The Big Chill is a 1983 American comedy-drama film directed by Lawrence Kasdan. The film focuses on a group of baby boomers who attended the University of Michigan (UoM), reuniting after 15 years when their friend Alex commits suicide. Harold Cooper is bathing his young son when his wife, Dr. Sarah Cooper, receives a phone call at their home telling her that their friend, Alex, has committed suicide. At the funeral, Harold and Sarah are reunited with college friends from the UoM. They include Sam, a television actor; Meg, a real estate attorney in Atlanta; Michael, a journalist for People, Nick, a Vietnam War veteran and former radio host; Karen, a housewife from suburban Detroit who's unhappy in her marriage to her advertising executive husband, Richard. Also present is Chloe, Alex's younger girlfriend.
This morning, however, we changed the name from The Big Chill to The Big Stall because on June 3, 2019 we issued a “Trading Flash” stating that we though a trading bottom was being formed. At the time the S&P 500 (SPX/2886.98) was trading at ~2729. Four sessions later, Thursday 6-6-19, the SPX was changing hands at 2852 and we scribed another “Trading Flash.” To wit:
“Our models are suggesting a stall in the upside into mid/late-June. This morning (6-6-19) the preopening S&P 500 futures are up by some 6-points on no real overnight news. Traders should react to Draghi’s dovish ECB Communique. That combined with other metrics is likely what lifted stocks yesterday. This morning’s economic number did not surprise. We think the equity markets stall for a few sessions.”
On Jun 6, 2019, the day of our last “Trading Flash,” the SPX tagged 2852. As of last Friday, the SPX closed at ~2886, a mere 34 points higher than it was on 6-6-19. Indeed, The Big Stall. Still, our work shows the stock market’s “internal energy” is basically used up and it should take a few more sessions to rebuild said energy. Ideally, it would be picture perfect if the SPX would pullback to the 2825 -2835 level, but our short-term proprietary model suggests the downside will likely not be that deep. We think over the next few weeks the equity markets will reenergize and breakout to new all-time highs. That is consistent with our “secular bull market call” since October 2008.
This week the markets should put on “rabbit ears” for the FOMC meeting. It is widely expected for the Federal Reserve to cut interest rates. By our pencil the economic data is not anywhere suggestive of a rate cut. However, the Fed needs to consider other factors like the shape of the “yield curve,” falling inflation, the escalating trade tiff, Iran, etc. . . . Last week a major investment bank came out and stated that there would be no rate cuts this year, which is kind of how we feel. Such rate worries have caused our phone to light-up with the ubiquitous question, “What should I do with the fixed income allocation in portfolios?”
On this rate cut sense market wizard Leon Tuey writes:
“Two important points most miss is:
1. Led by Jerome Powell, the Fed wish to smooth out the wild swings of past economic cycles by fine-tuning the monetary policy. Instead of the stop-and-go of past cycles, the Fed just gently taps the brakes.
2. Due to obvious factors, we have a Goldilocks economy which is ideal for equities. Unfortunately, most are not aware of this and they continue to react to events based on past cycles. This cycle is, indeed, different as it is the longest recovery in history already. In my upcoming report, I will review the six major market factors that help me determine the market's long-term trend.”
So, wrote Leon Tuey. As for us, while our forecasts on stocks have been pretty good, since most stocks bottomed in October 2008, our forecasts on interest rates have been mixed. What we have used, and recommended for the past ten years, has been Putnam’s Diversified Income Trust (PDVYX/$6.86) managed by our friend Bill Kohli. On a trailing 12-month basis the fund yields 4.92%. According to my friends at Putnam, since I have been recommending it (10 years), here is the record:
Speaking of PDVYX, it’s coming up on 10 years since you have been a buyer of the strategy. You spoke with Rob Bloemker back in July 2009. Time flies, huh? You have been vocal supporter ever since. Can’t thank you enough for your advocacy!! What’s pretty cool to see is just how well the strategy has performed over the past decade. You picked a winner!
Bill Kohli and team have managed through this year’s falling rate environment darn well. The 10 year started this year at 2.66% . . . and now sits at 2.10%. To run a strategy that can be very nimble with its duration (as you know, has been negative in the past) AND to still be top quartile vs the peers, says a lot about their investment skills.
I have personally owned PDVYX for the past 11 years.
Also, speaking to income that my generation is desperately seeking, I have associated in a professional partnership with the Naples, Florida- based Capital Wealth Planning, a billion-dollar money management firm. We buy large capitalization, dividend paying, blue chip stocks, which hopefully increase their dividends, and then sell short-term, out of the money, “call options” against them to generate a 5% - 7% income distribution stream, plus capital appreciation. Here is the recent track record for EDIP as of 6-13-19:
The call for this week: The SPX has recaptured its 50-day moving average (DMA) and is less than 3% from its alltime high. The NASDAQ, however, has made two failed attempts at its 50-DMA and is more than 4.5% from its record high. The small and midcap complex is in about the same shape as the NASDAQ. Worth note is that ~58% of the S&P 500 stocks are above their respective 50-DMAs. Also, the cumulative Advance/Decline Line traded to another new high. Another reason to remain optimistic is the fact that like in January we recently got another Zweig Breadth Thrust (ZBT), named after famed money manager, and our friend, Marty Zweig. As the astute Jason Goepfert (SentimenTrader) writes:
“Since stocks bottomed a couple of weeks ago, breadth has been strong, and the 10-day exponential moving average of the Up Volume Ratio is nearly to the trigger point for another ZBT, since it became oversold enough during the decline. Even though it’s not quite to the “official” threshold, it has surpassed 57%, which is the highest in more than two months (see chart)”
The S&P 500 Index had an Inside Day on Friday. This is another indication that stocks are preparing for a significant move. It was the perfect ending for the four sessions that consolidated, on contracting volume, the explosive rally of the previous five sessions. This morning the preopening S&P 500 are flat as The Big Stall continues.
Investing/trading involves substantial risk. The author and Saut Strategy do not guarantee or otherwise promise as to any results that may be obtained from using this report. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any prospectus and other public filings of the issuer. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author, and are subject to change at any time without notice. The information provided in this report is obtained from sources which the author believes to be reliable.
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