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RoboStreet – August 30, 2018
Upbeat Trade Talk Fuels Historic August Rally
Euphoria is running high after this week’s big gains for the U.S. stock market, now considered the only game in town relative to global investing. All the right things to keep the an uninterrupted rally running are falling into place, and that’s caught many fund managers underinvested and aggressively upping their equity weightings to keep pace with the major averages. It’s the most impressive August rally I’ve ever seen and I’m not alone. Most of Wall Street is stunned by this late summer rally that is being catalyzed by trade talks moving in the right direction.
Animal spirits have emerged as news of positive developments on global trade have taken center stage and brought money off the sidelines targeting U.S. equities. The domestic stock market landscape is nothing short of “sweet”. Third quarter GDP is set to challenge 5.0%, core inflation is holding at the Fed’s 2.0% target, the yield on the 10-yr Treasury is camped out below 3.0% and the dollar has pulled back on a rising narrative that further Fed tightening will cease in 2019 and quite possibly after the September 26 FOMC meeting.
Aside from the mid-term elections that are a complete toss up, the upside breakout for the market is legit. Yes, there are outside geopolitical risks that include sanctions against North Korea, Russia, Iran and Turkey as well as the trade war with China, but this week’s trade deal with Mexico looks to bring in Canada as well, and this sets a positive tone for some progress with China. While that may take many months to iron out, it is not a rally killer and traders have seized on this narrative.
What is impressive is that the rally is broad based- evidenced by strong weekly rotation from sector to sector with technology and consumer discretionary stocks outperforming the other nine market sectors. What is most impressive is that the market rally is grounded on solid earnings growth. With 91% of the companies in the S&P 500 reporting results for the second quarter, 79% have reported a positive EPS surprise and 72% have reported a positive sales surprise. Sure, tax reform can juice up earnings, but there is no substitute for strong top line revenue growth. That is organic at its core.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
The second quarter numbers were historic. For Q2, the blended earnings growth rate for the S&P 500 is 24.6% and marks the second highest earnings growth since Q3 2010 (34.1%). The blended sales growth rate for the S&P for Q2 2018 is 9.9%. Spending by businesses on technology and automation led the uptick in the growth rate. For Q3 analysts currently expect earnings to grow by 20.3% and revenues to grow by 7.7%, which will likely be handily exceeded as were the Q2 forecasts.
The chart below tells a bullish story for the S&P 500 in that while the market is trading at all time highs, earnings are robust enough to maintain a forward PE for the market of around 16.5 times, which is slightly above fair value but not overvalued relative to double-digit earnings growth. Stocks are moving higher in tandem with earnings growth and with the analysts currently expecting earnings to grow near 20% for the rest of 2018, the prospect of the S&P 500 trading to 3.000 is quite good.
This backdrop argues well for our RoboInvestor portfolio that is putting up some heady performance numbers. While the S&P 500 is up 10.14% year-to-date, RoboInvestors are booking 9%-10% profits over 1-3-month period, crushing not just the S&P’s performance, but also blowing past the annualized rate for the hot Nasdaq that is up by 17.26% YTD.
With four months left in the trading year and coming into the strongest season for stock performance, I’m looking for the market to take a breather over the near term to relieve some of the short-term overbought condition and then make a strong year-end run that will light up our RoboInvestor Portfolio like a Christmas tree. Here are the main factors in the strong year-end run we’re looking toward:
Although the tech sector gets most of the time in the spotlight followed closely by consumer discretion, it’s important from a portfolio management discipline to have some diversification if one is to manage a concentrated list of stocks and ETFs. My effort to fashion a portfolio that strongly outperforms the indexes makes room for owning stocks in technology, energy, finance, consumer discretion, industrial and utilities. By finding hot stocks within these sectors, the ride higher is smooth and steady. There is always sector rotation and you want some stocks you own to zig when other zag.
The Tradespoon Seasonal Chart above shows one of our current holdings– Exelon (EXC), Exelonis the largest electric power utility in the U.S. and the biggest operator of nuclear power plants. As the financial media gushes over the latest news surrounding Tesla, shares of EXC are trading like a giant sea turtle, marching higher toward the year-end finish line while the hare that is bleeding cash and Street credibility has seen its share shed -22% in market value in just the past three weeks.
All four forward forecasts for the stock (20, 30, 40, 50 days) have the stock trading higher and you’d be hard pressed to find a prettier one-year chart for any defensive stock that rivals Exelon. Talk about smooth and steady. There are probably a vast number of Tesla stockholders who would gladly swap into Exelon if they could just get back to break even.
And while the race to win market share in the electric car space is furious among all the major automakers, the real winners will be the electric power companies that will be the source to charging those tens of millions of batteries that are the heart and soul of the electric auto industry. Owning Exelon is a lot like being an arms dealer in a multi-faceted large-scale war. You don’t have to choose sides just as long as you are supplying everyone what they need to fight on. It’s a beautiful thing…this Exelon stock.
And remember we’re not talking about day-trading here. I’m looking for 50-100% gains inside of the next 3 months, so my weekly updates are timely enough for you to act.
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