Bulls & Bears Even But Opex Tilts Down

Bulls and bears come into the new week on equal footing,  both still fighting it out in the trading range. The bulls have done nothing wrong to indicate anything more than a 3-5% pullback and the bears will have a lot to prove at that point. Since early December, the small cap Russell 2000 has lagged and the bulls are getting to that point where it’s time to step up. Clearly, the unpopular NASDAQ 100 has been the leadership index. As I mentioned on CNBC last week, I do think Dow 20,000 gets hit sooner than, but that would be a short-term selling opportunity rather than a launching pad.

For this holiday shortened, option expiration week, the seasonal trend is for mildly lower prices and that’s how it look like the week is beginning. The “losers” from Q4 or the mean reversion instruments continue to lead the markets. Those are treasury bonds, gold, yen and euro. I am a little surprised that staples, utilities and REITs haven’t stepped up, but maybe they need a little soft patch from stocks. In any case, these are short-term opportunities and not trades for the whole year.

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Bears Need to Act Quickly, But Bulls Won’t Make It Easy

After Thursday’s morning sell off the bears finally had something to latch on to. All they needed was to stave off any bull attempt to rally into the close so the bears could try and follow through on Friday morning. However, as pundits called for more weakness, stocks rallied all afternoon and into the close. Unless the bears can make some serious noise on Friday and undercut Thursday’s low, it looks like Dow 20,000 will be tested over the coming few days.

Earnings season has begun and everyone is keenly focused on the banks as strong results are expected. I have a slightly different view. While I fully expect good earnings, especially from JP Morgan, Bank America and the super regionals, the real test comes in three months as fruits of the Fed’s recent rate hike will start to be felt. I also think that forward guidance or soothing commentary will be much more important than the current report.

I have been mentioning that what lost during Q4 was likely to bounce back and lead to begin the year. That means treasury bonds, gold, yen and euro. If stocks are ready to blast higher by another 1000 points or so, these instruments should start to roll over much sooner than later and revisit their December lows. At the same time, I would expect leadership from semis, banks and transports to reemerge and make new highs.

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Top 15 Financial Resolutions for 2017

It’s amazing how powerful the turn of the calendar can be. New Year’s resolutions dominate the landscape with all of the weight loss programs and workout products at the top of the list. I’ve never been a huge “resolution” person, probably since there’s just too much I need to change and it’s a little overwhelming!

But each year, I may pick one single project or thing that needs to get done and is manageable. Last year, my goal was to spend five consecutive weeknights at home (by 5pm) with my family. Between coaching my kids’ teams and their activities, I was unable to accomplish that. That will happen in 2017 plus a new goal on the business side.

Below is my full list of resolutions for 2017 which was partially unveiled and discussed on WTNH’s Good Morning CT Weekend. You can watch that HERE.

1 – Take a financial inventory of your current holdings

Make a list of all accounts and holdings on a piece of paper or Excel spreadsheet of their values at the end of 2016 and 15 (and as far back as you have data). Compute the return from one year to the next. Using 2007 – 2016 should give you a good cross section of market environments with strong up years like 2013, a strong down year, 2008, and a number of strongly volatile and very average years.

Determine the composition of your portfolio: What percent is in stocks, bonds, currencies, commodities, cash, etc.? Try to understand why something did better or worse than expected and consider adding or withdrawing where appropriate. Remember, the most successful investors are the ones who add to their best investments after they experience a challenging period. Make sure you understand what you own and why!

2 – Photograph inventory of your home

With modern technology, it’s never been easier to take pictures or record video. Start on the outside and make sure to capture anything and everything than can be lost due to fire, storm or theft. You, your insurance company and the authorities will be happy you did.

3 – Organize key financial documents

Should tragedy strike your family, make sure that all important documents can easily be located and used by other family members, lawyers or the executor. These documents include but are not limited to will, power of attorney, bank, brokerage and 401K accounts, insurance, mortgage, deeds, etc.

