because it has been a challenge, as you know, the last several years, trying to get nice conservative income. There are ways to do it, but it’s been challenging, and again, don’t ignore the fact that if rates are rising, what do you own? If you just own plain old bond funds, you’re seeing them down this year.
Look, the stock markets up this year, as of today, when’s the last time the stock market was up, and the bond market was down? Right now, that’s what’s happening, the bond market’s down over 3% as I mentioned, and stocks aren’t. There not great this year, but they are in the green despite some volatility, there in the green. The spread between stocks and bonds is big, and it actually, the more conservative in traditional investing 101. The more conservative it is, meaning more bonds, the worst it’s been and the riskier it’s been this year. Think about that when you look at your portfolio, I would rather you see break it up between growth we’ll call it, capital gains oriented investing, and income.
Don’t label it just stocks or bonds, that says there’s only two types of investments you have access to, and you don’t. You have access to tons, and tons of different investments. By the way, one of the things that got hurt this week, speaking of risk, is Bitcoin. Bitcoin down about 10% this week, and down 41% year to date. Let’s see, off of its high, down about 55%. It held at it’s 200A moving average, everybody said, “Here we go again,” and they were perking up, but now they’re starting to fall again, as more regulation, and things like that. It’s interesting, I’m not getting near as many calls as I use to on cryptocurrencies in general.
Before we go today, I did want to point you again to the website, EggerssCapital.com. I told you at the beginning of the show about the financial planning page. If you click on financial planning, you will see on there the big green button with the free track your finances tool. That’s really important, if you use that, and nothing else, that’s great. Some people, you start with that, and then they contact us and want us to look at their situation and it’s been interesting. We get a lot of positive feedback when we do financial planning, which some people believe we just manage assets, but we do a lot of financial planning.
We hear terms like, “This has been very enlightening. This is very comforting.” I’ve told literally two people this week, they need to be spending more money. Based on what they’re trying to do in their life, and based on what the numbers are telling me, they need to be spending more money. Based on what they’ve told me they wanted to do. They wouldn’t have done that before, and there’s people making retirement decisions, not really knowing if they can retire. They’re like, “I think I can. I see my neighbor, she makes it.” But they don’t really know, and we go through the process and either confirm, or we look and say, “You might want to hold off, or you may want to do these. If you do these other two things, then you can retire when you were thinking about it.”
And what to do with this chunk of money, “I’m inheriting some money, should I pay off debt? Should I put it in a college fund? Should I spend it? What should I do with this money?” And again, we can’t answer those questions unless we go through the financial planning process, and look at it, not in a vacuum, but as apart of a whole plan. Once we do that, we end up, at the end of the day, yes we look at how the sausage is made, and we do that. But at the end of the day, what we do is give the clients who go through our financial planning process, a checklist. “Here’s your to do list, these are the things we’ve observed.” Some of it may be confirming. “Keep doing this, keep doing that. Change this, up this, change this allocation, convert this.”
Those are the things we do. That’s what you’re looking for are answers in that regard, and it could bleed over into investments of course. Again, it starts with that financial planning, so if you want to check that out or just contact us, you can obviously do that on, EggerssCapital.com, or 210-526-0057. Hey guys, have a great weekend, happy mother’s day to all the mothers out there, including my mother, and my wife who is a mother as well. Have a great weekend, we will talk to you guys soon. This has been Karl Eggerss for the Eggerss report, your investing playbook. By the way, we’ve got an exciting announcement coming up, probably next week we’ll announce it, so check back next week. We’ll see you then.
Speaker 1: This show is for entertainment only, and information provided by the host, guests, 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.