One Door Closes Another Opens

On Wednesday, to no one’s surprise, Janet Yellen & Co. ended the Fed’s 5+ year experiment of purchasing assets in the treasury and mortgage backed securities market, also known as quantitative easing (QE) or money printing. I won’t rehash all of the reasons why I continue to believe this is a misguided strategy, but it is.

Before the ink was even dry on the statement, the Bank of Japan completely caught the markets off guard last night with another ramp up of their own QE, buying more bonds, extending maturities and really ramping up their purchase of stocks using ETFs and REITs. I have said this since Abenomics (Japan’s version of our QE but on steroids) was launched in Japan, this will go down as the greatest financial experiment in history. Japan is going to print until the world runs out of ink!

And the European Central Bank (ECB) isn’t far behind.

Many are left to wonder what our markets and economy are left with in a post QE America. In a vacuum, the end of QE is headwind, however, with Japan going on even more steroids and the Europe about to begin QE, I don’t view it as a negative just yet. That time will come down the road.

For now, my thesis remains the same. Markets gave us a golden opportunity to buy a few weeks ago and I hope people took advantage of that. It was easy in real time and I wrote about the bottoming forming as it took place. The bull market is old, wrinkly,  but still very much alive. Rallies should get more selective from hereon and it will be interesting to see where leadership comes from.

Markets really need to see the high yield sector step up and rally! Odds favor it will.

Happy Halloween! One of my favorite holidays. Can’t wait to take the kids out tonight and then come home for some adult beverages.

Enjoy the weekend and be safe…

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Dow Theory Trend Change

Dow Theory has been around for decades and it’s not something I discuss very often. You can Google it to find newsletters and blogs and opinions on its value. As the stock market gets closer and closer to the final bull market peak, I think it’s something we should watch.

Dow Theory works in a couple of ways and I am going to focus on one piece here, primary trend change. Dow Theory Primary Trend Change occurs when BOTH the Dow Jones Industrials and Transports close above or below a previous secondary high or low. In essence, the trend of the market is said to have changed when lower lows are made during an uptrend or higher highs during a downtrend.

Earlier this month as you can see below, both the Industrials and Transports closed below their previous secondary lows from August. At that point, Dow Theory says the trend changed from up to down. Of course, that was also the stock market bottom I called in real time to contradict Dow Theory. Anyway, today, Dow Theory is still in a downtrend until both the Industrials and Transport make new highs which the latter did today. With my own upside target still 18,000, I would be surprised if the Industrials do not see all time highs and another Dow Theory Trend Change and whipsaw.

What would cause me much greater concern is if the Transports saw new highs, but the Industrials do not. That is called a Dow Theory divergence or non confirmation and often warns of a larger decline possibly unfolding.

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Goldman Sachs’ Oil Forecasting Prowess

Goldman Sachs is a firm often in the limelight for hiring the best talent on Wall Street, winning the high profile deals, having close ties to the government and paying enormous compensation. It’s also a firm under intense scrutiny and often in the cross hairs.

The last time I wrote specifically about one of their market calls was when they “curiously” downgraded the biotech sector in January 2014. You can read that piece here. http://investfortomorrowblog.com/archives/941

This week, Goldman cut their crude oil forecast by $15, which on the surface, should not get much attention. But it did get me thinking. I vividly recall spring 2008 when oil was soaring and the country was worried about it never ending. At that time, Goldman called for $200 oil when oil was $125 and had already rallied $40 in under six months. To me, it seemed like the venerable firm was caught up in the hype and hysteria, and was only inflating the bubble even more.

So this morning, I did some research and found other occurrences of Goldman changing their forecast on energy. To be fair, it is certainly possible I may have missed some, but below is what I could find.

As you can see below, in June 2008 with oil at $125, Goldman raised their target to $200. Oil did rally for another month before utterly collapsing to $35 in less than a year.

In May 2011 (below), Goldman raised their forecast on oil, only to see it plummet almost immediately by 20%+.

In October 2012 (below), the firm lowered their target on oil, but within a few weeks, oil began a major rally.

Today, as you can see below, after oil was taken to the woodshed, Goldman cut their forecast by $15. If history is any guide and I believe it is, the next significant move in oil should be a major rally.

My takeaway from this is that just because Goldman Sachs is cheered, revered or sometimes jeered, doesn’t mean they have a good crystal ball or make accurate forecasts.

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Ending a Big Week

As I first laid out last week and then again on Monday, this week was expected to be a big one for the bulls. In real time, I wrote about the likelihood for a low that was then confirmed, making me very happy to have called it as it was happening. (In this  business, you get to celebrate so little before the market turns on you!) The only question I had and still have  is, “was that THE bottom or A bottom?”

