Santa Ain’t Messin’ Around

The stock market bottom this week wasn’t as pessimism laden as the one in October,  but it was certainly fun nonetheless! And just like I did in October, I gave readers a few days notice to prepare for the low. Frankly, this was easy.

While it was a slightly soft seasonal time, the market sold off a few percent more than it should have which is part of the reason the rebound has been so robust. December is a haven for strong trends and several collided this week with a focus on Wednesday, Fed day. It was Santa’s turn to propel the market and boy did he deliver with the S&P 500 just a whisker away from all time highs to close the week. Yes, you read that right, ALL TIME HIGHS.

It was only a few days ago when friends, colleagues and pundits were all telling me that the quant models were wrong; bull market was over and stocks were not going to rally like they usually do this time of year. I don’t know; the bears are the ones who look to be the wounded party.

In any case, it was a great three days for the bulls, but now comes the time where I really want to see the Dow, S&P 400, Russell 2000 and Nasdaq 100 step up and grab new highs. If we fast forward to January and these indices are still lagging, I will certainly become concerned.

It was also good to see the high yield (junk) bond sector turn on a dime and take off. This group is vital to the long-term success of the bull market.

On the sector front, the news is less robust with plenty of sectors still not leading like I would like to see. As with the major stock market indices, let’s give them into January to get themselves healthier. Earlier this month, I sold our position in the transportation sector when it stopped rallying as crude oil collapsed. That sector needs to repair itself. Today, I sold half of our long-term position in semiconductors as they went from strong leader to laggard.

Have a good weekend and be safe!

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Santa Claus is Starting to Call… Right on Time

Over the past few weeks as stocks declined I remained firm in my forecast that Santa Claus would pay the markets a visit as he typically does in bull markets. One by one, I heard from people why this year was different, why stocks are already in a bear market, why oil would consume the market. I targeted this week and early next for the low as history suggests and for the rally to begin. Yesterday was also a very strong trend based on the Fed meeting for stocks to rally. Given Wednesday’s very impressive showing, stocks should have seen the bottom.

How will I know if I am wrong? That’s the question I always want to answer before committing client capital which I did this week. In the short-term, stocks should not fall back over the coming few sessions below yesterday’s low. Stocks are supposed to follow through to the upside almost immediately, which I believe they will.

Tax loss selling should have ended and the energy stocks are the best group to confirm this. They look like they are beginning a good bounce into the New Year. Was it THE bottom or just a trading low? It’s too early to tell, but I favor the latter right now.

As I mentioned before, more than 80% of portfolio managers are trailing their benchmarks this year which is why I did not believe the market could experience a large decline into year-end. Managers would use any pullback to commit cash and try and play the catch up game. The recent pullback gave them plenty of opportunities although I doubt they went all in, at least  not yet. Continuation of yesterday’s rally will likely force their hands at higher prices and further fuel the market higher.

We’ll see what today and tomorrow brings for stocks, but stocks are off to a good start thanks to Janet Yellen and the Fed.

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Fed & Yellen on Hot Seat Today

The Federal Open Market Committee (Fed or FOMC) concludes their two day and final meeting of 2014 on Wednesday with their announcement at 2pm and subsequent press conference with Janet Yellen. Interest rates will not be raised. Market watchers will parse the statement to see if Yellen & Co. remove the “considerable time” phrase for low interest rates from the release, signaling that rates may increase sooner than later. Should those words continue in the statement, I would expect stocks to move sharply higher.  As an aside, there is a strong trend in play today indicating that stocks should close solidly in the green.

I have ranted enough over the past 18 months that QE should not have ended and rates should not even be close to rising. The Fed will rue that decision if it’s made in 2015. However, with energy prices collapsing and inflation with it, the Fed could easily use this as cover not to change course anytime soon. It would be the best decision right now without even mentioning how bad Europe and China are presently.

The problem is that we have a divided Fed with the usually wrong Charles Plosser and Richard Fisher having voting power and loud voices. Add Jeff Lacker into the group and you have a triumvirate of policy makers who could not have been any more wrong in 2007 and 2008. Talk about asleep at the switch; these guys actually wanted to raise rates and reduce liquidity as the markets and economy were in collapse. It has been a profitable trade to take the opposite side of these “tenured” bankers.

