Archive for December, 2015

Top 10 US Stocks Per Sector Ranked For Price vs 1-Year High

Sunday, December 27th, 2015

These tables present the 10 stocks in each US sector of the total US stock market ranked by how close they are to their 1-year trailing high price as of December 24, 2015.  To be included in the filter universe, each stock had to have a 3-month average Dollar trading volume of at least $10,000 per minute.

This is not a recommendation to buy or sell any of these stocks.  It is merely a snapshot of where we are at essentially year-end 2015.

2015-12-27_21-TopSectorStocks5 2015-12-27_21-TopSectorStocks4 2015-12-27_21-TopSectorStocks3 2015-12-27_21-TopSectorStocks2 2015-12-27_21-TopSectorStocks1

International Market Breadth vs US Market Breadth

Monday, December 21st, 2015

In several prior articles, we have explored US stock market breadth as one component of overall market condition and adverse implications for future market direction ( Dec 14, Nov 23, Sep 28, Aug 11, July 30, and times in between).

The breadth observations are not stand alone indicators, and other factors should be taken into consideration (such as the currently supportive yield curve, the currently non-supportive operating fundamentals, such as the negative profits and profit margin picture; but also make reasonable forward judgements about prospective changes to those factors, and your own investment time horizon and short-term risk tolerance).

This article is a quick summary comparison of stock market breadth in selected international markets versus the US.

  • US small-cap breadth is worse than US large-cap breadth
  • US large-cap breadth is poor
  • Europe, Japan and the UK have better market breadth than the US
  • China has very bad market breadth, but signs of possible breadth bottoming
  • The Middle-East is a train wreck

Breadth for US S&P Market-Cap Indexes

You can see by examining the “% in Bear” row (the % of index constituents that are in a Bear or worse condition) that the smaller the size of the market-cap, the worse the condition of the constituents.  The same is true when you examine the “Median % Off High” (the % by with the median stock is below its 12-month trailing high price).

In each case, the median stock is significantly farther below its high than the index is below its high (by about 6.5% to about 11%).

These are all signs of sub-surface trouble with the US indexes.

On the positive side,  the percent of small-cap stocks above their 10-day average is significantly higher than for the large-cap stocks, suggesting some possible nascent recovery.

The other three measures (the % of constituents with the tip of the 200-day average  moving up; the % with the price above the 200-day average; and the % rising, defined as both the tip pointing up and the price above the average), are roughly equivalent  for all the market-cap level indexes.

(click images to enlarge)
2015-12-19_US by Mkt Cap.pmg

Breadth for Total US Stocks versus Selected International Indexes

Looking at the “% in Bear” data, we see that Europe, Japan and UK are in better shape than the US; but that China, Australia and the combined Middle-East indexes are in worse shape.  The Middle-East indexes, are in terrible shape on both a relative and absolute basis, with almost 88% in a Bear condition.

The UK is in the best shape according to the % of constituents within 2% of their trailing 1-year high price, and the Middle-East is in the worst shape, with nearly zero near their high.

When it comes to the median stock % off its high versus the index % off the high, the UK differs from the US and the other international indexes. The median stock is actually closer to its high than the index overall. That suggests the UK index is more balanced in its performance composition, and that the index breadth is positive.

Note that for breadth, the largest constituents can decline to match the median stock (a falling market); or the median stock can rise to match the largest stocks (a strengthening market); or the two can converge by the median rising while the largest stocks decline (uncertain implication).

Even though China has a huge number of stocks in Bear condition, there are signs of a breadth bottoming process.  Unlike the other indexes with about 21% to 37% “Rising” (moving average Tip Up, and price above moving average), China has about 63% rising.  The Middle East is no where near stabilizing with only about 5% rising.

The UK “% Rising” is about the same as the US, but Europe and the Japan are in significantly better shape.

2015-12=19 International

These data (definitely not the only data you should rely upon) suggest that you should avoid Middle East markets, consider Europe, UK and Japan if you want to diversify outside of the US; and perhaps nibble at China if other data support the evidence of bottoming possibly shows in this data.

Here are relative performance charts for the US market-cap indexes versus the SPDR S&P 500 ETF; and international indexes versus the Vanguard/CRSP US Total Market.  The data is dividend adjusted price data from StockCharts.com.

US Market-Cap Indexes

  • US Mega-Cap (OEF)
  • US Large-Cap (SPY)
  • US Mid-Cap (MDY)
  • US Small-Cap (IJR)

2015-12-19_US breadth

Major International Indexes

  • Europe (VGK)
  • United Kingdom (EWU)
  • Australia (EWA)
  • China (GXC)

2015-12-19_ITL breadth

Middle-East Indexes

  • Gulf States (GULF)
  • UAE (UAE)
  • Qatar (QAT)

The Middle-East markets are tiny, but as they are in the general war zone today and are important oil exporters, they are an interesting set to observe.  There is no suggestion that they are appropriate for most persons, but they may be interesting to watch.

 

2015-12-19_ME breadth

 

Saudi Arabia Index

  • Saudi Arabia (KSA)

The Saudi ETF has only a few months of existence, since the market just opened to the outside, but because it is the largest Middle-East market, and because is it the most important oil exporting country in the midst of the historical oil supply war, and the Sunni/Shia war, we thought is would be an interesting market to observe.

2015-12-19_KSA breadth

 

Disclosure:  We have positions only in SPY among the securities mentioned in this article.

