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1704 On The S&P 500 In 2016? Less Far-Fetched Than Investors Want To Believe

How does a favorable bullish uptrend become an unfavorable bearish downtrend? Does the transition happen overnight? Do commentators, analysts, money managers and market participants simultaneously concur that the environment for risk-taking is exceptionally poor? The transition from “good times” to “bad times” is far more gradual than many realize. Granted, prices on the Dow or the S&P 500 may fall apart in a matter of days, changing the narrative from “no reason to worry” to “don’t panic.” That said, there are a wide variety of indications that forewarn mindful investors six to twelve months in advance , including consecutive quarters of corporate profitability declines, economic deceleration, and waning participation in price gains across the majority of assets and asset types. 1. Corporate Profits Have Been Breaking Down For Quite Some Time . Peak profitability for the S&P 500 occurred with the third quarter results of 2014 (9/30). Operating earnings that exclude “non-recurring” charges like one-time losses and loan write-downs came in $114.5; reported, or actual earnings, came in near $106. Not only will operating earnings decline for two consecutive quarters on a year-over-year basis for 12/31/2015, but reported earnings will decline for three consecutive quarters on a year-over-year basis (i.e. Q2, Q3 and Q4 in 2015). An earnings recession – two consecutive quarters of year-over-year declines is a bad omen regardless of the earnings type that one looks at. According to one researcher, Keith McCullough, two consecutive quarters of declining profits always result in bearish price depreciation for the S&P 500 in the subsequent year. Similarly, I have pointed out in past articles that a relationship between a manufacturing recession via erosion of the Institute for Supply Management’s PMI strongly correlates with declining earnings per share (EPS). In other words, as much as cheerleaders look to play up ex-energy (EPS) or the 65%-70% service-oriented (ex-manufacturing, ex industrials, ex transports) economy, overall S&P 500 profitability weakness goes hand-in-hand with overall economic weakness. The last two bear markets tell the tale. Back in 2000, bulls continued to push the idea that consumers were resilient and forward earnings projections (ex tech) looked phenomenal. They missed the bearish turn of events entirely. Back in 2008, bulls opined that forward earnings estimates (ex financials) were attractive, and that manufacturer health was irrelevant. They missed the housing bubble as well as its subsequent bursting. Here in 2016, bulls are confident that the U.S. can shake off $30 oil, energy company stock/bond woes, a manufacturing recession and a sharp global economic slowdown without a 20% drop for the Dow or S&P 500. Unfortunately, there’s more to the story. 2. The U.S. Economy Continues To Slow And The Global Economy Is Getting Worse . In 2014, I talked about the best way to participate in a late-stage bull market. In June of 2015, I advocated lowering one’s overall allocation to riskier assets . Bearish? Cautious would be a more appropriate description for downshifting from 70% equity exposure to 50% equity exposure. One of the key reasons for reducing risk had been the consistency of the downtrend in the global manufacturing. Here is a chart of JP Morgan’s Global Manufacturing PMI that I described in numerous pieces in the summer of 2015. It should not come as a surprise that U.S. corporate earnings peaked near the top of the PMI Index level in September of 2014. Since that time, a super-strong dollar strangled profits as well as U.S. exports. Meanwhile, Fed “de facto” tightening via tapering asset purchases throughout 2014 coupled with its direction shift in overnight lending rates in late 2015 have strained gross domestic product (GDP) growth. Even worse, Russia and Brazil are fighting off nasty recessions. Japan is there as well. China’s slowdown may be accelerating. Oil producing nations are close to falling apart on $30 oil. And expectations for Europe continue to sink, as debts pile up and international trade diminishes. Indeed, it’s not difficult to spot the pattern on global nominal year-over-year GDP. When it’s negative, market-based asset prices, including those in the U.S., are more likely to deteriorate. What about the constant drumbeat that sensational U.S. job growth proves that the domestic economy is healthy? Not only are the majority of new jobs low-paying, part-time positions, but the erosion of 25-54 year-old workers from the labor force – from 83.5% in 2008 to 81% in 2016 – represents millions of non-retirees who are not being counted. What about the notion that the U.S. consumer is resilient? According to a wide range of resources, including data at Federal Reserve web sites, personal consumption expenditures (PCE) is the primary measure of consumer spending on goods and services in the U.S. economy. Some would say that PCE accounts for nearly two-thirds of domestic spending, which would make it a significant driver of economic growth. Here’s the problem. Year-over-year percent growth in PCE has been declining steadily since May-June on 2014, which is roughly in line with more significant reductions in the Federal Reserve’s asset buying program (QE3). 