December 2, 2021

For a period of the year that stocks are supposed to be very strong they’ve put in their worst performance during Thanksgiving week since the 1940’s.

The continual erosion in the % of stocks above their respective moving averages is potentially coming to crescendo conclusion. A healthy market is a market that lifts all boats and not just a handful.

The three biggest props to the market have been Apple, Google and Microsoft. For example, yesterday December 1st Apple traded from 165 to 170 in the morning. (I sold at $170) on a day in which the Nasdaq rose from 15560 to 15814. Once Apple peaked at $170.27 it fell to $164.70 and the Nasdaq fell from 15814 to 15208 or 3.8%! And, all in a single day.

In the chart above the second row shows the Number of Nasdaq Stocks Making New Highs minus the Number of Nasdaq Stocks Making New Lows. It reveals the present market weakness is the most significant since the Covid low of 2020.

It also shows that the percentage of stocks above or rising above the 50-150 and 200 day moving averages is almost in free-fall. Eventually the major market indices will reflect the serious erosion in the average stock. So it’s my opinion that we are not near the end of this decline. Every rally at this point is an opportunity to sell.

With risk so high and a market bottom no where in sight we are at 100% cash. If the selling becomes severe enough we will have an opportunity to truly invest and not be a short term owner. Or, as an acquaintance says “You’ll have the opportunity to marry some stocks rather than just dating.” Looking at my data this selloff has at least another two weeks before some semblance of stability is restored.

Serious market weakness is a significant opportunity. In an average year there are usually only about 2 windows of market weakness that offer such an opportunity. Due to the Federal Reserve’s support of bond prices stock sell-offs have been only very brief and shallow.

In the meantime, the best thing to do is sit tight. It doesn’t matter in the end what the cause of the selling is. There is always another good market rally to emerge after serious selling and that’s what we should be focused on. And, having 100% cash will allow us to be unemotional despite what the near future has for the markets.

Thank You,

Brad Pappas

PS: Over the past year of two I’ve told many of you that Janene and I were going to move to the Ft. Lauderdale area. We’ve thrown that plan out the window and have settled on moving to Downtown Denver. The fire risk here is too much. Just last week I spotted a nascent brush fire just a quarter mile from our home.

September 29, 2021

We are potentially arriving at a point where a good risk/reward entry point for stocks may present itself. There has been a frustrating lack of entry opportunities for equities this year. However the concerns regarding the Fed’s future change of course appears to be having the desired affect of stomping out excessive enthusiasm.

Fear is almost always present at market lows. Or, as long time market technician Walter Deemer used to say: “When it’s time to buy you won’t want to. When it’s time to sell you won’t want to.”

As much as I loathed the sell off for the past two days, it has created driven down the markets to the point where it’s time to think about adding to our holdings. At present we are in the weakest portion of the year for stocks. This will give way in approximately two weeks to the strongest seasonal tendency from October thru March.

It’s too early to do any serious buying today and possibly next week. I’ll continue to wait until buy signals appears before moving aggressively.

Changes to the stock selection and holding process

Markets are always in a state of evolution in trends. What worked in years past will likely not work in the future and visa versa. For most of my career in portfolio management I’ve changed strategies to fit and improve performance going forward.

It has been a difficult year for RMHI as it has been for the vast majority of technical trend traders. 2021 has been a year where a “buy and hold” approach worked well but only for a tiny majority of stocks. I’d place these stocks and their inherent characteristics in what I’d call “Stable Growth Leaders” or SGL.

The most common characteristic of SGL’s is their consistent moderately high earnings and sales growth. In addition, this category of stocks must also maintain performance greater than the market indices for a multiple of years.

I scan my screens daily for SGL’s but on any given day there might only be 10 to 15 that meet my parameters.

My strategy is to have at least 50% of account assets in these names, many of which are already in your accounts now. These are not intended to be traded actively unless they drop or rise precipitously, like Adobe Systems did recently.

Presently, the following meet my criteria and are in client portfolios today. So you know we only have partial positions in accounts right now. I’ll add to them should the market stabilize and begin to rally:

Entegris
Epam Systems Fortinet
Ihs Market Ltd Intuit
Johnson Controls SVB Financial Group

Current market weakness creates and ideal entry point for these kinds of stocks. While I’ve only listed 7 names, several more companies have fallen back in their buy zones.

With the exception of SVB Financial which is in the black for us. The other holdings have moderate to small losses. Thats ok for now. These names have repeatedly bounced back from sell-offs in years past before resuming moderate and steady appreciation.

The balance of our holdings will be the classic technical trading that works very well in strong markets.

In creating this form of hybrid methodology is an effort to create more balance where at least one strategy could be working while the other does not.

In addition, both technical and SGL’s will work initially after a good market sell off like we’re in the midst of right now.

Thank You,

Brad Pappas

September 21, 2021

For months I’ve been writing and saying that the major market indices have been masking the erosion of individual stock declines. When we see this type of erosion with underlying stocks it usually means there is a broad selloff coming.

What made the erosion unique in 2021 has been how long it’s been sustained. The percent of stocks above their respective 200 day moving average peaked in April 2021 and has been declining ever since. I believe this is the longest streak since 2000.

Unless you’e a day trader it’s very difficult to show sustainable profits when the tide is moving out.The erosion accelerated in July to the point where the indices have finally given way.

This should be considered a pullback within an ongoing long term bull market and not the start of something more severe.

