John Kosar on FAANG Stocks and the Future of the US Economy  

Mon, Apr 27, 2020 - 3:40pm

John Kosar of Asbury Research recently joined the Financial Sense Newshour to discuss what the FAANG stocks represent in the larger picture of the S&P 500. He explains what we can learn from the 1918 flu pandemic and tells listeners where he thinks the U.S. economy is headed. Read below for excerpts from his interview with Jim Puplava.

See Comeback: The Road to Recovery; Plus, Oil and the Economy for audio.

There seem to be two different sides to what’s going on in the market and there’s a dichotomy between the stories we’re hearing about it. What are your thoughts?

There is—there usually is— we just see this one more because it's such an extreme situation with COVID-19. You don't get paid in the stock market by trading the economy, because although they're ultimately the same thing, they run on different speeds.

The economy is day-to-day, there's always new information coming out. Then there's the stock market, which is a discounting mechanism that, depending on who you talk to, discounts the economy one, two or three quarters ahead or more than that. So, they're related, but they're really two different animals.

We don't get paid on what the economy does, we get paid on what the stock market does. So, for us at our shop, nothing has really changed. We're just following the money. You know, we're following the data. And we're trying not to outsmart ourselves. We’re keeping it simple in that way.

During these times, a quantitative approach, a data driven approach really has its advantages because you can move away from the din of information that's in your face every day. You can just look at the numbers and that's what we do.

Let’s talk about the FAANG stocks. If you were to take them out of the S&P 500, things don’t look so good.

After the market suffers a big hit like we have, you're looking at the large capitalization, typically tech stocks because they tend to lead up and down. You want to see how they're performing outright and relative to the S&P 500. I just pulled up a chart of Microsoft because that has been one, along with Intel, that's been one of my poster children that I've been watching.

Price activity in Microsoft over the past three weeks has been really constructive. I have a chart pattern that targets a move to 198, which would mean a new all-time high. Just because there's a price target, doesn't mean we have to hit it. But when you're looking at the stock market, especially after it's taken a big hit like this, and you're turning over rocks to try to see some indication of where the market's leaning, it's leaning higher.

I have a relative performance chart of Microsoft versus the S&P 500. It first started outperforming the S&P 500 back around Thanksgiving on a monthly basis. It keeps doing that. The tip of the spear, as I like to call it, looks healthy and targets higher prices. I've got a target of 6850 and we're at 5978 with Intel right now.

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Businesses are closed and wondering how they're going to reopen. How do you open a restaurant when you can only have half the number of tables there? All this sort of this stuff crosses my mind. But again, I'm not getting paid to try to handicap the restaurant business or the airline business. I am getting paid to try to follow the money in the stock market.

Right now, while we're talking, our models turned back to positive. We have two technical models; they’ve turn back to positive, one on April 7 and one on April 9. And I've got targets in some of these bellwether tech stocks that suggests we're going to take a run at the old highs. It doesn't make sense to me. But again, I'm just following the data.

What are your key group of indicators, the Asbury 6, telling you?

The Asbury 6 are six separate indicators that we back tested and quantitatively tested. We looked at the indicators and threw ones out that were redundant kept those that were a little bit different. The goal is to give you a six-sided look at the stock market that works well offsetting false signals or incorrect signals in some of the six.

So, we came up with these six, and they have been positive since April 7. If you go to our website, there's a sample there under models and you can take a look at those. They went to positive on April 7, and all six are currently positive. Only one of them is based on price alone, it's the monthly rate of change in the S&P 500.

The other five are not based on price because with algorithmic trading being 75 or 80 percent of the daily volume in the stock market, there are a lot of choppy, false moves on a day-to-day basis in the S&P 500 and other indexes. People who trade these things every day know that. They seem to run the stops up and down and sometimes just focusing on price isn't enough.

Five of the six are things like flows into the SPDR, high yield corporate bond spreads, on balance volume, other stuff like that. Obviously, we get paid on price, on what the S&P 500 does, but I'm focusing more on under the hood indications of the day-to-day condition of the market. And not so much on a tick by tick movement in the S&P 500 anymore.

It’s hard to believe that two months ago markets were at record levels and now we’re talking about one of the biggest contractions in the shortest period we’ve ever seen.

Yeah, I've been doing a lot of thinking about this because if you want apples to apples comparison, we had a pandemic in 1918. There's a PBS special—I'm a big fan of PBS—and it’s from the program American Experience, and the special talks about the 1918 pandemic. It’s on the internet and I watched it twice just to try to understand how it was done and how people reacted.

Obviously, it was a completely different economy. It was 100 years ago so there was no internet, it was still an industrial and farming society back then. But then I realized, I should just be looking at fear and greed because that's something that no matter what the event is— the financial crisis, or the 1987 crash, or the tech bubble— the fear should stay constant.

I looked at a lot of indicators, like the percentage that the S&P is trading below the 200-day moving average, breath statistics, volatility, and about a half a dozen others. If you go back 30 years, they're all at levels that have coincided with major bottoms. Sometimes it was a secondary bottom. If you go back to 2007, when all these extreme set, that first bottom was November 2008, that's when you saw the big spike in the VIX and percentage of S&P underneath its 200 day moving average, all those things I just mentioned. Then you didn't get the final bottom until March of 2009.

So, we could very well have another retest or make a new low and maybe not have a bottom until Labor Day or Thanksgiving. I don't know, I'm not a fortune teller, but I try to measure fear, rather than try to handicap COVID-19— I don't think anybody can do that.

Many businesses have quickly adapted to curbside service, to go orders and online purchases for the time being, but people’s behaviors are going to change.

That's right and, you know, the one thing that really amazes me is the durability of the economy and of ingenuity. Things are going to be different; it's going to change things. But while some businesses are going to never come back, or come back in a different way, other businesses are going to thrive.

Look at Netflix, I mean, that's just the one that comes to mind. But when this is over, there are going to be smart people in American business that are going to see the world has changed, and they're going to be able to get out in front of it and they're going to figure out ways to make this work in their favor. Life will go on and our world will change and it'll be different. But, you know, I have a lot of confidence in the ability of people and companies being able to adapt. And I think that's going to be the interesting part going forward.

Click here to listen to the full interview with John Kosar or for an archive of past shows, visit our Financial Sense Newshour page.

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