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QUOTE OF THE WEEK

"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer.
They will die poor."

Jesse Livermore

– Enjoy more of our favorite investing quotes –

 


APRIL 10, 2016

 

On THE PRECIPICE OF A SELLOFF?

 


Jump Links:

- Markets Flash Warning As Yields Drop
- Real U.S. Bond Rates Are Already Negative
- Real-Time GDP Tracker Points to Just 0.1% Growth in US
- S&P 500 Momentum Breaks Down
- Our Plan for This Week



MARKETS FLASH WARNING AS YIELDS DROP


Chart 1 shows that the yield on US 10-year Treasury Bonds has once again dropped to a level at about 1.6% that has been support since mid-2012. The only time 10-year bonds fell below this level was in mid-2012, during the European financial crisis.  During that period, the interest on ten-year bonds dropped from about 3.7% in early 2011 to 1.4% in July 2012. Today the 10-year Treasury yields stand at just 1.685%.


CHART 1: US 10-Year Treasury Bonds have dropped again to a yield near 1.6%.

 

Negative interest rates are spreading across the world in countries such as Sweden, Switzerland, and Japan as these countries try extreme measures to spur stagnant economic growth. Germany's ten-year bond is yielding below 0.1%, generating speculation that it will also soon move into negative territory.

About one-quarter of government bonds in Europe and Japan have nominal yields below zero. These unprecedented low yields, where savers have to pay the government for their prudential discipline, is driving international money to the US bond market, thereby also weighing on US yields. Many analysts are projecting US yields will drop below 1% by late 2016 based on the pressure from negative rates worldwide. Of course, these extremely low bond yields reflect the very dire economic conditions across the globe.

 

REAL U.S. BOND RATES ARE ALREADY NEGATIVE


According to an April 8 article in the Wall Street Journal, real yields on US 10-year Treasuries are already negative. With the latest reading on the Core Consumer Price Index at 2.3%, investors in the 10-year Treasuries are losing money relative to the rate of inflation. Chart 2 below shows the nominal 10-year Treasury yields in green and the inflation-adjusted yield in orange:



CHART 2:
The 10-Year Treasury Yield is now negative when inflation is taken into consideration.

 

REAL-TIME GDP TRACKER POINTS TO JUST 0.1% GROWTH IN US

 

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation’s overall economic activity. – Investopedia

Many economists and market watchers follow the Gross Domestic Product (GDP) number as an indicator of the strength or weakness of a country's economy. However, in the US, that number is released with a substantial lag. An initial 'advance' number is issued a month after the end of a quarter; then it is revised two times. That means that the most accurate readings come out well past the period in question.

Most economists define a recession as two-quarters of negative GDP. However, the call on when a recession occurs can be very delayed. For example, the last recession which started in December 2007 wasn't identified until December 2008 – one year after the fact.

To the rescue comes the Federal Reserve Bank of Atlanta with its 'GDPNow' program. Introduced in 2014, the GDPNow tracker is a model that attempts to mimic the government's estimate of real GDP growth but with rapid updates. The Federal Reserve Bank of Atlanta inputs economic data points as soon as they are released and uses a formula that projects GDP for the current quarter. It updates the GDP estimate shortly after each piece of new data, offering a real-time projection of the pace of US economic growth.

What is shocking to some, but confirmation of our recent documentation of a radical decline in S&P 500 large-cap earnings and negative Russell 2000 small-cap earnings, is that the GDPNow tracker plummeted from a relatively healthy estimate on March 11 of 2.3% for the first quarter to the most recent reading of just 0.1% last Friday (April 8).

Chart 3 below shows the progression of the reading for 1Q2016 and how it has dramatically dropped off since early March:



CHART 3:
The Atlanta Fed's GDPNow tracker has plummeted to an estimated GDP of 0.1% for 1Q2016

 

S&P 500 MOMENTUM BREAKS DOWN


For some time now we have been making the case that the recent market run-up since February 12 was not a resurgence of the six-year bull rally, but simply a typical, very powerful, bear-market rally. That short-lived rally appears to have ended last week with another lower-high than the one set in December.

