Trump, Merkel & Tech

Stocks begin the week with a mixed bag of news. President Trump made for a rough weekend with his comments regarding the NFL and player protests as well as saber rattling with North Korea. In Europe, Angela Merkel’s party won the election for the fourth time and she is the presumptive Chancellor yet again. For two years, I have been calling the German election the single biggest geopolitical event since the Maastricht Treaty was signed in 1999, officially creating the Euro currency.

Whether Merkel won or not wasn’t the real story. A loss would have sent markets into a tailspin and hastened a frightful collapse of the Euro currency and Eurozone. A victory doesn’t change the final outcome which will be ugly and awful; it just prolongs it with death by 1000 paper cuts. The Euro currency remains doomed as does the Eurozone. It’s just going to take longer to get there. While you may breathe a sigh of relief, it also means that it’s going to take a lot longer to have a fertile ground in Europe for real, sustainable economic growth to compete with the U.S. and Asia.

Turning to our markets, technology has been stutter stepping and finally looks to be falling under its own weight. While Apple is looking more and more oversold and ready for a bounce, Facebook, Amazon and Netflix have a ways to go. Markets are also in a seasonally weak period for another month with the teeth of that negativity just around the corner.

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***Special Fed Day Alert. No Rate Hike But Changes to Balances Sheet Announced***

Behavior Models for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Seven meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM.
The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 80%+, however with the Dow up 8 straight days, the bulls exhausted a lot of energy and that trend’s power has been muted significantly to less than 50%. That’s not exactly the kind of trend worth trading.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

No Rate Hike But Balance Sheet Taper…

The good news is that short-term interest rates will not be moving higher at 2:00 PM. That will likely happen at the December meeting. The bad news is that Janet Yellen is going to formally announce the Fed’s plan to begin to reduce its $4.47 trillion balance sheet of treasury and mortgage backed securities. No one will be surprised with that announcement. I say it’s bad news because the economy is finally starting to show some better growth and I have my doubts whether that will be sustainable with even tighter monetary conditions.
Regarding Yellen’s plan, I expect the Fed to cease the reinvestment of certain instruments, if not all, to the tune of $300 to $500 billion a year. On a $4 trillion account, that doesn’t seem like a lot of money but it certainly is in absolute terms. Yellen has also stated publicly that she does not expect a return to its pre-crisis $900 billion, all treasury bill balance for the foreseeable future.
Velocity of Money Still Collapsing

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money was, is and will continue collapsing. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.
This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will  not fully recover and function normally until money velocity rallies.
It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one calls the Fed out on this and certainly not Yellen at her quarterly press conference.

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Semis Breaking Out But Some Concern Out There

Stocks begin the new week on decent footing yet I remain of the belief that strength is a better selling opportunity than a buying one for now. While the underpinnings are not suggestive of recession, bear market nor 10%+ stock market correction, I continue to see evidence that a mid single digit pullback may be in the cards over the next 6 weeks. It’s also the single weakest of the year based on history. This one single week performs more poorly than any other according to data miner Rob Hanna of Quantifiable Edges, always a great read.

From a price standpoint, the Dow and Russell 2000 are the leading indices, but the others are not far behind. I do expect every major index to see new highs by year-end. The tech-laden NASDAQ 100 which is totally dominated by the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks had been the market’s big leader, but ceded way this quarter. On the right side of the chart, you can see the index trading between those light blue lines. In other words, it’s becoming coiled up for a big move. At this point, the direction of that move is not clear although more than 50% of the time, it’s in the same direction as the previous trend.

I have written much about the semis lately and how they have shouldered the leadership burden all quarter. Today, the group has broken out to new highs where the grouping of sell orders is more difficult. It will be very, very important to watch how this sector performs over the coming week. Giving much back in here will not bode well for stocks, especially tech.

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Semis Strong, Shouldering the Burden. Other Sectors Stepping Up.

The stock market continues to quietly drift higher, at least on the surface. The Dow, S&P 500 and NASDAQ 100 have seen new highs this week while the S&P 400 and Russell 2000 look constructive but still well below their peaks. I do expect them to play catch up and see blue skies before any meaningful downside is seen.

I wrote about the banks earlier this week as being a concern. Discretionary is a bit stronger but also not firing on all cylinders. Transports have rallied strongly and seem poised for new highs. Semis, as I wrote about before, have shouldered most of the leadership burden and are just shy of new highs. That’s been an impressive run and I don’t think it’s over.

Outside the key sector group, I see some really encouraging behavior by healthcare, biotech, industrials, materials and energy. While some analysts question market participation, this behavior counters that argument. Furthermore, although the percentage of stocks above their long-term trend (200 day moving average remains in a downtrend as you can see in the first chart, the second one is a longtime favorite, the NYSE Advance/Decline Line. For me, the latter is a better representation of what’s going on beneath the surface.

Here’s the bottom line. While the stock market is not without short-term concerns and I am still looking for some weakness next month, the majority of the key indicators are in good shape. Bull markets do not end with behavior like we are currently seeing.