Not one to hem and haw, I still don’t have strong conviction either way. The higher the major indices go, obviously, the more likely last week was THE bottom. In any case, we have more than enough longs right now to amply participate. I did, however, do a little pruning during the week as our positions melted up a little too far too fast for comfort. At the same time, our global macro strategy bought back the long-term treasury bonds it sold during the wild spike higher last week. For the first time in a long while, our high yield models both turned positive and we now have sizable positions in the junk bond market.

On the sector front, which is very important here, I have seen a number of sectors begin to repair themselves, while some of the downtrodden like, energy and telecom remain dogs. Not so sexy utilities and staples are pushing to new highs along with biotech, but none of those represent strong bull market leadership I want to see.

Gold continues to be very volatile and downright frustrating at times for us. We just took a long position as the miners have fallen too far too fast to be sustainable.

Have a safe and enjoyable weekend! Perfect fall weather in New England and the last weekend of softball games for my daughter, thankfully!

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Two Market Scenarios for the Quarter

In the last issue of Street$marts, I wrote about stocks being in a “murky” period for the next few weeks. I am going to pat myself on the back and say it has certainly looked “murky” since early October although I wish I had been more aggressive in taking action. The dark clouds have recently dissipated and the sun is starting to pop out. Once the decline began, it looked like the second half of October would see a low and that’s been confirmed.

I recently shared research that indicated a 15% chance of a 8-11% decline during the Q4. This was based on the S&P 500 seeing a fresh high in September or October which usually insulates the market from much more than a 10% decline. So far, on a closing basis the Dow and S&P 500 have dropped almost 7% and 7.5% respectively, and 8.6% and 9.4% on an intra-day basis. The other major indices have seen more significant weakness.

Either by skill or luck, I am always happy to nail a low as it occurs, especially now, when so many others were calling for much more serious damage. With the world fixated on Ebola, Europe’s economy, earnings and ISIS, fear was prevalent last week, the likes of which we haven’t seen since mid June and in some cases, 2011.

So far, all we know for sure is that “A” bottom was achieved. Whether it was “THE” bottom remains to be determined. If prevailing sentiment becomes “sell the rally”, the upside is likely to continue. However, if the masses believe that we just saw the final bottom of 2014 on the way to new highs, a more difficult path will be in store as I discuss below.

I continue to watch two scenarios as the most likely paths over the coming months. The green line in the chart below is obviously the more bullish of the two. It has last week’s low as “THE” low from which the year-end rally has already launched and all time highs are to be seen within a few months. The orange line forecasts a lot more volatility with the currently rally petering out shortly and marginal new lows seen within a few weeks. From there, the real rally begins, similar to 2011, with higher prices down the road.

 What is obviously missing from the scenarios above is a truly bearish one that has the bull market already over and this current rally representing a good selling opportunity leading to sharply lower prices right into the New Year and beyond. At this point, I just don’t see it. We simply do not have enough dead canaries to warrant such a negative outcome. And speaking of dead canaries, I will update the Canaries in the Coal Mine next week.

For now, the takeaway is to watch for signs that the rally is hitting stumbling blocks. High yield (junk) bonds had a truly epic day on Friday, recovering five days worth of declines in one day. That nascent advance must live on. Good sector leadership needs to emerge and not from consumer staples, utilities and REITs. Although the banks are a bellwether sector, the bull market can live without them for a while longer, but that will likely lead to the eventual demise.

Before I finish this article, there are things that concern me. It’s not all roses out there! After 67 months, the bull market is showing its age. Traditional Dow Theory just gave its first negative trend change in some time as both the industrials and transports closed below their August secondary lows. That’s long-term problematic unless both make fresh all time highs in the coming months. What would bother me even more is if one index scores a new high, but the other one does not. Anyway, we have time to explore this further next week.

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So Far So Good!

Just two ago, I wrote about the stock market “groping” for a bottom and laid out a scenario for that to begin on Wednesday. The beaten down Russell 2000 was the key as it very quietly had been outperforming the market for three days. That behavior is not what you typically see if a crash was unfolding. Our indicators and systems backed up my own thoughts and our equity strategies went to maximum exposure at the close on Wednesday.

When I woke up Thursday morning and saw the global stock markets in collapse, I thought it was going to be a truly interesting day. With so many things looking good a few hours earlier, I was either very wrong, which has happened before and will happen again, or this sharply lower open was an absolute gift to the bulls. At this point I am very glad I stayed the course and even took what I would classify as personal gambles at the open by buying oil and shorting the VIX.

