Tuesday, February 7, 2017

DVY Dividend ETF Daily Chart; Negative Divergence; Upper Band Violation

Television pundits keep telling Ma and Pa to buy dividend stocks. RBC strategist Jonathan Golub says dividend stocks will outperform going forward. Many investors, thinking they are smarter than everyone else, are scaling into dividend stocks thinking they will be safe defensive places to hide while enjoying a dividend; they are only covering themselves with a fig leaf.

The Federal Reserve and other central bankers have greatly distorted markets over the last eight years. Regular expected business and economic cycles are thrown out the window since the central banks have artificially pumped all asset classes higher with easy money. Decades ago, when a business cycle was maturing and rolling over, a great hiding place would be stocks such as utilities and consumer staples taking advantage of the defensive nature of the stocks and they would fall less than other stocks in a bear market. People need electricity (utes) as well as soap, toothpaste, toilet paper and other daily human necessities (staples; XLP).

Thus, investors turn towards divvy stocks thinking that in a downturn, which is very long overdue, these stocks will survive better. The reason a recession has not occurred is because of the central bankers supporting markets. The ECB continues printing money like mad men although the monthly purchases will taper from March into April. This is a potential watershed event since the central bankers have dug a deep hole for themselves. Once the ECB begins tapering within two months, and considering the Fed, BOJ and other banks are nearly out of ammunition, the long awaited recession may be on the come much faster than most market participants expect.

Back to the chart, the dividend stocks have been topping out since December. The negative divergence and overbot conditions shown by the red lines create the pullback to end 2016, begin 2017 and into mid-January. Dividend stocks pop higher in late January and now again in February but the indicators (maroon lines) clearly show the lack of oomph. At the same time price has touched the upper standard deviation band so the middle band at 89 and lower band at 88 is on the table. Price is above the 20-day MA, above the 50 MA above the 100 above the 200 so a mean reversion lower in price is needed.

The DVY weekly and monthly charts are agreeable to softness ahead and this is important since it appears very likely that stocks are printing a multi-year top at anytime in the weeks ahead. Perhaps stocks will top out as the ECB taper begins.

If you ran into dividend stocks while patting yourself on the back at how smart you are, do not be so fast to declare mission accomplished. The prudent path ahead is to scale-out of dividend stocks. Prices will likely be far lower one or two years from now. If the multi-year top prints, say over the next couple months or so, these stock prices may not be seen again for 5 to 8 years and some stocks may never recover to the current highs. Dividend stocks quickly lose their luster if the stock price dumps -10%. This would take over 3 years of a 3% divvy to make back your capital loss. If price loses -20%, -30% and even more, well, you do the math. All of a sudden divvy stocks will look a lot like all the other garbage.

Do not buy the hype on television with the cheerleaders telling you to buy dividend stocks. The charts indicate that it is more prudent to begin moving away and greatly scaling back on all these positions. When the downdraft hits, all stocks including dividend stocks and perceived safety plays will be whacked the same. This is due to the Fed and other central bankers pumping all asset classes higher over the last eight years with easy money; there is no longer any differentiation between the sectors; everything was pumped higher; the economic cycle theory is dead due to the multiple years of central banker intervention. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added 2:58 PM EST on Thursday, 2/9/17: DVY is down -0.1% this week thus far now printing 89.99. The weekly chart is in negative divergence. Take the dough and walk away. Leave that money in cash for a few weeks and months.

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