3. Weakness in Breadth Of U.S. Stock Market As Well As Majority Of Asset Types . By May of 2015, when the S&P 500 hit its all-time record (2130), investors had learned that reported profits had declined on a year-over-year basis – 3/31/2015 ($99.25) versus 3/31/2014 ($100.85). In the same vein, by May of 2015, investors were privy to significant deceleration in Global PMI, U.S. manufacturer woes as well as dissipating personal consumer expenditures (PCE). Yet there was more. The NYSE Advance/Decline (A/D) Line seemed to have peaked in late April. From late April through the August-September correction, the number of declining stocks outpaced the number of advancing stocks. In fact, in late July, market breadth had grown so weak, the A/D Line fell below its 200-day moving average for the first time since the euro-zone crisis – four years earlier. What’s more, less than 50% of S&P 500 stocks could claim bullish uptrends. Equally disturbing, the Industrial Select Sector SPDR ETF (NYSEARCA: XLI ), the iShares Transportation Average ETF (NYSEARCA: IYT ) as well as small caps via the iShares Russell 2000 ETF (NYSEARCA: IWM ) had already entered corrections; all had dropped below respective long-term trendlines. In other words, market breadth was extraordinarily weak. Obviously, a great many folks believed that an October snap-back rally had terminated the volatile 12% correction that occurred in the summertime. Not only did the S&P 500 fail to recover the highs from May of 2015, but virtually all asset types never made it back. And now, most of those assets are actually lower than they were at the August/September lows . Take a look at the widespread carnage that extends far beyond the S&P 500 or the Dow. U.S. small caps in the Russell 2000 (IWM) reside near 52-week lows. The same holds true for commodities via the PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ), Europe via the Vanguard FTSE Europe ETF (NYSEARCA: VGK ) and emerging markets via the Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ). Still choose to believe that rapid deterioration across asset types as well as within U.S. stocks themselves is irrelevant? Perhaps some data from the wildly popular Bespoke Research team might provide additional perspective. Internally, the average stock in every U.S. stock classification has already fallen more than 20% from a 52-week high (through 1/11/2016), meaning the average stock is in a bear market. Think this is a mathematical slight of hand because of energy stock depreciation? Wrong again. Every stock sector with the exception of consumer stables and utilities – safer haven assets less tied to economic cycles – is down more than the 20% bear market demarcation line. Is it possible for Amazon (NASDAQ: AMZN ), Alphabet (NASDAQ: GOOG ), Facebook (NASDAQ: FB ), Microsoft (NASDAQ: MSFT ), Home Depot (NYSE: HD ) and a host of influential companies to keep market-cap weighted S&P 500 ETFs like the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) from sinking 20%? It’s possible. Is it likely? Not unless the Fed has a change of heart on the direction of its monetary policy and not without unanticipated improvements in both corporate profits and the global economic backdrop. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Dual ETF Momentum Update

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet, which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum . Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk , also details Dual Momentum as a total portfolio strategy. My Dual ETF Momentum spreadsheet is available here , and the objective is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum. Invested signals also require positive absolute momentum, hence the term “Dual Momentum”. Relative momentum is gauged by the 12-month total returns of each ETF. The 12-month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of the iShares Barclays 1-3 Treasury Bond ETF (NYSEARCA: SHY ). In order to have an “Invested” signal, the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns. An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3-, 6-, and 12-(“3/6/12”) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF. Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12”). The test results were posted in the 2013 Year in Review and the January 2015 Update . Below are the four portfolios along with current signals. “Risk-Off” is the current theme among all four portfolios: Return Data Provided by Finviz Click to enlarge As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker-specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions, and the terms of their commission-free ETFs could change in the future. Disclosure: None.