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Santa Claus Rally Just Around Corner

Big picture. Late October through mid January is the strongest seasonal period to invest in stocks. That’s fact.

Over a similar but slightly different period, the semiconductors are the strongest group to invest in. Just since the October bottom, they are up 27% and I am very glad we own them in our sector program. They made up for some crummy positions we have held during the same time.

Early December shows some slightly negative seasonal headwinds, like we are seeing now. In bull markets, these headwinds usually turn to tailwinds over the coming week.

The much maligned and beaten down Russell 2000 index of small cap stocks has its most favorable period right now through early January, one of the “January Effects”. Tuesday’s wide daily range in the Russell turned the index from breakdown mode to possible breakout mode next week or the week after.

The traditional year-end or Santa Claus rally often seen in bull markets is set up to begin shortly and take the Dow above my longstanding target of 18,000 with the likelihood that small and micro cap stocks finally show some outperformance in an otherwise crummy year for them. I would be concerned and question that scenario if the Russell 2000 closed below Tuesday’s low, roughly 2.5% lower from here.

There are always many crosscurrents in December and this year is no different with most of the market doing well, while the energy sector is under severe pressure. Tax loss selling in energy stocks is supposed to wrap shortly and that group should see at least a reflex rally, regardless of where it is going next year. At the same time, with so many portfolio managers trailing their benchmarks, it’s very difficult for the bears to make any headway until next year. Any 1-3% decline should be quickly gobbled up, especially in the sectors and stocks that have performed the best in 2014.

Like I said, lots of crosscurrents through year-end…

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Feel is not Real

I have been playing golf for the better part of of 40+ years and I have taken my fair share of lessons. I can’t tell you how many times I have commented to my teacher that something “doesn’t feel right” or this “feels weird.” And each and every time the response has been the same; “feel is not real.” If you typically walk with a slight hunch, try walking really tall to understand what I mean. It feels funny, but barely noticeable to the eye.

As you know, I have been an unabashed bull for the past few years and that’s not changing now. I remain positive into 2015 with the chance for much higher prices next year. Over the past few weeks, it certainly “feels” like stocks have seen fresh all-time highs day after day after day. After all, stocks haven’t experienced more than a day’s hiccup since the bottom in mid October.

However, similar to what I mentioned about my golf swing, “feel” may not be real in the market right now. While the Dow Industrials have closed at fresh all-time highs three out of the last four days, the S&P 500, S&P 400, Russell 2000 and Nasdaq 100 have not matched the Dow’s short-term strength. They have been laboring along.

Seasonally, the period from late October through mid January is the most bullish time of the year to be invested, but on a smaller scale, early December has seen a few small potholes. Couple all that with a very solid employment report but tepid market response on Friday and you have a stock market looking a wee bit tired and in need of a little nap.

The healthiest and most bullish response would see the market do nothing for a days or so (essentially staying within a few percent of here) and then gear up for the traditional year-end (Santa Claus) rally. At the same time, we should see tax loss selling, the selling of losing positions for tax purposes like energy, begin to subside.

So while December always offers lots of crosscurrents in the markets, it’s almost always resolves itself to the upside to close the year. And to give the bears their fair share, should they mount an attack that lasts into year-end or the New Year, that would be a complete and total change of character for stocks and cause me to rethink my positive stance.

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The Greatest Financial Experiment Ever

This article is a follow up to emails I received after my segment on CNBC’s Squawk Box last week regarding the unexpected news from Japan. Here is the link. Japan in Recession… Who Cares

Japan has been in the news of late with the unexpectedly poor economic report indicating their economy has fallen back into recession. As I discussed last week on CNBC as well as Yahoo Finance, it really doesn’t matter at this stage. Japan has embarked on the greatest financial experiment of all time and they will just forge ahead with more and more quantitative easing or QE. In layman’s terms, that means the Bank of Japan is printing money to buy assets.

This tactic is not new there nor is it here, but Abenomics as it is referred to after their Prime Minister, Shinzo Abe, takes what our Fed has done and puts it on steroids, to a factor of 10. Abe is committed to printing and printing and then printing some more. And when that’s done, guess what? They will buy more ink and print again.

