Hello again,
In December/January I told you that after many years GE has bottomed out and it was ready to move higher and it did; two months ago I told you that Ford was a good buy and one week after that Ford had a significant move upwards; on my last newsletter I told you that the market was ripe for a correction and over the past few weeks we had a correction. Where do we go from here and does it matter? The correction did not last long and people were coming up with many reasons for the correction ending briefly. The main reason given was that the Federal Reserve indicated that it is willing to consider lowering interest rates in 2019. Just before the market started moving up, almost everyone on Wall Street was bearish and they were all talking about how bad this bear run could go. To me that was a clear indication that at least for the very short term the market was ready to rebound. I am a hopeless contrarian! I put a few dollars in to calls that mirror the NASDAQ index which is a mirror of the tech sector. Prior to that NASDAQ took a worse beating than the DOW so I expected a better come back from NASDAQ and it did not disappoint me as my small investment tripled in three weeks. The Federal Reserve did not give a guarantee that it would lower interest rates but these days the Feds just follow the bond market and not vice versa. The bond market has been lowering rates for some time so the Feds will have to follow that example or create a big mess in the financial markets. The bond rates did not go down due to fears of recession, not this time; the bond rates declined as investors were rushing to bonds to find a safety heaven as the stock market was so hectic and pessimistic.
By observing strange things that go on Wall Street, we could learn a lot about the market. Have you heard of a publicly traded company called, “Beyond Meat”? They make meat substitutes that are better than what is available in the market place. However it does not get my vote as it is loaded with processed food and protein derivatives of plant based foods that sound like cancer causing chemicals. I think it is better to eat a small portion of real meat to be perfectly healthy. Young people these days crave for vegetarian foods and “Beyond Meat” is a big hit among consumers. The IPO came out in May 2019 and with about $40MM in annual sales it was so popular with investors, a few weeks ago the market cap was around $4Billion! It was the sweetheart of the short sellers and most stocks were shorted as buyers were paying a ridiculous price for this stock. Last week BeyondMeat had their first earnings call and they beat all Wall Street expectations with annual revenue rising to $112MM. In one day, the share price went up by about 80% to $188 or so! On 6/11/19, with annual Revenue of $112MM, the market cap is at a ridiculous $7Billion! Why did this happen? Very simple, All the short sellers had to run for the hills and buy the stock at any cost! Whether it is the whole market or a stock of a company, if the short sellers are heavily in to it, and they were wrong about the underlying stock or ETF, there is much to gain for those who are bullish. Even though this happened I would not recommend anyone buying in to “Beyond Meat”-the stock or the product.
So for the market in general what can we expect? Some say “sell in May and come back in September”; which has worked in some years. Some say there will be a “summer rally”; and there have been summer rallies in the past. To get an indication what lies just in front of us, we have to look at technical analysis which has nothing to do with fundamentals (economy, prices, earnings and so on.. The problem with technical analysis is that it is very fluid and fast changing. It could point in one direction and some action in the market could make it turn direction fast. One of the tools used by technical analysts is the VIX index (Volatility Index) which has the nickname, the “fear index”. If the market has done else but move up in straight line for a long time, you could expect to see a low VIX. Recently I came across this proven theory, let us say that the market has been going through a correction and start rising again (as it did recently) then as the market rises, according to conventional wisdom, the VIX should start going lower (lower levels of fear) but when the market rises and if VIX also rises, then this technical analyst states that we are heading towards a major correction as what happened during the Fall of 2018. According to that technician, we could have a major correction very soon. Between 6/10/19 and 6/13/19, Dow did not move much at all but VIX kept moving higher (but slightly). On Friday 6/14/19, the market went down slightly and the VIX too went down. Next time we have a major move up or down in the market, it would be interesting to see what would happen with the VIX index.
The macroeconomic information we received was good for the economy and bad for the market. Recent upsurge in the market is because more people expect the Federal Reserve to cut rates this year. In fact the bond market has at least 2 rate cuts “baked in” already. Mortgage rates are so low many people care refinancing their houses. The macro information we received on 6/14/19 clearly show that we can expect a rate of growth for 2019 Q2 of 2% to 2.5%. Why would the Feds lower rates when unemployment rate is under 4% and when we are growing at 2.5%? If there is data to support strong growth and if we see inflation raising its ugly head again, The Federal Reserve is sure to increase interest rates and not lower them which is very bad for the financial markets.
Have a great month!
Fernando