On this week’s show, despite another risk to the stock market, investors ended up buying stocks and markets moved higher. But, the volatility remains.
Karl Eggerss: Hey, welcome to The Eggerss Report, it’s your investing playbook. This is the podcast and the podcast is something we put out weekly. It is a audio version of really what we’re thinking, what we’re doing and we actually do a lot more audio and video than we do writing because the writing takes up a lot of time, and it’s cool if you were sitting in our office during the week. You’d hear our thoughts, what we’re thinking about the markets, just backtesting things, looking at the current environment, checking other times that are similar to these if there are or are such a thing as times like these. But all of that really in order to bring it to you to make sure that you are really getting the most out of your money, that you are protecting yourself and really the main thing right now is to distinguish between a bear market, a prolonged market that’s falling versus a correction like a speed bump. That’s really right now in the short term kind of our main job.
If we had a microphone and had cameras in there, you could see what we talk about all day. But we try to kind of put that together and bring that to you. Most of you know that I don’t spend a lot of time prepping for this show. Really what I do is I just sit down and say, “Turn on the microphone,” and tell you what I’m thinking and what my staff is thinking and what we’ve been talking about in our investment meetings and what we found and things that are going on that maybe you missed. That’s really what we try to do here. Sometimes we talk about, in plain Jane financial planning, behavioral finance, how to think about your money and then we also talk about obviously current events and what’s going on with your money from the investment side of things. That’s what we do here.
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With that being said, let’s jump right into what was moving this week, what was working. We’ll go over some things that were moving because actually when you look at the market, it was a pretty good week. The Dow Jones was up almost 2% for the week despite 122 point loss yesterday. But overall we had a very at least productive week.
Now, if you are following our Twitter which is at @KarlEggerss or you’re following our Instagram feed, you will see we put a chart up there of the Dow Jones from a technical perspective and you’ll notice that it is at a really critical point right now because not only are we sitting above this 200 day moving average, which is a technical jargon for basically a smoothing mechanism, it bounced off of that in early April. We had this double bottom from the February intraday lows and then we bounced and of course we came back to April intraday lows. That period is kind of a line in the sand for some people. By the way, that amount on the Dow Jones would be around 23,370 to get real technical with you. The low in February was 23,380. It’s 23,360 so somewhere around there. We’ll call it 23,350.
Now, as it’s bounced, we also had been making lower highs. We made a high in January. We made a lower high in February, a lower high in March and a lower high in April so far. You draw a line there and you could see we’re real close to potentially breaking out, and on top of this, we are underneath what’s called a 50 day moving average which has been rolling over.
Now, here’s the next thing you’re going to hear. You’re going to hear the word “death cross” that’s going to be brought up over and over. It’s when the 50 day moving average, which is a shorter term indicator, goes below the 200 day moving average. They call it the death cross and you’re going to hear, “Oh, my gosh. The market, it’s horrible. It’s horrible.” Of course statistics will show sometimes it doesn’t matter, sometimes it does.
Something to watch because this correction we’ve been in has lasted for a while. I mean, we’re moving on three months now. We went all through February, all through March and here we are in mid April and we’re still seeing this market really kind of stuck in the mud, and a lot of it has been caused by a fear of a Federal Reserve that’s raising rates and potentially an economy that’s peaked. You toss on top of that tariffs which there’s been a lot of rhetoric and no tariffs have actually been implemented yet but a lot of negotiating. But the fear of that is it would slow global growth.
Then the third thing that’s added fuel to the fire is Syria and just geopolitical risk. If there’s not enough to worry about, we throw that on top of it as well. A lot of stuff going on. But through that, the market is hanging in there because if you look back really from early February, for two months now, we’ve been moving sideways. It hasn’t felt like it because we’ve had a lot of daily 1 to 2% moves, but we’ve been moving sideways.
For the week, the Dow Jones up a little less than 2%. We had a lot of big winners on the week. Did you know oil was up over 8% and breaking out to new recent highs for oil? Oil is very strong. Energy stocks, look, if oil keeps staying up here, they’re going to play catch up because they’ve been lagging behind so watch oil stocks. They had a good week.
