Don’t “Sell in May”

Don’t “Sell in May” (or Go Away)…but Be More Selective

by Louis Navellier

April 26, 2016

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

The S&P 500 is up 2.3% year-to-date and the DJIA is up 3.3%, but the NASDAQ is down just over 2%.  Last week, the S&P 500 was up 0.5% and +1.5% for the month of April so far.  Near-term, the stock market appears to be overbought after the DJIA and all 10 sectors of the S&P 500 rose above their 50-day moving averages last week as many taxpayers fund their pension plans before the April 15 deadline. After the April 15 tax deadline, new pension contributions tend to slow dramatically.  This is (in part) why so many folks begin to talk up their “sell in May and go away” theories during late April.

May Image

I don’t ever favor “selling in May” (or “selling all stocks” at any time).  Instead, I look for bargains within specific sectors or categories.  Overall, I’d say some big names remain ripe for consolidation.  First-quarter earnings are expected to be weak and expectations remain very low but any company that lowers its sales or earnings guidance will likely be shot on the spot.  As a result, I expect the stock market to become increasingly narrow in May. (Please note: I do not currently hold a position in NFLX or ILMN. Navellier & Associates, Inc. currently owns positions in NFLX and ILMN for some client portfolios.)

I should add that BBB-rated corporate bonds yield 1.9% less than they did four months ago, while the inventory of good investment-grade bonds available remains especially tight; so I expect that more investors will continue to turn to high-dividend yielding stocks as an income alternative.  I am also eager to see the latest stock buy-back activity figures, since Corporate America continues to sell low-yielding debt to retire its outstanding stock.  I suspect that when we look back at 2016, stocks that offered high and reliable dividends buoyed by stock buy-backs will be hailed as the biggest market winners of the year.

In This Issue

In Income Mail this week, Bryan Perry examines the spectacular rise in bullish bond sentiment since February.  In Growth Mail, Gary Alexander looks at five great publications from 240 years ago, including Adam Smith’s “Wealth of Nations,” and how Smith’s insights are reflected in global growth statistics. China has been a great growth story since 1980, but Ivan Martchev warns of a coming Chinese Hard Landing, as well as a possible Fed blunder this week.  Jason Bodner recalls historical manias from Tulip Bulbs to Tickle Me Elmo to examine the importance of timing, and I’ll comment on Europe and Energy.

Income Mail:
A Choppy Earnings Season Creates Bond Bulls
by Bryan Perry
BOJ Offers Member Banks “Pay to Play” Option

Growth Mail:
Some Common Sense about the Wealth of Nations
by Gary Alexander
Gross Output Tends to Rise (or Fall) Faster than GDP

Global Mail:
The Chinese Hard Landing is Progressing on Schedule
by Ivan Martchev
Is the Fed about to Compound its December Mistake?

Sector Spotlight:
Technical vs. Fundamental Analysis – Which is Better?
by Jason Bodner
Technical Timing in “Tickle Me Elmo” Dolls

A Look Ahead:
The View from Europe
by Louis Navellier
The Latest News from the Oil Patch

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

A Choppy Earnings Season Creates Bond Bulls

by Bryan Perry

This past week, Treasury yields gave up a bit of ground. The 10-year Treasury Note now yields 1.85%, in deference to the U.S. stock market’s optimism about the prospect of better economic growth in the second half of 2016, fueling continued capital rotation into economically sensitive sectors. However, that optimism was tempered when some high-profile, big-name stocks missed first-quarter Wall Street expectations with each respective stock taking a step back, since forward guidance was also guarded. This string of earnings shortcomings changed the overall tone of the market for the near term. When some of these growth “darlings” came up short, there was a natural step backward in investor sentiment.

Leading up to last week’s round of high-profile earnings releases, money was starting to rotate out of the super-safe dividend sectors with the idea that cyclical growth is getting back in fashion with institutional investors. That notion, though still somewhat intact, ran into some roadblocks with investors opting to roll right back into the utilities, consumer staples, telecom service providers, and specialty REITs late last week. It was as if the market heard the voice of John Wayne saying, “Whoa! Take it easy there, Pilgrim.”