Dividend Growth Stocks for a Low Price Return Stock Market

Friday, December 18th, 2015
  • ACE, ADP, Microsoft and Raytheon look to us to be attractive long-term dividend growth investments; and they have been so in the long-term and short-term past
  • High quality, low leverage stocks with long histories of persistent dividend payment and growth are important in the low forward price return US stock market expected for the next few years
  • Free cash flow is to be prized in stock selection when thinking about weathering storms
  • Stocks that have paid and increased dividends though multiple recessions could help investors sleep on those investments

Most analysts agree that total return for US stocks over the next few years will be modest.  When expected price returns are high, dividend yield takes a back seat for many investors (not necessarily conservative or retired investors), because of their low contribution to total return.  When expected price returns are modest or low (as they are now), dividends get up in the front seat, and maybe even the driver’s seat.

It seems to us that at least for a good part of a portfolio for retirees and near-term pre-retirees, dividends should be in the front seat.  That is not necessarily something for younger investors with at least, say, 10 years before retirement; and who are still in the earning and asset accumulation stage of their financial lives.

So this investment note is probably more suitable for the retiree or near-term retiree crowd (or any other investor who for whatever reason is attracted to dividend stocks).  And this note is not about reaching for yield.  It is about finding high quality, steady dividend growth companies, that have weathered the test of time; and up and down markets.

We always begin our search for opportunity with a quantitative filter.  We think you really have to do that, unless you rely in tips on TV, radio or investment media — something that will not expose you to the full range of possibly good ideas. And, more importantly, such tips will seldom give you much depth — but you can research them to see if they work for you if that is your cup of tea.

I suppose you could say this article also a tip, but we think its different.  It is different, in great part, because we take you through the steps of how we got to our conclusion, so you have the basis to make your own evaluation, and to determine what additional research you need to do for your self if any of the ideas here seem potentially attractive.

There are thousands of ways to set up a filter with different criteria categories and different parameters within the categories; and we use several different filters to generate ideas.  This is just one filter, not the only filter than makes sense to us.

There are over 8,000 listed securities on the NYSE, NASDAQ and AMEX.  Nobody can review them all, so a filter reduces the size of the universe to examine.  Our preliminary quantitative filter yesterday reduced 8,000+ securities to a list of 15.   Here is how we go those 15.

FILTER CRITERIA:

  • Dividend Growth Consistency: Paid and increased dividends for at least 8 years (through 2008-2009 market crash)
  • Dividend Growth Rate: minimum 3% annualized over 1, 3, and 5 years
  • Current Yield: >= 2%
  • Trailing Payout Ratio:  less than 100% (except for REITs or MLPs)
  • Debt-to-Equity: maximum 2
  • PEG Ratio: > 0 and < 3
  • 8-Year Price Change: better than zero (traverses last recession)
  • 1-Year Price Change:  better than negative 5%
  • Liquidity: 3-month average per minute trading volume is at least $10,000
  • Quality Rating: by at least one of Value Line, Standard & Poor’s, MSCI or Wright Investors’ Services
  • Consensus 12-mo Target Price/Market Price: >=1

FILTER RESULTS:

This table lists the 15 filter survivors, along with their sector and industry.

(click image to enlarge)

best15-2015-12-17

We are concerned these days about free cash flow, that could be helpful if there is margin compression due to a sales slump, increased interest costs, or some other adverse development.  Because of that concern, we visually examined free cash flow charts for the 15 filter survivors and found 6 stocks with a nice enough year-by-year pattern and enough total free cash flow to give us some comfort.  Their charts are shown below, also presenting their price, their revenue and their dividend.

VISUAL CHART SELECTION

Of the 15 filter survivors, 6 look best after reviewing charts of free cash flow.

Declining revenue at LEG is unattractive.  Declining revenue at RTN is much less concerning, because it was based on defense sequester, which will end; and most importantly RTN’s critical role in weapons systems for the war with ISIS.

2015-12-17_ ACE 2015-12-17_ ADP 2015-12-17_ LEG 2015-12-17_ MSFT 2015-12-17_ RTN 2015-12-17_ SJM

Also because of concerns about a tepid global economy, we would currently favor quality stocks more than usual as an extra level of comfort in the event that things go poorly in the markets.  This table shows the quality ratings for the 6 stocks remaining in our filter.

QUALITY RATINGS

2015-12-17_guality

A synopsis of how the firms describe their rating goes like this:

  • S&P Capital IQ Earnings & Dividend Rank: Growth and stability of earnings and dividends
  • Value Line Financial Strength Rating: balance sheet leverage, business risk, the level and direction of profits, cash flow, earned returns, cash, corporate size, stock price, cash on hand, and net of debt
  • MSCI Quality Index: Durable business models with sustainable competitive advantage; high ROE, stable earnings with low business cycle correlation, and  strong balance sheets with low leverage.
  • Wright Investors’ Service Quality Rating: (1) Liquidity, (2) Financial Strength, (3) Profitability & Stability, and (4) Growth. The ratings are based on 32 factors (8 for each of the four rating elements) using 5-6 years of corporate records and other investment data. The highest possible score is AAA20.  The lowest possible score excluding certain designations for insufficient information or time frame, is CCC0.  They consider the minimum rating for “quality” to be BBB4.

By these ratings, MSFT is clearly best and SJM is probably worst.

The Street (mostly Sell-Side firms) publish their 1-year forward price targets.  The graphics that follow present the composite Street view of each of the 6 stocks.

STREET ESTIMATES:

Looking at the analyst estimates, LEG looks least attractive.  ADP looks most attractive to the Street consensus

2015-12-17_Consensus_ACE 2015-12-17_Consensus_ADP 2015-12-17_Consensus_LEG 2015-12-17_Consensus_MSFT 2015-12-17_Consensus_RTN 2015-12-17_Consensus_SJM

 

INDEPENDENT ANALYST RATINGS:

Two leading independent analytics services are Standard and Poor’s Capital IQ and Value Line.  They approach the matter of rating differently.  S&P is more qualitative and Value Line is more quantitative.  They sometimes agree and often do not.  An example here is on ADP where they are as far apart as they can possibly be, with S&P saying stay away and Value Line saying jump on board.