The oil and gas equipment companies up over 11% for the week. Oil and gas exploration companies up 8% for the week and just the plain Jane XLE, ETF energy sector up about 6%. Even stronger, remember aluminum with the tariff steel in aluminum? Well, aluminum prices up over 14% just this week going back to their January highs, late December, early January highs. The selloff that happened after all that tariff talk, it’s back up to highs.
Those were some of your big winners and we had biotech rebounding, which had been hit lately up about 5%. Semiconductors, 4%. Gold did pretty well this week. Steel stocks did well this week.
How about on the flip side? Volatility. If you’ve been thinking that volatility was going to stay elevated, that was not a good trade this particular week. Russia, down 9%, had a really bad day a few days ago on, I guess it was Wednesday, Tuesday, where it was down quite a bit. In fact, I think it was … Actually it may have been Monday that it was down over 10% in one day because of sanctions and so forth. Home construction stocks down about 3%.
Airlines down. One of our favorite areas, by the way. Fundamentally we love the airlines right now. But when you have oil prices going up and you have flight cancellations due to geopolitical risk, you’re going to get a selloff, and so we’ve had that. Airlines, to me, look like a great value from a fundamental standpoint and actually technically they look very interesting as well. For those of you who have a chart in front of you, go take a look. We talked about the Dow Jones making lower highs, lower highs, lower highs. Take a look at the airline stocks since last September. Higher lows, just the opposite. This is the fourth time it’s made a higher low, so watch those. It could be timely, and from a fundamental standpoint, we think it’s a basket. They make a lot of sense.
We also saw utility stocks get hit a little bit and the REITs. That’s your outliers that we saw. Now, during the week, a few different things were of course moving. Gold was on the move, which it’s interesting. Gold right now, we have some gold mining stocks in one of our strategies. We also own some gold in some of our more passive strategies and it’s interesting because gold’s been fairly constructive, pretty quiet. But wouldn’t you think with North Korea, with Russia, with the president tweeting out, “Hey, we’re coming. We’re going to shoot some missiles.” Wouldn’t you think gold would have a really, really, really strong week? Yet it’s still stuck. It’s been trending higher since the beginning of 17 but all of 18, it just can’t seem to get past this bigger hurdle. Watch gold, but it should have had a bigger week than only up about 1% in my opinion. That was gold.
Monday, we saw this big reversal. Remember the market was up 440 points, the Dow Jones, and it ended up only 40, big, big reversal, kind of a big deflator. Then of course we get China who kind of acquiesced on the whole tariff deal. They came out and it sounded like they were the first to make a move that was in our favor. We saw the market was up pretty big that day on Tuesday, the Dow.
Then Wednesday we get the Fed minutes. The Federal Reserve meets. They announced what they’re going to do. Then a few weeks later, their minutes from their meeting comes out. When it comes out, the market can move. Basically the Federal Reserve sounded pretty hawk-ish. What does hawk-ish mean? That means that they sounded like they wanted to raise interest rates. Again, I’ve been saying for a while the biggest fear I have is that the economy has peaked from a growth rate standpoint, not a recession coming, but the acceleration slows down.
Are we going to see things slowing down a little bit? If that’s the case and the Federal Reserve isn’t reacting to that and in fact continues to raise rates in an adamant fashion, could we see the market drop? And the answer is yes because bonds would do poorly. Stocks would do poorly. To me, that’s one of the big drivers right now. If the tariff situation, which seemed to have taken a backseat this week, it was kind of like, okay, cooler heads are prevailing. Then of course we had Syria, all that and Trump saying, “We’re coming after you.” It’s like, oh, my gosh and Russia and blah blah blah. All of that seemed to had taken front and center and the tariff situation seemed to be in the backseat.
Well, if that’s the case, why isn’t the market moving up? Well, number one, you had the Syria stuff and, number two, I think it’s because in the back of people’s mind still they’re still worried about, “Is the economy peaking? Have we seen the best of the economy?” How come the Federal Reserve isn’t saying, “Hey don’t worry about it. If the economy has peaked, don’t worry. We’re not going to raise rates.” They’re not saying that. They’re still coming out saying, “Yeah, two to three more rate hikes,” as if nothing else is going on. It’s putting a lot of pressure on the economy going forward, and we’re starting to see some leading indicators maybe start to soften a bit, too early to tell.