4 – Create/update will

More than half of all Americans die without a will. That is one amazing statistic. Most reason that they just haven’t gotten around to having one done. Laws vary by state as to exactly what happens if you without a will. With estate laws about to change again, there are a variety of reasons to have an updated will. First, you are able to decide exactly what share of your estate and what property goes to which individuals. Otherwise, and especially if there have been more than one spouse and multiple children from those spouses, the different parties will spend a lot of money and time fighting over the assets. If you don’t have an attorney or don’t want to pay one, at least buy the software and do it yourself.

5 – Update beneficiaries

Retirement accounts like IRAs, 401Ks and annuities have beneficiaries. That is, a person, people or entities you want to receive those assets after your passing. Make sure your beneficiaries are still alive and you still want them to receive that predetermined portion. Many times beneficiaries’ family status changes and account owners no longer want them to receive all or any of their account. Additionally, accounts grow in different ways and significant growth of an account may skew the intended gift.

6 – Check credit report

There are several services that offer to supply your credit report on an annual basis for free. Make sure to check all three credit bureaus. Identity theft and credit fraud have become pervasive this decade and it takes a very long time to correct problems. If you see a negative mark on your credit, even a small one, make sure to address it until it has been fixed. It may take a while. Additionally, make sure to close any and all accounts and cards not currently being used as they can negatively impact your credit.

7 – Create a budget

If you notice, I didn’t say to live by a budget, just to create one. That’s the hardest step to take, the first one. Simply either keep track of everything you spend or for a few dollars, purchase a program like Quicken to track it for you. You will be amazed how your money gets spent over the course of the year.

8 – Pay down/off high interest rate credit card debt

This should be the most obvious tip as the higher the interest rate, the more difficult it is to pay off. With the Federal Reserve raising short-term interest rates in December and likely to raise a few more times in 2017, just paying the monthly minimum will take you decades to pay off your debt. That is among the worst mistakes you can make. Whatever it takes, even at the expense of retirement plan contributions, you absolutely must pay down and then off high interest rate credit card debt.

9 – Consolidate debt

Credit card companies are thirsting for new business and luring customers with all kinds of 0% interest rate and free transfer offers. Whether or not you can pay off/down your credit card debt, you should definitely consolidate as many of your credit cards with balances as possible at preferably 0% interest.

10 – Refinance your mortgage

The 35-year bull market in bonds ended in July 2016. With the bond market running in 30-40 year cycles, the odds greatly favor that long-term interest rates, not the ones the Federal Reserve sets, will be rising for the next few decades on balance. Long-term mortgages key off the 10 year treasury note which has already rallied 100% from its 2016 bottom. If you haven’t already refinanced your mortgage when interest rates were at record lows, use any weakness seen during the first four months of 2017 to refinance.

11 – Establish an emergency fund

Working people should have an emergency fund of at least 3-6 months of expenses in case an unexpected event occurs, like losing your job. This fund should be very liquid and easily accessed. If you are single and in your 20s, you can probably get away with a smaller fund. The older you are and the more people who depend on you means the fund should be larger. Having available credit on a credit card is not an acceptable emergency fund.

12 – Rebalance 401K and other investment accounts

While I advocate rebalancing quarterly, most investors, especially those who do not work with a financial advisor, do not even do this annually. This is vital for long-term success. Let’s say your 401K account is allocated 70% to equities and 30% to fixed income. Over the course of every year, stocks and bonds perform differently and that allocation has likely changed, sometimes dramatically. Rebalancing sets that account back to the 70/30 or whatever you chosen allocation is.

13 – Increase 401K or other retirement plan contributions

For the vast majority of Americans, employer sponsored retirement plans are the best form of saving for retirement. With old fashioned, traditional pension plans going the way of the rotary dial phone, many people are offered 401K plans with some employers giving certain contribution matches. Participants should strongly consider raising their contribution percentage until it is maxed out, even if that means just a few dollars a week.

For 2017, the maximum 401K contribution is $18,000 for individuals under the age of 50. For those over the age of 50, the IRS allows an additional $6,000 catch up provision. For IRAs, the maximum contribution is $5,500 for those under 50 with an additional $500 catch up provision for those over 50.

