Weekend Strategy Review October 29, 2017

Posted by OMS  at October 29th, 2017

The rally in the markets continued this week.  Technology stocks pushed the Dow 33 points higher on Friday with the large cap index closing at 23,434.  The Dow was up 106 points for the week.  But the real impact of technology was felt on the NASDAQ where stocks like Amazon, Apple, and Alphabet (Google) caused the index to gain 144 points on Friday and close up 72 points for the week.

Friday was all about technology.  If you owned it, you were happy.  If you didn’t and were holding almost anything else, you probably wondered what was going on.  You might have been watching the NASDAQ gain 144 points while most of the stocks in your portfolio were falling.  How could this be?  Hmmm?

Well, even though most of the commentators on CNBC and FOX Business news were cheering again, the fact is that The Tide is still negative.  The A-D oscillator is still negative.  This means that most stocks on the NYSE are falling.  As I mentioned last week, four stocks, AAPL, AMZN, FB, and GOOG, make up 34.2 percent of the NASDAQ.  So, if AMZN explodes for 128.5 points after announcing third quarter earnings of 0.53 cents, and GOOG sees a 44- point pop after their announcement, it’s easy to see why the technology laden NASDAQ tacked on 144 points.

So, should we all rush out and buy technology?  Hmmm?  After all, it appears that Amazon Prime is taking over the world.  You can order something before 2pm and have it delivered to your door the next day.  No need to drive to the malls.  We don’t have to lug that 65-inch TV set home from Costco (down 0.08 cents yesterday).  Just go on-line and order it from Amazon.  Easy.

Yes, let’s face it.  Amazon Prime is a great business.  It has changed the way we live.  But because this is a financial column, we need to ask ourselves is Amazon a great stock?  Should we buy it?  Especially now that it is priced at $1,019 per share. 

To me, Amazon is like the tulip bulbs the Dutch were selling in the early 1600s, when speculation drove the value of tulip bulbs to extremes. At the height of the market in 1636, the rarest bulbs traded for as much as six times the average person’s annual salary. People sold possessions, including properties, to buy tulip bulbs.  The Cramer’s of the day were stomping their wooden shoes telling people to buy tulip bulbs.  It all came to an end in 1637, when prices dropped as the selling began. Bulbs were soon trading at a fraction of what they once had, leaving many people in financial ruin.

Sure, the bulbs produced beautiful flowers, but at the end of the day, were they really worth six times a person’s salary?  After yesterday’s positive earnings announcement, AMZN was selling for a P/E of 280!   The average stock on the S&P 500 has a P/E of 31.49, which just happens to be the second highest P/E in the history of mankind.  The only time this P/E number was exceeded was just before the market crashed in 2000.  In other words, Amazon is priced at almost 9 times the highest P/E ratio in the history of markets.  Is it really worth it? 

Amazon got to be where it is because it was the first retailer that got things to you in a hurry.  It was not the first company to sell things.  Nor was it the first company to sell things on the internet.  It was also not the first company to ship things.  But it was the first company to get you what you wanted in a hurry.  Hmmm?  So, before you rush out to buy Amazon, you need to ask yourself, ‘Can other companies do that?’  The answer is yes.  As a matter of fact, companies like Walmart and Costco are currently working on this now.  It won’t be long before they too will be competing successfully with Amazon.  And if you’re pinning your hopes on Amazon’s Prime Air concept of using drones to deliver packages weighing less than five pounds in a half hour, you need to ask yourself if people are really going to pay 4 times the price of bulk shipping for a roll of paper towels?  I don’t know about you, but I can wait a day for paper towels to be delivered.  If it was toilet paper, maybe, but for me a half hour would be too late!

While you’re thinking about this, think about Apple and their magic wrist watch.  It was supposed to change the world.  It didn’t.  It too was just a fad that fizzed out, just like the tulip bulbs.  On Friday, Apple announced that their new iPhone X sold out in less than 10 minutes after it became available for pre-order.  The news, which helped lift the stock 5.64 points on Friday, sounded a lot like what happened when Apple announced the watch.  Lots of sizzle, not enough steak.  Lost in the announcement was the fact that demand for the iPhone 8, the more conventional smart phone was sluggish in its first few weeks on sale.  By comparison, the iPhone 8 only represents 16 percent of iPhone sales, while the older 6 and 7 series, still make up 24 and 58 percent of Apple’s revenue.  So, it’s not like people are rushing out to buy new iPhones.  I know I’m not.  I like my 6 plus just fine.

The reason I’m talking about Apple today is because the company will be announcing its earnings after the close next Thursday, 2 November.  If Apple disappoints, it could spell trouble for the tech sector.  Remember, I’m still watching AAPL because it continues to form a potential Head & Shoulders reversal pattern.  As long as the stock stays above 152, things should be OK.  But IF APPL breaks 152, a lot of the high-priced technology stocks are going to start looking like the tulip bulbs of 1637.

Friday’s Sector Report was basically unchanged. The Sector Ratio remained at to 19-5 positive.  The Strong Sector List was led by the Semis, Service, Cap Equipment, Banks, and Computers.  On Friday, only eight out of the 19 positive sectors still had positive Trend Scores.  So, while the momentum remains positive, the decreasing Trend Scores is warning that momentum is slowing in the sectors.  The Weak Sectors were led by Telecoms, Media, Household Products, Food/Drug and Foods.  Continue to stay in stocks and ETFs in the strong sectors and avoid or short those in the weak sectors.  And watch the Sector Ratio closely. 

The market remains in a large Ending Diagonal Pattern that continues to suggest a major top is near.  The P/E ratios are at historic highs and The Tide with its A-D oscillator is negative, meaning most stocks are starting to move down. The indexes are being propped up by a handful of high priced technology stocks. The current rally in the indexes could end at any time.  Be extremely careful now.

Have a great weekend.

That’s what I’m doing,

h

Market Signals for

10-30-2017

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