Red is the Theme Short-Term But Green is on the Way

After Friday’s big down day which historically has occurred less than 1% of the time, the model for Monday is another large red day of 1-3%. From there, stocks should attempt to form a low on Tuesday or Wednesday and rally for a few days to a week. This is right in line with the Playbook I offered here on Friday.

As you would expect, the financial sector has been hit the hardest, but I am a little surprised that technology has been so weak. Semis, specifically, saw new highs last Thursday and are now down 10% in two days. What has been leading, remains leading, namely defensive sectors like REITs, staples, utilities and precious metals. Long-term treasury bonds have exploded higher, sending yields close to all-time lows. That’s definitely a plus for the mortgage market!

Investors all over the country are wondering what to do now. While trying not to sound flippant, if people weren’t nimble enough to take action before the vote, personally, I wouldn’t overreact emotionally like investors usually do during major geopolitical events. We are in a period of short-term pain, but that should not dictate the long-term plan for gain.

What I found amazing from my weekend reading was how many pundits were now calling for recession within 9 months because of the vote. My head is still shaking, especially when it comes to the U.S. While we are long overdue for a mild recession, I absolutely do not believe it will be caused by the BREXIT vote.

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The Aftermath & Shock of BREXIT – A Market Playbook and Dow 20,000

Good for the citizens of the UK! In true democratic form, the majority were unhappy and voted for change. And that’s what they got. Kinda, sorta. If I had the power to vote, I guess I would have voted to leave because I would rather be the first one out than the last.

The pundits were embarrassed. The markets got it wrong. The bookmakers appear to have lost a fortune. In my piece earlier this week, http://investfortomorrowblog.com/archives/2292, on Twitter and Facebook, I quoted the late Joe Granville whom I learned lots from in the 1980s. “If it’s obvious, it’s obviously wrong!” Joe is smiling and laughing today as he looks down from heaven. The markets weren’t worrying about the vote which was worrying to me as I wrote.

As stocks around the globe rallied sharply over the past week, I figured that the UK would vote to remain in the EU and then we would see a sell off on the news. Buy the rumor, sell the news. We are only getting the sell part this morning although the Dow is simply back to the level we saw just one week ago.

Let’s get one important forecast out of the way right here. I remain firm that the bull market in stocks is not over. The bull market remains alive and all-time highs are on the way this year.

2007 Offers a Good Playbook

As you know, I love looking for comparable periods to current market action. While I admit to not to spending more than 5 minutes thinking about this today, February 2007 immediately came to mind when we first heard of potential woes in China.

Look at the chart below on the far right side to see what I mean compared to 2016 just below that.


The huge down day in February 2007 wasn’t THE low, however it was where the vast majority of damage was done. Two weeks later after some choppiness and digestion, stocks made their final low, as I was sitting on top of a ski mountain in Utah celebrating my 40th birthday while doing a TV interview.

Finally, less than two months after the huge down day, the major stock market indices saw fresh all-time highs. I believe a similar path is on tap today with my familiar call for Dow 20,000 not far behind.

Why is Everyone Freaking Out?

That’s a good question! First, the UK Leaving the EU doesn’t mean much economically, fiscally or politically. Some are concerned that Scotland and/or Northern Ireland will be next. I think that’s valid and there will be at least one vote for independence.

The huge concern is that now the UK is supposedly leaving, it will make it easier for the Netherlands, Denmark, France, etc. to hold their own votes to leave. In other words, the dominoes will begin to fall and fall hard and jeopardize the whole EU and euro currency. Those are valid concerns and a forecast I first wrote about more than 10 years ago when I saw how flawed the euro was.

Keep in mind that this one high profile vote in the UK yesterday is not binding and may not be over. Parliament must vote and the UK and EU then have at least two years to negotiate terms of the exit. I hope no one thinks it’s going to be an easy negotiation. During that time, don’t be surprised if the powers that be in the UK hold another referendum to overturn this one. It’s that fluid and crazy!

Finally, last night’s vote puts another nail in the coffin of German Chancellor Merkel as she stands for reelection in 2017. Once the most popular and respected politician in this history of Germany, her stance on immigration has turned her into public enemy number one. Should Merkel lose, the euro currency and EU would lose their most vociferous supporter.

Interesting times we live in…

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BREXIT, SCHMEXIT – Much Ado About Nothing???

