Markets Begin a Period of Consolidation

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was a down week for stock markets across the globe, with Dow Jones down 0.35%, S&P 500 falling 0.43% and the NASDAQ tumbling 1.05%. The MCSI Emerging Markets Index also pulled back 1.62%.

Big gainers in your Alpha Investor Letter portfolio included Phillips 66 (PSX), which climbed 2.29%, The Walt Disney Company (DIS), which rose 2.19%, and the PureFunds ISE Cyber Security ETF (HACK), which jumped 2.18%.

Tech giants Alphabet Inc. (GOOGL) and Apple Inc. (AAPL) both fell back below their 50-day moving averages and moved to a HOLD.

Your holding in Apple is down fairly significantly in after-hours trading on the back of a lousy earnings report. Apple’s quarterly profit fell for the first time since 2003, and sales of the iPhone fell for the first time ever.

Gains in the markets have really leveled off this past week with the entire market hitting the brakes. But it’s worth keeping some perspective.

As bad as the market sell-off was at the start of 2016, the rebound since Feb. 11 has been equally historic. The S&P 500 has now gone 10 weeks without trading beneath its low from the prior week. That’s its longest winning streak since February 2011. And between 1928 and 1952, the market never managed to go longer than nine weeks without dropping below a prior week’s low. So this bounce has been historic by all measures.

Bears point out that several market sentiment indicators are showing readings that have consistently led to downside moves in the short- to medium-term. The CNN “Fear and Greed” indicator has been flashing “greed” for well over a month now. When it stands at above 79 (where it has traded up until yesterday), the S&P 500 returned a negative 1.3% annualized. In addition, when the VIX — the “fear gauge” — has traded below 16.5 for nearly 30 days in a row, as it is doing now, the S&P has tended to struggle in the shorter-term. Finally, we are entering a seasonally weak time of the year with May through September tending to be the weakest six months of the year for the markets.

The bulls argue that market breadth and momentum has been strong — suggesting a lot of positive moves in small-cap stocks — that the multi-month rally in stocks will continue in the weeks and months ahead. Technical analyst Tom Asprey of argues — compellingly, I think — that the strong action of the Advance/Decline lines is a clear indicator of the market’s underlying strength. In addition, the low level of investor participation in the stock market is a strong indicator that any new high in the averages will not coincide with a major bull market top.

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A lot, of course, will depend on the Fed statement today. While the Fed is expected to be dovish in its statement, yields have been rising in the bond market. Although market expectations are for the next rate hike to come early next year, the Fed has suggested it expects two rate hikes before then, which would negatively impact the overall market.

Overall, I expect the market to consolidate its recent gains or even pull back over the coming weeks. As always, pay attention to your stops.

Portfolio Update

Berkshire Hathaway (BRK-B) added 0.73% over the last five trading days. The Berkshire Hathaway Annual Shareholders Meeting happens this Saturday in Omaha, Nebraska. According to Warren Buffett, his favorite part of the festivities is listening to his long-time partner Charlie Munger speak at the meeting — and Charlie really can be quite “colorful.” At the 2007 meeting, Charlie said, “We learned about foreign labor competition in our shoe business. It reminds me of Will Rogers, who said he didn’t think man should have to learn easy lessons in such a hard fashion. You should be able to learn not to pee on an electrified fence without actually trying it.” BRK-B is a BUY.

Google (GOOGL) gave back 6.55% last week after reporting an earnings miss on Thursday. GOOGL reported earnings per share (EPS) of $7.50 vs. the consensus analysts’ expectation of $7.96. Revenue came in at $20.6 billion vs. an expected $20.38 billion. GOOGL reported EPS of $6.47 and $17.26 billion in revenue for the same quarter last year. GOOGL fell below its 50-day moving average (MA) on the news and is now a HOLD.

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Guggenheim S&P 500 Equal Weight ETF (RSP) rose 0.41%. Although the S&P 500 Index opened 2016 with a sharp and painful drop, the ensuing recovery has pushed levels higher for the year. Year-to-date, the S&P 500 (SPX) is up 2.34%. However, investors riding the RSP train have fared more than 50% better as RSP is up 4.96% year-to-date. RSP remains a BUY.

PayPal Holdings (PYPL) gained 1.25% last week as investors readied for PayPal’s earnings report today, after markets close. Consensus estimates are calling for first-quarter 2016 earnings and revenue to beat 2015 second- and third-quarter reports. Expected EPS is $0.35 and expected revenue is $2.5 billion. PYPL is a BUY.

Vanguard Global ex-US Real Estate ETF (VNQI) traded flat last week, rising just 0.04%. Although real estate has not been a big part of the 2016 news cycle (so far), a look at VNQI’s year-to-date move suggests great strength within global real estate. Since bottoming in early 2016, VNQI has been on a nearly unbroken run upwards, gaining 22% — and the momentum appears primed to continue. VNQI is a BUY.

Market Vectors Biotech ETF (BBH) added 0.99%. Although the “biotech bull” hasn’t run lately with the same strength of past years, BBH continues to gain steam and push higher. BBH is 23% below its 52-week high, moving steadily up towards its 200-day MA, giving the bull plenty of room to run. BBH is a BUY.

Apple Inc. (AAPL) ran down 2.39% last week as investors pushed the stock lower going into yesterday’s after-market earnings announcement. Although Apple reported a weaker-than-expected quarter, the company added $50 billion to its stock buyback program and announced a 10% increase in its quarterly dividend. However, Apple’s quarterly profit fell for the first time since 2003, and sales of the iPhone fell for the first time ever. AAPL reported $1.90 in EPS vs. a $2.00 EPS estimate, and revenue was $50.56 billion vs. an expected $51.97 billion. Dipping below its 50-day MA, AAPL is now a HOLD.

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Phillips 66 (PSX) climbed 2.29%. Several big oil names will report earnings this week, and PSX will do so as well on Friday, before markets open. Although low oil prices have been tough on oil sector companies, and this may well be reflected in earnings reports, the expected rebound in oil prices and current falling production levels stands as a coming tailwind for the entire industry — and not a moment too soon. PSX is a BUY.

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