Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 25 FEBRUARY 2020

Coronavirus’s Global Spread May Not Be Contained, WHO Says The number of new coronavirus cases in China is declining, but it isn’t yet clear whether the outbreak can be stopped from spreading globally, the World Health Organization said.

(…) “I don’t think it can be contained at this point,” said Tom Inglesby, director of the Center for Health Security at the Johns Hopkins Bloomberg School of Public Health. The virus is spreading in communities in multiple countries, he said. (…)

“We are encouraged by the continued decline in [new] cases in China,” Tedros Adhanom Ghebreyesus, the WHO’s director-general, said at the news conference. “The key message that should give all countries hope, courage and confidence is that this virus can be contained.” (…)

Still, Dr. Tedros said, the new coronavirus “absolutely” has the power to become a pandemic. He said the growing number of cases in Italy, Iran and South Korea is “deeply concerning” and urged other countries to prepare for outbreaks.

Yet many countries may not be ready to identify symptoms that can easily be mistaken for the flu, the WHO and infectious-disease experts said. Tests for the virus aren’t in widespread use, even in countries with advanced public health systems like the U.S. Hospitals may not be able to handle an influx of critically ill patients, particularly in the middle of flu season.

“We believe that all countries are vulnerable,” said Dr. Ryan. All nations have older people who are at higher risk for severe illness from the virus, he said. (…)

(…) The Harvard epidemiology professor Marc Lipsitch is exacting in his diction, even for an epidemiologist. Twice in our conversation he started to say something, then paused and said, “Actually, let me start again.” So it’s striking when one of the points he wanted to get exactly right was this: “I think the likely outcome is that it will ultimately not be containable.” (…)

Testing people who are already extremely sick is an imperfect strategy if people can spread the virus without even feeling bad enough to stay home from work.

Lipsitch predicts that, within the coming year, some 40 to 70 percent of people around the world will be infected with the virus that causes COVID-19. But, he clarifies emphatically, this does not mean that all will have severe illnesses. “It’s likely that many will have mild disease, or may be asymptomatic,” he said. (…)

The emerging consensus among epidemiologists is that the most likely outcome of this outbreak is a new seasonal disease—a fifth “endemic” coronavirus. With the other four, people are not known to develop long-lasting immunity. If this one follows suit, and if the disease continues to be as severe as it is now, “cold and flu season” could become “cold and flu and COVID-19 season.” (…)

Lipsitch’s “very, very rough” estimate when we spoke a week ago (banking on “multiple assumptions piled on top of each other,” he said) was that 100 or 200 people in the U.S. were infected. That’s all it would take to seed the disease widely. The rate of spread would depend on how contagious the disease is in milder cases. On Friday, Chinese scientists reported in the medical journal JAMA an apparent case of asymptomatic spread of the virus, from a patient with a normal chest CT scan. The researchers concluded with stolid understatement that if this finding is not a bizarre abnormality, “the prevention of COVID-19 infection would prove challenging.” (…)

Overall, if all pieces fell into place, Hatchett guesses it would be 12 to 18 months before an initial product could be deemed safe and effective. That timeline represents “a vast acceleration compared with the history of vaccine development,” he told me. But it’s also unprecedentedly ambitious. “Even to propose such a timeline at this point must be regarded as hugely aspirational,” he added. (…)

“If we’re putting all our hopes in a vaccine as being the answer, we’re in trouble,” Jason Schwartz, an assistant professor at Yale School of Public Health who studies vaccine policy, told me. The best-case scenario, as Schwartz sees it, is the one in which this vaccine development happens far too late to make a difference for the current outbreak. (…)

Fear of Coronavirus, Rather Than Virus Itself, Hits Economies Estimates of the epidemic’s impact on the global economy are largely educated guesses

(…) Estimates of the disease’s economic impact are largely educated guesses.

Goldman Sachs, for example, projects a 0.8 percentage point hit to U.S. annualized growth in the current quarter from reduced tourism, exports and supply chain disruptions, with most of that reversed by year-end. But “risks…are skewed towards a larger hit because a change in the news flow could lead to increased risk aversion—less travel, commuting or shopping.”

Peter Berezin, chief global strategist at BCA Research, an investment advisory, estimated global growth would fall to zero in the current quarter and then rebound, for a full-year hit of about half a percentage point. But he also sketched out a more pessimistic scenario.