Like Y2K, the second war in Iraq and other date certain events, the United Kingdom will vote on Thursday whether it wants to remain in the European Union (EU), otherwise known as BREXIT (BRitain EXIT). Unlike most geopolitical events which just happen, the BREXIT vote has been known about for some time as UK Prime Minister Cameron promised to hold this referendum if he won reelection in 2015.

What is the BREXIT & Why

Depending on who you ask, the reasons for staying or leaving are all over the place. However, I would speculate that less than half the people voting actually understand what they are voting for or against. And those with very strong convictions are the ones who probably have an axe to grind.

Personally, I don’t care what the British people decide. It’s their country and they should do whatever they want. I just laugh when people like Hillary Clinton, Barack Obama, Warren Buffet, Jamie Dimon and other Americans make these forceful arguments for staying. Or those like Donald Trump and Paul Ryan on the other side. When politicians and others from other nations opine on our affairs, we tell them to mind their own business. We should take our own advice and shut up.

Anyway, over the years, I have written about the flaws with the EU and euro currency. Flaws that some day would need to be addressed. It’s the “haves” and the “have nots”. Unlike the U.S. where the playing field among states is generally level, it is definitely not in Europe, especially on the fiscal front as we have seen over the past 7 years. If the EU and euro are to remain viable long-term, they have a lot of work to do.

Getting back to the BREXIT vote, nationalistic political parties throughout Europe have been surging as a result of the terrorist attacks and immigrant crisis and the UK is no different. Each side of the vote cites immigration as one reason to stay or leave with either closing the borders again or leaving them open.

Cost of EU membership is another black/white issue. In 2015, the UK paid north of $18 billion to be part of the EU and some argue that they received a fraction back in revenue. Trade is another huge issue as all EU members’ agreement are in accordance with EU law. Some argue that leaving the EU will allow the UK to renegotiate better deals while others don’t think it will get any better. Those in favor of exiting also cite loss of sovereignty as a reason to leave. They want the UK to make their own laws and regulations without having to answer to a high power.

The bottom line is that both sides are equally right to some extent.

Polls & Opinions

BREXIT has been a financial media obsession for months. More recently,it seems like any and every time stocks pull back, the media has “Breaking News” about the markets collapsing on an outcome to leave. Yet the few large rallies are attributed to opinion polls swinging back the other way. In the internet age, polls have definitely lost some of the value from the good ole telephone calls. We saw that really happen during the early primaries. I would put much more stake in how the bookmakers are viewing the vote as there is real money on the line.

While I don’t have a stake in this vote nor a strong opinion on what’s best, if I had to predict the outcome, I would go with the UK remaining in the EU, which flies directly in the face of my hatred of following the herd. It seems like more and more being interviewed are forecasting a BREXIT failure. Hmmmmm…

Does a BREXIT really matter?

If this was a one shot deal for one country, I don’t think it would matter at all. The problem is that it could have a domino effect around Europe as well as in the UK itself. If the UK votes to leave, it very well could bring up the issue of Scottish independence yet again, not to mention the potential for Northern Ireland to leave the UK. And those pale in comparison to potential exits by Greece, Portugal, Italy, Spain and France, in which case, the whole EU and euro begin to implode.

Let’s say there is a BREXIT. It doesn’t happen overnight. Rather, the EU and UK spend AT LEAST the next two years negotiating agreements on how an exit would take place. If the exit terms are too onerous or UK citizens have a change of heart, the UK could hold yet another referendum to overturn the one on the 23rd. Nothing is absolutely certain after this vote.

Markets Not Worried Which is Worrying

Global markets have been fairly calm and some would argue, complacent, about the vote. There doesn’t seem to be a high degree of stress in the system. I think the central banks and financial powers around the world have learned their lessons from previous missteps. There is an ocean of liquidity in the system now and my sense is that bankers are not going to let that change this month.

The doom and gloom has been very vocal lately with that quack, George Soros, forecasting a global meltdown and calamity on a vote to leave. He is not alone in “selling his book”. Markets have been on the comfortable side which puts me on guard for at least a short-term bout of weakness regardless of the outcome. As I have stated hundreds of times over the years, I don’t care as much about what the news actually is as much as I do about how the markets react.

