Are we about to pullback?
Let’s break it down.
The S&P500 (SPY) remains in an uptrend, so what would point to a drawdown at this point?
With the S&P500 reluctant to breakout to fresh all-time highs, we focus on the “generals” performance.
Every army has its generals, just as every bull market has its leadership stocks. In our view, we cannot begin to assume the markets are ready to decline, until the generals falter.
Let’s look at Apple. Is this stock weak? Hardly. And with the iPhone 7 response, the stock appears to be ready to weather 4th quarter earnings season. Higher lows and higher highs do not cause us concern. This general is bullish.
Apple Inc. is expected* to report earnings on 10/25/2016 after market close.
What about the FANG stocks, Facebook, Amazon, Netflix and Google, do they look ready to rollover?
Facebook continues to grind higher. It’s been on a buy signal for three weeks. RSI is moving sideways, just above the 50 zone. MACD is above the zero line. Could we pullback to the 200ma? Sure we could, but what is the catalyst? Earnings? Are we required to pullback just because we haven’t?
If we did pullback to the 200ma, that would be a 10% drawdown.
Bollinger bands are tight and earnings season is around the corner. Facebook, Inc. is expected* to report earnings on 11/02/2016 after market close.
Amazon is the quintessential discretionary stock. It’s also trading at fresh 52 week highs. Does this general appear ready to pullback? If so, what is the catalyst? Maybe earnings?
EPS is scheduled for 10/27/16.
Does Netflix look ready to pullback?
NFLX doesn’t appear ready to me, as we note the bullish flag over the past week. Additionally, the stock is consolidating gains from its recent move through the 200ma, having traded below this key average most of 2016. SOTEMA is bullish.
Netflix, Inc. is expected* to report earnings on 10/17/2016 after market close.
GOOGL is moving sideways, and, as the saying goes, “the longer the base, the higher in space.” Will this candidate pullback to the 200ma, just because its spent the past three months above the 200ma? Or, is it more likely price action will break higher out of this 9 week base at 52 week highs? I think it breaks higher and soon, yeah but don’t listen to me. Smirk.
We don’t know, but one thing is certain. In order for us to get concerned about our longer term view of the markets, the generals have to falter.
Alphabet Inc. is expected* to report earnings on 10/27/2016 after market close. I hate that name, Alphabet, as it makes no sense to me. Still, its not enough to change my opinion of its trend.
While we view the 5 star generals as the leading growth stocks, there are a dozen other stocks we view as two and three star generals. Be sure to check their charts as well. BA, CAT, DE, GE, JNJ, MSFT, SBUX, TSLA, VZ, XOM, to name a few.
The takeaway is this. Even if we assume the lack of forward progress equates to a looming drawdown, we still need to focus on the historical probabilities that any markdown will exceed 5% or extend beyond. This is especially important if we’re considering 401(k) positioning.
Below are stats that I’ve updated since Josh Brown’s last post in early 2015, titled “How We Do Tactical.”
It’s worth a read, especially if you consider current price action as reason to exit your long term positions.
When we invest for the long term, we invariably need to endure periodic drawdowns. There have been 50 instances in which the S&P 500 was in a drawdown period of 5% from all-time highs.
- 18 of those 50 instances saw the drawdown extend to 10% from all-time highs.
- 9 of those 50 instances saw the the drawdown extend to 20% or worse
- In other words, these nine instances were the bear markets since the late 50s.
Finally, if you invest long term, with the same mindset of a day trader, you’re in for a lot of sleepless nights. If you’re mindful of how few drawdowns we’ve had in excess of 5% in the last six decades, you can begin to invest with a better sense of context and sleep better in the long run.
“The Generals” will start to fall apart if the markets are due for a drawdown, so remember to check them periodically.
Happy Saturday,
Vinny
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