If the virus infected a billion people, as the swine flu did in 2009 and 2010, 20 million could die, he said. “Demand for most items other than necessities would seize up.” The resulting recession would be as deep as 2008-09, though recovery would be much faster, he predicted. (…)

Chicago Fed National Activity Index Suggests Improved Growth

The Federal Reserve Bank of Chicago indicated that its National Activity Index (CFNAI) rose to -0.25 during January from -0.51 in December. The three-month moving average of the index gained to -0.09, the highest level since August. It was improved from the low of -0.52 in April. During the last 20 years, there has been a 70% correlation between the index and the q/q change in real GDP.

The CFNAI is a weighted average of 85 monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

The rise in the overall index last month was due to gains in each of the index components. (…)

But GDP growth remains below trend as this Advisor Perspectives chart shows:

CFNAI and Recessions

China’s main manufacturing hubs reboot after virus shutdown As many parts of China ease coronavirus travel curbs, main manufacturing hubs in the east and south are seeing hundreds of thousands of migrant workers returning to work and more traffic on the roads during rush hours.

(…) Several provinces have lowered their coronavirus emergency response measures, allowing more flexibility on transportation and helping firms resume production.

About 180 million workers have left their hometowns to return to work since Feb 10, when China ended the prolonged Lunar New Year holiday due to the virus outbreak, according to Reuters calculations based on transportation ministry data.

At the current daily travel flow rate of more than 14 million people, about 192 million people are likely to return to cities where they work during the last two weeks in February, beating a government projection of 120 million.

Data compiled by China’s internet giant Baidu Inc (BIDU.O) shows that Guangdong province, an economic and export powerhouse in the south, and Zhejiang province, a major manufacturing hub for textile and machines in the east, are seeing significantly more inflows of migrant workers since last week.

Guangdong government said it has sent nearly 200 chartered trains in the past two weeks to bring more than 6,000 migrant workers back from their inland hometowns. (…)

Shenzhen, headquarters of Huawei and known as China’s Silicon Valley, has seen migrant flows picking up to the highest level after the Lunar New Year holiday, although it is still well below travel flows during peak days last year.

Urban transport in Shenzhen also shows a sharp rise this week. According to Shenzhen traffic police data, 420,900 cars were tracked on roads during morning peak hours on Monday, up 58% compared to the same period last week.

That remains 40% less traffic than a normal Monday before the coronavirus outbreak, as Chinese authorities are still encouraging employees to work remotely to reduce the risk of virus spread.

Location technology firm TOMTOM’s traffic index also shows a climb in congestion levels in Shenzhen and other major cities, including the capital Beijing and financial center Shanghai, this week.

Guangdong province added 30,000 firms to its business resumption list last week, compared to only 12,000 firms the week before.

Even as companies return to work, production levels remain behind what they would normally be due to supply chain disruptions, curbed demand, and spotty labor shortages. (…)

Daily coal consumption at six major coal-fired power groups across China rose to 427,000 tonnes on Monday, the highest level for nearly a month, but still 34% lower than the same period last year. (…)

February air pollution readings drop to 6-year low in many cities (Thanks Mark)

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View of Shanghai, Feb. 22. (Photo by Yusho Cho)

BDO MANUFACTURING CFO OUTLOOK SURVEY

Note: this survey was taken before the COVID-19 erupted.

(…) Survey respondents cite trade policy stability as the most critical factor to the overall health of the U.S. manufacturing industry. (…)

Since the start of the trade war, the United States has imposed tariffs on more than $375 billion worth of imports from China. Another wave of tariffs on $7.5 billion worth of European Union goods went into effect in October 2019, targeting cheese, wine, whiskey and aircraft products, among other goods. Tariffs on EU auto imports are currently under consideration. Even Mexico was temporarily subjected to a 17.5% tariff on tomato imports before a deal was struck. But tariffs are only one tool in the Trump administration’s trade arsenal: Over the last three years, the administration added more than 3,100 individuals and entities to the Treasury Department’s sanctions list. Other foreign-made goods have been subject to export controls.

While the intention of these “America First” trade policies is to “level the playing field” for American manufacturers, the industry itself is largely opposed to the protectionist measures that have actually been implemented. Unhindered global trade ultimately benefits manufacturers, who have long supported policy agendas that break down trade barriers rather than build them.