As always there are a lot worries out there:

The Republican stance of not raising the debt limit is phony and the limit will be increased.

The Chinese governments attempt to control the Evergrande debt fiasco poses risks for the Chinese economy which is the driver of world economic growth.

Chmn. Powell’s testimony tomorrow will likely be mild. He has enough issues on his plate to cover his dovish stance for quite a while longer.

I previously showed the chart below this Summer with the understanding that going into the weakest months of the year. Correspondingly once we emerge from early October we’ll be entering the strongest months of the year.

Covid luddites prolonging the pandemic.

In my opinion the market weakness is a buying opportunity once the markets stabilize. The chart says late September or early October.

Plus, Monetary policy remains easy which is conducive to a bull market.

Summary: This appears to be a garden variety market selloff and not the start of something more significant. Monetary policy in the US would have to severely change in order for a prolonged bear market to emerge. This is not the case today.

My hope is that this selloff puts and end to the waning individual stock participation – it usually does. And, in doing so creates enough fear and angst for a new leg higher for stocks and the indices.

Sincerely,

Brad Pappas

August 9, 2021

Imagine watching a long bridge over water filled with traffic. The bridge appears stable and strong with no sign of weakness on the roadbed. But if you look below to the bridge foundation you see individual bits of brick, mortar and concrete fall into the water.

The bridge road surface is still stable but for how long? And, would you be willing to cross it?

This is my attempt at an analogy of the broad market indices today. Markets are stagnant but stable on the surface. However severe erosion exists beneath the surface which has made investing increasingly difficult. Trades that normally would hold value after a few days are reversing after days 2-4.

For example, the Nasdaq 100 made a new all-time high today (8/5) but only one stock from the index made a new high as well: Costco.

In this letter I show how there have been several periods like this in the past. While its not 100% assurance that a good sized sell-off ensues, its a high probability occurance. Periods like today with eroding stock participation are before sell-offs in excess of 5%-10%+.

From my observational view when I run into trouble buying into a series of high probability trades that end up not working out, I stop. By stopping I want to see why my textbook entries are not working out as they should in a healthy market. Recently there have been a few textbook trades that are strong on day1 but run into trouble after day 2 or 3. Whats happening?

What is happening is that big institutional firms are selling into the rallies rather than making additional buys that can propel the stock higher. We’ve had cases where this has not happened such as with Adobe, Align Tech or Cloudfare. But we’ve taken enough small losses to force me to pause.

Bob Farrell is Old School. He was the Chief of Technical Analysis at Merrill Lynch when I first broke into the business in the early 80’s. In his Ten Lessons of Investing is the following quote:

“Markets are strongest when they are broad based and weakest when they narrow to a handful of blue-chip names.” And that describes exactly where we are in August 2021.

Since July, equity markets have become a chop-fest. Up, down, up, down with zero consistency while the percentage of stocks above important moving averages continues to decline.

This erosion in the markets is being masked by the largest % weightings in the S&P 500 index. The S&P 500 is not a group of 500 companies weighted equally so it’s possible to prop up an index with heavy buying of the highest weighted stocks.

Apple 5.5%
Microsoft 5.3%
Google aka Alphabet A & C shares 4%
Amazon 3.9%
Facebook 2.2%

At the moment we are time period where companies are reporting earnings and expectations for the second half of the year. And, there is a trend emerging in which Amazon, UPS, Facebook, Apple are reporting that the first half of the year revenue growth was unsustainably great that it was borrowing from the second half of the year. In other words, all 4 companies that benefited from the Covid crisis are expecting declines in demand and revenues for the second half of the year.

In addition, we can expect the Fed to begin easing off their purchases of Treasuries and Mortgage backed securities – as if the real estate market isn’t hot enough.

These are my thoughts as to why we could experience a sharp down move in stocks in the coming two months – August and September happen to be two of of the worst months for stocks. But at this point these are opinions that have yet to be validated by the markets.

Based on the chart below, the cycle peak for stocks was last week. Maybe its accurate, maybe not. It’s interesting regardless.

Now lets drill down to facts:

The Nasdaq composite remains elevated but without serious weakness at the surface. This is due to the pegging of Google, Apple, Microsoft, etc expressed previously.

Below the surface to individual stocks there is a very different story. Serious erosion in the average stock while the indices remain high. As the chart shows this is not a rare occurrence but it usually leads eventually to significant market weakness.

The percent of stocks below their respective 150 and 200 day moving averages (dma) continues to grow. The Bob Farrell quote comes to mind here.

What is happening is that investors are cutting their losses in stocks and then shifting the assets to FANG + M (Facebook, Apple, Netflix, Google and Microsoft). In a sense they’re hiding in extremely large and liquid shares.

If there is a serious market decline those who’re buying FANG + M will sell those as well.

Another method of analyzing the erosion in participation (market breadth) is the Nasdaq McClellan Summation Index (NASI) which has clearly been on a Sell recommendation since July.

Every major market pullback in the last 20 years show declining market breadth before the bulk of the selling began. However, not every period of declining breath presaged a sizable market pullback.

Should market breadth begin to improve, I plan on increasing our percentage invested. In the meantime its very difficult to sustain meaningful gains with the current erosion in stock participation.

Like everything else market-wise this is a temporary condition. Its just not an ideal time to be aggressive and fully-invested.

Thank you for reading.
Brad Pappas
August 9, 2021