After the lower open, stocks staged a very impressive comeback and the internals looked much better along with sector leadership. Our own flagship sector strategy has had a very tough month coming in to this week, but as with the Russell 2000, it bucked the market downtrend and closed higher on Tuesday, Wednesday and Thursday. For the past week or so, I have strongly suggested that clients add money right away as this correction was nearing an end. And I followed my own advice by making my kids’ college fund additions as well as my 2014 retirement plan contribution into the market weakness.

Time will tell if we just saw “THE” bottom or “A” bottom, but even if stocks don’t go right back to all time highs, the preponderance of evidence suggested a good rally was close at hand. There are two scenarios I am watching now and I will spell those out in the Street$marts edition I am currently writing.

Remember, the largest one day stock market rallies usually occur after a decline. In 2008, we saw 4-8% one day moves many times. The larger the decline, typically, the larger the snapback. If you hated certain stocks, ETFs or funds on the way down, use the strength to rebalance your portfolio the way you want.

I am keenly watching how the plain vanilla high yield (junk) bonds funds act now. They are very stretched to the downside and are supposed to rally smartly. It’s put up or shut up time for the short-term, intermediate-term and perhaps even long-term.

Finally, I mentioned watching Apple and Netflix for signs of leadership. Apple hung in really well and should see new highs this quarter. Netflix announced bad earnings and was bludgeoned. IF this is the final rally of the bull market, IF, I would expect the rally to leave many key stocks behind. In other words, it would be narrow. The rising tide would not lift all ships. Again, IF.

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Stock Market Groping for a Low

If you woke up this morning, turned on the computer or TV and saw another Texas healthcare worker with Ebola, European markets under siege yet again and our own stock market futures in collapse, you probably did not feel so great. Anxiety? Panic?

As the morning progressed and our stock market opened, your saw an immediate mini panic with the Dow down 370. At the same time, the 10 year treasury note’s yield absolutely and totally collapsed under 2%. That is capitulation in stocks and flight to quality or safety in bonds. Heading to the exits en mass. Throwing the baby out with the bathwater. Choose any cliche you want.

(Side note. Our Global Asset Allocation strategy has owned treasury bonds almost every day this year and today is the first time we are seeing a sell signal in that asset as its price has spiked to unsustainable levels.)

Is this “A” bottom or “THE” bottom or even a bottom. We should know more by the end of the day. If stocks rollover yet again during the afternoon and close below the lows of the morning, the panic is likely to follow through until we see another panic set up. If, however, stocks can hold the morning low and firm throughout the day, even to still close down, that would be a good sign that at least a bounce, if not full fledged rally is here.

The Russell 2000 index of small cap stocks, which has been bludgeoned since July has performed very well this week on a relative basis. And so far today with stocks taking it on the chin early, small caps fought back to unchanged. This is bullish behavior and not typically what we see if stocks were on the verge of additional collapse or even crash. It will be VERY telling to see how the Russell 2000 ends the day.

Besides the small cap stocks, Apple and Netflix have been pillars of relative strength of late. When stocks finally bottom and bounce, I would closely watch these two large caps for leadership.

On the sector front, none have been spared the carnage of the last month with energy being decimated the most, close to the point where they have performed so poorly, it’s actually good going forward. I remain positive on REITs, biotech, transports and semiconductors for now, but that should change with the heightened volatility from day to day and week to week.

I fully expect wild swings today and probably the rest of the week.

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Who Turned the Lights Out… Again

 Yesterday, I wanted to see what leadership emerged after Wednesday’s big surge and more importantly, I wanted definite confirmation from the plan vanilla high yield (junk) bond mutual funds that the canary wasn’t dying. That was before the open.

I have to say that the depth and tenaciousness of Thursday’s decline definitely caught me off guard. While giving back 25% or even 50% of the big rally would not have out of the ordinary, losing all of it certainly was. It reminded me of January 2008 as stocks were groping for their first low of the year.

The anticipated up day in plain vanilla high yield bond funded ended up as a moderately lower day in the end. That is not good. It says that liquidity is leaving the market and shows concern that the economy may not be as stable and strong as the jobs report indicated. At this point, high yield bonds look like they want to continue lower as water finds its own level. The positive from my selfish perspective is that there should be a very solid buying opportunity over the coming month for a good trade into the New Year. I can’t believe I just typed “New Year.” Wow, did this year fly by!

Looking at the stock market, earlier this week I wrote that there was a 15% chance of a 8-11% correction taking the Dow below 16,000. That scenario certainly looks like it’s shaping up. With the August lows in the S&P 400 and Russell 2000 long breached, the S&P 500, Dow and Nasdaq 100 should not be too far behind.