The Japanese are going to print money until either their economy awakens from its multi-decade slumber or the bond vigilantes push back and force interest rates higher. That’s going to be a big problem for the vigilantes because the Bank of Japan has essentially become the entire government bond market in Japan. It’s often said tongue in cheek, but never fight with the guy who owns his own currency printing press.

The end result in Japan, which is years away, will be fascinating. In a country that does not want or really allow immigration, demographics are so upside down that the youth cannot support the aging population. It has been the most widely predicted and anticipated disaster for decades, but now the rubber is meeting the road, hence the massive QE or money printing.

So far, the biggest mistake the Japanese made was to raise the consumption tax from 5% to 8% in hopes of raising money to combat sharply lower tax receipts. That’s always a tactic that makes me go “hmmmm” with incredulity. Although I am never really in favor of raising taxes, there is a time to do it and a time to certainly not do it. It’s pretty clear that governments should not raise taxes or balance budgets during challenging economic times. That’s when stimulus is needed most. The Abe government shot itself in the foot by allowing political opposition to win the tax increase. They printed money on the one hand and took it away with the other. That’s just plain stupid in my opinion.

News this week out of Japan that phase two of the consumption tax increase has been shelved with the poor economic report. No kidding?!?!

Japan’s economy is in an untenable position. Unless they open their borders or remilitarize, both very unlikely, their hopes to end 25 years of economic malaise rests solely in Abenomics and massive amounts of money printing. The world is watching; history is being made; and economic textbooks will be written on the outcome.

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Holiday Tailwind then Headwind for Stocks

Historically, this is a quiet week for the markets with an upward bias. In other words, stocks usually drift higher without much fanfare. The market looks a little tired, but reaction may have to wait until after the country stuffs itself with food, football and fun. To begin the new week after the holiday, stocks usually experience a headwind where mild weakness is seen. Of course, since early 2012 most of the negatives suggested by history have been thrown out of the window in one of the most powerful bull runs ever.

As you know, my thesis hasn’t really changed in several years. The bull market is old and wrinkly, but still very much alive. Until investors stop selling into each and every single digit pullback and act like the sky is really falling, the bull market should live on. The pattern of investors waiting for a pullback during a strong rally to buy, only to see that decline and sell instead of buy has been commonplace since early 2012. When investors finally start buying any and all weakness as well as strength I will begin to get much more concerned about the end of the bull market.

Last week, I did a full Canaries in the Coal Mine article that indicated some caution flags, but nothing really serious. Since then, stocks have continued to rally, but two of the warning signs have become more severe, high yield bonds and the New York Stock Exchange Advance/Decline line. I don’t take these lightly and will be watching very closely over the coming few weeks. Because markets are in the home stretch for 2014 and so many hedge and mutual funds are trailing their benchmarks, a significant decline is very unlikely as managers will use any slight weakness at all to play the performance catch up game into year-end.

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Dow 20,000 and How We’ll Get There

My longstanding target of Dow 18,000 is now within a day or two reach if the bulls can muster the energy by Thanksgiving. If not, they may to wait until later in December. As you have read for several years, the bull market is old, but alive and should live on until enough people throw in the towel and stop predicting doom and gloom on every single digit pullback. If and when the Dow closes above 18,000 for a week, that will open up the possibility for 20,000 by mid 2015.

Earlier this week, I spent some time with the good folks at Yahoo Finance and my friend, Jeff Macke in particular. I always enjoy creating segments there as they are usually controversial, timely and thought provoking. They also inspire an awful lot of people to send me very “interesting” emails and post “unique” comments on Yahoo about me. Sometimes, I need the skin of a rhino to deal with the personal attacks, but it is what it is.