Forget China, Buy These 3 India ETFs Instead

While a flurry of weak Chinese data escalated concerns regarding sluggish global growth, it’s India that showed promises to outpace other major economies over the next few years. The World Bank along with the International Monetary Fund (IMF) indicated that India was the world’s fastest growing economy in 2015 and will continue to hold that position for the next three years, easily surpassing the former leader, China. In this scenario, ETFs having significant exposure to India may provide an excellent opportunity for investors to tap this positive trend. Weak Chinese Economy The sluggish growth condition in China remained one of the major concerns over the past one year. Recently released economic data showed that the Chinese economy is still struggling to provide a congenial economic environment. While the Caixin manufacturing PMI finished below 50 for the 10th straight month in December, the Caixin China services purchasing managers’ index PMI dropped to 50.2 in December from 51.2 in November. Multiple rate cuts and devaluations of the yuan over the past one-year period failed to resuscitate the economy. Also, the World Bank reduced its outlook for Chinese GDP growth in 2016 by 30 percentage points to 6.7%, below last year’s estimated growth rate of 6.9%, which was also below the June forecast of 7.2%. The bank also predicted that the economy may grow at a slower pace of 6.5% over the next two years. Blaming the weak Chinese economy, the bank also reduced its global growth rate forecast for 2016 by 0.4 percentage points to 2.9%. However, it remained above 2015’s estimated growth rate of 2.4%. India in a Bright Spot The World Bank projected the Indian economy to expand at a rate of 7.8% this year and 7.9% over the next two years. While the economy registered a GDP growth rate of 7.4% in the July-September quarter, the economy is expected to continue this positive trend to end the current fiscal year with a growth pace between 7% and 7.5%. Increase in activities in sectors such as manufacturing, mining and services were cited as the main drivers behind the growth in the quarter. Moreover, economic policies including rate cuts by the Reserve Bank of India (RBI) along with several measures taken by the Indian government are likely to boost the economy in the months ahead. Meanwhile, positive net FDI flows in the reserve of RBI and a significant decline in fiscal deficit also had a positive impact on the economy. It was reported that India’s fiscal deficit gradually declined from 7.6% of GDP in 2009 to currently 4%. Also, the continuing slump in prices of oil, which is one of the major imported commodities in India, had a significant effect on the Indian economy over the past one year. While the plunge in crude helped the trade deficit to remain at a controllable level, decline in prices of oil and other major commodities also restrained the inflation rate to go beyond the targeted range. The World Bank said, “In contrast to other major developing countries, growth in India remained robust, buoyed by strong investor sentiment and the positive effect on real incomes of the recent fall in oil prices.” 3 India ETFs to Buy Given the bullishness, we have highlighted three India ETFs with a Zacks ETF Rank #2 (Buy) that may prove to be profitable for investors who are interested to gain from the positive outlook of the Indian economy. Market Vectors India Small-Cap ETF (NYSEARCA: SCIF ) This fund targets the small cap segment and tracks the Market Vectors India Small-Cap Index. In total, it holds 143 securities in its basket with none making up for more than 3.27% of assets. Financials occupies the top position from a sector look at 27.7% while industrials, consumer discretionary, and information technology round off the next three spots. The fund has so far amassed $173.2 million in its asset base while charging 89 bps in annual fees. Volume is good, exchanging around 94,000 shares in hand a day. The ETF lost 0.3% over the past one-month period. EGShares India Infrastructure ETF (NYSEARCA: INXX ) This ETF provides exposure to 30 Indian stocks by tracking the Indxx India Infrastructure Index. It is pretty well spread out across components with none of the securities holding more than 5.06% of assets. With respect to sector holdings, construction & materials takes the top spot at 18.3%, followed by mobile telecommunications (14.7%), electricity (14.3%) and industrial engineering (10.2%). The product has managed assets worth $40.8 million and trades in volume of nearly 26,000 million shares a day. It has an expense ratio of 0.93% and lost 0.3% over the past one month. PowerShares India ETF (NYSEARCA: PIN ) This fund offers exposure to a basket of 50 stocks selected from the universe of the largest companies listed on two major Indian exchanges by tracking Indus India. The top two firms are Reliance Industries and Infosys (NYSE: INFY ). From a sector look, the fund is tilted towards energy and information technology, each accounting for around 20% share, followed by financials (11.5%) and healthcare (11%). The fund has amassed $430.3 million in its asset base and trades in solid volume of around 1.2 million shares a day on average. It charges an expense ratio of 85 bps and lost 0.4% in the past one month. Original Post