Many U.S. manufacturers rely on more affordable imports from overseas to make their products. The imposition of tariffs and sanctions has resulted in significant supply chain disruptions. In fact, more than one-in-five (21%) manufacturers experienced a disruption to their supply chain as a result of government restrictions in the last 12 months.

China is also the third-largest—and fastest growing—market for U.S. goods exports. For its part, China has imposed $110 billion of retaliatory tariffs on U.S. exports. Escalating trade tensions between the two nations have had a marked negative impact on growth in exports to China, both in terms of volume and value.

The trade war with China and other major trading partners has certainly been an impetus for executives to rethink their global supply chains. However, rising labor costs, political instability and a greater focus on transparency, among other trends, mean supply chains will be under review regardless of the outcome of trade negotiations. While cost control is the predominant consideration and challenge in optimizing the supply chain, other factors, such as speed, resilience and quality control, also come into play.

Graphs of How Manufacturers Have Responded to Escalating Trade Tensions Over the Last 12 Months

Strategic sourcing is one lever manufacturers can pull to reduce procurement costs and mitigate tax and tariff impacts—though it’s worth noting that roughly a third (33%) of manufacturers still view Asia as the most stable location outside the U.S. for sourcing products in the long-term.

Manufacturers also need to realign their supply chain strategies to account for shifts in customer demand as well as demographics. When facing off against larger competitors who provide next-day or even same-day delivery, supply chain efficiency may need to take precedence over cutting costs. Manufacturers with global operations, for example, see greater customer demand for faster delivery than they do lower costs. (…)

Slumping tourism will cost Asia up to $115bn this year Holidays in Hell: The impact of the Covid-19 virus on economies in Asia is potentially huge, as tourism in the region takes a beating.
Luxury goods makers brace for €40bn hit from outbreak
TECHNICALS WATCH

Lowry’s Research notes yesterday’s heavy and widespread selling but says that it was “little different from similar sharp drops in the early stages of prior market corrections” and that such down day “rarely represents the exhausted Supply historically found around important market bottoms.” Nonetheless, Lowry’s considers that “the probabilities are that the current market drop represents only an interruption in an ongoing bull market.”

SentimenTrader notes that “Monday was the first session in nearly 6 months when more than 90% of the volume on the NYSE flowed into stocks that declined on the day. Streaks have gone on much (!) longer but this is still one of the longer ones since 1962. (…)  this kind of action typically led to even more selling pressure in the weeks ahead. Risk was high relative to reward even up to three months later.”

ST goes on listing the number of recent technical warnings, many pointed out in the Daily Edge, including the Hindenburg Omen triggered again on Friday and yesterday’s Titanic Syndrome.

If we can get past the silly names, and focus on what they’re saying, it’s worth noting since they’re designed to highlight periods when there is heavy turmoil underlying the mask of the indexes.
Over the past month, there has now been a combined 13 warnings on both exchanges.

What we know:

  • World economies and corporate supply chains were severely hit by the US-China trade war. That pain continues after the so-called truce and is now being seriously aggravated by COVID-19.

What we don’t know:

  • How long it will last, how painful it will be on economies and supply chains and profits.

The probabilities are thus tilted to the darker side until proven otherwise, especially with equities still overvalued. That last part, we know.

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Basic technicals show the 100-day moving average at 3157 and the 200-dma at 3040 where, based on current trailing EPS, the Rule of 20 P/E would be 20.7 and the regular P/E 18.5.

FYI, Bain& Co’s annual:

GLOBAL PRIVATE EQUITY REPORT 2020

THE DAILY EDGE: 24 FEBRUARY 2020: Caution!

Stocks Slide as Virus Cases Accelerate Outside of Asia Global stocks fell as investors grappled with the potential economic fallout from mounting coronavirus infections in South Korea and other countries outside China.
  • Total China cases at 77,150, up by 409; death toll 2,592
  • Worldwide death toll 2,624; total cases 79,440
  • Afghanistan, Bahrain, Kuwait confirm first cases; 12 dead in Iran

(…) In Italy (…) more than 50,000 people weren’t allowed to leave their towns under a quarantine in effect Sunday. The outbreak’s epicenter within the country is just miles from Milan, the engine of Italy’s economy, and led to trade shows, soccer matches and other public events being canceled. (…)