14 – Sell winners

In my Top Financial Tips to Year-End (http://investfortomorrowblog.com/archives/2559), I suggested that investors should hold off selling their winning positions as there was a good chance that capital gains taxes would be cut in 2017. With the calendar turned and a tax cut likely to be seen in the second half of the year, but retroactive to January 1st, investors with taxable gains who were looking to sell in 2016 should now consider selling with the prospect of lower capital gains taxes.

15 – Understand exactly what your health insurance covers

This is not your parents’ old health insurance coverage! There is no more blanket coverage. Deductibles are very high. Copays are high. There is in network, out of network, coinsurance, urgent care, emergency room, etc. With the ObamaCare exchanges failing and premiums skyrocketing, insurance companies are not going to absorb the cost. You are! Don’t wait until your family gets a negative surprise to understand the coverage you have and don’t have.

BONUS – Travel to Europe

It was only 9 years ago when supermodel Gisele Bundchen demanded to be paid in euros instead of dollars. Around that time, it cost $1.60 to buy one euro. I vividly remember doing several media interviews declaring that the euro was peaking and a new, long-term, secular bull market in the dollar was in its infancy. Since Gisele’s embarrassingly poor call, the euro has collapsed from 1.60 to 1.01, or 37%, making travel to mainland Europe the cheapest since 2002 and on its way to becoming even more affordable this decade.

If you need help working through these resolutions or some of your own, please call the office directly at 203.389.3553 or email info@investfortomorrow.com.

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Dow 20,000 on Hold for Now

On Friday the Dow Jones Industrials failed to touch the vaunted 20,000 level, missing by less than a single point. It’s been interesting to watch the media fall over themselves, cheering, pushing and encouraging the Dow to touch 20,000. Frankly, it’s kind of embarrassing. What’s worse has been the pundits who actually believe Dow 20,000 actually means anything. It’s just a number although I guess eclipsing milestone levels does add to the euphoria. For me, it’s been a target I started forecasting in 2010 before the bull market ended.

Anyway, as the Dow failed to hit 20K and fell back during the afternoon, the underpinnings of the stock market were less than impressive. The number of stocks hitting all-time highs receded. The NYSE Advance/Decline Line was actually negative on Friday, showing fewer stocks participating. The Russell 2000 small cap index saw its second straight down day. Market sentiment based on surveys was frothy. This is not the healthiest short-term landscape for a blast higher right here.

Whether stocks hit 20,000 this week or fail, it looks like the market is a bit tired and needs a rest or pullback for a few weeks.

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Santa Came a Callin’ But Who Cares…

The Santa Claus Rally (SCR) has officially ended with the bulls winning by almost 1/2%. That’s supposed to portend positive things for the year ahead. However, as with most Wall Street adages and assumptions, it just stand up to scrutiny when doing the research. First, let’s remember that during most long-term periods, stocks rise at least 2 out of every 3 years, so a permanent kind of tailwind to support the bulls.

As I started to update the stats on the SCR, my friend, Tom McClellan (of Summation Index, Oscillator and newsletter fame), emailed me his findings which I will quote as he rarely makes mistakes. A positive SCR foretells an up year for stocks 68% of the time since 1928. Excluding the Great Depression decade, that figure rises to 74% versus 72% for any random year. Since 1980, an up SCR leads to higher year 80% of the time versus 75% for any random year since 1980.

On the flip side, for those curious, since 1928, the odds of any year being down are 34%, 28% since 1941 and 25% since 1980. A negative SCR has correctly predicted the full year being down, 42% since 1928, 33% since 1941 and 36% since 1980. While the negative SCR correctly called for 2008 to be down, it failed to forecast 2000, 2001 and 2002 being lower.

What seems so powerful on the surface is just barely better than random when looking into the details on the upside and downright poor in predicting a negative year.

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Santa Came a Callin’ & Dow 20K Up Next

While the point totals so far have been more impressive on Tuesday, the market action on Wednesday is more constructive and healthier. We had a quieter opening without emotion. The Russell 2000 and S& P 400 are leading, which runs counter to the trend I pointed out yesterday. The NYSE Advance/Decline Line is much stronger today. Commodities are bouncing back. I was hard pressed to find any sector that behaved well on Tuesday, but the vast majority are today. I said I wasn’t going to discuss leadership and I didn’t!

