Yet ANOTHER Potential Low

For the second time in a week, stocks are trying to hammer out at least a trading low. Market action has not been good this whole quarter, but lately it has become so bad that it could be approaching washed out. February’s decline isn’t surprising given that down 5% months like we had in January typically lead to another lower month, but it has been on the ugly side for the bulls.

It now looks like the major indices have revisited or retested the internal or momentum low seen in January. Whether that’s successful or not remains to be seen. Stocks need to close above their February highs to signal a stronger and longer lasting rally and those levels are a good 5% higher. I mentioned before that if the major indices retest their January bottom too soon (I was looking for March) it may not create a stable enough base for a good rally to develop. Think of this like standing in a windstorm. If you are feet are close together, your base is narrow and you will be more easily blown over. However, if you widen your stance, you have better support and will be able to stand firmer for longer. That’s how the market operate after a decline. They a firm foundation.

On the sector front, I am not seeing “healthy” leadership from semis, banks and discretionary. Utilities and staples are leading with transports, materials and industrials in the early stages. That needs to change if any rally is going to last.

Bonds and gold have been the big beneficiaries of the decline in stocks and both have gone vertical of late in a supposed “flight to quality”. That is debatable. Both look like they peaked on Thursday and should see some short-term weakness or digestion before heading higher if that’s their ultimate path. Gold itself saw massive volume this week in what I see as a buying panic. Historically, that has spelled the end of the rally in most cases. However, if the gold bugs can fight off the bears and keep gold from declining over the next week or so, this could end up being one of the rare cases where strength begets strength. We’ll see and for now, I am favoring the former until proven otherwise.

Along with bonds and gold, the Japanese Yen has also gone vertical in what must make the Bank of Japan central bankers apoplectic after they kind of, sort of went to negative interest rates. Crude oil is really trying to bottom here, but I would rather see it start to go up on bad news than just see these short-term spikes on rumors of OPEC productions cuts.

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Another Potential Low

The major stock indices took it on the chin to begin the new week, following through from Friday’s decline. Coming in to the week, I said that unlike the previous week, it was now time for the bulls to take a stand. If they didn’t then a full re-test of the January low was likely up next, something that makes me a little uncomfortable because it shouldn’t be this quick. Should this test fail and the S&P 500 close below 2015’s low, it would open up a new scenario of very sharp and fierce trap door selling.

For most of Monday’s trading, the bears were firmly in control and it was on the verge of getting ugly. The last two hours saw the bulls roaring in to close the indices well off their lows. Monday’s lows were not uniform as the Russell 2000 and NASDAQ 100 exceeded January while the Dow, S&P 500 and S&P 400 did not. Once again, we have another opportunity to see at least a trading low. For that to happen the bulls need to defend this week’s low and make some upside progress by the end of the week.

Sentiment is once again cycling back towards overly pessimistic and the new COT data on small speculators has reached levels where good rallies have developed. It has been a solid indicator with the exception of 2008.

On the sector front, transports have gone from laggard to leader, but it’s not time to celebrate that just yet. Banks, semis and discretionary are still not acting well and that needs to change. Staples, industrials, materials and energy have become leaders, but those are typically not the groups in healthy rallies.

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Panic Buying Seen Off January Low… Will It Matter???

On January 22nd and January 29th, an extremely rare occurrence was seen in the stock market; something that had only happened 9 times since 1971. Over a span of five days, there were two days where 90% of the trading volume on the New York Stock Exchange took place in stocks that were up on the day.

90% volume days are nothing new to analysts. They have been watched since the days of Jesse Livermore in the 1920s. However, two so close together is a rare feat and something that should be watched very closely. Pre-2007, these events, most commonly known as breadth volume thrusts, were as rare as a pink rhino and always led to a new or refreshed bull market. Starting in 2007, however, these events have been seen roughly once every year and a half and their behavior has changed somewhat.

What changed?

In July 2007, the SEC eliminated the uptick rule which had been in place since the 1930s to prevent short sellers from piling on a stock that was accelerating to the downside. (Short selling is the exact opposite of buying. One sells a stock they technically do not own in hopes of buying it back at lower prices.)

On the surface, I would have thought that these events would occur more frequently after the SEC eliminated trading stocks in fractions in 2001 and went to full decimalization. This change basically eliminated stocks closing unchanged on the day. Upon deeper analysis, the real culprit beginning in 2007 after the uptick rule was eliminated was the much maligned algorithmic or high frequency trading. This acutely hyper and ultra short-term computer driven trading exacerbates moves, especially on the most lopsided trading days which just happen to be on the days in question.

Getting back to the original topic at hand, the breadth volume thrust, let’s dive in to the previous 9 occurrences to see similarities and differences. In 1971, it hit as stocks emerged from a bear market and never looked back over the ensuing few quarters. The drawdown or paper loss was 0.

It took 11 years for the next thrust to appear in 1982, again as a new bull market was launching. As with 1971, the market never looked back and there was not any drawdown seen.

Two years later in 1984, there was another thrust as stocks were emerging from a bear market. As with the previous two occurrences, stocks just powered ahead without any paper loss at all.

January 1987 was next and that makes it four for four with stocks never looking back although this time, the market wasn’t emerging from a bear market. A subtle change took place.

