Transcript:
Tom Vaughan:
Okay, of course, I like to start off every show with a summary of kind of what I saw happening in the market this week. And if you take a look at this chart, you can see that this particular week that we have here, right at the end, is all green, very heavily up, really strong bounce off of last Friday, we hit a low last Friday for the year, in the morning, rally back, actually all the way to a positive. And this week, for those of you that watch my daily videos, where I summarize the market every day, Monday through Thursday, I have shirts that I wear, so I wear a green shirt, when the market is up over the S&P500 is up over one and a half percent. And actually, this would have been the third green shirt day in a row for not in a row, but for this particular week, which is pretty rare. So really, really strong bounce that we’re having very broad based and what have you two? So the first question I’ll try to answer here is just, you know, why are we having this bounce, you know, we hit that low, okay, everybody’s thinking things are gonna go lower. And all of a sudden, we’re having this bounce. So let’s take a look at that. And I’ll show you at least some of my thoughts as to why this is happening.
First of all, this is the American Association of individual investors Sentiment Survey. This is done every week. And you can see, you know, the last four weeks here, just how many people feel that the market is going to be better in six months, or worse in six months, or neutral, right. So the better is green. And you can see just example, for this last week that just finished on Thursday, basically, yesterday, it was only at 19.8%. Right? So pretty, pretty low. Most people feel the market is going to go down. If you look at the bottom, the historical average is 38%. Last month, we had three weeks in a row, where it was less than 20% of the people in the survey felt that the market was going to do better in six months, that’s actually never happened in the survey since 1987. And the reason I bring this up is because when you get a huge number of people to think the market is going to do poorly. And they’ve all made their moves, they’ve gathered their cash, you know, the fund managers right now have more cash than they’ve had since 911. According to the Bank of America survey, and what have you, we’ve got, you know, investor sitting on the sidelines, it doesn’t take a lot to start it to move the other direction. And I know this seems really strange. But when enough people think the markets gonna go down, it generally goes up. And that’s, you know, historically. So this is one of the things that you have to understand, you know, to be a better investor is this kind of big contrarian strategy with investment surveys and such.
So, here’s one of the things I think that might be pushing it up. And this is a report that came out from JP Morgan yesterday. And so they’re talking about corporate buybacks, right, and how much that’s helping the market find its bottom, at least in their opinion. And so they estimated that the buybacks are three to four times higher than usual during this sell off that we’ve been having. And so what’s happening here, you’ve got $429 billion worth of buybacks that have been announced by S&P 500 companies. So these are companies that are buying back their stock. And they’re buying it back at higher rates as the market falls, I mean, they’re buying the dip just like everybody else. And so if you have everybody that’s already sold on one side, and then you have these corporations coming in and buying on the other side, all of a sudden, you can have a pop, and you can get some motion going. And then maybe that turns into something, you know, long term too, and we’ll talk about that. But this corporate buybacks is a huge deal. It’s one of the things that’s really fascinating about it. And I know, like Apple, for example, announced a $90 billion corporate buyback. So it puts some support into the stock, you know, and what have you too, so I like that. And it doesn’t take a lot of volume to move the price back up when everybody all the sellers have already left as far as it goes.
So one of the other things we’re seeing, just in the last couple of weeks, insiders, specifically executives, and these are the people theoretically that know the most about their company, their buying has gone up, it’s about two times average right now, if you look at this chart, you can see when that’s happened before, it was often these low points where the market pulled down quite a bit. And so for the most part, insiders are pretty good at when to buy, they see things happening within their companies, they see the price coming down to a level they reach into their own pockets in general and they buy the stock. And so you know, there’s a big saying that there’s lots of reasons that that executives would be selling stock, you know, for diversification, want to buy a new vacation home, you know, whatever it is, but there are only really one main reason that they would be buying the stock and that’s because they think it’s going to go higher, right? So that that’s, that’s a big deal too. So we have corporations buying back stock, we have executives buying back stock, we have massively negative sentiment in the investment world, everybody thinks it’s going to go down. So they’re all out. And they’re waiting on the sidelines. And all of a sudden, you’re getting this run up. So really fascinating what’s going on right now.