I agree with that caution. Most of the data crossing the tape last week was soft. Housing Starts (1089K vs an 1170K consensus), Building Permits (1086K vs 1200K consensus), Philly Fed (-1.6 vs 9.9 consensus),, and Leading Indictors (0.2% vs 0.4% consensus) all came in below consensus estimates (source: Briefing.com). In addition, the week ahead contains dozens of earnings reports from the energy, industrial, mining, and materials sectors that will provide investors with insight as to how low the earnings expectation bar was set. First-quarter results from Caterpillar, General Electric, and Honeywell reported last Friday each came in within estimates and their shares shed less than 1%, not a bad showing at all. (Please note: I do not currently hold a position in CAT, GE, or HON. Navellier & Associates, Inc. does currently hold positions in CAT or GE for some client portfolios, but does not currently hold a position in HON for any client portfolios.)

Mark Hulbert, a senior columnist at MarketWatch, reported on April 1st that bond bullishness is at a record high, going back to the 1980s when Hulbert started monitoring the investment newsletter industry. This comes as the stock market has risen roughly 12% off the February 11 low. What’s driving so much bullishness? The Hulbert Bond Newsletter Sentiment Index (HBNSI), a measure of the average bond market exposure level among a subset of short-term bond-market timers, has gone vertical since February.

Bond Market Exposure Level Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Contrarians will claim this is the stuff of market tops, but with no fewer than six developed nations and regions offering negative interest rates, it might not seem so much of a conundrum. Hulbert points out in his analysis that this kind of spike in bond sentiment is more of an exception than a rule. I can’t say if the past is prologue, but when some of America’s very best blue chip growth companies don’t make their numbers, then maybe the guys in the bond trading pits have better information than NYSE floor traders.

United States Dollar Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

BOJ Offers Member Banks “Pay to Play” Option

Few would argue that one of the main drivers for the recent rally has been the notable pullback in the U.S. Dollar Index (DXY) that acts as a currency catalyst for multinational companies that dominate the DJIA.

It’s important to know what goes into the Dollar Index when the debate over currency manipulation by central banks is such a focal point of daily reporting in the financial markets. The U.S. Dollar Index tracks the strength of the dollar against a basket of currencies. In recent years, the strength of the U.S. dollar has fallen against other currencies as a result of U.S. monetary policy. Since the elimination of QE in August of 2014, the value of the dollar against that currency basket has rocketed higher, reaching a recent trading range of 94-100. DXY is a weighted basket of the dollar's value relative to six other select currencies:

U.S. Dollar Index (DXY) Weighting
 Euro (EUR)  57.6% weight 
 Japanese yen (JPY)  13.6% weight 
 Pound sterling (GBP)  11.9% weight 
 Canadian dollar (CAD)   9.1% weight 
 Swedish krona (SEK)  4.2% weight 
 Swiss franc (CHF)  3.6% weight 
 Source: Trading View

 

With the Bank of Japan and the central banks of Denmark, Austria, Netherlands, Sweden, and Switzerland all moving their overnight lending rates into negative territory and the ECB moving in that direction, it stands to reason that the recent sell-off in the greenback may be limited, with a resumption of the cyclical rally to potentially follow soon thereafter. Consider the big news of the week – which barely got mention in the U.S. business news channels – that the Japanese yen declined sharply amid reports that the Bank of Japan may offer negative interest rate loans to financial institutions to ease the damage from negative interest rates.

Japan and German Government Bonds Yields Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So, in plain English, the BOJ is charging interest to its member banks to keep money on deposit with the central bank while at the same time paying those same banks to borrow money, essentially saying, “We’re going to penalize you for keeping your money with us, but we’ll also pay you to take it from us.”