With the Santa Claus Rally period ending shortly, it looks like Santa definitely did call to Broad & Wall, fending off bears as the adage goes, although I don’t think that really holds water anymore. We have the first five days of January system ending next Monday and an up period supposedly bodes well for the rest of January which would bode well for the entire year. However, I will never believe that people make portfolio decisions based on five random days of the year.

So far in 2017, the bulls have been resilient. I am impressed. Dow 20,000 looks like a hit before the weekend. I still think there is a deeper pullback this month, but it’s hard to fight the strength here.

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Bulls Rockin’ to Start 2017

It looks like the bulls are refreshed and ready to go into 2017 with the bears perhaps still nursing a hangover. Early indications show the Dow Industrials up roughly 150 points this morning which would put them within striking distance of 20,000 this week. I have seen a number of very short-term studies over the weekend which all point to higher prices today and possibly tomorrow based off the weak close to 2017 within the context of a higher December.

HOWEVER, equally as interesting, I also saw what happens when the bulls fail to follow through. That would mean a quick trip below last week’s low en route to the bottom of this little pullback, probably next week or so.

While there are lots and lots of crosscurrents during the first few trading days of the new year, I try not to put too much emphasis on leadership. Rather, I look for historical trends to play out. This year, one strong trend is for small and mid caps to underperform the NASDAQ 100 and S&P 500. Yes, you read that right and it’s exactly the opposite of what is being bandied around the media and internet.

Stocks are supposed to be higher today and likely tomorrow. If the bulls can’t hold on, volatility should expand and the largest pullback since the election will continue. No big deal and the highs are not in yet.

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Well, Well, Well Mr. Bear

Wednesday was definitely an interesting day as opening strength was immediately sold and built upon throughout the day. That behavior is not only out of character for the post-election rally, it certainly is as well for the final few days with prices so extended. Market internals were pretty much as expected for a day like that and the Dow held up much better than the other major indices. Except for gold, sector weakness was across the board. Treasuries got a bid and I am sure somewhere, people will say that it was a flight to quality. I doubt it.

The big question now is, was this a one day wonder and chance for the bulls to buy the dip for a rally into the new Year or has something changed. I don’t have strong conviction on that just yet. I would like to see how stocks close on Thursday. If all is well, the bulls should rock and roll during the afternoon, especially into the close. However, if anticipated early strength is sold and the bears make some noise during the last hour, stocks will likely see their largest pullback since election day, which really isn’t saying very much. One thing I feel strongly about is that stocks should not fall apart from here. Although bears do, bulls don’t die easily.

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Dancing Sugar Plums & Dow 20K

Two days into the Santa Claus Rally and the Dow is up a whopping 26 points. While that doesn’t seem like anything, it’s fairly typical of the final five trading days of the year which often see a mild drift higher before sellers sometimes come in on the final day. Tuesday saw the bulls come right back to work early in the day with thoughts of sugar plums and Dow 20,000 dancing in the heads.

Stock market internals were certainly supportive as advancers overwhelmed decliners by 1400 in the morning and sector leadership was nicely ordered with semis on top. However, by the end of the day, the major indices gave up a good portion of their gains and the NYSE A/D line was up almost 700, half of what it was earlier. If this wasn’t the last week of the year or if we saw Dow 20K, I would be a little more concerned about short-term market fatigue and perhaps I should be. Remember, with capital gains taxes likely to be cut in 2017, I imagine many sellers are holding on to their winners to sell in early January. That’s what I am focused on now.

Over the intermediate-term, almost every sentiment gauge is flashing warning signs that froth is present. That doesn’t mean that stocks are about to fully correct 10%+, but it could mean a multi-month pause in the rally.

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Reagan’s Stock Market Analog Dies

Last month, I offered a price analog to the 1980 election of Ronald Reagan. There were many similarities between 1980 and 2016 as you can see below, including the big correction early in the year and the post-election market celebration. That all ended by Thanksgiving as the 1980 pattern gave back 100% of the rally while the 2016 pattern kept powering ahead.

In the next issue, we will take a look at the other analog from 1991 and 1992 to see how that’s doing. Early indications have it still holding up.

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