Fidelity publishes the view of a variety of mostly independent analysts, and then Reuters uses a proprietary weighting system to come up with a single score from 0-10 called StarMine.  They weight the analyst opinions based on the historical accuracy of each analyst firm for the sector in which the stock they are rating belongs.

S&P Capital IQ uses a 1-5 rating system, where 5 is best and 1 is worst (Stars are for year ahead return, and Fair Value is market price versus the S&P view of fair value).  Value line uses a rating system from 1-5, where 1 is best and 5 is worst (their Earnings Predictability is a relative measure of the reliability of earnings forecasts).

Here is how each service rated each of our 6 selections.

By these three services, LEG looks better than in the Street consensus and ADP looks worst, based on S&P giving ADP an outright Sell  and a most overvalued price versus Fair Value.  ACE is clearly on top according to these sources.

2015-12-17_ratings

 

SELECTED FINANCIAL DATA:

Nothing beats reading the full SEC filings, and studying the full set of financial statements and footnotes.  That said a summary look at selected financial data can focus attention on a stock or divert attention elsewhere.

The first table presents absolute Dollar amounts (in $millions) for selected financial data.  The second table presents the same data on a common size basis (each data point expressed as a percentage of sales).

2015-12-17_SelecrtedData

2015-12-17_commonsize

MSFT has the best EBITDA margin, but apparently pays more tax, because it has the same net income ratio as ACE and ADP which have lower EBITDA margins.  The all have good Current Ratios (MSFT the best).  SJM has a negative tangible equity, because its intangibles exceed its book equity.

GROWTH RATES:

LEG is the weakest in overall growth rates.

ACE seems to be the most consistent average to above average performer, and may benefit most by rising interest rates.

MSFT has been weak on EPS growth, but strong on sales and dividend growth.  They have the resources to keep the dividends coming, and their negative EPS has been significantly impacted by write-downs of discontinued businesses, which may not be as problematic going forward.

RTN has poor historical revenue growth, but restocking and development of the US high-tech weaponry arsenal is likely, and they would be a direct beneficiary.

SJM has had earnings growth problems (as has LEG), but has kept dividends growing nicely, and they have some product lines with strong brand equity that should carry them forward (e.g. Smuckers jellies and jams, Jiff peanut butter, Pillsbury, Folgers coffee, Kibbles n’Bits and 9Lives cat food)

2015-12-17_growth

A really important point for us at this juncture in this time of expected low price returns and high importance of dividend return (and for the needs or our mostly near retirement and retired clients), is the persistence and growth of dividends through difficult times.

Each stock in this list of 6 has paid and increased dividends for at least 11 years (RTN) and as long as 44 years (LEG).  To put those long periods into more functional perspective, we looked up all of the recessions in the last 44 years and counted how many recessions each stock lived through while paying and increasing their dividend.

The more recessions they weathered, the more likely they are, we think, to weather the next one.  If a retiree can count on the dividend, even if the stock price is gyrating (particularly if the retiree can live on the income from the portfolio alone), the more the retiree can sleep at night, and be less concerned about the price of the stock in short periods of a year or two.

LEG persisted with dividend growth through 7 recessions — pretty impressive.  ADP persisted through 6 recessions — also pretty impressive.

Just because a stock persisted through fewer recessions is not necessarily a ding on performance, because they may not have existed at all of those times.  MSFT is an example of that.

Lastly for growth, we engaged in an entirely hypothetical calculation just to possibly provide some scope of future dividend payback of the original purchase price.  These calculations should not be relied upon, just reflected upon.

We projected the 7 years historical dividend growth rate forward 7 years; then the 5-year history out 5 years; then the 3-year history out 3 years to see how much of the purchase price might be recovered before a possible sale of the stock at the end of those periods.

Then we projected out 5 years again using the average of the 7, 5 and 3 year dividend growth rates; and once more using only the minimum growth rate among the 7, 5 and 3 years rates.

By those calculations MSFT looks best and SJM works, and none are bad.

BUSINESS DESCRIPTIONS:

Most of you probably have a reasonable idea what most of the 6 stock do, but here are business descriptions to paint a possibly fuller picture of each company’s business.

ACE: ACE Limited is a holding company. The Company is a global insurance and reinsurance company. The Company offers commercial insurance products and service offerings, such as risk management programs, loss control and engineering and complex claims management. It provides specialized insurance products to niche areas, such as aviation and energy. It also offers personal lines insurance coverage, including homeowners, automobile, valuables, umbrella liability and recreational marine products. In addition, it supplies personal accident, supplemental health and life insurance to individuals in select countries. The Company’s segments include Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance and Life.

ADP: Automatic Data Processing, Inc. (ADP) is a provider of human capital management (HCM) solutions and business process outsourcing. The Company operates through two segments: Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled HCM solutions. These offerings include payroll services, benefits administration, recruiting and talent management, human resources management, insurance services, retirement services and payment and compliance solutions. The Company’s PEO business, ADP TotalSource, offers small and mid-sized businesses human resources (HR) outsourcing solution through a co-employment model. ADP TotalSource includes HR management and employee benefits functions, including HR administration, employee benefits and employer liability management, into a single-source solution, including HR administration, employee benefits and employer liability management.