Here’s the rub. It’s not like the banks don’t want to make good quality loans; they most certainly do. In my estimation, the BOJ (like the ECB) is encouraging higher-risk lending with the caveat that they will absorb the loan risk if the banks start to run into trouble with shaky credit. In other words, it’s hard to call what the BOJ and the other central banks are doing other than enacting “desperate” fiscal policies because all of their other traditional options have proved ineffective and new limits need to be explored.

Such untried monetary measures make global bond markets nervous. That is why the U.S. dollar slide will likely not continue, even if the Fed pushes out their target date to raise interests another quarter point.

If my assumption is correct and the dollar index holds support at the 94 level, then it will be difficult for the DJIA to trade back up through its all-time high of 18,351, even though the index came within about 140 points of that number on April 20. “Close, but no cigar,” at least not yet. However, with the 10-year T-Note comfortably camped out under 2.0% and the Fed meeting this week, the DJIA and the other major averages will very likely take out the previous highs by year’s end if not sooner. Capital is plentiful and interest rates have never been this attractive – two very powerful catalysts even if earnings are only so-so.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

Some Common Sense about the Wealth of Nations

by Gary Alexander

In 1776, five world-changing documents entered the human library.  It was our greatest year of freedom literature, by far: 1776 began with the publication of Thomas Paine’s then-anonymous tract, “Common Sense,” wherein the author Paine-stakingly skewered the British crown and argued for independence.

At a time when the population of America was under three million, nearly every literate household owned this book.  In its first year, over 500,000 copies of Common Sense were printed in 25 editions, turning the tide of public sentiment toward revolution.  Then, in the middle of the year – July 2 – 56 members of the Continental Congress signed Thomas Jefferson’s “Declaration of Independence” in Philadelphia.

On December 23, Tom Paine ended the year with this stirring opening of the first edition of “The Crisis.”

“THESE are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered….”

While these three documents memorialized the Revolution, Britain published two ground-breaking (and much longer) books in 1776.  One was the first edition of Edward Gibbon’s “The Decline and Fall of the Roman Empire.”  According to David McCullough’s book “1776,” Gibbon was a member of the House of Commons at the time, and he favored smashing the rebel uprising in America.  Apparently, the great historian thought the British Empire was the “Rome” of its day, still in its ascent – not ready for a decline.

The fifth great book published that year (March 9, 1776) was Scotsman Adam Smith’s “Inquiry into the Nature and Causes of the Wealth of Nations,” perhaps the most influential book of modern times.

For centuries, European nations were seduced by the economics of “mercantilism” – which often boiled down to trade by subterfuge or theft in order to stockpile gold and goods in a favorable “balance of trade.”  Portugal, Spain, and France grew great and inevitably waned based on these principles, but Adam Smith stuck a fork into mercantilism by favoring mutually beneficial trade based on “comparative advantage.”

Smith introduced a system of “natural liberty” in which the “invisible hand” of self-interest caused merchants to create goods and services that would generate such demand that both buyer and seller would profit.  Capitalism leverages human nature for a positive outcome instead of indulging in the base instincts of the mercantilists to steal commodities from weaker people or nations, primarily in the New World.

As we celebrate the 240th anniversary of Adam Smith’s book, we can see that global growth exploded after 1776, as the nations which followed the prescriptions of that book were the fastest growing regions.

Global Growth Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As this chart shows, the economic systems that followed Adam Smith most closely – the U.S., UK, and Western Europe – grew first and fastest.  However, we don’t need to look back hundreds of years to see this.  Since World War II, we can examine a billion-person experiment in Marxism vs. Adam Smith in China – first, 30 years under Mao and his immediate successors (1949-78) and then nearly 40 years under Deng Xiaoping and his capitalist successors.  Deng began by freeing the farmers to retain some of their production and then he expanded capitalism to township enterprises and then to exporting industries.