If It’s Obvious, It’s Obviously Wrong

Early in the my career, the late Joe Granville taught me that if it’s obvious, it’s obviously wrong. Majority opinion regarding the BREXIT and market outcome is likely to be incorrect. As I discussed in this Media Interview (http://www.moneycontrol.com/news/fii-view/mkts-will-continue-to-sell-going-into-brexit-week-heritage-cap_6879701.html)
last week, my thought process has been to go opposite whatever the markets did into the vote. If they rallied strongly, I thought we would see a decline after the vote. If they sold off into the vote, I thought they would bottom next week. Unfortunately, they haven’t done much on balance over the past week with a decline and then rally right back. Perhaps the best move right now is no move.

Regardless of the BREXIT vote, the naysaying pundits and doom and gloom crowd will get back to worrying about Donald Trump, the Fed, poor earnings, negative interest rates in Europe, China and the employment data before long. My investing theme remains unchanged. Until proven otherwise, weakness is a buying opportunity and new highs will be seen this year with Dow 20,000 on the way. The bull market ain’t over!

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Biding Time to BREXIT

After an almost celebratory opening on Monday which saw the Dow up 200 points, stock steadily declined throughout the day and closed at their lows. On the surface, the average person saw all of the major indices nicely higher with the vast majority of stocks up on the day. The short-term trader saw a tired market that couldn’t hold early gains and closed at the low tick. Both observations are correct but time frame determines your viewpoint. I fall somewhere in the middle.

As I mentioned last week here and to CNBC India interview, I am looking to go opposite the reaction we see from the BREXIT vote on the 23rd. The hardest thing will be if stocks meander into the vote. I will have more on the BREXIT tomorrow.

Defensive sectors remain in the leadership as utilities, staples, telecom and REITs all behave well. However, don’t overlook energy, materials, internet and industrials. Long-term treasuries and gold put in significant downside reversals so the bears have the ball there. It will be interesting to see how they trade into the vote as well as after.

Finally, high yield bonds are trying to step up again and they will need to if the rally in stocks is to make new highs sooner than later.

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Bulls’ Time… AGAIN

As has been the theme since the February bottom, weakness is buying opportunity until proven otherwise. Except for the brief period from April 21 to May 20, I have been pounding the table on the bullish front. The Fed, earnings, China, BREXIT, employment have all given ammunition to the bears, but someone forgot to tell the stock market. Last Thursday saw a somewhat dramatic reversal the day after the Fed meeting which helped our Fed trends. While the bulls took a break on Friday and the naysaying pundits were out in force, it did nothing to negate the uptrend and rally.

The bulls have the ball and it’s time to move.

Heading in to the new week, we have more day of the positive Fed trend which is a small tailwind. However, the week after June options expiration has historically been a challenging one for the market, especially when stocks are above their average price of the last 50 days which they are not right now. Additionally, from now through the end of June, small caps typically outperform large caps.

Sector leadership has been good not great with semis, industrials, materials, energy, telecom, REITs, staples and utilities behaving well. Healthcare, biotech, banks and retail are not. High yield bonds have pulled back and it’s time to step up as treasury bonds should see some weakness.

Finally, as I keep saying, watch how markets react to new not what the news is. With the BREXIT vote coming on the 23rd, you would intuitively think that the pound and euro would be under pressure. However, they are acting nicely in the short-term and should see added strength into the vote.

Speaking of the vote, I will be publishing a piece on this shortly as I head to Baltimore. If you’re in that area and would like to grab coffee or an adult beverage, please let me know.

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***Special Fed Meeting Update & The Continuous Loss of Credibility and Clue***

Six weeks later and it’s Groundhog Day all over again! Or is that deja vu all over again?!?! It matters not. I began my Fed day comments with this in April.

“The Federal Reserve Open Market Committee concludes their two day meeting with an announcement at 2 pm that interest rates will not change today. That’s what the markets are expecting. There has been all kinds of hot air coming from several Fed officials that rates need to rise now, but Chair Janet Yellen has been on the other side, sticking with her more accommodative stance. It would be very hard to believe that the majority of voting members would overtly vote against their chair.”

Before I get into the meat of this issue, I want to mention three independent studies surrounding FOMC meetings. All three short-term studies conclude that stocks are supposed to rally here. One is a one day trade. One is a two day trade and one is a three day trade. Their accuracy has been 70-90%.

Fed Officials and Wall Street Lost Credibility Again
For four weeks, we continually heard from the Fed heads and pundits that Yellen & Co. will definitely raise interest rates on June 15. Goldman Sachs, Merrill Lynch, UBS and the endless parade of analysts on the financial channels. It was a certainty. The Fed heads prepared us over and over and over again through their speeches. They publicly wanted to hike rates. They needed to raise rates. They thirsted and craved higher rates.