South Korea on Sunday raised its infectious-disease alert to red—the highest level—for the first time since the H1N1 swine flu outbreak in 2009. (…)

“This will also put the hosting of Tokyo Summer Olympic Games under scrutiny, as Japan now has the highest number of infections outside of China alongside an aging population.” (…)

(…) Zhao Jianping, a doctor heading a team working in Hubei, said on Thursday that there had been cases in which patients tested positive after they had seemingly recovered. “This is dangerous,” Zhao was quoted as saying by Southern People Weekly magazine. “Where do you put those patients? You cannot send them home, because they might infect others, but you cannot put them in hospital because resources are stretched.” (…)

MORE CENTRAL BANK STIMULUS COMING
US Flash PMI signals first fall in business activity since 2013

Adjusted for seasonal factors, the Composite PMI Output Index (covering both manufacturing and services) slumped to 49.6 in February, down from 53.3 in the opening month of 2020.

Weakness was primarily seen in the service sector, where the first drop in activity for four years was reported, but manufacturing production also ground almost to a halt due to a near-stalling of orders.

New orders meanwhile fell for the first time in over a decade. The deterioration was in part linked to the coronavirus outbreak, manifesting itself in weakened demand across sectors such as travel and tourism, as well as via falling exports and supply chain disruptions. Exports of goods and services both fell at increased rates in February. However, companies also reported greater caution in respect to spending due to worries about a wider economic slowdown and uncertainty ahead of the presidential election later this year.

Compared with official data, statistical analysis indicates that the survey indices are consistent with GDP growth slowing from just above 2% in January to a crawl of just 0.6% in February. Manufacturing output is meanwhile indicated to be falling at a quarterly rate of 0.8% (roughly 3.2% annualised). Note that any IHS Markit PMI manufacturing output index below 53.7 is indicative of the official (Fed) measure of manufacturing production declining on a quarterly basis.

(…) the marked slump in the headline composite PMI in February is a warning that the coronavirus outbreak is having a material impact on the US economy, both through reduced service sector activity and via lost manufacturing exports and supply chain delays. As such, the PMI has moved further into territory that would be historically consistent with an easing bias at the FOMC. The big question for policymakers will be how long the PMI remains in such weak territory. (…)

Xi Pledges Easier Monetary Policy for Economy Pummeled by Virus

Fiscal policy will be more proactive, while construction projects will be accelerated, according to a statement issued after a Politburo meeting chaired by President Xi Jinping on Feb. 21.

The central bank will free up part of the reserves of some commercial lenders to unleash long-term funding to the economy, and consider adjusting the benchmark deposit rate at an appropriate time, Deputy Governor Liu Guoqiang said in a separate statement. (…)

Flash Australia PMI signals deeper downturn amid adverse weather, coronavirus

Eurozone:

Our colleagues in the European economic forecasting team expect eurozone GDP increase 0.9% this year, 1.0% in 2021, and 1.2% in 2022. On this basis, we assume no additional policy easing from the ECB in 2020, albeit with the current highly accommodative policy stance set to continue for a considerable period of time.

However, the next Governing Council meeting on 12th March is likely to see the ECB tweak its assessment of downside risks to the growth outlook to reflect the increased uncertainty stemming from the COVID-19 outbreak and restate, perhaps more forcibly, that it stands ready to adjust all of its policy instruments if necessary. The bottom line is that the ECB is going to want to have more time and information to gauge the significance of the COVID-19 outbreak and its consequences. It will therefore keep options open until it has a better grasp of the potential economic effects on the eurozone and their longevity.  (…)

German manufacturing exports fell during February at a marked and accelerated rate, whilst there was clear evidence of supply-chain disruption stemming from the COVID-19 related shutdowns in China (average lead times for the delivery of inputs to manufacturers deteriorated for the first time in over a year during February).

Subsequently, the German nowcast for Q1 GDP has been revised a little lower to -0.17%, from a previous estimate of -0.14%. Whilst we believe that official GDP growth in the first quarter will surely benefit from compensating rebounds in both industrial production and retail sales, which were driven markedly lower in December due to calendar-related distortions, the latest nowcast and PMI figures reinforce our view that the underlying performance of the German economy remains weak. (Markit)

Home Sales Sluggish as Lack of Inventory Frustrates Buyers U.S. home sales sputtered in January, the latest sign that some of the lowest interest rates in half a century are failing to offset the high prices and limited inventory keeping many buyers on the sidelines.