And so we just had some reports that came out today that are really, I think, fascinating two that are important. And that really popped the market this morning. This is called the personal consumption expenditures price index i called PC E. This is the preferred inflation measure that the Federal Reserve uses. We all talk about CPI Consumer Price Index, which was 8.3%. You know, the last report that came out for April? Well, the PCE was at 6.7, sorry, 6.3%. And, as you can see, it came down, right. So still a lot higher than what the Federal Reserve wants, they really want to get two to 3%. So they’re going to come in and still be raising rates to try to bring that down. But the direction is important. It’s coming down at this point in time. Now, this particular grouping of goods and services that they’re using, to find this gauge includes energy and food. Of course, one of the reasons that we saw these things dropped in April is because gas came down in April, the price of gas, now it’s come back up in May two.
So there is another measure called core PCE where they take out energy, they take out food, and they look at the rest. And you can see that’s actually even coming down at a faster rate. As far as that goes. So prices are growing at a slower rate, that doesn’t mean prices are getting cheaper, it basically means that the rate of inflation is slowing down. That’s a huge deal, because the Federal Reserve has really made a massive effort here to try to talk everything down, they’re making mortgage rates go up, they’re making the 10 year Treasury go up and making the stock market go down. They’re raising rates, they’re talking about raising rates, they’re taking money off their balance sheets, all in a hope to do this. So if you actually start to see some results, the market loves this. Because it just means the Federal Reserve could maybe, you know, stay on their path, not get more and more and more aggressive. Like what we were seeing for the first part of this year, when inflation just continued to go up no matter what happened. Now we’re starting to see inflation slow down, right. So pretty critical. And then the other report that came out today was personal spending, which was up point 9% for the month. And you can see it was a little bit higher at other points of time during this year. But the average is about point 5%.
So we’re still have more than average personal spending going on. So even though prices have dropped, right, in terms of the amount of you know, increase in price has dropped, we’re still seeing consumers really healthy, really, really healthy consumers. Unfortunately, one of the things that needs to happen is you need consumer spending to slow down a bit, we actually did see that this month, you can see that in the chart here, where there’s a little bit of a slope or downward, but you don’t want consumer spending to drop off completely, because that’s what kicks us into a recession. So those are the things that are happening, we’ve got this, you know, very negative sentiment, we’ve got corporate insider buying, we got inflation numbers that are seem to be peaking, that’s good. We’ll see if that continues. And we got personal spending and consumer spending still great, because two thirds of the economic growth that happens is attributed to consumer spending. So really important, all of these reports came out today. So very, very, you know, good day. And that’s why the markets up so much as we speak. Now let’s talk about what you want to do strategically right now, in this particular market. You know, I have different strategies for different markets.
So when I have a market that’s going up, and there doesn’t look to be any recession coming, you know, we have one strategy of trying to find things that are trending on a momentum basis, when we’re in a different market, like we’re here where the market is coming down. But the recession is still not happening. Even the early indicators aren’t showing a recession yet for the most part, then you want to rebalance. And then there’s another strategy when the recession is coming. And the early indicators are showing, then you want to get defensive, right. So three different strategies. So we’re in that middle strategy right now. We’ve been in that strategy, you know, really since November. And what you want to do is have a very high quality portfolio that you rebalance. And so one of the things you have to have first is a gauge for recession. How do you know it’s going to come? And I have a whole host of different indicators that I look at. This is one of my favorites. It’s actually one of the most accurate recession indicators in advance, kind of that seven to 10 months. And if you look here, you know closely you can see you know, prior to the 90 recession, there was 18 months in advance it peaked prior to the 2000 downturn sorry, the recession was 11 months, 21 months peak before the 2008. Right now, it actually peaked in March, it was down point 3% in April. And in my studies looking back, I need to see at least 1%, because it goes up and down, you can see it’s actually had one month year in the air. And so you can’t react to it every single time it has any downturn at all. So we’ve got to wait until it gets down 1%. So, to me, I’m in this middle grouping of strategies where we do not have a recession coming yet. And so I want to rebalance. So the second thing you really want to have, there is a really high quality portfolio. Because what you’re doing when you’re rebalancing is essentially buying on the dip, which you know, can work great in a situation where the market comes down some and then recovers, you’re kind of buying all these different pieces, but certain stocks could go down forever, or even disappear. So a lot of the things that did really well and 2020, innovative technology, genomics, Clean Energy and what have you, I would be careful with areas of the market where they don’t have good earnings. It’s not a quality scenario.