Again, we got to look for trends in the economy, not just the individual data points because when an individual data point comes out, people like to react. Good jobs report, bad jobs report, higher wage inflation, less wage inflation, industrial production, CPI, PPI, M-O-U-S-E. All of the stuff comes out. You got to put it all together in a blender and see what’s happening. Right now, there maybe some softening here. We are in earning season. We’ve been hearing a lot about that, that earnings are expected to rise 20% in this latest quarter compared to a year ago. That’s a big jump.
Now, what are these companies going to say about the future? Are they going to blame tariff talk if they missed earnings? Are they going to blame the weather? They’re going to blame something. That’s what they do and they set expectations low and then they try to beat them. But that’s going to be a lot of pressure on companies and the economy in general because the expectation is you better surprise us. Otherwise, we’re going to sell stocks. That’s what it feels like. But Syria definitely took front and center this week because again Wednesday morning, I think it was Wednesday morning, maybe it was Tuesday night, Trump essentially threatens military force. Thursday we come in and the market has a really good day up about 300. It was up like over 400 at one point. But up about 300, but it was a weaker day under the surface. You could see it. If you have a lot of mutual funds or ETFs, you just didn’t make that much money. But some of the large caps kind of drove the industries.
Then of course Friday, the market is kind of hanging around the flat line trying to get even. Then it has this afternoon sell off and then of course bounces a little bit into the close. But we still have this tug of war going on. By the way, bitcoin and all the cryptos had a really strong Thursday and Friday. Now, is this, not to change the subject but I’m going to, is this strength in cryptos, is it the end of this horrible bear market? This thing has been nasty. I don’t have anybody asking me about cryptocurrencies anymore. That was so three months ago.
But there’s a lot of speculation. Why are these cryptocurrencies running up all of a sudden? Is that a precursor to people taking more risk? Is it the new risk on? When we see cryptos doing well, does that mean that the stock market is going to do well coming up in the next few days and weeks or are cryptos going up because all the people that were selling cryptocurrencies in the last few months were doing so because they had to pay taxes? That is not the reason in my opinion because half of these people aren’t going to pay taxes because they don’t know they’re supposed to pay taxes when they sell a cryptocurrency. If they did have gains and they sold them, half of them don’t know because they’re not getting the 1099 and that’s what, to me, the IRS is going to have a mess on their hands with all these cryptocurrencies.
You’re seeing a lot of regulation coming down which was part of the reason they sold off and it should. This is the Wild West right now, so there should be more regulation coming down on some of this stuff. But I don’t know if these are going up because of the taxing. I don’t believe that’s it. Some people believe it’s some big governments starting to say, “You know what? We see that as an asset class. It’s beaten down. There’s a lot of expensive things in this world. This is something we feel is cheap,” which I don’t know how you know that just based on the historical price. It’s cheap relative to what? Just relative to where it was or relative to some tangible value? I don’t know but they believe it’s cheap and maybe they’re putting their money in there. Who knows? We don’t know. What we do know is that they had a big move on really Thursday and Friday. Bitcoin was up over 28% this week.
Now, it’s still on a downtrend and it’s hovering around this 200 day moving average based on GBTC, G, B as in boy, TC. That’s the bitcoin investment trust. That is the one some people trade. What to do with that? Nothing. I don’t know what to do with that. I’m just bringing you the information but the reason I bring it up is because it has been interesting that it started to sell off.
Remember when bitcoin peaked? When did it peak? Do you remember? It was December 19th is when bitcoin peaked. December 19th. It was a Tuesday. It ran up, made a new high and then reversed. Then it had three or four really nasty days. Wasn’t that interesting? When did the stock market peaked? Do you remember that? The highest point for the stock market, January 26th. Cryptocurrencies actually peaked a month before the stock market. Could it be that they’ve bottomed a month before our stock market? Maybe so. Maybe so. I don’t know if that’s the case, but that is some of the talk on the trading floors right now is what are these cryptos telling us about the overall market in terms of risk taking? In the past, it’s been watch the high yield junk market, high yield bonds or junk bonds. Wherever those are going, it will tell you where the market is going.