Given the depth of the pullback, a scenario should unfold where stocks see some capitulatory selling next week or soon thereafter followed by a feeble rally and final decline into the ultimate bottom. I will discuss more if and when this unfolds. For now, it’s probably too late to sell and too early to buy. Patience is the virtue.

Have a safe and enjoyable weekend, especially if it’s a long one for you! I would be surprised if the media doesn’t start talking correction, crash, etc. with possible Blue Monday.

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BOOM! Now High Yield is Key

What a great day in the city on Wednesday! I knew I was okay when Metro North actually ran on time to start the day. I did two segments with the good folks at Yahoo Finance, one discussing the most overused word in investing, “bubble”, and the other on the current state of the bull market. As they are posted I will share the links.

I headed to the floor of the NYSE in the afternoon for a quick stint with Bill Griffeth on Closing Bell. Since the 1980s in the FNN days, I have always been a big fan of Bill’s and I really enjoy chatting with him. The floor was crazy busy and I could hardly move around. It wasn’t, however, from floor traders and professionals doing business. There all kinds of groups visiting and moving around.

Finally, Fox Business’ Making Money with Charles Payne was my final stop and I got to spend a full hour on the show with the other guests. That was special and I will post the various links shortly.

Stocks had a huge day on Wednesday, in both directions. After Tuesday’s drubbing, the decline continued yesterday morning before firming into lunch to get back to unchanged. Then the Fed released their minutes and the market took off like a rocket ship. Frankly, stocks were so stretched to the downside to begin with and were already firming into the news. Yellen & Co. just threw gallons of gas on a tiny little fire and the inferno ensued.

At the end of the day the major indices gained back what they lost on Tuesday plus a little bit. I would have liked the internals to be a little stronger, but you can’t have everything.

The big question now is, “Was that THE bottom or A bottom?”

The jury is out at this time, but for sure, the bulls have the ball now. Let’s see where they are at 4pm today. Let’s watch leadership emerge.

High yield bonds funds, one of my most important canaries, all closed down yesterday which is the norm on a day when stocks  take off during the afternoon from a decline. I would be shocked if funds like PHYDX, NNHIX, MWHYX and JAHYX do not show gains when their prices are posted tonight. If these funds are not up at least .20% or more, that will be very worrisome for the intermediate-term.

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History Says 15% Chance of 8-11% Decline Right Now

Today (Wednesday) I am excited to head to New York City for a day full of media (and a tiny bit of shopping). My first stop is with the good folks at Yahoo Finance to create two or three segments on what’s hot now. I know for sure we will do one on market bubbles which should be controversial and interesting. I imagine there will be one about the bull market or Fed and then one on the hot story of the day, like today’s thrashing in the stock market. It’s always a good time to visit Jeff Macke.
From there I head to the New York Stock Exchange for a 3:45pm interview on CNBC’s Closing Bell. After all these years, I am still wowed when I visit the floor. Finally, I am thrilled to join Fox Business’ Making Money with Charles Payne for a whole hour from 6pm to 7pm. Sometime in between, I hope to buy a suit which I am told that I desperately need.

The short-term picture remains murky for the next few weeks, but looking out beyond that, markets should regain their solid footing and march higher later this quarter. October has a reputation of being a bad month for stocks. Most people recall the great crash of 1929, crash of 1987, mini crash of 1989, crash of 1997, crash of 1998 and Lehman collapse of 2008, which all occurred in October. Keep in mind that some macro news event usually was given the credit (or blame) for causing the decline, isn’t that always the case? In a vacuum, October looks like a very scary month, but that would be a big mistake!

Taking a wider view, you realize that in almost every case above, stocks were already in decline before October began. The month actually acted as an accelerator rather than an initiator. Furthermore, October was most often a turning point for stocks in that declines continued into October, bottomed mid to late month and then a significant rally began. You would be hard pressed to find many examples of times when October did not see at least an interim low.

Given that stocks peaked last month, I went back and researched how the market behaved in the fourth quarter after a new high in September. The results may surprise you!

Since the bull market began in 2009, the only significant Q4 decline was in 2012, -8%, or 1/5 times(20%).

Since 2000, besides 2012, 2007 was the only other year. The Dow peaked in October and declined 11%. That’s 2/14 or 14% of the time.

There were no Q4 declines from a September or October peak in all of the 1990s! Read that line over again.

1989 saw the mini crash of 9% from an October peak and 1980 had a very unusual 10% from a November peak.

Since 1980, there five significant Q4 declines from a high or just 15% of the time.

So here we are on October 7, having seen a September new high peak heading into Q4. History says there is a 15% chance of 8-11% decline from the September Dow high of 17,280. If this is one of those times, the Dow is looking at a possible downside range of 15,379 to 15,898. Anything else on the downside would be a 35+ year precedent setter. 

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