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Banks Warning, Hold Key to Bull Market

Since late July I have been in the camp looking for a trading range with a mild/modest pullback. I remain of that opinion today. Should stocks gather themselves and score fresh new highs this month, I think it will be a good opportunity for the  nimble  to sell for a modest move lower into October. All along, I have written about a mid single digit pullback and that’s still my target. I do not believe we will see a 10%+ decline and certainly, the bull market is not over.
I am not going to rehash my rationale for why a trading range/pullback and why so modest right here, but I do want to add color to a previous concern, the banks. As you know, the banks/financials are one of my four key sectors to a bull market’s health. The others being semiconductors, consumer discretionary and transports.
Remember that the banks peaked in February 2007, long before the stock market did in October as you can see below. A 2 1/2 year, 50%+ debacle followed suit.

Before the Dotcom Bubble burst in 2000, the banks double topped in July 1998 and April 1999 before the bull market ended in March 2000. A 50%, 2 1/2 year collapse ensued.

Last week, the banks were at their lowest level in three months while the S&P 500 was one good day from all-time highs. That’s not exactly healthy behavior and can lead to some kind of trouble for stocks. Additionally, the banks had also sunk below their long-term trend, more popularly know as the average price of the last 200 days (200 day moving average). However, let’s also remember that not all poor behavior by the banks leads to a 50% or even a 20% stock market decline.
As the new week began and Hurricane Irma’s ferocity did not cause the damage expected and certainly not the worst case scenario, stocks opened with a relief rally that ended up powering higher all day. The banks were a leader. This morning, as I type this, banks are once again leading and have rallied right back to the pink line or their long-term trend, giving a sigh of relief to the bulls. You can see that important chart below.
However, nothing has changed fundamentally, not a single thing, or really technically for that matter. And the Fed is still slated to announce their balance sheet taper plan next week with the likelihood of one more rate hike in December. Bank earnings are unlikely to accelerate from here. The economy’s output has improved as I have been writing about all year, but a recession still looms in President Trump’s term.
The three month low does not look the a low of significance or not the ultimate bottom. It appears to be just a spot for a bounce before moving lower. It will be interesting to see how price behaves now that it has bounced. Bulls really want to see the group close above the pink line below (long-term trend) for a week straight. Failure to do so will likely result in the pink line beginning to trend down with price beneath it. That’s a bad set up. Also, the price lows for 2017 are at the blue line, another line in the sand the keep a close eye on.
The final area of the chart above I want to point out is the far right side where I have red and green lines with question marks. I am being the master of the obvious to say the banks can go in either direction, but I really do think there is a binary outcome from here although it isn’t likely to be in straight line fashion. I just don’t see the sector staying in that trading range. It’s either going to breakout to the upside or breakdown. The next few days and weeks are likely key although a massive breakout of significance will oftentimes begin as a fake out in the opposite direction first.

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Remembering 9-11

September 11th seems to sneak up on me each year. With summer vacation, kids going back to school, Labor Day and the start of the NFL season, it feels like I wake up and realize 9-11 is either the next day or very close by. We all remember where we were and what we did on September 11th, 2001. I was sitting in my office and saw the World Trade Center on TV with the media reporting that a plane had it one of the towers. I kept thinking that didn’t make sense. Where was the little plane? Who ever could have thought that it was a huge jet. I kept wondering why the camera didn’t show the ground where this supposed plane would be in bits and pieces.

Teri & I were engaged at that point and we vividly remember exchanging AOL emails on what we thought was just a little “accident”. The stock market index futures were selling off after the news broke. I thought, “what a great buying opportunity”! I mean, why would people sell stocks because a little Cessna plane had accidentally flown into one of the towers.

Then the second plane hit and people immediately had footage. I remember standing in my office in disbelief. Speechless. Shock. I had friends in the WTC.

As the day continued to unfold, people in my office park kept coming in to my office as we were the only ones with TV. I think everyone felt comforted to be surrounded by others. “I can’t believe this” became the refrain of the day. Over and over and over.

I later learned that I lost my childhood and high school friend, Chris Murphy, along with a college fraternity brother, Charlie Dolan, whom I did not know well. We all lost someone directly or indirectly.  The stories began to pour out of those who were supposed to be in the WTC that morning or who turned around because something else happened. My good friend Alison got out of the taxi a little before 8:30am on that day for work in front of the towers.  She realized she forgot important work at home and turned right around and headed back to her apartment. She was one of the lucky ones. Her boyfriend worked for Cantor Fitzgerald and he was tragically not.

In my travels over the years, I have met a number of people who got out. They talk about being covered is dust and debris, struggling to breathe and running for their lives. Few went back to work in New York City. All were profoundly changed forever.

One thing the terrorists miscalculated, the American spirit and resolve. This unspeakable attack brought the country together like hadn’t been seen in many decades. No one was prepared to let evil win.

Never forget…

In remembrance of those who perished at the cowardly hands of murderers, we will be donating what amounts to today’s firm profits to a fund for the benefit of those families directly impacted.

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The Misconception About September’s Ire

Academics and the media do a pretty good job of warning the investing public of September’s historically poor performance. In fact, many investors become alarmed each year as August comes to an end and the various dire studies are paraded around. After all, since 1928, September is by far the worst month of the year with an average return of -1.1%. 39 have been up while 49 have been down. The other 11 months are basically flat or up with all showing more ups than downs.