LEG: Leggett & Platt, Incorporated is a manufacturer that conceives, designs and produces a range of engineered components and products found in homes, offices, automobiles and commercial aircraft. The Company operates in four segments: Residential Furnishings segment, which manufactures steel coiled bedsprings; Commercial Fixturing & Components segment, which include work furniture group that designs, manufactures, and distributes a range of engineered components and products primarily for the office seating market; Industrial Materials segment consists of wire group, which operates a steel rod mill and tubing group, which supplies welded steel tubing and Specialized Products segment designs, manufactures and sells products, including automotive seating components, specialized machinery and equipment, and service van interiors. Its brands include Semi-Flex, ComfortCore, Mira-Coil, Lura-Flex, Superlastic, Super Sagless, Tack & Jump, Schukra, Gribetz, Masterack and Hanes, among others.

MSFT: Microsoft Corporation is engaged in developing, licensing and supporting a range of software products and services. The Company also designs and sells hardware, and delivers online advertising to the customers. The Company operates in five segments: Devices and Consumer (D&C) Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. The Company’s products include operating systems for computing devices, servers, phones, and other intelligent devices; server applications for distributed computing environments; productivity applications; business solution applications; desktop and server management tools; software development tools; video games; and online advertising. It also offers cloud-based solutions that provide customers with software, services and content over the Internet by way of shared computing resources located in centralized data centers. It provides consulting and product and solution support services.

RTN: Raytheon Company, together with its subsidiaries, is a technology Company that specializes in defense and other Government markets. The Company develops products, services and solutions in markets: sensing; effects; command, control, communications and intelligence (C3I); and mission support, as well as cyber and information security. The Company operates in four segments: Integrated Defense Systems (IDS); Intelligence, Information and Services; Missile Systems, and Space and Airborne Systems. The Company serves both domestic and international customers, as both a prime contractor and subcontractor on a portfolio of defense and related programs primarily for Government customers. The Company’s products include Global Integrated Sensors, Integrated Air & Missile Defense, Cybersecurity and Special Missions, Global Training Solutions, Land Warfare Systems, Advanced Missile Systems, Tactical Airborne Systems, Advanced Missile Systems and Electronic Warfare Systems.

SJM: The J. M. Smucker Company is a manufacturer and marketer of consumer food and beverage products and pet food and pet snacks in North America. The Company has four segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International, Foodservice and Natural Foods. The Company’s U.S. retail market segments consist of the sale of branded food products to consumers through retail outlets in North America. The Company’s International, Foodservice and Natural Foods segment represents sales outside of the U.S. retail market segments. The Company’s principal consumer food and beverage products are coffee, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, pickles, condiments, grain products and nut mix products. The Company’s pet products consist of dry and wet dog food, dry and wet cat food, dog snacks and cat snacks.

OUR CHOICES:

We own ACE, ADP and RTN; are thinking about MSFT, which we have owned in the past.

  • ACE as an insurance company will probably benefit by interest rates as they rise
  • ADP will benefit by an improving jobs picture, and ever more complex benefits and HR issues
  • RTN will benefit by the increasing reliance of high-tech warfare, and the current war with ISIS
  • MSFT is coming back with its Windows 10 system, its own computer brand, and cloud platform (and a new and better CEO)

This note was written on Wednesday December 16, 2015.  The following charts were generated at end-of-day Friday December 18, 2015.

PERFORMANCE COMPARISON CHARTS

These chars plot the dividend adjusted percentage performance of each of the 6 stocks versus an S&P 500 ETF (in black).

10 Years Monthly

2015-12-18_10yr-a

2015-12-18_10yr-b

3 Years Weekly

2015-12-18_3yr-a

2015-12-18_3yr-b

 

3 Months Daily

2015-12-18_3mo-a

2015-12-18_3mo-b

Deteriorating US Stock Market Condition & 2016 S&P 500 Target Price From 15 Institutions

Monday, December 14th, 2015

[This is our 2015/12/13 letter to clients]

It is sagacious to eschew obfuscation – so let’s be direct – the US stock market sucks right now.

There are a number of problematic issues for stocks at this time, but let’s look at three key factors, as if they are three legs of a stool:

  • Treasury yield curve
  • Fundamental company operations
  • Stock index and index constituent behaviors

There are many factors that influence these three things, but they are too many and their specific individual impact is too uncertain to be clearly interpreted. However, they are all assimilated into the markets and manifested by the three legs of our stool.

2015-12-11_1

What is the condition of the stool (the stock market)?

  • Treasury Yield Curve (positive): The curve is favorable to company operations and investment, to investor risk taking, and to household purchases on debt
  • Company Fundamentals (negative): Revenue is declining, profits are declining and profit margins are declining, and credit worthiness of an increasing number of companies is in question (energy is a big factor)
  • Index Behavior (negative): Stock returns are flat for the year, a narrow group of large companies is supporting the indexes while most stocks are doing poorly, and index intermediate price trends are negative.
We all know what happens to a stool when a leg is missing or one or two are too short – that is where we are right now in the stock market.
2015-12-11_2

IMPLICATIONS FOR US STOCKS EXPOSURE
This does not mean a Bear market is on the way, nor does it mean the stock market will not rise next year. However, if does mean there is damage that needs to be repaired before the market can mount a sustainable advance. That repair will take some time – not days, not weeks; probably months, and possibly quarters.

The condition needs monitoring, and that is just what we are doing.

At this time we counsel above average cash positions, and below average allocations to each of bonds and stocks.

For those accounts where we have discretion, we raised extra cash back in July, and are waiting for the post-Fed rate rise period, and for US stocks to exceed their July high, before re-committing significant funds. In the interim, we may nibble here and there on individual securities that look particularly attractive

We agree with Bill Gross who recommended in his last monthly letter that both credit bond and equity exposures should be reduced.

