Going For The Record

With six months to go both the S&P 500 Index and Nasdaq 100 Index are on course to post a record 10th straight yearly gain:

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This just as valuations, as measured by the CAPE Ratio, push further into the stratosphere:

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The CAPE Ratio Explained:  The CAPE ratio is a valuation measure that uses real earnings per share (EPS) over a 10-year period to smooth out fluctuations in corporate profits that occur over different periods of a business cycle. The ratio is generally applied to broad equity indices to assess whether the market is undervalued or overvalued. While the CAPE ratio is a popular and widely-followed measure, several leading industry practitioners have called into question its utility as a predictor of future stock market returns.

Hat tip Charlie Bilello/Investopedia.com

 

Super Herc Fireworks

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From Strategypage.com:   A C-130J Super Hercules sits on the flight line during a fireworks display at Yokota Air Base, Japan, July 3, 2018. Air Force photo by Senior Airman Donald Hudson

Hornet Hook Up

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From Strategypage.com:   ATLANTIC OCEAN (June 30, 2018) F/A-18E Super Hornets from the Jolly Rogers of Strike Fighter Squadron (VFA) 103 perform a tanker-tow over the Nimitz-class aircraft carrier USS Abraham Lincoln (CVN 72) during an air power demonstration for guests. Abraham Lincoln hosted a friends and family day cruise to show loved ones what their Sailors do on a regular basis. (U.S. Navy photo by Mass Communication Specialist 3rd Class Jeff Sherman)

Biotech Sector On Fire

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The IBB(iShares Nasdaq Biotechnology Index)is surging over 3.5% today.  This powerful breakout move, which is the indexes best gain of 2018, has driven it past the June and February highs.  The IBB is setting up well for a retest of the 2018 peak($119.30).  Here’s a look at the top ten weightings in this Biotech ETF:

IBB TOP 10 HOLDINGS
  • Gilead Sciences, Inc. 8.27%
  • Amgen Inc. 8.09%
  • Biogen Inc. 7.77%
  • Celgene Corporation 7.34%
  • Illumina, Inc. 5.24%
  • Regeneron Pharmaceuticals, Inc. 4.52%
  • Vertex Pharmaceuticals Incorporated 4.34%
  • Alexion Pharmaceuticals, Inc. 3.60%g

 At time of posting we are long IBB in some managed accounts.

June Jobs Report, Better Than Expected

The lede:   The U.S. created 213,000 new jobs in June, another strong showing that reflects an acceleration in economic growth that started in the spring. Economists polled by MarketWatch had expected a gain of 200,000 nonfarm jobs. In a surprise the unemployment rose to 4% from 3.8%, but it might be tied to education with the end of school year. The average hourly wage paid to American workers rose by 5 cents, or 0.2%, to $26.98. The yearly rate of pay increases was unchanged at 2.7%. Employment gains for May and April were revised up by a combined 37,000, the Labor Department said Friday. The government said 244,000 new jobs were created in May instead of 223,000. April’s increase was raised to 175,000 from 159,000. 

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Rollbacks matter.

Hat tip MarketWatch.com/dshort.com/advisorperspectives.com

Fear The Inversion?

An inverted yield curve has proven to be a key indicator in predicting recessions.  Currently the 10-year Treasury yield (2.83%) is now only 0.31% higher than the 2-year yield (2.52%), the flattest curve since August 2007.

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But, is it always wise to fear an inverted yield curve? 

9 of the last 9 recessions started with one.

The 2-10 inverted in Dec ’88, May ’98, and Jan ’06.

S&P 500 Index peaked 19, 22, and 21 months later.

It gained +33.2%, +39.6%, and +22.3% AFTER each inversion.

Yield Curve Inversion Explained:  An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

The shape of the yield curve changes in accordance with the state of the economy. The normal or up-sloped yield curve may persist when the economy is growing and conversely, the inverted or down-sloped yield curve is likely to press on when the economy is in a recession. One underlying reason such a relationship exists between the yield curve and economic performance relates to how a higher or lower level of long-term capital investments may help stimulate or rein in the economy. By issuing longer-term securities with lower-yield offerings, businesses and governments alike can acquire needed investment capital at affordable costs to jumpstart a weak economy.

Hat tip Charlie Bilello, Ryan Detrick, Investopedia.com

Employment Report Due Tomorrow Morning

Some color:   The Investing.com forecast for the forthcoming BLS report is for 190K nonfarm private new jobs and the unemployment rate to remain at 3.8%. Their forecast for the May full nonfarm new jobs is (the PAYEMS number) is 200K.

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From yesterday’s ADP report:   “The labor market continues to march towards full employment,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Healthcare led job growth once again and trade rebounded nicely.”

Mark Zandi, chief economist of Moody’s Analytics, said, “Business’ number one problem is finding qualified workers. At the current pace of job growth, if sustained, this problem is set to get much worse. These labor shortages will only intensify across all industries and company sizes.”

Hat tip advisorperspectives.com

Coming Aboard

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From Strategypage.com:   PHILIPPINE SEA (June 20, 2018) An F/A-18E/F Super Hornet assigned to the “Dambusters” of Strike Fighter Squadron (VFA) 195 prepares to make an arrested landing on the flight deck aboard the aircraft carrier USS Ronald Reagan (CVN 76). Ronald Reagan, the flagship of Carrier Strike Group (CSG) 5, provides a combat-ready force that protects and defends the collective maritime interests of its allies and partners in the Indo-Pacific region. (U.S. Navy photo by Mass Communication Specialist 1st Class Darren M. Moore)

One Helluva Run

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When the market does correct, and it will, it’s going to be painful.  A 50% correction, similar to the 2000-2002 and 2007-2009 versions, would drop the S&P 500 Index down to the $1775.00 area wiping out all the post election gains in the process.  The 2016 low was set in February at $1810.00.  

Why is the potential for a major correction growing.  Consider:  The current bull market, as measured by the S&P 500 Index, is now 112 months old.  It is now the second longest stock rally in history, only 1990 to 2000 bull run is longer(114 months).  

The current economic expansion reached its 9 year(108 months)birthday last month making it the second longest expansion in history.  Only the roaring 90’s(120 months)stand in the way of  it becoming the longest ever.

Hat tip LPL Research/Ryan Detrick

Time For Gold To Shine?

Some Color:  Since 1975, the second quarter of the year has been by far gold’s worst—with returns dead flat over the 41-year period—and this year has been no exception, with gold down about 1%. On the flip side, the third quarter has been the best, outperforming its closest rival, Q4, by a whopping 40%.

Given the clear seasonal patterns gold has exhibited over the past four decades, investors can use these trends to make strategic purchases when the market is the weakest.

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The GLD fell to new 2018 lows yesterday under heavy selling pressure.  The index retested its 40 week moving average, which had previously held a major low last December, during Monday’s sell off.  This morning Gold is rebounding nicely and may be in the early stages of a powerful new rally leg.  The seasonal patterns are certainly in line for this.

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At time of publication we are long GLD in some managed accounts.

 

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