Flashing Lights  

The nausea-inducing volatility so prevalent over the past two months continued since our last Hotline and, as of this writing, we are much closer to seeing a technical breakdown in the S&P 500 that would take the index below key support at the 200-day moving average.

Now, to give you a sense of that volatility, consider that last Friday the S&P 500 was down 2.10%. After a relatively calm weekend with no negative news catalysts, the market rebounded sharply, sending the S&P up 2.72%.

On Tuesday, things once again got ugly, and the broad measure of the domestic market slid 1.73%. Wednesday finally brought a sense of relative calm to markets and, after some choppy trade, the S&P closed lower by just 0.29%.

This morning, stocks opened firmly to the upside, with about a 0.90% gain in the first 90 minutes. Yet given the volatility in this market, and the fact that this is the final trading day of Q1, I expect the volatility to continue into this session’s final hour.

Of course, it’s hardly fruitful to myopically focus on the events of the week, as we are not investing just for the week in this service.

Rather, we are investing in some of the best companies, and some of the best funds, the market has to offer. And, we are allowing the power of compounding and dividends to keep us calm in the face of the latest market churn.

Yet one thing we do need to be conscious of here is the flashing “caution” lights we’re seeing in this market. There’s simply no disputing that we’ve increasingly received signs telling us that this market just wants to roll over for the bears.

Signals such as a breakdown in Dow Theory (where we’re seeing lower highs and lower lows), a compression in the 10s-2s yield spread (which hit a multi-year low on Wednesday) and the big decline in key market leadership sectors such as technology and financials all must be acknowledged and respected.

A failure to be mindful of this reality leads to a lack of understanding, and a lack of understanding leads to emotional, even epistemological, turmoil.

The way I see it, this bull market is facing a couple of possible climaxes. One is stagflation, and the other is a deflationary recession.

If we see stagflation, we will experience higher interest rates and inflation that will eventually choke off economic growth. In this scenario, cash loses value to inflation, bond values decline and stock prices drop as earnings peak.

If we are approaching a deflationary recession, we will see economic growth roll over (which is what the bond market, i.e. the 10s-2s spread, is implying), then we’ll see a situation where inflation stalls or even reverses, and where the Federal Reserve is forced to cut interest rates to stimulate the economy. If that happens, bonds will outperform, as will defensive equity sectors.  

Now, I am not saying that either scenario is imminent, but one of these two scenarios is likely to ultimately play out. And while I am getting a bit ahead of myself here in preparing you for this outcome, it’s my job to make sure you don’t get blindsided by reality.

Finally, this week I received an email from reader Jeff E., who asked me about the current Income Multipliers list of “buys/holds” on the website, and how often they are updated.

This list has remained unchanged since I assumed editorial control, and the reason why is that except for the most recent action in markets, we’ve been in a confirmed bull trend that has not required we alter our holdings.

Of course, the price action over the past month-plus has changed that, so now is the time to reevaluate our positions.

In our next monthly issue, I will be updating the Income Multipliers holdings, and I’ll provide lists of new stocks added to the buy list and new stocks added to the hold list.

And, from here on I will be doing this portfolio update on a quarterly basis, or in special circumstances, on an individual stock when a change of status is warranted.

P.S. I’m going to be at the Las Vegas MoneyShow, May 14-16, 2018, giving two presentations. My first talk, “Listening to the Music of the Markets,” is going to be on May 16 at 8 a.m. My second talk, “Invest Like a Renaissance Man,” will also be that day but in the afternoon at 2:15 p.m. I look forward to seeing you there! For more details, click here.