Now, here’s an important thing about where we are in the big picture. We still believe that we are in a bull market. The economy may be sputtering a little bit, maybe a soft patch coming up in the next few months, not a recession. But if we are in a bull market and we’re in this correction, how do we evaluate the health of the market? Well, one thing is we want to look at the breadth of the market, advance, decline lines, how many stocks are going up versus down, just the overall health of the market when you dissect all these numbers. What we see is still strength.
A lot of these things would start to deteriorate into the future and then you would see the stock market behind it sell off. What we’ve seen is really that stuff holding up pretty well but yet the prices of stocks are going down. Now some of that is large cap. We know large caps are getting hit because they are stuck in the tariff situation. There’s the FANG stocks, the tech stocks, all these big caps which control the Dow and the S&P and the Nasdaq. Those are really driving the ship right now. Maybe things aren’t as bad as the industries would lead you to believe.
But we’ve had a 10% correction. We’ve had, I don’t want to say extreme volatility. A lot of people believe that this is the most volatile the stock market has ever been. I’ve actually heard people say that. “This is the most volatile. The market has never done this before.” Yes, it has. It hasn’t had these point moves before because it’s never been this high before. But on a percentage basis, these are 1% moves, 2%. Are those high? Sure. That’s higher than normal and it’s certainly higher than normal relative to last year, but this is not highly unusual.
What may be a little unusual is just every single day seems to be like this. We’ve got up and down every day. But when you look at where the market was, where it is right now, it’s interesting because remember we had a run up in January before the market fell. When you look at the Dow Jones for the year, it’s almost flat. It’s down a little bit. The stock market is down a little bit. The bond market is down a little bit, but it’s not a huge amount because we’re pretty much were given up gains. That’s really a blessing that we’re given up some gains and we’re just churning around here trying to figure things out.
What I want to see is who are going to be the leaders coming out of this thing? Is it going to be the same thing? Is it going to be FANG stocks, F-A-N-G, Facebook, Amazon, Netflix, Google? Is it going to be utility stocks which led the rally? Is it going to be REITs, public REITs? I don’t think so. I think what could come out of this is energy which is doing very well, had a great week. It could be commodities in general which I think look good. It could be stuff like airline stocks. There’s lots of things that could lead on the way out.
It would be interesting to see what the leadership looks like because, again, as we’ve been stating, a bear market is when everything goes down. A more normal market is where somethings go down and somethings go up. I think if you go back and really dissect the dot-com bubble bear market and the ’08 financial crisis bear market, vastly different from one another, very, very different from one another. If you look at that, the dot-com bubble market was really to me what we might see this go round, not even as far down but in terms of there are some things going up during that time where you could have hid and invested and done fine whereas ’08, it wasn’t like that.
Again, know what you own. Know what you own because do you own the things that have gotten you here? In other words, if you are bragging at cocktail parties about Facebook or Amazon, you’ve done very well if you’ve owned those the last several years, but are they going to continue going forward? That doesn’t mean you have to not own them. But do you need to own them in the amounts that you do versus other things that maybe have underperformed? Because again, we don’t just want to buy things that are lagging and sell things that are winning. That’s not a smart strategy. But are you getting a little ahead of yourself and thinking that, “Okay, all of this stuff is going to keep going the direction it is.” That’s the old mutual fund warning. Past results are no guarantee of future returns or whatever the little slogan is on there. They’re essentially saying, “Look, don’t look at past returns to help guide you where you’re going in the future. You don’t necessarily know that.” Sometimes you want to look for things that are out of favor or at least of value.