The comparison between the two systems is clear (below), with a 110-fold increase in per capita GDP:

China’s Per-Capita GDP Growth
(measured in yuan per person)

China's Per-Capita Gross Domestic Product Growth Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Freedom involves more than trade; freedom gives scientists and inventors the ownership of their ideas and the opportunity to profit from their work.  In 1800, the average lifespan was under 40 years, virtually unchanged since ancient times.  Many of the greatest composers failed to reach 40 – Mozart died at 35, Schubert at 31, Chopin at 39, Mendelssohn at 38.  Adam Smith argued that the main source of wealth was not gold, silver, currency, land, or natural resources, but “the skill, dexterity, and judgment in the application of labor.”  That’s why small, relatively weak nations (say, Singapore, Holland, or Switzerland) can prosper, while larger nations with plenty of resources (like Brazil, Russia, or South Africa) often fail.

Here’s another example: “In 1950 oil-rich Venezuela was more than three times as rich per capita as South Korea. Yet by 2011 this relation was nearly reversed as capitalist South Korea’s per capita GDP was nearly three times that of Hugo Chavez’s Venezuela, despite several years of $100-a-barrel oil” (from “How the Wealth of Nations Made Us All Wealthier,” by Martin Conrad, Barron’s, April 23, 2016).

Gross Output Tends to Rise (or Fall) Faster than GDP

This Thursday, all eyes will be on the Bureau of Economic Analysis’ (“BEA”) initial (wild guess) estimate of first-quarter GDP, released April 28.  I won’t pay much attention, since revisions are usually large and (as I showed last week), first-quarter growth rates routinely underperform the second quarter and the year as a whole.  We already know that the economy is weak from various components of GDP already released, plus the Leading Economic Indicators (LEI). According to the Conference Board, reporting last Wednesday, the LEI rose a puny 0.2% in March after falling the previous three months, reflecting a sputtering economy.

These 10 indicators are “Leading” since they reflect business activity more than consumer demand.  As you can see, the LEI is dominated by business activity, not consumer actions.

The 10 Leading Economic Indicators (LEI):

  • Weekly hours worked by manufacturing workers
  • Average weekly initial applications for unemployment insurance
  • Manufacturers’ new orders for consumer goods and materials
  • ISM Index of new orders
  • Manufacturers’ new orders for non-defense capital goods
  • New building permits for private housing units
  • The S&P 500 stock index
  • The leading credit index
  • The spread between long and short interest rates
  • Average consumer expectations for business conditions

It doesn’t make sense to ignore most business-to-business transactions in the GDP.  Businesses spend more than consumers do, but businesses represent only 16% of GDP, dwarfed by consumers (68%) in the GDP’s accounting (the rest is government).  Only about 12% of private-sector jobs are in retailing, and those are some of the lowest paying jobs.  Most people work for companies that sell to other companies.

Manufacturers and shippers and designers are vital components of the economy, creating jobs and adding value.  A $300 wood table, for instance, involves several stages of production – from harvesting trees for lumber, which is used to shape the boards necessary to manufacture the table.  Along the way, each business is paid in real cash, but in the GDP, only the $300 table is counted, ignoring interim transactions.

Gross Output – a gross name, to be sure, but with a more elegant acronym (“GO”) – was first officially released in 2013.  (For the full rundown of the Gross Output statistics by industry, see the BEA Website.)

I’m concerned about 2016 GDP because Gross Output grew by only 0.6% last year and declined slightly (0.15%) in the fourth quarter vs. the third quarter.  Gross Output tends to rise or fall faster than GDP.  In a downturn, business spending declines faster than consumer spending.  In 2009, for instance, nominal GDP fell only 2% while GO fell by over 7% and intermediate inputs fell by 10%.  Wholesale trade fell 20%.

To clarify this difference, economist Mark Skousen created a business-to-business (B2B) index based on GO data.  It measures all the business spending in the supply chain and new private capital investment.  As you can see from this comparison, B2B spending declines faster than consumer spending in a recession (2008-09), but it also recovers faster than consumer spending (in 2007 and the years since 2010).

United States Business Spending Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There are several investment applications for this new statistic.  First of all, consult the BEA tables for yourself to see how each of several basic industries is faring.  You’ll find that some industries are growing far faster than others.  In the last quarter, for instance, Information increased its rate of growth, while growth rates slowed in the other sectors.

