Northern Star Newsletter 8/08/2016
Where we stand.... exciting or concerning?
More than half way through the market's annual cycle, we find ourselves in a rather interesting set of conditions. So to examine these conditions, a bit of background will help here I think.
During bear market transitions, it is NORMAL to see a few changes take place. Small-cap stocks shift from demand in favor of supply taking over and eventually seeing a fall from grace to disgrace. We have seen the small cap universe of stocks decline to bear market category in an overwhelming number. Bear market is considered when 20%+ decline takes place from their 52 week high. At this point, we are seeing 34% of small caps fitting well within this criteria.
We begin to see an exhaustion of buying and weakening volume from Feb lows to July suggesting an overvaluation of stock prices to the point where buyers are becoming ever increasingly selective in what they buy. To date, we are seeing gold, utilities and ultra-blue chip dividend paying stocks on the rise while virtually all other sectors are either holding or declining.
When you begin to see GOLD and Utilities outperform other more traditional growth oriented sectors, this suggests that in spite of desire to grow portfolios, investors are shifting into "safer" and more steady positions.
We see the overall valuation of the S&P 500 at about 21-26 (depending on which method you choose), which is about 4-9 points higher than historic bull market valuations of 17. While this seems to be a small figure of distance, it is in reality substantial for such an index.
Transition periods in history...keep in mind here that the longer the bull market, the longer the bear market. The larger the rally, the deeper the fall. We have experienced one of the longest bull market rallies inside of a bear market cycle in history from 2009 to present. When compared to such time frames as the 1921 to 1929 rally or even form 1982 -2000, it took over 2 years to transition from the first signs of a bear market to the actual top of the markets BEFORE the fall. This being said, we can read the "signs" before the fall if you know how to read them...
Common Signs are:
- Selectivity in buying.
- High valuations of PE ratios.
- Weakening demand for new buying.
- Strengthening in selling pressure.
- Sector leadership changing from typical growth in technology, pharmacy, bio-healthcare, ect...into safer sectors such as gold, utilities, defensive stocks, mega cap dividend paying stocks, ect...
- 1/3rd of the all stocks right now are currently in a bear market condition while the markets are making all time highs...interesting!
- As of July, DJ transportation index (leading indicator) is declining while the DJ utilities (considered defensive indicator) are rising in a strong manner...this is a sign (one of many) of an unhealthy rally.
We have seen a rally in the markets since Feb making new highs in both the S&P and Dow which will cause many to "suck in" and chase returns. This emotion is where investors get caught and crippled in their investments (in hindsight) causing them to get trapped into the vicious cycle of behavioral finance.
It is easy and VERY common to look at 2014 & 2015 and try to exert more pressure on your investments i.e. to raise your risk levels in an effort to make up returns or continue to get your investments to perform better. Guard against this behavior. We saw it in 1999 and again in 2007, only to cause investors significant damage to their investments that cost them years and thousands to hundreds of thousands of dollars.
This is also why the average investor fails to outperform the indexes over time and leads many to feel like beating the markets is impossible to do. It isn't. What is difficult to do is think counter-intuitively when dealing with money in addition to suppressing your emotions and thinking logically...if it were easy to do, everyone would be doing it.
Till we speak again, enjoy your week!
S&P 500 at New High After Jobs Blowout
WEEKLY UPDATE - August 8, 2016
Stocks bounced last week, ending sharply higher after a better-than-expected jobs report. For the week, the S&P 500 gained 0.43%, the Dow rose 0.60%, the NASDAQ added 1.14%, but the MSCI EAFE lost 1.41%.
Among last week's major events was a shockingly good July jobs report. Last month, the economy added 255,000 new jobs, blowing away expectations of 180,000 jobs. Even better, the gains were broad-based and the labor force participation rate (an area of concern because fewer people in our population were actively participating in the labor force) ticked upward. Overall, not too shabby.
Headline unemployment remained stable at 4.9%, but that single number hides a lot of complexity. Let's dig a little deeper. The chart below shows six different measures of unemployment, each slicing the data in a different way.
The U-6 unemployment rate is the most comprehensive, showing total unemployed, marginally attached workers (discouraged workers and those considered barely employed) and those total employed part time for economic reasons.