I want to see what’s coming out of this and we may be starting to see some rotation happening in these markets but overall, the overall health of the market is still good. But are we entering a soft patch for the economy? Yes, but we’ve had soft patches before. We were looking in our office. It’s interesting. If you look at something, industrial production, we’ll just grab one out of the air of one economic indicator, it went negative and started getting weaker and weaker and weaker in the 2014, ’15 timeframe mainly due to energy having a bear market and collapsing. But as far back as we could go, we never saw a time where that’s happened outside of a recession. Every time that’s happened, you’ve had a recession but not in ’14 or ’15. It was a garden variety slow down.
Could it happen in something like that? Maybe. Probably. Now, could it always turn into a recession? Sure, we don’t have that crystal ball and neither does any economist. But from what we can see right now, we do not see a recession on the horizon. We don’t see a bear market on the horizon. What we can’t answer is how long a correction lasts, how it ends up as far as the day it stops? Is it going to turn on this date? What’s the pattern going to look like?
I can tell you this, that generally speaking, a correction ends on fear and a reversal and a no news reversal. There’s no news and we saw that a week ago Wednesday, didn’t we? We saw that the stock market, I think that was on the 4th of April, if I’m not mistaken, where the Dow Jones made a new low, April 4th made a new low, opened down 4, 500 points and finished up to 250 or so. We had a 750 or 800 point reversal. That is generally what a reversal looks like. Yet, we haven’t really got the real strong demand to say, “Yes, that was definitely it.”
But I’m telling you that to bounce off the 200 day moving average as it did and smoothly rise to new highs isn’t normal. It could happen. We’re probably so geared up for bad news that some positive tweets or some positive news may get us there. But generally this stuff ends when you’re going, “Get me out. Get me out. Get me out.” That’s just how it ends, a correction, and that’s why you get paid a risk premium to own stocks.
What are you doing here? We’re trying to upgrade some of our energy stocks, so to speak. Maybe selling some that have run up a lot and trying to look for some better value in the same space. But I don’t feel like it’s a time still for big positional moves in a portfolio. Is this the time to take 20% off the sidelines and put it in the market or take money from the market and put it on the sidelines? That’s still kind of neutral in terms of the short term here, but technically it still looks good, the setup. Again, I feel like we are some positive news away, some type of catalyst whether it’s earnings or not. We’ve got some good earnings on Friday, especially from the bank stocks. Guess what? They went down and I was getting some Twitter comments saying, “Hey, this doesn’t make any sense. Good earnings and the stock goes down.” I said, “Look, in the short term, those two things don’t correlate. In the long term, they do.”
Remember, one thing that’s been happening with bank stocks and financials is interest rates keep going down, long-term rates. They call it the 2 and 10 year spread so two year rates are going up. 10 year rates aren’t really moving. They should be widening and they’re not. Is that telling you the economy is going to get weaker in the next few months? It very well could be.
The question is how weak? Some believe it’s really weak and some believe, “Eh, not a big deal, just kind of a soft patch.” I think we’re in the soft patch camp for now until we get some other indicators. If we do, we will tell you, “Hey, by the way, three more things went negative that we watched this week, caution ahead.” We don’t see that just yet.
That was some of the news this week. Hopefully, there is some resolution on the Syria front. We’ve obviously got some discussions between President Trump and Rocket Man. We could see some positive out of that. If we continue to see positive earnings and guidance and the tariff talk goes on the back burner, we could see the stock market move up to new highs. Remember, new highs from this level would be good. That would be, I don’t know, 7, 8% from these levels up to the old highs.
All right. A reminder, (210) 526-0057 is our telephone number. Our website, eggersscapital.com. E-G-G-E-R-S-S capital.com. Don’t be afraid to share the site. Don’t be afraid to tell your friends about it. We don’t bite. We don’t bombard people stuff. We just put the content out there, give you information. If you need us, we are here to help you. Some of you have done that multiple times. Some of you are clients of ours. Some of you have listened for years and never done anything. Some of you listened for 10 years and you call us when something changes in your life. We’re open to all of that and just fortunate to have you guys listening. Thank you very much. Have a wonderful weekend. Take care, everybody.
Speaker 2: This show is for entertainment only and information provided by the host, guests and this station should not be deemed as advice. Your investment decisions 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.