The following data and chart shows that the momentum of price, breadth, and volume of the S&P 500 SPDR (SPY) is now rolling over and investors should expect a significant downturn. Since we believe this is a bear market that started last summer, the new low set from this coming downturn should be below the March low of about 182 on SPY (1820 on the S&P 500 index). This would be a downturn of more than -12% and could occur over the course of just the next week or two, since selloffs are usually very rapid and violent.

 


CHART 4: The momentum oscillators for price, breadth, and volume have all rolled over for the S&P 500 ETF.

CHART 4: Intermediate-Term Indicators: The Price Momentum Oscillator (PMO, top of lower three windows) is finally following the Breadth Oscillator (ITBM, middle of lower three windows) and the Volume Oscillator (ITVM, bottom of lower three windows). These indicators have been displaying the erosion of breadth and volume occurring under a persistent price advance. The breadth isand volume oscillators rolled over two weeks ago (March 25).

The Price Momentum Oscillator (PMO) finally turned down at the end of last week (April 7-8). Deterioration of momentum is a classic technical analysis leading indicator of a change in market direction. Notice that the Price Momentum Oscillator (PMO) was quite accurate in identifying the turnpoints of the market over the course of the last year. These signals would have gotten you out just before the August crash and also before the January selloff (red lines). They also would've gotten you back in at the optimum time for the upturns (green lines). Right now it is saying that a downturn is imminent.


OUR PLAN FOR THIS WEEK


With momentum falling for all three indicators (price, breath, and volume) on the S&P 500 and also the Russell 2000 (not shown), we believe a significant downturn is forthcoming and will likely begin this week. However, that breakdown of price has not yet occurred, so conservative investors may wish to wait for it to begin before purchasing inverse ETFs.

Of course, waiting for a breakdown will mean missing out on the largest gains from inverse ETF's because the biggest drops usually come near the beginning of a selloff. Therefore, you need to be the judge of your risk tolerance. Keep in mind that this trade is a bet on probabilities based on the data provided in this and in prior Intelligent Value Alert issues. Investing based on proven signals is never a 100% guaranteed winner. However, if the trade should go in the opposite direction we expect, we will exit quickly, thereby limiting losses.

For the AGGRESSIVE Portfolio, we will do as the name suggests: be aggressive with inverse ETF selections in preparation for the likely selloff. With the CONSERVATIVE Portfolio, we will also follow its namesake and will remain mostly in cash until we see a confirmed breakdown of prices. Subscribers should follow the portfolio they self-assess with which they are most comfortable. An email will be sent regarding changes to the CONSERVATIVE Portfolio the evening before we make them. Changes to the AGGRESSIVE Portfolio for Monday's open are on its portfolio page in the Member's Area (passwords required).

As always, each position purchase will be made at the market open the following day after our recommendation and prices for each selection will be adjusted to the opening price so that our portfolio returns match yours. We also include a commission on each transaction, even though many brokers offer ETF's without charging a commission.

We hope that we have competently discussed the issues addressed in this Value Alert, and you can implement these ideas to your benefit.  Our objective is to give you the best value-oriented investment information possible, with ease of use, timely identification of the issues that affect our portfolio positions, and a full understanding of our approach. If you have any questions or comments, please contact us with a support ticket.

Best Wishes for Another Week of Intelligent Value Investing,
IntelligentValue.com

 

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DISCLAIMER
Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the subjects discussed, market environment, company or ETF SEC filings. Investors may wish to consult a qualified investment advisor. The information in this material was obtained from sources believed to be reliable, but were not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Shareholders, employees, and writers associated with IntelligentValue, Inc. may hold positions in the securities that are discussed. Neither IntelligentValue.com, nor any of its employees or affiliates are responsible for losses you may incur.