You can see that all measures rose during the recession and have been steadily dropping ever since. While headline unemployment (U-3 unemployment in official parlance) stands at 4.9%, U-6 is still at 9.7% (almost two percentage points higher than the pre-recession low of 7.9% achieved in 2006), indicating there are many people who haven't participated fully in the labor market recovery; however, the rate has fallen significantly from the 17.1% high it reached in 2009. All told, most areas of the labor market are still making gains.
Britain's central bank moved to lower interest rates to fight the Brexit blues. The Bank of England cut interest rates for the first time in nearly seven years and announced an aggressive round of bond purchases to stimulate economic activity. The bank is moving quickly to head off a possible economic blowback from Britain's vote to exit the European Union.
Will the Federal Reserve raise rates while one of our major trading partners is going the other way? We'll see.
Tuesday: Productivity and Costs
Wednesday:JOLTS, EIA Petroleum Status Report, Treasury Budget
Thursday:Jobless Claims, Import and Export Prices
Friday:Retail Sales, PPI-FD, Business Inventories, Consumer Sentiment
Motor vehicle sales miss expectations. July sales of cars and trucks by major U.S. automakers slipped as pent-up demand slackened.
Consumer spending increases more than expected. Spending by American consumers rose more than expected in June, suggesting consumption remained strong throughout the second quarter.
Factory orders fall. New orders for manufactured goods fell in June for the second month in a row, though stabilizing business spending offers some hope.
Construction spending falls to one-year low. Spending on construction projects fell in June, suggesting a downward revision to second-quarter economic growth may come.
Tax Benefits for Job Hunters
Are you or is someone you know looking for a job? If you're looking for a job in the same line of work (i.e. not switching careers), you may be able to deduct some of your expenses on your federal taxes. Here's what the IRS has to say:
- You'll usually deduct your expenses on Schedule A, Itemized Deductions, as a miscellaneous deduction. However, you can only deduct miscellaneous deductions that are more than 2% of your adjusted gross income.
- Costs that you can deduct include: resume preparation, editing, and mailing costs; travel expenses related to your search, and placement agency fees.
- You may not be able to deduct job-hunting expenses if there has been a long gap between the end of your last job and the beginning of your hunt, or if you're looking for a job for the first time. Keep in mind that reimbursed costs are never deductible, and you should always keep receipts and mileage logs in case of an IRS audit.
For more information about job-hunting tax concerns, consult a tax professional in your area or see Publication 529, Miscellaneous Deductions, on IRS.gov.
Tip courtesy of IRS.gov
Get Around Trees
Don't let the trees get you down. If you find yourself behind a tree that's too high or too close for you to get over, you'll have to go under and around. Depending on how far you have to go and how low the tree is, consider a mid-iron, which will keep the ball low, but high enough to get out of the rough. Also think about how wide your swing needs to be to go the distance. Smaller swings generate less spin, which will help keep the ball under the trees and prevent a repeat of your current situation.
Tip courtesy of Nick Kumpis, PGA | Golf Tips Mag
Catch Skin Cancer Early
3.5 million new cases of skin cancer are diagnosed each year in the U.S., the consequences of many days spent outdoors without sun protection. Fortunately, advances in detection and treatment mean that most cases aren't fatal. However, preventing skin damage by regularly using sunscreen and catching the disease early are critical to avoiding serious consequences.
According to Nancy L. Snyderman, M.D., possible warning signs of skin cancer include:
- Moles that are asymmetrical or have irregular borders.
- Moles with a variety of colors.
- Moles that are large in diameter or have changed size, shape, and color.
Check your body regularly for unusual skin lesions and make an appointment with a dermatologist to check out any areas of concerns. Consider taking annual or semi-annual photos of any moles to track changes over time.
Tip courtesy of AARP
Give Old Jeans New Life
If you have an old, ratty pair of jeans that are too worn to be donated (or have sentimental value), don't throw them away! Instead, try some of these eco-friendly ways to repurpose and reuse them:
Use them to pack glassware, ornaments, or other delicate items in boxes.
Cut them up to use as patches for kids' clothes or gardening clothes you want to keep using.
Cut off the jean legs, fill them with sand or polyester stuffing, and sew up each end to create draft stoppers.
Make a garden caddy or gadget case.
Tip courtesy of Green Living Tips
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