We recommend a strong tilt to large-cap, high quality stocks with strong brand equity, solid financial condition, above average yield, consistent dividend growth and reasonable valuation multiples versus growth expectations. To the extent that the next year or so produces low total return, the dividend income component becomes relatively more important.

Actually, we always favor such stocks, so the change aspect to this is to reduce current exposure to momentum stocks, high leverage stocks, small-caps, non-yielding stocks, and lower quality stock generally. With respect to bonds, we suggest reducing exposure to low quality, high yield bonds until the bond market settles a bit.

In a period rising interest rates and slowing economies, companies with solid balance sheets with low debt-to-equity are a safer choice.

YIELD CURVE
The current yield curve is supportive of stocks. This chart shows the difference between a supportive yield curve, such as we have today; and one that is inverted and bad for stocks, such as we had in April of 2007 leading up to the Bear market.

(click images to enlarge)

2015-12-11_3

Check off the box for a positive yield curve stool leg.

COMPANY FUNDAMENTALS
Sales are declining. Profit margins are declining. Reported earnings and S&P calculated operating earnings are declining.

These three charts show those dimensions (in green, left scale) versus the S&P 500 index price (in red, right scale).

2015-12-11_4

2015-12-11_5

2015-12-11_6

Check the box for a negative fundamentals stool leg.

For a little more color, here is a table that compares some internal breadth data for key S&P market-cap indexes:

2015-12-11_7

You can see that the larger-cap indexes are in better shape than the smaller-cap indexes: S&P 100 (mega-cap) better than S&P 500 (large-cap) better than S&P 400 (mid-cap), better than S&P 600 (small-cap).

More of the larger-cap index constituents are within 2% of their trailing high. Fewer of the larger-cap index constituents are in their own Bear markets. The median index constituent percent off of its 1-year trailing high is lowest for the largest-cap index, grading down to the greatest percentage off the trailing high for the smallest-cap index.

In a strong Bull, the smaller-caps outperform the larger-caps. In an aging and tired Bull market, the largest-cap stocks lead. This data suggests the Bull market is aging and deteriorating.

INDEX BEHAVIOR
We break the data in this leg into two parts: one for the index as a whole, and the other for the underlying components.

Part 1: The Index as Whole
The price chart of the S&P 500 (large-caps) and of the Russell 2000 (small-caps) are weak, but not terrible.

This pair of charts shows the daily price and the 200-day average year-to-date for the S&P 500 and the Russell 2000. The small-caps are visibly weaker than the large caps. The small-caps need to improve before the large-caps are likely to have a sustained rally.

2015-12-11_8

This next pair of charts shows the same indexes, but using a “noise canceling” plotting method, that only plots a new price box when the price moves by more than the 14-day average daily price change.

The S&P 500 chart shows more clearly how the index tried to exceed the 2100+ level three times earlier in the year, and then failed again just recently. The 2100 price level seems to be a current ceiling that poses significant resistance to the index.

The Russell 2000 chart simply shows the weakness in that index. In Bull markets the small-caps tend to outperform the large-caps.

When the small-caps lag the large-caps, there is a good chance the Bull is tired.

2015-12-11_9

Part 2: Index Internals (Breadth)
Breadth refers to what portion of the constituent companies in an index are moving together.

In the current situation, a narrow group of large-cap stocks are rising, while most of the constituents are doing poorly. When large-caps are holding up the index, as it the current case, but the bulk of constituents are doing poorly; the indication is that the overall index is getting tired and likely to have a significant setback.

We look at a variety breadth indicators, most of which are neutral to negative. This table rates each indicators in a binary way, assigning either a +100 or -100 based on a value for that indicator that is either better or worse than a threshold. If there are two dimensions to an indicator and one is positive while one is negative, we assign a zero value to the indicator.

2015-12-11_10

There are a couple of our indicators that we find particularly persuasive. Here are charts for them.

Each chart plots the percentage difference between the 1-year high price and the current price for the S&P 500 (in orange using right scale); and whatever the other dimension is in gray (for the weekly value) and in dashed black for the 13-week average of the weekly value, using the left scale.

This chart plots the distance from its 1-year high for the median stock in the S&P 1500 (the S&P 1500 is the sum of the large-caps, mid-caps and small-caps). You can see that while the S&P 500 index is off of its high by around 5%, the median S&P 1500 stock is off by 15% to 17%. That is a negative breadth indication.

2015-12-11_12

 

This chart plots the S&P 500 position relative to its high versus the percentage of S&P 1500 stocks that are within 2% of their 1-year high. Only 2% (about 30 stocks) are within 2% of their high right now; and only about 10% (150 stocks) are within 2% on a 13-week moving average basis. That is very weak.

2015-12-11_13

 

This chart compares the S&P 500 relative to its high versus the percentage of S&P 1500 stocks that are in a Correction or worse (off 10% or more from their high). Fully 71% are in a Correction or worse now; and 65% on a 13-week moving average basis. That’s bad.

2015-12-11_14

 

This chart is like the one above, but it shows the percentage of S&P 1500 stocks that are in their own Bear market or worse (off by 20% or more). There are 43% in a Bear right now; and 39% on a 13-week moving average basis. That’s terrible.

2015-12-11_15

 

Add up all those parts for the three legs of our stool, and we say this market is currently unattractive. Two legs are broken (or at least too short) and all we have that is really positive is the Treasury yield curve, which may not be enough alone to keep the stool from falling over.