Dow 20,000 and How We’ll Get There

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Coal Mine Air Still Healthy… Says the Canaries

With stocks soaring to new highs over the past few weeks, it’s a very appropriate time to see how the canaries are faring and if any have died. Remember, the more “dead” canaries, the more likely the bull market will follow suit. This is very long-term analysis and not helpful for much other than end of bull market warnings.
Let’s start with the Dow Industrials below and it’s great to see a clear and decisive all-time high right now, coming on the heels of a false move in October that breached the levels we saw in August. This fake out caught a lot of investors off guard, which has been and is causing them to scramble to buy at higher levels, making me very happy!
The S&P 500 is below and it looks exactly like the Dow Jones Industrials above. So far, we have two very alive canaries.
The first caution sign comes with the S&P 400 mid caps below. They peaked on the left hand side of the chart back in June and continue to see lower highs and lower lows. That is not the definition of healthy. However, they are only a few percent away from all-time highs, which would negate this warning, something I do think will happen shortly.
The small cap Russell 2000 is next and there clearly has been a problem since late June with a 14% total decline that has not fully recovered. A 5% rally would cure this problem, but that’s not as easy as the S&P 400 has it. I won’t label this a “dead canary”, but it’s certainly one with breathing problems.
Let’s turn to the technology laden NASDAQ 100 where you can see “all systems go” with fresh highs right now. This index looks like it’s wound up and ready to move sharply higher before long, even if it sees some minor weakness first.
Summarizing the major stock market indices above, for a 5+ year old bull market, they look surprisingly spry!
The Dow Transports are next and they look exactly like the Dow Industrials and S&P 500 with fresh all-time highs right now.
Turning to the two “key” sectors we watch, banks are only a few percent from fresh highs and they should get there before long after frustrating me over the past year or so with their inability to lead during rallies.
Semiconductors are below and this is one area I have always viewed as critical for the long-term health of a bull market. Historically, as go the semis, so goes tech. And as goes tech so goes the broad stock market. Semis peaked in September and now reside a few percent below that peak. They looks strongly positioned to see fresh highs before long.
Below you can see the cumulative New York Stock Exchange advance/decline line which is a fancy word for how all of the stocks on the NYSE are behaving in sum total, not just the biggest ones. Almost every single bull market dies after a warning from this indicator. What we want to see is the chart below looking like the Dow and S&P 500 which it is not right now. The line below MUST make a fresh high in order to avoid killing a very important canary. It’s not that far away, but action this week has also not been positive.
High yield or junk bonds are another very important canary and they are next below. Because junk bonds feel every ripple in the liquidity stream, economic weakness often manifests itself in this group first. High yield bonds usually “die” long before the bull market does so it’s often a very telling sign in advance. Keep in mind, however, that this group also gives false warning signs like it did when then Fed Chair Ben Bernanke caused the “Taper Tantrum” in May 2013.Right now, junk bonds are not at fresh highs, but close enough to correct before long. My concern is that since mid October this group has only upticked when stocks experienced very strong days. Normal or healthier behavior would see high yield add a little here and there on a daily basis during stock market rallies.
For a 5+ year old bull market, the canaries remain alive and mostly well, which fits into my own scenario for the bull to live on into 2015 with Dow 18,000 next on the list. Once 18,000 is reached, possible scenarios open up for 20,000, 23,000 and even higher. But let’s take one hurdle at a time and manage this in the present.
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Even My Bullish Forecast Wasn’t Bullish Enough

Three weeks ago as the stock market was being labeled as “in collapse”, I wrote about the bottom being formed and offered two scenarios for the market to follow. Of course, both scenarios were generally bullish, each ending at new highs, but the length of time varied. Below you can see that same chart updated with market action over the last three weeks.

 In short, the stock market responded even more bullishly than my very bullish forecast with all time highs being achieved in a matter of weeks from what was being called “the end of the bull market” and a “total game changer of a decline”.

Today, the Dow, S&P 500 and Nasdaq 100 are behaving very well with fresh highs occurring on an almost daily basis. The S&P 400 and Russell 2000, however, are lagging and need to step up sooner than later or risk will once again grow for a 4-8% pullback.

As I have said ad nauseum for several years, the bull market remains alive. It is old by historical standards, but bull markets do not die from old age. They die from a host of other factors, usually including mistakes made.

When you see a vertical rally like what’s been happening since mid October with so many caught off guard, some profit taking is naturally to be expected. However, with so many on the outside looking in, especially with the sprint to year-end, any weakness should be temporary and short-lived. Until proven otherwise, dips are buying opportunities.

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