Assuaging Your Worries (XHB, GS, HYG)

The greatest risk any investor faces in a bull market is jumping early.

We therefore want to dedicate this letter to reassuring you that despite all the noise, the bull is strong.

And for those who are, indeed, considering selling – and even more for those who’ve yet to climb aboard, we say –

chillout

We start this week’s shenanigans with a word on the homebuilders.

You’ll remember that last week’s letter was all hot and bothered by the prospect of a homebuilder breakout above an ascending triangle, a technical development that normally brings with it a rush of excited buying.

Well, looky here –

xhb21915

 

This is the SPDR S&P Homebuilder ETF (NYSE:XHB), and as you can see, the breakout (in red) occurred directly after our letter went out. Adding to the strength of the move, we saw the moving averages unfurl completely (in green), a development with profound long term implications for the stock and sector.

With daily volumes on the rise and both RSI and MACD showing little sign of reaching ‘overbought’ levels, we believe the cruise is on for the homebuilders, and, moreover, expect the sector to ignite the rest of the domestic economy in the months ahead, as well.


By the way…

 

XHB’s breakout happened even as the homebuilders’ sentiment survey, released at the beginning of the week, offered a lower read than anticipated. It seems the ongoing nasty weather had the group in a funk over sales numbers – particularly in the lucrative Northeastern markets.

But no matter. The stock’s climbing despite the snow.

nastyweather

This is the purest and best evidence of the strength of a bull market. When it matters little which way the economic reports point, when the money has decided to push stocks higher and sloughs off all the bad news, nothing but pure exhaustion will kill the bull. And that’s where we stand today.


But there’s more.

 

Further evidence of the bull’s strength can be found with the financials and high yield (junk) bond cohort.

We’ve said this many times over the last few years, but it bears another go-round, and it’s best expressed by an old Wall Street saying –

“It’s not over ‘til Morgan has its run.”

Or at least that’s the way it came out a century ago.

Today, you might replace Morgan with Goldman Sachs and come closer to the truth. For there’s simply no end to a bull market in stocks until there’s a pot’o’gold sitting on every executive’s desk over at Goldman.

And we’re getting there.

Bull markets are cash cows for one group of businesses more than any other – the broker dealers. There’s no way they can’t make money in a bull market, and they’ll certainly make more than anyone else as the bull reaches its zenith. A wild blow-off Shangri-la-di-da move in GS stock will be a necessary indication that we’re nearing the end. As of today, it hasn’t happened.

As the long-term chart of Goldman (below) shows, the company is still a ways from besting its late 2007 highs in the $250 range. We’re of the opinion that marker will have to be leapfrogged before anyone can call for caution in equities.

Have a look here –

gs21915

This is a long-term chart of Goldman Sachs, and it shows the (minimum) 25% gain we expect to see before we reach former all-time highs and can commence to worry about an end to the bull.

We note in particular that volumes have been even for the last three years (in black), with no demonstrable sign of a buying frenzy – like we saw during late 2008/early 2009 when the shares bottomed.

More Proof: Oil Stabilizing, High Yield Recovering

 

We’ve written elsewhere regarding our belief that oil has bottomed and should now begin the slow process of recovering. And that recovery should have salutary effects on the high yield sector, as well.

bullish

A disproportionate number of energy companies turned to the high yield market to finance operations while rates were low and junk spreads were tight. Then, when the bottom fell out of the crude market this summer, a great number of those issues were put in jeopardy.

But now the tide is again turning. Junk is on the rise, as seen in the action of the biggest junk ETF, the iShares iBoxx Hi Yield Corporate Bond ETF (NYSE:HYG).

Have a look here –

hyg21915

Most significant here is the oversold washout bottom that came on big volume in mid-December (red arrow).

Since then, HYG has recovered reasonably well, with both RSI and MACD retaking their respective ‘waterlines’ and a recent price breakout above resistance at the 90.50 mark (in green). These developments speak to continued gains, likely to the bunched moving averages in the 92.50-range for starters.

High yield is perhaps the best barometer of the market’s taste for risk.

As this asset class climbs, you can be sure the market will climb faster.

Now go bet on it.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy Research

See what people are saying...

  1. Jim

    Corporations are stupid. Why? They only start buying their stock when the prices have risen sharply, they never buy their stock when the price is low. But guess what? That is great for the bull market beause they are flush with cash and will continue to buy stock.
    Then at some time in the future they will unload those shares as the market begins to falter.
    IMHO that time is far in the future years, at least 2-3 years. In the mean time we all will benefit from this rising market.
    I agree with you, this market is far from a top!
    Have a great day, all bulls!!!

  2. Gary Cooper

    Regarding the oil:
    I believe in the short term, we will see lower oil prices because in this over supply situation, we have to consider storage! The ocean tankers are full so where to put it?
    As the oil price drops for the above reason, drilling and production will cut back, some companies with no hedges will fold, and that is what will bring on the increase in the price of oil, supply dropping below demand!

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