Existing home sales fell 1.3% in January compared with December at a seasonally adjusted annual rate of 5.46 million, the National Association of Realtors said Friday.

That compared with economists’ expectations for a 2% decline last month.

Existing-home sales were up 9.6% in January from a year earlier. (…) NAR said the housing inventory level was the lowest for January since 1999. (…)

Limited housing stock has contributed to higher home prices, with the median sales price for an existing home in January up 6.8% from the prior year at $266,300.

Inventory has been tight at the cheaper end of the market. Homes priced from $100,000 to $250,000 experienced a 10.3% drop in inventory from a year earlier in January. Meanwhile, homes in the $250,000 to $500,000 range saw inventory fall 6%. (…)

image(Haver Analytics)

(…) the slowest pace we’ve seen in 18 months, as the seasonal winddown wears on through the winter.

Rents are likely to maintain an upward streak throughout 2020, as the number of renters continues to rise in the U.S. The demand for apartments is high, including among those renting by choice. 157% more Americans who earn over $150K per year began renting this past decade, showing a preference for a more flexible and comfort-driven lifestyle. (…)

Saudis Weigh Breaking Oil Alliance With Russia as Virus Crimps Demand Saudi Arabia is considering a break from its four-year oil production alliance with Russia, as China’s coronavirus outbreak contributes to a drop in global oil demand, according to people familiar with the matter.

The Saudi kingdom, Kuwait and the United Arab Emirates—which collectively represent over half of OPEC’s production capacity—are holding talks this week to discuss a possible joint output cut of as much as 300,000 barrels a day, said the people.

The coronavirus outbreak has created a rift in the partnership between Russia and the Saudi-led Organization of the Petroleum Exporting Countries. The two sides have collaborated since December 2016 in an effort to balance global oil supply amid a surge of crude from U.S. shale producers. If the Saudis, Kuwait and the U.A.E. break with the Russians, the split could further weaken OPEC’s ability to influence oil prices. (…)

At an emergency meeting earlier in February, Russia rejected a Saudi push to deepen the alliance’s existing oil production curbs by 600,000 barrels a day.

Russian officials still don’t see a need for reductions, the people familiar with the matter said. Russian delegates say business activity in China is recovering and the impact of the virus on oil demand is limited, the people said.

Saudi exports to China have remained stable since the crisis began, though sales from other OPEC members have shown weakness, according to commodities-data provider Kpler. (…)

The International Energy Agency warned Feb. 13 that demand for oil is likely to be 435,000 barrels a day less in the current quarter compared with a year ago. Vitol Group, the world’s largest independent oil trader, cut its forecast demand for the quarter to 98.3 million barrels a day, down 2.2 million barrels a day from its previous forecast for the period. Under either scenario, a quarterly decline would be the first since the height of the global financial crisis.

However, Moscow says weakened demand would be offset by reduced supply resulting from Libya’s oil shutdown and new sanctions targeting Venezuela’s crude sales, one person familiar with the matter said.

Libya’s oil output has fallen to 120,000 barrels a day from 1.2 million daily barrels since a renegade general shut pipelines and oil ports in January in a dispute with the central government.

The U.S. on Tuesday imposed sanctions on a subsidiary of Russian state-run company Rosneft Oil Co. that had become the main marketer of banned Venezuelan crude. The new restrictions could cut Venezuelan exports by 600,000 barrels a day, said energy consulting firm FGE, which sees the market tightening by June as a result of the Libyan and Venezuelan disruptions.

Trump Says Farmers Might Get More Aid President Trump said the U.S. would consider a third round of aid payments for American farmers who have borne the brunt of retaliation for U.S. tariffs for much of the past two years.

(…) If farmers “need additional aid until such time as the trade deals with China, Mexico, Canada and others fully kick in, that aid will be provided by the federal government,” the president said on Twitter on Friday. (…)

The U.S. authorized a $12 billion program in 2018 and a $16 billion program in 2019.

The president has described the programs as being funded with tariff revenue and said a third program would be similarly funded. (…) The previous farm-aid programs weren’t directly funded by tariffs, however, but through a Depression-era Department of Agriculture program that is currently authorized to spend up to $30 billion a year to aid farmers amid poor farm conditions. Using the USDA program requires no congressional vote.

