Weekend Strategy Review January 28, 2018

Posted by OMS  at January 28th, 2018

The markets finished the week with another major rally.  The Dow was up 224 points on Friday and up 545 points for the week, closing at 26,617. The NASDAQ and SPX were also up Big on the week, gaining 169 and 63 points, respectively.

It was another great week for stocks…especially if you were in the right sectors.  Since the beginning of January, the S&P500 has gained 7 percent.  But if you were in the stronger Sectors, you did a lot better.  For example, the Food/Drug Sector, which has been leading the Strong Sector List, was up 10 percent.  Healthcare was up 12 percent.  Cap Equipment was up 8 percent.  Specialty Banks were up 9 percent.  During this same time, the Utilities Sector, which has been leading the Weak Sector List, lost money.  If you were in Telecoms, another weak sector, you broke even.  Hmmm?

This is why I continue to say stay in stocks in the right sectors and avoid stocks in the weak sectors like the plaque.  It matters!

Just look at the Sector Ratio.  When I wrote the first WSR for the year on 6 January, the Ratio stood at 21-3 positive.  That was an EXTREMELY strong Ratio.  This weekend the Ratio is 22-2 positive.  It’s even more positive than it was at the start of the year when the Dow was 1,793 points lower.  It’s one of the reasons I continue to say…Ride the Horse.  When the Sector Ratio starts to weaken, that’s when I’ll think about getting off the horse.  But until then, its ride, ride, ride.

President Trump spent the past two days in Davos, Switzerland, telling a summit of business and political leaders that the United States would “no longer turn a blind eye” to what he described as unfair trade practices. Wow!  He also said that ’the United States is open for business and that now is the best time to bring your money, your jobs, your businesses to America.  He talked about how the tax cuts and curbs to regulation are boosting the investment climate. The Dow has risen 365 points since he’s been abroad.  It’s obvious that Wall Street loves his message.  The interesting thing about what he’s been saying is that IF Europe starts to believe him and actually starts to move their money and jobs to America, the current rally could continue a lot longer than many people expect.

The tax cuts and reduction in regulations that are happening in America have changed the investment climate.  There’s no doubt about it. After years of businesses being treated as if doing business and making money was a bad thing, the environment is starting to change.  A few years ago, I saw this happen in Ireland, where they reduced taxes and made their investment climate favorable to businesses.  People from all over the world moved to Ireland in droves, along with their money. Their economy soared!  Ireland is a small country.  Think about what could happen if something similar starts to happen in America?  If businesses start to move their Headquarters to America, instead of the what we’ve been seeing for the past few years, where U.S. businesses have been moving to Europe to avoid taxes.  The change could be revolutionary.  Europe might have to re-think their entire social system to compete.

I saw this happen several years ago on a small scale while I was working for the Navy.  We entered into a joint multi-national cooperative R&D program with the Europeans to develop a missile system.  Then once the missile was developed, we planned a competitive production to build the missile with two separate production lines established…..one in America and one in Europe.  There were seven competitions conducted to produce the missile.  The U.S. won everyone.  That’s how things were before business was thought to be bad.  Yes, taxes were relatively high back then, but there were other things that leveled the playing field.  Regulation was low, and businesses didn’t have the burden of Obamacare.  European businesses did.  It wasn’t called Obamacare, but it was basically the same thing. Socialized medicine.  Add in the 6 to 8 weeks of vacation time most Europeans received, a daily routine that included multiple half hour latte breaks, long lunches, and other bennies, and you’ll understand why they lost.  Their missile cost 40 percent more to produce than the U.S. version.  They couldn’t compete. 

So maybe things are starting to change.  Make no mistake about it….IF the President’s message starts to resonate with European businesses, and they take him up on his offer to do more business in America, this market is going a lot higher.  I’m not saying we will continue to see the market moving up in the sky-rocket rallies we’ve been seeing.  But a choppy path to 29,000 to 30,000 is no longer unreasonable.  That’s how much I believe the change in tax code and reduction in regulations are impacting the earnings of major U.S. companies.

And if the Dollar and interest rates stay relatively low, there is no reason why this market can’t continue to push even higher.  Keep your eye on UDN.  If it stays on the Dean’s List, the environment for most U.S. businesses will remain favorable.

Same for the Sector Ratio.  If the Ratio stays positive, stay in stocks and ETFs in the strong sectors.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

01-29-2018

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