2015-12-11_16

KEY ANALYST FORECASTS FOR 2016 – 4.4% to 14.3%, average 2016 price return forecasted
[Last Friday closing price for S&P 500 = 2012]

Even though we see data suggesting a deteriorating US stock market, the analyst community is generally positive in their view for 2016.

There average price target by 15 firms for the S&P 500 is 2233 (11% higher than last Friday). The lowest targets (2100) are for a 4.4% rise. The highest target is 2500, which is a true outlier. The next highest target is 2300 (up 14.3%).

We hope they are right, and if/when they are right, the legs our stool will confirm that.

Here are their individual targets for S&P 500 2016 year-end price and earnings per index share, along with comments they made and/or the sectors they favor and expect to avoid.

2100 — Goldman Sachs (David Kostin) 2016 year-end target: 2,100 | 2016 EPS forecast: $120
“We forecast the S&P 500 index will tread water for a second consecutive year in 2016,”
Favor: Info Tech, Financials – Avoid: Consumer Staples, Energy, Materials, Utilities

2100 — BMO Capital Markets (Brian Belski) 2016 year-end target: 2,100 | 2016 EPS forecast: $130
“We believe the S&P 500 will likely suffer its first calendar year loss since 2008 … However, we continue to believe the longer-term outlook for US stocks remains bright, and we remain confident with our call that US stocks are in the midst of a secular bull market.”

2175 – Morgan Stanley (Adam Parker) 2016 year-end target: 2,175 | 2016 EPS forecast: $125.90
Favor: Financials, Consumer Discretionary – Avoid: Industrials, Energy, Consumer Staples

2175 – Black Rock (Russ Koesterich) 2016 year-end target: 2,175 | 2016 EPS forecast: $125
Favor: Financials, Technology – Avoid: Consumer Staples, Utilities

2200 – Citigroup (Tobias Levkovitch) 2016 year-end target: 2,200 | 2016 EPS forecast: $132.50
Favor: Financials, Energy, Technology — Avoid: Health Care, Consumer Discretionary, Materials

2200 – Columbia ThreadNeedle (Jeffery Knight) 2016 year-end target: 2,200 | 2016 EPS forecast: $126
Favor: Technology – Avoid: Utilities, Materials

2200 — Bank of America Merrill Lynch (Savrita Subramanian) 2016 year-end target: 2,200 | 2016 EPS forecast: $125
“We expect modest gains for US large cap stocks in 2016: the likelihood of a recession in the next 12 months is low in our view, but valuations have normalized from previously low levels and narrowing returns are to be expected,”

2200 — Credit Suisse (Andrew Garthwaite) 2016 mid-year target: 2,200 | 2016 forecast: 6.8% growth
“We think that we are at the later stages of the equity bull market and see increasing headwinds for equities related to valuations, an uncertain macro environment, bottom-up disruptions, weak earnings momentum, and falling market breadth,”

2200 — Barclays (Jonathan Glionna) 2016 year-end target: 2,200 | 2016 EPS forecast: $111
“Our macro narrative is simple, if obvious … We believe U.S. interest rates will go up leading to a stronger U.S. dollar. This should cause earnings per share growth and returns to remain subdued. We forecast 4% EPS growth and a 5% gain for the S&P 500.”

Favor: Financials, Energy – Avoid: Consumer Staples
2200 – JP Morgan (Dubravko Lakos-Bujas) 2016 year-end target: 2,200 | 2016 EPS forecast: $123
Favor: Energy, Technology, Financials – Avoid: Utilities, Telecom, Industrials

2250 – Prudential (John Praveen) 2016 year-end target: 2250 | 2106 EPS forecast: $122
Favor: Financials, Info Tech – Avoid: Materials, Utilities

2275 — UBS (Julian Emanuel) 2016 year-end target: 2,275 | 2016 EPS forecast: $126 | range (2,500 to 1,750)
“Barring an unforeseen external shock or a recession, if earnings continue to improve, 2016 should be a positive year for US equities … Regardless, we continue to expect further volatility — which in essence means higher risk, both upside and downside.”

2275 — Deutsche Bank (David Bianco) 2016 year-end target: 2,250-2,300 | 2016 EPS forecast: $125

“We reduce 2016E S&P EPS from $128 to $125 … We’re unsure of the tone of language appropriate to describe this reduction. Slashing or even cutting is too harsh as our new estimate is merely 2.5% lower. This trimming shouldn’t surprise investors given recent commodity and currency markets.”

2300 — RBC Capital Markets (Jonathan Golub) 2016 year-end target: 2,300 | 2016 EPS forecast: $128
“2015 was marked by falling oil prices, a diminishing global growth outlook, and flat rates … Our constructive 2016 outlook is predicated upon stabilizing commodity prices, and an incrementally higher dollar and rates. All of this should result in a substantially higher earnings trajectory as well as a modest re-rating of stocks.”

2500 – Federated Investors (Steven Auth) 2016 year-end target: 2,500 | 2016 EPS forecast: $125
Favor: Financials, Health Care, Technology, Industrials – Avoid: Energy, Materials

US SECTORS
This table consolidates the analyst recommendations on sectors. We also added some sector data to help put their views in perspective:

2015-12-11_17

The green highlighted sectors are those with the most favorable expressions (Financials and Information Technology). The pink shaded sectors are those with the most recommendations to avoid (Materials, Consumer Staples, and Utilities). The yellow shading on Energy shows a split between those who expect more poor performance and those who expect a recovery and good performance.

To tie back into our discussion of internal breadth, we added three breadth dimensions to the table:

  • The percentage of sector stocks within 2% of their 1-year high
  • The percentage of sector stocks in their own Bear market (down 20+%)
  • The percentage by which the median sector stock is below its 1-year trailing high

Clearly, Energy is in the worst current condition and Consumer Staple are in the best current condition. Energy will depend on the price of oil next year, which is anybody’s guess. Consumer Staples may be over-bought due to yield pursuit, and they may suffer somewhat as interest rates rise.

