Resolute
Adjective
admirably purposeful, determined, and unwavering.
"she was resolute and unswerving"
Yesterday, the market followed up a great session to end a great year and a great decade that was not without challenges. Those challenges sparked massive outflows of individual investor funds from domestic stocks, perhaps reflecting a loss of faith in several American institutions, including:
- Capitalism
- Government
- Businesses
- Educational System
- Stock Market
Yet, even as the nation climbed out of the Great Recession, the lack of trust remained. A part of the problem was the notion of settling. The experts taught us to cheer on the so-called “green shoots” or small incremental gains, as they warned the country would never return to robust growth.
That’s where bifurcation between the stock market and public sentiment diverged.
Stocks were extremely oversold by the time they hit rock bottom in March 2009. As panic and fear fed onto themselves, sellers took enormous financial hits, rationalizing it was better than seeing it all go to zero. Sadly, most investors sold very close to zero, and at levels, most stocks hadn’t changed hands at for decades.
It was like going back to “Go” in the game of Monopoly. Instead of collecting $200, investors lost not just their money, but years of appreciation – and not to mention the hard work, sweat, sacrifice, and hurdles needed to get the funds to invest in the first place. Individual investors were victimized twice by the same market crash. They lost a ton of money from panic selling, then they missed out on a rally of a lifetime, still smarting and licking their financial and emotional wounds.
However, the stock market rallied, not because of green shoots, but the worst was over, and stocks were oversold concerning their intrinsic value. The rally lost its oomph, even as the bias was generally to the upside.
That’s why the economy and the stock market needed a spark. And it happened with the election of Donald Trump. It goes beyond lower taxes and removing onerous regulations, but unleashing animal spirits. Consequently, the stock market has taken on a different kind of characteristic beyond drifting higher from its oversold condition.
Got a New Attitude
This new attitude of resolve has resulted in the stock market regaining its swagger; it even has individual investors looking to get back in it. With the 2018 decline, the market fought against huge forces that conspired to trigger the 2009 - like scenario.
The Fed hiked rates four times and hinted at as many cuts in 2019. The media screamed “recession” each day, scaring the public into sitting on cash, even as their paychecks were surging.
Closing Year with an Exclamation Point
On New Year’s Eve, even the stock market was lethargic, and it looked as if it would limp out the year satisfied with a great year, but this is a different market. Although it was down with only an hour of trading in 2019, the stock market found a spark. This was no green shoot, but a declaration and reminder that this is a different kind of stock market.
Yesterday, the same pattern emerged with a monster rally into the close.
Starting with a Bang
Midway through yesterday’s session, the market was higher, but the market breadth was neutral to negative. Then, just like the last session of 2019, the first session of 2020 went parabolic.
Market Breadth
The last session of the year also underscored there is more to the stock market than a handful of hot momentum names. Yesterday saw even more stocks on both the NYSE and the NASDAQ close at new highs.
December 31, 2019 NYSE
NASDAQ
| January 2, 2020 NYSE
NASDAQ
|
Stretched Valuations
Price to Earnings Ratio | Trailing | Forward |
Dow Jones Industrial Average | 21.47 | 19.09 |
Dow Jones Transportation | 18.99 | 15.84 |
Dow Jones Utilities | 25.81 | 19.40 |
There is no arguing that overall valuations are well above historical averages, yet that’s been the case for some time now. As we head into earnings season, there is a chance for earnings to lower price-to-earnings (P/E) ratios, but we might see increased volatility before then.
Long-term investors must ride these waves, which means ebbs and flows to access those outsized gains the media talked about all week long. No one made 4000% on Netflix (NFLX) without a few sleepless nights.
I don’t think that will be the case in 2020. I suspect folks looking to chase stocks after watching from afar for the year will blink on the first pullback.
That said, the message of the week is something you must keep in mind, as you want to maximize gains over the entire year.
Dumping Losers
Recently, there has been bifurcated action in the market with buyers chasing the winners, and others kicking the tires of losers. Yesterday, the market took a different twist, where investors dumped safe haven names like hot potatoes:
- Consumer Staples
- Real Estate
- Utilities
There was value seeking in Industrials and Energy, but its clear buyers are focused on jumping on bandwagons.
S&P 500 Index | +0.84% | |
Communication Services (XLC) | +1.17% | |
Consumer Discretionary (XLY) | +1.19% | |
Consumer Staples (XLP) | -0.79% | |
Energy (XLE) | +0.90% | |
Financials (XLF) | +0.97% | |
Health Care (XLV) | +0.27% | |
Industrials (XLI) | +1.89% | |
Materials (XLB) | -1.17% | |
Real Estate (XLRE) | -1.16% | |
Technology (XLK) | +1.88% | |
Utilities (XLU) | -1.25% |
Yellow Flag
If you are worried about the Russell 2000, read my book Unstoppable Prosperity. While these are mostly domestic companies, consider that there are serious issues, including 22% being unprofitable and a large portion of the index on those safe havens - which underperformed in 2019, and sold off big yesterday.
Portfolio Approach
We added two stocks to our model portfolio yesterday. Don't miss out on this market. If you are not a current subscriber to our Hotline, click here to get started today or email us at research@wstreet.com.
Today’s Session
Let’s see where the market goes today. The killing of one of the world’s worst monsters will have positive long-term consequences, although “severe retaliation” is promised.
A short time ago, President Trump tweeted, "General Qassem Soleimani has killed or badly wounded thousands of Americans over an extended period of time, and was plotting to kill many more...but got caught! He was directly and indirectly responsible for the death of millions of people, including the recent large number........of PROTESTERS killed in Iran itself. While Iran will never be able to properly admit it, Soleimani was both hated and feared within the country. They are not nearly as saddened as the leaders will let the outside world believe. He should have been taken out many years ago!"
We aren’t making changes in our portfolio, as we saw signs gold wanted to go higher last week, and while crude has been compelling, we have several older positions that are down. A breakout might spur us to add.
Oil
Forms double top at $63.85 through there has straight shot to $71.00 but is this a one-off?