They were out of their collective minds and the word “quack” now comes to mind.

With the blink of an eye, one weak employment report and a June rate hike is all but off the table. And almost as fast, those same pundits and analysts are now forecasting with certainty that the Fed will stand pat at 2 pm on Wednesday. Did they forget about the vote across the pond on June 23 for the UK to exit the Euro? There was no way Janet Yellen was going to raise interest rates before then.

How fast can you say, total lack of credibility???

Leave Rates Alone
Since late 2008 I am on record all over the place saying that the Fed should unequivocally not raise interest rates until the other side of the next recession after the Great Recession. Since then and every moment after, I have firmly stated that the recovery would not be and is not your typical sharp snap back. Rather, it is a post-financial crisis recovery which is uneven, tantalizing, teasing and once in a while terrifying. They do not happen all that often around the world, but the path is very clear.

This is not new news for you, my loyal readers, nor is it new for anyone paying even the slightest attention to the real world. For years, I was convinced that the economy and markets could not handle higher rates. I am still not convinced. However, over the past year and a half, a few new reasons became clear.

WHY???

First and perhaps most important, I do believe that Janet Yellen is keeping the U.S. dollar under her hat. Fed officials rarely discuss currencies, but as I mentioned six weeks ago, I firmly believe that the really smart folks inside the room are worried that future rate hikes with the rest of world easing and/or accommodative with negative interest rates abound, the dollar could pull a repeat of the mid 1980s where it soared to almost 150 on the trade weighted index as you can see below.


Why does this matter?

Let’s say the Fed raised interest rates next month. Would you rather own the dollar where rates are increasing or the Euro where rates are becoming more and more negative each month? Where would your money be treated best?

You can make the same argument in Japan. The Japanese will continue to print and print and print, buy and own almost 100% of their government bond market and force rates well below 0%. Money flows where it’s treated best.

Dollar to Soar
In the short and intermediate-term, more rate hikes from the Fed would fuel another major rally in the dollar at least to the upper end of the trading range that’s been in existence since early 2015 as you can see on the chart below. That would not be bad overall. Sure, companies who export goods would struggle but the rest of the corporate world would do just fine.

The real concern comes once the dollar scores fresh highs and stays there for at least a few weeks. The scenario would quickly turn to the playbook from the mid 1980s but on a much grander scale. I contend as I have since early 2008 that the U.S. Dollar is in a secular (long-term) bull market that will carry the index well above 100 with the Euro first falling below par (100) on the way to collapsing to all-time lows below 80.


Dow Above 20,000

If I am right, we will see massive capital flows from Europe and Asia into the dollar sometime in 2017 or 2018 that will feed on themselves. After dollars are bought, money will flow into treasury bills and notes for those seeking safety. However, similar to the 1980s, I see hundreds of billions and ultimately more than a trillion dollars making its way into blue chip stocks. That’s where my long standing forecast of Dow 20,000 and above come into play. Investors will be partying like it’s 1985 – 1986 again.

Ultimately, as with any and all gargantuan capital flows, severe global market dislocations will appear and we all know how poorly they end. The crash of 1987 was how the 80s dollar boom ended.

Besides the dollar and the upcoming vote by the UK to leave the Euro, few seem to be talking about China. Forgetting about their weakening economy and real estate woes, let’s not forget that the Bank of China responded very decisively to the Fed’s December rate hike by devaluing their currency several times in January and February, adding further stress to the global markets.

Long-Term Rates
Finally (for now), long-term interest rates as measured by the 10 year Treasury note are back down to the 1.6% level as you can see below. That’s getting eerily close to the all-time lows levels of 1.4% seen in 2012. While the Fed controls the overnight lending rate, the market determines most other rates. How “interesting” that the Fed heads would even contemplate raising short-term rates with long-term rates in collapse. This would further serve to flatten the yield curve and damage banks.


I am all the way to the end and it’s time to hit the send button without diving into stock market leadership which has been solidly defensive of late. Both utilities and consumer staples (for full disclosure we own them) recently hit all-time highs as bonds prices rallied. Dividend paying blue chip stocks are in high demand as replacements for “safer” fixed income.