But corn stocks are going in the opposite direction, ballooning to the highest in three decades. And the president’s hints for more farmer aid could make the disconnect between the two even more pronounced.

Soybean reserves will fall 25% in the coming season to the lowest since 2016-17, the U.S. Department of Agriculture forecast at its outlook forum in Arlington, Virginia. Higher exports, especially to top importer China, will add to increased domestic demand to eat up stocks.

Meanwhile, the government forecast corn inventories will jump about 29% to 2.637 billion bushels as farmers plant more. That would be the highest in 33 years.

Current prices and yield prospects have increased bets that farmers will sow the yellow grain over the oilseed. The USDA on Thursday said corn plantings would likely climb to the highest in four years. While soybean acres should also rise, they are projected to stay below pre-trade war levels. (…)

“The farmer will plant like crazy,” Joe Davis, a director at brokerage Futures International, said in a message. “Trump is almost wanting the farmer to be happy and plant.”

EARNINGS WATCH

Punch We need to be careful with recent backward looking data as COVID-19 has the capability to completely change the picture.

From Refinitiv/IBES:

Through Feb. 21, 437 companies in the S&P 500 Index have reported earnings for Q4 2019. Of these companies, 70.5% reported earnings above analyst expectations and 19.9% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 5.0% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 4.9%.

Of these companies, 64.7% reported revenue above analyst expectations and 35.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 58% of companies beat the estimates and 42% missed estimates.

In aggregate, companies are reporting revenue that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.0%.

The estimated earnings growth rate for the S&P 500 for 19Q4 is 3.2%. If the energy sector is excluded, the growth rate improves to 6.1%. The estimated revenue growth rate for the S&P 500 for 19Q4 is 5.1%. If the energy sector is excluded, the growth rate improves to 6.3%.

The estimated earnings growth rate for the S&P 500 for 20Q1 is 3.2%. If the energy sector is excluded, the growth rate declines to 3.0%.

Analysts continue to ratchet down their Q1’20 and 2020 numbers,and at an accelerating rate:

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Overall, pre announcements look ok BUT, in just the last week, 8 of the 10 new pre-announcements were negative:image

Q4 2019 U.S. RETAIL SCORECARD

Fifty seven percent of companies in the Refinitiv Retail/Restaurant Index have reported Q4 2019 EPS. Of the 119 companies in the index that have reported earnings to date, 71% have reported earnings above analyst expectations, 6% reported earnings in line with expectations and 23% reported earnings below expectations. The Q4 2019 blended earnings growth estimate is 8.0%.

The Q4 2019 blended revenue growth estimate is 4.6%. Fifty eight percent have reported revenue above analyst expectations and 42% reported revenue below expectations.

A Look at Leverage, Market Cycles, and Current Valuations

TECHNICALS WATCH

  • NDR Crowd Sentiment Poll (Ned Davis Research via CMG Wealth)

  • CAUTION

It has been a while since Lowry’s Research flagged caution. After Friday’s close, Lowry’s explained that while Adv-Dec lines still show broad participation in the market rally, the quality of the rally, “the strength or ‘intensity’ of the Demand supporting rising prices” is “providing a reason for caution about the market’s short-term outlook.” Specifically, nearly half of stocks are trading below their 10-day moving averages and 53% are below their 30-dmas.

“While a lack of intensity is not necessarily fatal to a market advance, this lack can leave a rally especially vulnerable to a rise in selling”, happening today. However, Lowry’s says that down volume on recent declines has been relatively light, concluding that “any near-term pullback would serve only as an interruption in an ongoing bull market still headed for new highs in the months ahead.”

My own caution here is to be aware that medium and long-terms are made up of a sequence of short-terms. Given the potential damage of COVID-19, I would be prudent buying the dips until they get into more reasonable valuation ranges.

At today’s preopening of 3265 (charted below), the Rule of 20 P/E is 22.1 (recent peak 22.87). Fair Value at current trailing earnings ($164.60) and inflation (2.27%) is 2918 (R20 P/E = 20.0), 10.6% lower.

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The December 2018 low was reached at a R20 P/E of 16.85 (2400) and the May 2019 low at 18.88 (2735). Technically, the 50-dma is at 3268, the 100-dma at 3155 (R20 = 21.4) and the 200-dma at 3038 R20= 20.7).