They have great future outlook, and, you know, very bright future potentially. But right now, they’re not producing enough, because what’s going to lead us out of these downturns are high quality companies. So if you look real closely at what we’ve got, here, we’ve got, you know, giant piece of the total stock market index. So we’re basically buy the whole market, a big piece of the S&P 500, which I think is a very good quality screen, got some Microsoft and Apple, two companies that are fantastic at generating cash flow, have, you know, really, really good cash positions themselves, some short term real estate and some semiconductors, which have been coming down quite a bit, but very good quality companies in that particular index that I think will come back around. And they actually have been most recently. So we’ll see how that plays out. And on the bond side, you know, the same thing, you’ve got to have good quality, lots of diversification, that total bond market index, treasury inflation, protection securities on the short term end, and an inflation, hedged high yield, for example. So when you’re rebalancing, you’re selling whatever those pieces that kind of stayed up higher, and you’re buying those pieces that came down lower, again, you have to believe in all those pieces. Otherwise, you could be buying a piece that just keeps going down really forever, right? So you got to be careful here. So got to know that there’s a recession not coming. That’s important, because you don’t want to keep rebalancing all the way down for a 50% downturn, right. Okay. The average downturn without a recession on the S&P 500 is 15%. If you do have a recession, the average downturns 36%. And so that’s why you won’t really want to focus on that you got to have high quality when you’re doing these rebalancing.
So Alright, we’ve got that now, when do we rebalance? Right? I have two main indicators that I use. One is called the VIX. And this is what we call a Fear Index. And so what happens with this is when the is a short term putt call, that’s happening on the S&P 500. And essentially, without getting too complicated, when the number gets above 30, the fear is getting pretty high. And that’s when you want to be buying. And so I put some little boxes around the four times where that got above 30, where we actually took action. As far as that goes, you also want to see the market stretched to the downside. And so I use this relative strength index. So while the relative strength index, I want to see that at 30 or less, and again, I put four boxes where that happened, where we took action as far as that goes. And then what you end up with are these four rebalancing points. And so you can see actually, they’re really good rebalancing points, they were, at least at that point in time, really drawn down the 24th of January, the 24th of February, the 29th of April, and really, you know, two weeks ago, so the One Two weeks ago, you know, it’s already at a profit. And when you’re rebalancing, you’re basically buying what’s the lowest, and you’re you’re buying more shares, and you’re bringing down your average cost per share. And so when things do recover, you get back to profitability faster by using these rebalancing. We do this mostly with retirement type assets, because this can be really a problem from a standpoint of taxable accounts, because you can generate a lot of taxes here. But if you have an IRA, or 401k, or those types of things, we don’t have to worry about the taxes and we can really kind of take advantage of that by doing these rebalancing. So that’s that’s the key piece there, you know. So now, the last part, I think that’s important to understand here, just going back to the S&P 500 itself and taking a look at this little tail that we have going on right now.
I’ve been talking about this for a while, but what happens is you get some catalyst and the market starts to move upward. You know, in my opinion, the catalyst that we had right here was that we were at an extreme stretch seven weeks in a row of Dow On turn, which really hasn’t happened since the 1930s. And so we’ve got some buying that came in, all the sellers were out and we got buying that came in. And then you normally will get some people that are shorting the market. And so they start to kind of freak out because they need the market to go down. If it goes up, they can have unlimited loss. And they’ve got what they call covering their shorts means that they’re actually buying the stock. And so that creates an upturn. And then all of a sudden, you get the fund managers are all sitting out there with more cash than they’ve had since 911. And they are competing against these indexes, like let’s say the S&P 500. Well, right now, cash is not beating the S&P 500. I don’t think we’ve seen the institutional money come in yet. But that is the thing that would get us back on a real recovery and not just a bounce. But you will notice on this chart, there was a big bounce at the end of March. And we had a really big run, and then stopped and it got killed. And really, in my opinion, what happened there was you know, two things. Number one, China started locking down for COVID. Right, and so that seems to be getting better now. Or at least China’s been able to do a better job than expected to keep productivity up even within these lockdowns by using what’s called these closed loops. But secondly, the Federal Reserve came out and really started hammering, you know, the concepts that they wanted to do, because the Federal Reserve would like to see the stock market, not run up a ton, just because that’s one of the things that causes people to spend money when we all feel rich from our stock accounts that our house is going up, you know, we spend more money and so they need us to slow down a little bit. And so I wouldn’t be surprised to see the Federal Reserve coming out here and talking aggressively again. But there is one difference between now and what happened back in the end of March, in that we are now actually seeing their preferred indicator for inflation go down. And so I don’t think they’re going to probably be quite as aggressive in their conversations. That might not scare the market as much, but we’ll see. You know, watch what happens next week or the week after if the market does keep running. So really interesting timeframe. Thank you for listening. And I hope that this helps you understand a little bit of what’s going on, you know, this week and this year all together. And look forward to talking to you again about it next week.