As I write about all the time on www.investfortomorrowblog.com, I care much more about the markets’ reaction to the news over what the news actually is. Keep a close eye on what leads and lags from 2:30 to 4 pm today. For the shortest and most nimble traders, selling long-term bonds, utilities and staples on the Fed announcement may be a good play.

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Yes, I Know… The Pullback to Buy

At the end of last week, stocks looked a tiny bit tired. Two days later and 2% lower, it’s getting ripe for at least a bounce. Over the past week, the inverse volatility ETF (XIV), which is really just the S&P 500 times 5 or 6 is down a whopping 34%! That’s some odd behavior and historically does not portend more significant downside.

Stocks are pulling back as they approached all-time highs which is certainly not unexpected. There are few indications that this is anything more than a dip to buy. Yes, I know the Fed is meeting right now. They won’t raise rate. Yes, I know that global rates are going more negative with the German 10 year Bund now below 0%. It’s a fear trade. Yes, I know that the UK has a vote to leave to Euro on June 23. Watch how the markets trade into the vote and after the vote, not what the vote actually is.

While the world turns dramatically bearish, keep in mind that the NYSE Advance/Decline line which measures participation is but a four days removed from an all-time high. High yield (junk) bonds, perhaps my favorite canary in the coal mine, are just two days removed from 2016 highs. Semiconductors have been leading which is a very positive intermediate-term sign although the other key sectors, banks, discretionary and transports are treading water.

All in all, I am a buyer into weakness until proven otherwise, the same tactic I have discussed since the February bottom. Keep a close eye on the sterling and euro ahead of the June 23 vote.

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The Answer is NO

If we were playing Jeopardy, the question would be, “Has the Stock Market Peaked?”

The other day, I wrote about the potential for a 1-3% pullback in the context of generally higher stock prices. That remains my view and weakness can be bought. It’s amazing that a single day of decline in the stock market after a 5% rally can bring out so many bears.

Stocks were overdue for some weakness and now we have it. While it’s probably a coin toss in the short-term with the Fed meeting next week and UK vote exit the eurozone on the 23rd, the intermediate-term remains solid.

Enjoy the weekend!

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Chicken Little is Alive and Well

In Friday morning’s piece, The “All-Important” Jobs Report, I discussed that it’s much more important to watch how the markets react to the news rather than what the actual news is. The jobs report was abysmal and the media reacted in kind by rolling out every bearish economist to let us know that the economy was as weak as anytime since 2009. Market strategists also responded as expected with the same wrong calls for a major correction and new bear market.

How many times have we heard these Chicken Littles calling for the end of the world over the past 7 years? It’s such a joke than anyone listens anymore to people who have been continuously misguided for that long. Don’t get me wrong. I make more than my fair share of mistakes. It’s always okay to be wrong; it’s just not okay to stay wrong.

Anyway, after some weakness early Friday morning, stocks slowly and surely rallied throughout the day into the close. That continued on Monday and Tuesday with the S&P 500, S&P 400 and Russell 2000 closing at new highs for 2016. Since I turned positive again on stocks on May 23, the major indices have rocketed higher and are still moving higher today. The peak is not close at hand although some short-term pause to refresh may be closer on the horizon. That could mean 1-3% on the downside. Buying weakness remains the correct strategy until proven otherwise as has been the case since early February.

Interesting to note that almost no one is talking about the fact that both stocks and bonds are rallying sharply together…

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The “All-Important” Jobs Report

Another new month, another employment report. As usual, the media is hyping this to the Nth degree as a clue to what the Fed is going to do with interest rates later this month. I learned very early on that economic reports and earnings and geopolitical news don’t really matter. It’s how the markets REACT to the news that’s really important. In October 2000, companies started reporting very solid earnings, but stocks fell sharply day after day in what became a multi-year bear market. Even in January 2008, GDP was reported to be be on the strong side, just as stocks were collapsing into the first 20% decline of the bear market.

Don’t get hung up on what is released today.

Stocks closed Thursday at their highest levels of the year, something I have been discussing here after turning positive on the market almost two weeks ago. History says there is a 75% chance that stocks close higher on Friday. Then, yet another short-term, routine and healthy pullback should ensue. If stocks gap up at least moderately after the employment report, that would be a good selling opportunity for very short-term oriented people with the idea to buy them back into the first bout of weakness from the typical post-jobs hangover.

Intermediate and long-term, the stock market remains constructive with all-time highs on the way.

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