HOWEVER

Most analysts stop right there and find no need to dig any deeper. After all, September is factually proven to be the worst month and investors should proceed with caution. But do those 39 months where the month is up have anything in common? How about those 49 down months?

With some help from Oppenheimer & Co., I went back and found that much of September’s negativity is dependent upon the position of price as the month begins. You can essentially use any long-term trend here to determine that. In this case, I looked at the 150 and 250 moving averages and Oppenheimer used the 200 day moving average. There is nothing magical about any of the numbers.

When September begins with the S&P 500 trading higher than its long-term average (trend), the month turns a negative 1% performance into a plus .50% performance which is very average. Stop and reread that again. When stocks were generally in an uptrend, September’s nasty bite was gone.

Since the bull market began, here is how Septembers have fared when beginning in an uptrend.

2009 – up

2012 – up

2013 – up

2014 – down

2016 –  even

Looking at September a different way, let’s take a look at Septembers the year after a presidential election.

2013 – up

2009 – up

2005 – up

2001 – down

1997 – up

1993 – down

1993 was the only down month which also began above its long-term trend. In other words, a failure in terms of the studies. 2001 was a large loss of 8%, obviously exacerbated significantly by 9-11. The other down months were relatively mild.

While the masses often fret about September, a closer look reveals that all Septembers are not created equal. September 2017 began with the S&P 500 in an uptrend.

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Small Caps, Semis & Junk Leading. Banks Looking Sick

Stocks ended last week on firm footing as the bounce saw four nice days. With more North Korea tensions in the air, it will be interesting to see if the stock market finally cares or just uses this as an excuse to open mildly lower. Very quietly as I have mentioned before, the Russell 2000 has been leading the major indices. That does have bullish implications if it holds on.

Additionally, the semis which have been the only key sector leading, are one strong day from new highs.

One sector that has me particularly concerned is the banks. They look sick. While that isn’t likely to have a short-term impact, it’s something that must be watched over the intermediate and long-term.

Turning to my favorite canary in the coal mine, high yield bonds are behaving more like semis than banks, trading just one good day from new highs. It would make me feel a whole lot better if this key group can score new highs before rolling over again.

Once again, we have a number of crosscurrents. If stocks gather themselves and rally, I think there will be a good opportunity to sell at new highs. Should stocks rollover first, I will become more concerned about the downside. In either case, I do not think stocks are blasting off higher until next quarter.

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Crosscurrents Abound. Enough for Bulls & Bears

Stocks continue the bounce they began two weeks ago and the same one I have been discussing. Tuesday was the day where the acceleration started. That could be slowing today. The NASDAQ 100 sits an all-time high but it’s lonely up there. The Dow and S&P 500 are within striking distance but the ever improving S&P 400 and Russell 2000 are not close. With the monthly jobs report out this morning, any strength will create a little short-term headwind for stocks into next week.

Speaking of the employment report, it was a little weaker than expected and last month was revised down a bit. This data will be very important to watch for signs of a possible peak. Topping out this year could put us on recession watch sometime in 2018 if the Fed doesn’t pull back their tightening cycle.

I have been writing about the importance of the semis to put the market on its back and lead as it’s the only key sector that is strong right now. This group is now within a good day or so of new highs, chalking one up for the bulls. On the flip side, discretionary, banks and transports are nowhere near that strong, creating a vacuum of good leadership. Healthcare and biotech are cranking at new highs, but those are not usually the sectors that can lead a new leg in an old bull market.

On the flip side of the flip side, high yield bonds have quietly been strong for two weeks and doing their best to recoup Q2 damage and remove themselves from being a concern. Basically, we have lots of crosscurrents right now. Let’s see if the NYSE Advance/Decline Line can make a new high.

If you missed my segment on ABC in CT yesterday regarding market reaction to Harvey, here it is.

Analyzing stock market behavior after disasters

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Q2 GDP Baby. Stocks Like It!

This morning, the government reported that the “second look” at Q2 GDP grew by 3%, higher than the original 2.6% first reported. 3% is even higher than any of my most bullish models and it continues to show that the US economy is re-accelerating higher this year.I would love to hear from all those people who challenged my bullish view of the economy or called me out Twitter. They kept telling me that 3% was a pipe dream.

My theme all year has been reality over rhetoric and this epitomizes it. You can call it coincidence. You can credit Trump or Congress or the global central banks. I would say it’s probably all of the above. The fact is that the economy is doing better than at any time over the past three years and should continue to improve with some slight adjustments and volatility from Hurricane Harvey.

Stocks opened sharply lower on Wednesday after North Korea fired a missile over Japan. However, by the end of the day, the bulls stepped up and regained all that was lost and then some. While I still believe stocks are in an intermediate-term trading range, short-term action is certainly strong and the rally that began at the open on Wednesday should continue. With banks, transports and discretionary still not leading, the rally may very well rest its hopes on the semis. Let’s see if they can score a new high for this quarter and possibly challenge their 2017 highs. That’s a stretch, but don’t count them out.

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