To add an element of valuation, we present the PEG ratio (1 year forward P/E ratio divided by the 5-year expected earnings growth rate) for each sector as published by Standard and Poor’s. Since lower (but positive) numbers are better, and under 2x is desirable, Financial, Industrials, Information Technology, Health Care and Consumer Discretionary look best by this metric.

VALUATION
There are many valuation measures to be considered. We will address them in some detail in a subsequent letter. For now, this is important to say: Over-valuation or under-valuation alone does not make markets rise or fall. Other facts need to stimulate trend change in markets. Markets can remain over-valued or under-valued for long periods.

Most measures today either support the US stock market as fairly-valued or over-valued. There is not too much out there for under-valued.

While fairly-valued or over-valued is not likely to make the market retreat, those levels make it a lot harder for the market to put up large total return results. It is a lot easier to generate high total returns beginning with under-valuation than from a fairly-valued or over-valued market.

CLOSING THOUGHT
Our view at this time is that probability weighted risk exceeds probability weighted gains potential; and given that, those in or near retirement should emphasize capital preservation more than capital growth in the short-run for now.

ETFs or Indexes Mentioned in the Article::

  • S&P 500: SPY, IVV, VOO
  • Materials Sector: XLB, VAW
  • Energy Sector: XLE, VDE
  • Financial Sector: XLF, VFH
  • Industrial Sector: XLI, VIS
  • Info Tech Sector: XLK, VGT
  • Telecom Sector: XLK, VOX
  • Consumer Staples Sector: XLP, VDC
  • Consumer Discretionary Sector: XLY, VCR
  • HealthCare Sector: XLV, VHT
  • Utilities Sector: XLU, VPU
  • Russell 2000 Small-Caps: IWM
  • S&P 600 Small-Caps: IJR
  • S&P 400 Mid-Caps: MDY
  • S&P 1500: ITOT (scheduled to change benchmark Dec 18, 2015)

ETFs 20% Or More Off 1-Year High (12/10/15)

Friday, December 11th, 2015

Representative sampling of long-only, non-leveraged ETFs trading at least $10,000 per minute, priced 20% of more below their 1-year high:

SYMBOL NAME % OFF HI
UNG UNITED STATES NATURAL GAS ETF (59.26)
USO UNITED STATES OIL ETF (49.87)
XME SPDR S&P METALS & MINING ETF (49.13)
GREK GLOBAL X FTSE GREECE 20 ETF (47.25)
TAN GUGGENHEIM SOLAR ETF (45.15)
AMJ JP MORGAN CHASE ALERIAN ETN (42.52)
XOP SPDR S&P OIL & GAS EXPL & PROD ETF (40.52)
EWZ ISHARES MSCI BRAZIL CAPPED ETF (39.62)
TUR ISHARES MSCI TURKEY ETF (38.17)
GDX MARKET VECTORS GOLD MINERS ETF (38.06)
XES SPDR S&P OIL & GAS EQUIP & SERVS ETF (37.85)
AMLP ALPS ALERIAN MLP ETF (37.43)
DEM WISDOMTREE EMRG MRKT HG DIV ETF (33.80)
FXI ISHARES CHINA LARGE CAP ETF (32.61)
ILF ISHARES LATIN AMERICA 40 ETF (32.17)
EMLP FIRST TRUST NORTH AMERICAN ENERG ETF (30.45)
GNR SPDR S&P GLOBAL NATURAL RESOURCS ETF (30.31)
MCHI ISHARES MSCI CHINA ETF (30.28)
IEZ ISHARES US OIL EQUIP SER ETF (29.80)
ECH ISHARES MSCI CHILE CAPPED ETF (28.96)
THD ISHARES MSCI THAILAND CAPPED ETF (28.78)
VWO VANGUARD FTSE EMERGING MARKETS ETF (27.77)
DWX SPDR S&P INTERNATIONAL DIVIDEND ETF (27.55)
EWM ISHARES MSCI MALAYSIA ETF (26.92)
ERUS ISHARES MSCI RUSSIA CAPPED ETF (26.78)
OIH MARKET VECTORS OIL SERVICES ETF (26.41)
EEM ISHARES MSCI EMERGING MARKETS ETF (26.38)
RSX MARKET VECTORS RUSSIA ETF (26.21)
VDE VANGUARD ENERGY ETF (26.20)
GXC SPDR S&P CHINA ETF (25.36)
PID POWERSHARES INTL DVDND ACHVRS ETF (25.00)
IYE ISHARES US ENERGY ETF (24.81)
XBI SPDR S&P BIOTECH ETF (24.58)
EEMV ISHARES MSCI MARKETS MIN VOL ETF (23.85)
VNM MARKET VECTORS VIETNAM TC ETF (23.81)
EWA ISHARES MSCI AUSTRALIA ETF (23.70)
SLV ISHARES SILVER TRUST ETF (23.62)
EWS ISHARES MSCI SINGAPORE ETF (23.38)
FM ISHARES MSCI FRONTIER 100 ETF (22.67)
EWT ISHARES MSCI TAIWAN ETF (22.67)
INDY ISHARES INDIA 50 ETF (21.61)
EPHE ISHARES MSCI PHILIPPINES ETF (21.45)
EPP ISHARES MSCI PACIFIC EX JAPAN ETF (21.42)
INDA ISHARES MSCI INDIA INDEX ETF (21.33)
IDV ISHARES INTERNATIONAL SEL DIV ETF (20.31)

