5 reasons why stocks may be primed to move higher
The panic would set in as soon as Dad would bellow “Where’s the clicker?” Everyone had to move. Cushions on chairs and sofas would be quickly tossed aside. Hands would stretch and scramble among the stale crumbs in the creases underneath in search of the elusive foe. Failure was not an option. There would be no TV that night until Dad’s hands grasp the clicker once more.
We called it a “clicker” because when you pushed one of the two, then on later models, four, buttons, a little hammer inside would strike one of four aluminum rods making a clicking sound that sent an ultrasonic signal to the TV set. Amazingly, even though today the electronic versions make no sounds that humans can hear, some people still refer to their remotes with this name tag.
The nightly (for some reason the remote never remained until the next evening on the table beside Dad’s chair) exploration began in the late ‘50s with the general availability of Zenith’s Space Commander remote control (which won its creators, Robert Adler and Eugene Polley, an Emmy and Inventor of the Year honors).
I’ll bet something like this search still happens in your house. I know it does in mine.
Of course, once the “clicker” was secured, the real fun began. Channel surfing at first was the attraction. Rather than watching the same network all night, we could now flip from channel to channel (to the extent that today the remote is called a “flipper” by many). Back in the day, this only occurred at the program’s end. Today, I know many who flip every time a commercial appears. They then come back to the story late or not at all. Sound familiar?
Also sounds frustrating, doesn’t it? At first the channel change was dictated by the TV Guide listings, but then that stopped coming. Cable offered hundreds of channels, and soon TV watchers began to click or flip between the channels randomly just looking for something to catch their interest.
It’s like that with most investors today. They flip between investment choices looking for something to catch their interest. One minute they’re scared and seeking safety, and the next minute they are feeling all confident and ready to take a fling on the next big, overhyped show.
Last week was a good example. Stocks sank to near their April lows intra-day on Monday as investors wanted anything but stocks, then came roaring back as stocks began to march higher for most of the rest of the week while investors clamored to get back on board the equity train looking for new highs.
Remote controls were invented to minimize the effort of changing channels—you no longer had to get out of your easy chair or argue with your children, who were probably lying on the carpet in front of the set, to do it. It just seemed like a lot of wasted effort.
At first investors traveled this same path in search of effortless investing. Remember when online investing first started and everyone was going to become a day-trading millionaire? It was kind of like a remote control; you didn’t have to call a broker to trade stocks; you just clicked away on your keyboard.
Losses and the work involved in keeping up with the markets soon ended that fad. Investors sought, instead, someone to do it for them. That’s what we have been doing here at Flexible Plan Investments since 1981 with our separately managed account (SMA) programs.
It’s still kind of like remote control. Our clients open the account, that clicks the “start” button, and we begin changing the investment channels for them. It’s further automated internally because we only use computer-driven, quantitative strategies to manage our clients’ portfolios.
Like with TV remote controls, however, the very automation of the process makes it easy for the user to begin to channel surf. And investors today, like TV watchers, may be doing so without a guide. Remember how frustrating such flipping was for the TV viewer. Be careful in changing channels, you could miss all of the good parts.
There were lots of good parts last week and the Second Season of the current bull market could be just beginning. Remember how I mentioned last time that April is one of the best months for stocks? Well, the second half of the month (after a brief respite after the 16th) is historically the best part of the month, and investors have already gained over 2% this month in the S&P and more on other indexes.
There are at least five keys to higher stock prices, and all of them are clicking on the same channel at the present time. There does not seem to be a good reason to switch.
First, interest rates remain low. As the chart shows, there has been no better time than now to refinance a mortgage or buy a new home. And early indicators are that the housing market, the primary driver of past recoveries, is accelerating in response to this.
Source: Bespoke Investment Group
Second, economic reports have been disappointing throughout this year. Week after week we’ve had to report that most were underperforming expectations. While there were only ten reports last week, it is pleasing to report that all ten met or exceeded expectations.
Third, investor sentiment continues to trend lower for stocks even as stock indexes move higher. This is not the characteristic common to bubble-type speculation. Instead, it is the behavior one normally sees in the early days after a market bottom has been made.
Fourth, we just entered earnings reporting season. These reports will concern private company operations in 2015’s first quarter. Because of the difficult winter and three months of declining retail sales, earnings analysts are extremely bearish on company prospects and have been lowering their earnings estimates at near record rates.
But this actually has been a good thing during the market rally since 2009. As the chart shows in the lower left-hand quadrant, when analysts have downgraded more companies than they have upgraded, stocks have declined only three times over the next six-week earnings reporting season. In contrast, stocks have risen during that period in the remaining fourteen time periods (upper left-hand quadrant).
Source: Bespoke Investment Group
The number by which the company earnings downgrades have exceeded the upgrades has only been greater than the current number three times since 2009. In the six weeks after these incidents, stocks historically have registered gains between 4.7% and 5.2%.
Last, but certainly not least, the primary upward trend in stocks continues. As the final chart shows, however, the trend is being tested. The S&P has been consolidating, but Friday’s price action seemed to be signaling a breakout to the upside, which could mean new highs yet this month. Unfortunately, there was no follow-through today, which might mean more consolidation in the short run.
Source: Bespoke Investment Group
Regardless, many of our quantitative strategies are geared to respond to a break in the trend should it occur. Other strategies can further diversify a portfolio to seek to generate a positive response during a down trend, as well.
As remote controls developed, soon it was not enough simply to have a TV clicker. The types of remotes have multiplied. The average media room probably has at least four. Of course, this proliferation has led to a new development—the universal remote where all the devices can be controlled from a single remote.
Our Strategic Solutions platform at Trust Company of America and on a tax-deferred variable annuity at Jefferson National provides a similar tool. We have scores of strategies available all on a single platform so you don’t have to use anything else if you do want to change channels. No additional paperwork and all just a click away.
One of the most annoying parts about watching TV with Dad was that until his dying day when the ads came on, if he wasn’t changing the channel, he would always mute the commercials. You’d go from full involvement in a drama to what seemed like a long period of silence before the action would begin again.
But now that I think back on that silence, I wish I had a clicker for all of the investment noise emanating from the financial media today. It’s such a distraction. I would love to be able to mute it. And in its place it would be great to hear my Dad’s voice once more, even if it was only to roar “Where’s the remote?”
All the best,