Real Gross Output by Industry Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Gross Output statistics can help you examine the outlook for the primary industries (“dirty jobs”), which could help you bypass some trendy retail and tech stocks that tend to fascinate so many TV talking heads.

There will be some flaws and inconsistencies to work out with this “GO” statistic, but it is a valuable new analytical tool for market analysts and economists, as well as a new addition to the Fed’s data dashboard.

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

The Chinese Hard Landing is Progressing on Schedule

by Ivan Martchev

The definition of a credit bubble is an economic boom that is driven by the ever-rising use of financial leverage. Towards the end of credit bubbles, prices of some assets are sky high, but few notice that the parabolic rise in borrowing in the economy results in ever smaller increases in GDP growth. Towards the end of credit bubbles a stock market crash is a fairly common event. This was the case in the 1920s in the U.S. and in 1990 in Japan. I believe this is the case today in China.

New Credit in China Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Total use of credit in the Chinese financial system continues to surge while GDP growth continues to languish (see chart, above). I have known about this for some time, even though timing the unravelling is easier said than done. My 2015 prediction in Marketwatch was for an economic hard landing in China (see my January 23 2015 column, “Why 2015 Could be Rough for China”). I explained this debt-driven growth dynamic in that article, 15 months ago, long before it became front-page news last summer.

Economic hard landings and stock market crashes are not one and the same thing. The 1987 stock market crash did not accompany an economic hard landing in the U.S., while the 2008 stock market crash did coincide with an economic hard landing. In the case of China, the economic deceleration is more gradual as the Chinese central bank is plugging the leaks in the financial system by accelerating lending into a busted credit bubble. That prevents a sharp economic unraveling, even though it promises a bigger deflationary problem later on, when accelerating lending stops working.

Seeing that the Chinese stock market had gone parabolic in a decelerating economy with its real estate market gathering momentum to the downside, I penned a MarketMail entry on April 27, 2015 called, “Can Crashes be Predicted?” – six weeks before the Chinese stock market crashed. The Chinese market had been rising on ever-increasing margin leverage and had no earnings to support the parabolic rise in share prices; so if one looked dispassionately at the mania that was happening at the time, one could foresee it.

Shanghai Composite - Daily OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Chinese stock market as represented by the Shanghai Composite is showing a classic pattern of bear market rallies after its initial decline in the summer of 2015, followed by a much sharper sell-off. I am aware that the bubble was much more pronounced on the Shenzhen Composite, home to many small and mid-cap stocks; but for all intents and purposes if we are to assume that Chinese stocks in general are in the midst of a serious bear market, all Chinese indexes would reflect that. This is the same as the Nasdaq Composite unravelling in the U.S. in 2000, which was mirrored in the Dow Industrials and the S&P 500.

It looks like the Shanghai Composite may have completed one of its bear market rallies and is about to deliver another dive. Those red trend lines on the SCOMP chart (above), also called fan lines, are a demonstration of the economic deterioration that is going on in China. I would not be surprised if the SCOMP ultimately bottoms in the 1000-2000 range as the Chinese central bank policy of lending aggressively into a busted credit bubble to keep problematic corporate borrowers afloat backfires spectacularly. I think we will see at least a nasty recession in China, similar to the Great Recession in the U.S. in 2008-09, post the mortgage meltdown, accompanied by a similar banking crisis.

So, when is this Chinese Great Recession coming? It could be by the end of 2016 or it could be pushed into 2017. The policy of accelerating lending to problematic corporate borrowers just to keep them afloat is buying time for the moment. The nature of such credit bubbles is that they can slowly unravel and pick up steam until they go into crisis mode. Those that were watching the spectacular collapse of many U.S. mortgage securities in 2007 knew that a spillover into the economy and financial system was coming in 2008. If we use that analogy today the Chinese credit cycle is where the U.S. was in mid-to-late 2007.