ETFs within 3% of 1-Year High (12/10/15)

Friday, December 11th, 2015

These ETFs, with at least $10,000 per minute 3-month average trading volume, were within 3% of their 1-year high price as of Dec 10, 2015:

SYMBOL NAME % OFF HI
SCHZ SCHWAB US AGGREGATE BOND ETF (2.99)
ONEQ FIDELITY NASDAQ COMPOSITE INDX ETF (2.95)
GOVT ISHARES CORE US TREASURY BOND ETF (2.90)
IGV ISHARES NORTH AMRN TECH SOFT ETF (2.83)
IYC ISHARES US CONSUMER SERVICES ETF (2.80)
FDIS FIDELITY MSCI CONS DISCR INDX ETF (2.74)
OEF ISHARES S&P 100 ETF (2.72)
PSL PWRSHRS DWA CNSMR STPLS MNTM ETF (2.61)
IWF ISHARES RUSSELL 1000 GROWTH ETF (2.60)
FSTA FIDELITY MSCI CONS STPLS INDX ETF (2.45)
FDN FIRST TRUST INTERNET INDEX CF ETF (2.38)
GVI ISHARES INT GOV CREDIT BOND ETF (2.34)
XLY SPDR FUND CONSUMER DISCRE SELECT ETF (2.31)
IYK ISHARES US CONSUMER GOODS ETF (2.31)
BNDX VANGUARD TOTAL INTERNATIONAL BND ETF (2.29)
USMV ISHARES MSCI USA MIN VOLILITY ETF (2.28)
STPZ PIMCO 1-5 YEAR US TIPS INDEX ETF (2.27)
RYT GUGGENHEIM S&P 500 EQUAL WE TECH ETF (2.21)
MBB ISHARES MBS ETF (2.15)
IXN ISHARES GLOBAL TECH ETF (2.14)
SCHR SCHWAB INTERMEDIATE TERM US TRS ETF (2.13)
XLG GUGGENHEIM RUSSELL TOP 50 MEG ETF (2.11)
FTEC FIDELITY MSCI INFOR TECH INDX ETF (2.10)
QUAL ISHARES MSCI USA QUALITY FACTOR ETF (2.10)
IYW ISHARES US TECHNOLOGY ETF (2.08)
FPE FIRST TRUST PREFERRED SEC INCOME ETF (2.07)
VGT VANGUARD INFORMATION TECHNOLOGY ETF (2.07)
IGM ISHARES NORTH AMERICAN TECH ETF (1.97)
SPLV POWERSHARES S&P 500 LOW VOLAT ETF (1.95)
XLK TECHNOLOGY SELECT SECTOR SPDR ETF (1.93)
IVW ISHARES S&P 500 GROWTH ETF (1.91)
AGZ ISHARES AGENCY BOND ETF (1.91)
ITM MARKET VECTORS INTERM MUN IND ETF (1.74)
MUB ISHARES NATIONL AMT FREE MUNI ETF (1.71)
TFI SPDR NUVEEN BARCLAYS MUNI BOND ETF (1.70)
IEI ISHARES 3-7 YEAR TRERY BOND ETF (1.68)
MTUM ISHARES MSCI USA MOMENTUM FACTOR ETF (1.63)
TDTT FLEXSHARES IBOXX 3 YR TIPS IDX ETF (1.58)
XLP SPDR FUND CONSUMER STAPLES ETF (1.55)
VTIP VANGUARD SHRT INF PROT SEC INDEX ETF (1.53)
QQQ POWERSHARES QQQ TRUST SRS 1 ETF (1.53)
ITE SPDR BARCLAYS INTERMEDIATE TERM ETF (1.53)
VCSH VANGUARD SHORT TERM COR BD ETF (1.47)
SJB PROSHARES SHORT HIGH YIELD ETF (1.31)
USDU WISDOMTREE BLOMBRG US DOL BUL ETF (1.26)
BSCH GUGGENHEIM BLLSHS 2017 CORP BND ETF (1.22)
BSV VANGUARD SHORT-TERM BOND ETF (1.14)
SCPB SPDR BARCLAYS SHORT TERM CORP ETF (0.98)
VMBS VANGUARD MORTGAGE BACKED SEC ETF (0.92)
RTH MARKET VECTORS RETAIL ETF (0.89)
PGX POWERSHARES PREFERRED PORTFOLIO ETF (0.87)
RHS GUGGENHEIM S&P 500 EQUAL WE CONS ETF (0.84)
CSJ ISHARES 1-3 YEAR CREDIT BOND ETF (0.83)
VGSH VANGUARD SHORT TERM GOVERNMENT ETF (0.73)
SHY ISHARES 1-3 YEAR TREASRY BOND ETF (0.71)
SUB ISHARES SHOR TERM NAL AMT FRE ETF (0.70)
SCHO SCHWAB SHORT TERM US TREASURY ETF (0.69)
PSK SPDR WELLS FARGO PREFERRED STOCK ETF (0.66)
SHM SPDR NUVEEN BARCLAYS SHORT TERM ETF (0.65)
FLOT ISHARES FLOATING RATE BOND ETF (0.59)
PGF POWERSHARES FINANCIAL PREFERRED ETF (0.59)
MINT PIMCO ENHANCED SHRT MATURTY ACTV ETF (0.58)
GSY GUGGENHEIM SHORT DURATION ETF (0.31)
NEAR ISHARES SHORT MATURITY BOND ETF (0.28)
BIL SPDR BARCLAYS 1-3 MONTH T-BILL ETF (0.15)
SHV ISHARES SHORT TREASURY BOND ETF (0.13)