Has Tepper Got It Right Again?
For much of his career, billionaire hedge fund investor David Tepper shied away from the media. Instead, Tepper focused on building his Appaloosa Management into a powerhouse with an enviable track record. However, back in September 2010, Tepper appeared on CNBC and suggested that stocks were a "win-win" and said that "everything is a buy."
Although the stock market was in the midst of its annual freak-out over Greece at the time and was dealing with a rather hefty correction, Tepper suggested that if the economy weakened the Fed would step in with a second QE program, which would be a "win" for investors. And then if the economy improved, Tepper opined, stocks would surely discount the environment and rally.
This quickly became known as "The Tepper Trade" as Appaloosa's chief provided what amounted to a dawning moment of comprehension for traders at a time when fear was in vogue. And as it turns out, Mr. Tepper "nailed it" with the call as the stock market roared ahead for the next nine months.
Since 2010, Tepper has made trips to CNBC's studios on an annual basis and has also spoken publicly with the folks at Bloomberg and other media outlets on occasion. And while none of his pronouncements have been as influential as the first one in 2010, the bottom line is when Tepper talks, people listen.
Yesterday, David Tepper was back on CNBC talking about his view of the world.
Tepper's Current View
Cutting to the chase, Tepper is not exactly bullish on the stock market at this time, calling the environment "challenging" and saying, "I can't call myself a bull."
Once again, Tepper's common sense approach sounded extremely logical. He told CNBC that the big picture is simple to summarize. "Lower world growth equals lower P/E's," Tepper said.
It's All About the Earnings
It is the subject of earnings and earnings expectations that appears to trouble the hedge fund manager at this time. In his words, "The question is where are earnings going to be and where will multiples be..."
Mr. Tepper quickly got to the point as he suggested bluntly that earnings expectations are too high for the coming year and that companies won't produce the numbers analysts are projecting. Going through the math and analyzing the consensus numbers, Tepper said, "I have a problem with earnings growth and a problem with multiples."
To be fair, Tepper has been cautious on the market for some time now. Back in May of 2014 at the annual SALT conference, Tepper told Anthony Scarmucci that it was time for investors to approach the market with more caution. As usual, his exact words were straight to the point. "I'm not saying to go short, I'm saying don't be too fricking long right now," Tepper said.
Although stocks have moved a bit higher since then, the S&P 500 is only modestly above (+3.9%) where is was when Tepper made the remark. In addition, it is worth noting that investors have been treated to not one but two meaningful corrections since then as the SPX fell more than 9% in the fall of 2014 and then 11.2% in the most recent dance to the downside.
Currently, Tepper tells us that "flat is not a bad place to be" in reference to the stock market and that taking some money off the table is "probably not a bad idea" if one is fully invested.
Mr. Tepper also acknowledged the current spate of volatility in the market saying, "turbulence is now the norm" and that we should expect volatility to remain high.
Finally, the man who manages billions for clients (and has made billions for himself) issued a warning about the stock market. "We don't have a cushion of safety in the stock market anymore," Tepper opined.
As to the question of when or where Tepper might be inclined to become more upbeat on the market, he said he'd be a buyer if stocks fell 15% - 20%.
So, yet another high powered manager has come out and publicly said that things look dicey. Couple this with the weakness in the indicators I've been yammering on about since late spring and you've got a pretty good argument for some caution and in Tepper's words, to not be "too fricking long right now."
Turning To This Morning
As usual, stock futures in the U.S. have been following the lead of the Asian and European markets this morning. Although it has been a fairly quiet overnight session, futures have recently perked up on comments made by another billionaire hedge fund manager. Activist investor Bill Ackman told CNBC's "Squawk Box" this morning that he's more bullish on the stock market than David Tepper and cites what he calls cheap valuations. While futures are off their lows, a negative open is still implied for Wall Street as of this writing.
The Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
Hong Kong: -0.27%
Crude Oil Futures: -$1.17 to $44.75
Gold: -$3.60 at $1105.70
Dollar: higher against the pound, lower against yen and euro
10-Year Bond Yield: Currently trading at 2.198%
Stock Indices in U.S. (relative to fair value):
S&P 500: -5.50
Dow Jones Industrial Average: -39
NASDAQ Composite: -11.60
Thought For The Day:
"Every strike brings me closer to the next home run." -Babe Ruth
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of China's Currency/Economy
2. The State of Fed Fed Policy
3. The State of the U.S. Economy
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Moderately Negative
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Negative
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Neutral
(Chart below is S&P 500 daily over past 2 years)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Key Near-Term Support Zone(s) for S&P 500: 1870
- Key Near-Term Resistance Zone(s): 1995
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator (Short-Term): Neutral
- Price Thrust Indicator: Negative
- Volume Thrust Indicator: Negative
- Breadth Thrust Indicator (NASDAQ): Neutral
- Intermediate-Term Bull/Bear Volume Relationship: Negative
- Technical Health of 100+ Industry Groups: Moderately Negative
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- S&P 500 Overbought/Oversold Conditions:
- Short-Term: Oversold
- Intermediate-Term: Oversold
- Market Sentiment: Our primary sentiment model is Positive .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.
- Weekly Market Environment Model Reading: Negative
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research
Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.
Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.
Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.
Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.
Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.
Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.
Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.
Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.
The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.
Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.
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