China AAA Corporate Bond Yields Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Chinese credit spreads are blowing out and there have been multiple bond offerings that have been cancelled this month, to the tune of $9.6 billion. If you recall the failed bond auctions in the U.S. in 2007 and 2008, you are seeing it in China right now (see Bloomberg April 18, 2016, “It’s All Suddenly Going Wrong in China's $3 Trillion Bond Market”). In this case, it is the Chinese banks that are on the hook for their preference of Chinese firms to use banks loans, as well as its infamous shadow banking system (see the Brookings Institution April 1, 2015 publication, “Shadow Banking in China: A Primer”).

Of the three canaries for a Chinese coal mine (listed in my 2015 prediction) – namely, Soufun Holdings (SFUN), Bitauto (BITA), and Noah Holdings (NOAH) – two have had a very rough time. I profiled these three “canaries” since Chinese economic numbers are not reliable, in my view; so it was better to use such secondary indicators, as they are leveraged to the problematic sectors of the Chinese economy. Among the two troubled holdings, SouFun Holdings is a real-estate listing portal, while Bitauto helps with online marketing for cars, which show a second derivative slowdown as the Chinese economy decelerates.

Noah Holding Limited - Weekly OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The only canary still flying is Noah Holdings (above), which repackages shadow-banking-system loans into wealth-management products that have higher yields. Shadow banking practices in China are facing a generational shakeout and it is entirely possible that Noah will not survive. I think the stock has topped out. I believe – and obviously I don't know this with 100% certainty ahead of time – that this stock will have at least three consecutive 50% declines when the shakeout in the shadow banking system starts. So if we are at $25 today, there will be a move to $12.50, $6.25, and ultimately $3 – if the company survives, that is. Noah, with its business of trying to create higher-yielding wealth management products out of shadow banking loans, reminds me of repackaging mortgages in various “safe” (AAA) debt structures a decade ago in the U.S. (Please Note: I do not currently hold a position in SFUN, BITA, or NOAH. Navellier & Associates, Inc. does not currently hold positions in SFUN, BITA, or NOAH for any client portfolios.)

The Chinese economic unraveling should be quite a sight to behold.

Is the Fed about to Compound its December Mistake?

I had a rather telling conversation with a retail investor last week. It went like this:

“What is going on with the Federal Reserve?” the investor asked me. “First they said they will have four rate hikes in 2016. Then they said there will be fewer than four hikes. Then one Fed governor says we should hike in April, another says we should hike in June, and a third says something different. This sounds disorganized. Do they know what they’re doing?”

My answer: “It is true that those conflicting signals may not seem very well organized, and they very well may not know what to do next. Or, they may be sending conflicting signals on purpose. At any rate, I think the first rate hike was a mistake and if there is another rate hike, that will compound their mistake.”

Thirty Day Fed Funds - Daily OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Fed fund futures (depicted above), as well as Treasury bonds, sold off last week as the rate hike signals intensified. I believe it was a major mistake to hike rates in December as the world has a deflationary problem and many central banks are experimenting with negative interest rates. I don't like the idea of negative interest rates. They collapse the net interest margins for banks, creating a different set of problems for already-weak financial systems struggling with deflation. So if the world has a deflationary problem, which I believe will get worse if the Chinese devalue the yuan, it is no time to be hiking rates in the U.S. After all, that will push the dollar even higher, which will add to global deflation.

I think the Fed is following academic models for the U.S. economy and is ignoring, or not paying enough attention to, the globalization aspect of the present environment. I don't think that the potential economic unravelling in China can put the U.S. economy into a recession because it is a more stable, consumer-driven economy, but I think that China will have many negative repercussions in Asia and will continue to suppress commodity markets for some time. This is clearly not an environment for U.S. rate hikes.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

Technical vs. Fundamental Analysis – Which is Better?

by Jason Bodner

What drives markets? Technicals or fundamentals? Both? Neither? Supply and demand? This debate is as old as the market itself. I believe the answer lies not in one camp or the other – or even in the middle ground, for that matter. I believe the answer lies more in the sequence of things – the timing.

Economic Ying Yang Image

Let’s talk about fundamentals for a moment. Looking at a stock, I would much rather invest my capital in a company that is managing its business in a way that aims to ensure that it stays around for a while. To be more specific, I prefer to focus my buying on companies that are growing their revenues and earnings, managing debt levels, and solidifying market share. These powerful factors can potentially deliver serious growth over time. These companies have a higher probability of being leaders both today and tomorrow.

Regarding technicals, I am not going to show you any bull or bear flags, MACD, Fibonacci retracements, or any technical tools. I do, however, believe that a strong focus on price ranges, volume and volatility can tell us a lot about the driving factors behind what is ultimately important: Price. I believe these basic technical factors drive initial price direction while fundamentals drive the longer-term picture.

Warren Buffet said “Price is what you pay; value is what you get.” My trading corollary to Buffett’s rule is “Technicals reflect where we are, and fundamentals show where we may go.” To exemplify that point, let’s talk about some specific examples – like tulip bulbs, Miami real estate, and “Tickle Me Elmo” dolls.

Come again?

Technical Timing in “Tickle Me Elmo” Dolls

Manias, crazes, and delusions have been documented throughout history. When they result in human destruction, as in Nazi Germany, they are considered dark corners of our human history. Yet when they occur in markets – whether financial, retail, or the secondary consumer market – these historical crazes have been treated as almost comical anecdotes. But the underlying causes of manias are always the same. They are the same forces that propel prices in the stock market. In shorthand, they are fear and greed.

One of the most infamous crazes of all time was popularized in Charles Mackay’s classic “Extraordinary Popular Delusions and the Madness of Crowds.” In it, he discusses the Tulip market in Amsterdam in the 1630s. Tulips arrived in Amsterdam in the 1500s and wealthy people began putting them in their gardens. For some reason, the value of tulip bulbs vaulted to unbelievable levels. It was reported that a single bulb sold for more than the value of a house! A single bulb traded for 5200 guilders when a typical tradesman earned 150 guilders per year. Mackay’s book tells the amusing story of an opportunistic hunchback who rented out his back as a portable desk to write contracts for tulip futures. It seemed everyone was raking in profits until 1637, when the bubble suddenly popped. Shortly thereafter, bulb prices fell over 99%.

The 1929 stock market crash was a famous bubble, but at the time it was overshadowed by a real estate bubble in Florida in the late 1920s in which sometimes-swampy city lots in Miami were traded as often as 10 times a day and small apartments sold for the equivalent of $4.5 million in today’s dollars.

Crazes occur all the time. Remember Tickle Me Elmo? It was an entertaining or irritating (depending on your perspective) doll that would laugh and say, “That tickles.” The TMX version included the fantastic feature of Elmo writhing on the floor in fits of laughter. The toy retailed for just south of $30 but ended up being sold for up to $2,000 by resellers. I recall talking with a value-based portfolio manager at the time. He refused to pay a premium for stocks, but when it came to Tickle Me Elmo, the stores had sold out so he paid well above $150 to take one home. The reason: his kid had to have one. Right around that time, I was privileged to actually see an Elmo impersonator get arrested in New York’s Central Park:

Tickle Me Elmo Impersonator Image

The same craze took place for Beanie Babies and Cabbage Patch Kids. Bubbles occur all over the place. Uranium in 2007 rocketed up to $300 per kg, only to crash back to a relatively stable $100/kg thereafter.

All along, there were individuals who said things like “the fundamental value” of Tickle Me Elmo is just a plastic frame, a microchip, and a speaker in a doll with ping pong ball eyes and some fur. The cost to produce is maybe $10 plus $6 per unit for marketing. Value investors would never pay more than $16 for it. While this is logical, the price did go up to $2,000. If even for an instant, the “real” value was $2,000.

Irrationality can distort prices for a long time, rendering the fundamentals temporarily irrelevant. The fundamental values triumph in the long run, but a temporary dislocation can make for major discomfort.

How does this relate to now? Well, let’s look at what is leading the market. Recently, we have seen a major resurgence in the price of oil. We have been harping on the fact that oversupply is still rampant, with seasonal demand serving as a catalyst for the rally in energy prices. The 12-month weakness in energy is household knowledge, but I must admit I was impressed when I looked at the 3-month Sector index returns today. All 10 sectors are up more than 5% and energy is up almost 17% in 3 months!

Standard and Poor's 500 Sector Indices Changes Tables

Whether or not the market is overbought now – and I believe it is – it is important to be mindful that irrationality can drive technical action. This technical action can drive markets to extreme ranges until price and behavior eventually catch up with the fundamentals. Energy saw extreme downward pressure, only to see an extreme rebound. The fundamentals say one thing, but the price says another. Which will win? Fundamentals or technicals? I think it’s more important to ask, “Which will win… when?”

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

The View from Europe

by Louis Navellier

Anytime you think America’s politics or central banking shenanigans are sounding like Looney Tunes, take a look across the pond. The European Central Bank (ECB) announced last Thursday that it is ready to use “all instruments” available, including further key interest rate cuts (from current rates at -0.4%) plus (possibly) more quantitative easing (QE). The ECB desperately wants to ignite inflation, and the easiest way to do that is to weaken the euro, thereby pushing the price of imports up. Frankly, the ECB’s latest statement sounds both clueless and desperate, and their rising desperation is frankly very scary.

Union Jack on Top of Euro Flag Image

The only reason the euro looks temporarily strong, in my view, is because European investors seem more comfortable with the euro versus the British pound until the outcome of Britain’s June 23 vote is known. Britain will vote on June 23 on whether or not to exit the European Union (EU). British Prime Minister David Cameron is coming under criticism on many fronts. Last week, President Obama visited Britain to ask the voters and politicians there to remain in the EU. Obama was met with mixed reviews, since many Brits find it odd that a lame-duck American President wants to meddle in their politics. Not too long ago, President Obama blamed the instability in Libya on British Prime Minster David Cameron in an Atlantic magazine interview (see “The Obama Doctrine,” by Jeffrey Goldberg, The Atlantic, April, 2016).

Furthermore, U.S. State Department and CIA officials have been repeatedly cited as the source of the leak of the “Panama papers,” which embarrassed Prime Minister Cameron’s family for allegedly having money in an offshore tax haven. This is not good for the personal relationship of Cameron and Obama.

Furthermore, the influential London mayor, Boris Johnson (an outspoken opponent of Prime Minister Cameron), was especially insulting to President Obama last week, tweaking the President for removal of a bust of Winston Churchill from President Obama’s White House office. That was seen by some as a sign of an “ancestral dislike of the British Empire.” In other words, the leading politicians in Britain stopped fighting with each other long enough to carp at President Obama instead. If Brexit passes on June 23, President Obama’s visit last week may prove to have been the pivotal tipping point as British leaders asserted themselves and made it crystal clear that Britain no longer is America’s (or anyone’s) lap dog.

The Latest News from the Oil Patch

There is a lot of confusion regarding what is happening to the crude oil market.  Reports of tightening supplies of distillates (e.g., diesel, heating oil, jet fuel, etc.) and Iran complaining about a shortage of tankers to boost its exports have contributed to helping crude oil prices firm up.  However, the April 17 OPEC meeting in Doha, Qatar, was simply a disaster and only a three-day strike by Kuwait oil workers helped to temporarily keep crude oil prices artificially high. That strike by Kuwait oil workers is over now and experts are refocusing on crude oil inventories, where the situation is clearly one of oversupply.

Last Tuesday, the American Petroleum Institute reported that crude oil inventories rose by 3.1 million barrels in the latest week. The simple fact of the matter is that America’s crude oil glut this year is higher than it was in 2015 and all previous years, so even though crude oil futures may be responding to small changes in production data, the excess inventories of crude oil are still overwhelming and may likely result in crude oil prices plunging in September when worldwide seasonal demand begins to ebb.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives Trade Summary

It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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