During the entire, historic bull market of the 1990s, there was not a single thrust. Not after the 1990 bottom nor the 1998 one. Even coming out of the 2000-2002 bear market, there were no thrusts. It wasn’t until the uptick rule was eliminated in July 2007 did we see another thrust. This one occurred after a routine 10% correction in stocks.

Unlike all previous thrusts, stocks saw what I will call an immediate pullback or quick bout of weakness. Additionally, stocks did see a drawdown or paper loss over the following few quarters. In this case, it was 13.57% and the thrust turned out to be a failure in hindsight after stocks rolled over for good in May 2008.

A little more than year later in November 2008, another thrust took place. I vividly remember this one as it looked to me like stocks were finally bottoming. It was the perfect thrust like we saw in the 1980s, or so I thought. But as with 2007, stocks saw the immediate pullback before heading higher over the short-term. Additionally, the maximum paper loss was a painful 23% over the next quarter.

After the Flash Crash in early May 2010, the breadth volume thrust hit again. And as we saw with all thrusts since the SEC eliminated the uptick rule in 2007, there was an immediate pullback and stocks did not run away. There was also a 7.34% drawdown before the bulls were handsomely rewarded.

Following an almost 20% waterfall decline during the summer of 2011, the thrust was seen again in August. As with the previous three cases, there was an immediate pullback and stocks did not run away unfettered. Bulls also had to tolerate a modest 6.23% drawdown before being hugely rewarded.

Finally, in 2012 after a less than 10% decline, a thrust hit in very timely manner and stocks never looked back, nor was there an immediate pullback.

This brings us to 2016 and the current thrust, which occurred after an almost 15% correction in stocks. On the surface, this reminds me most of 2011 so far. With stocks declining on Tuesday, the immediate pullback scenario looks to be in play, but it’s too early to tell what kind of drawdown may be seen. If 2011 continues to play out, there should be some modest upside shortly, followed by the drawdown and then a better rally.

What was an ironclad, close your eyes and back up the truck buy signal has morphed as the markets have evolved. Clearly, the elimination of the uptick rule and proliferation of computer driven, algorithmic trading has reduced the immediate effectiveness of the the breadth volume thrust. However, it should still be followed closely with the post 2006 behavior being the new norm.

As I was writing this article, an email came in from Rob Hanna who runs Quantifiable Edges newsletter with the same research thought. Thanks Rob, as always, for sharing!

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Stocks Continue to Dance Just Like 2008

On January 21st, I put out this piece calling for the internal or momentum low. That was the bottom where stocks stopped going down in accelerated fashion and the majority of the damage was done. Typically, that’s not the low where the strong rally begins. That’s later. In this case, from a low in March and then into Q2.$marts20160121.pdf

I know I have beaten the proverbial dead horse when I say that 2016 looks nothing like 2008 from an economic or fundamental point of view. I don’t see any reasonable chance that the markets in general behave anywhere close to the way they in 2008.

The only valid similarity has been a price analog that I began discussing in early January. Price analogs have been used for decades, across countries, asset classes, etc. Eventually, every single one of them breaks apart.

With that in mind, let’s update the price chart for the S&P 500 from 2008 and 2016 through today.

In 2008, as I have mentioned before, stocks declined right out of the gate, but really just continued a correction that began in late 2007 as you can see below. Prices really accelerated lower into MLK weekend and bottomed when the markets reopened on Tuesday. From the low, there was an 8 day rally to relieve the very oversold nature of the market.

2016 has also seen selling right from the start, but really just continuing the correction that began in late 2015. Selling was strong into the MLK weekend and stocks bottomed on the Tuesday after. Just like with 2008, the initial rally lasted 8 days.

IF the price analog continues, stocks should see a secondary low later this week and embark on another rally towards Monday’s peak. Remember, again, that eventually ALL analogs diverge and knowing when is the key!

In summary, while this comparison looks really nice on a chart, it’s also something I have written about before from other analysis I have done. I keep referring to March as the time when the stock market should begin the real rally, where the January bottom was when the majority of the damage would end and stocks would stop going down. It’s also a presidential election year and Q1 bottoms are also typically seen in March.

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What Would Ray Dalio Say Now?

All I heard Friday was how “surprised” everyone was with the magnitude of the rally. If people were paying attention, it was anything but a shock. I spoke about the internal or momentum low being hammered in the very day it happened and regardless of what it would lead to, stocks had to rally first. And rally they have!

Friday’s activity saw the second 90% up day in volume over a one week span. Historically, that has been very bullish, even during bear markets. Bears should not discount that buying thrust just yet. All I heard as stocks were bottoming was that everyone should “sell the rally”. Well, my bearish friends; you got that opportunity but you have been noticeably quiet of late.

The bulls put in one heck of a show late last week in the face of weaker than expected economic news. Heading in to the new week, the bears really need to step up early and make some noise. The longer the bulls can hang on and keep the major indices from giving back Friday’s gain, the more likely we will see another strong move higher. Pausing to digest is fine and expected, but not much more, 1900 ish on the S&P 500.

After a low, the most beaten down tend to rally the hardest before real leadership emerges. From a chart and trend point of view, staples and utilities appear to be the healthiest and that’s not exactly the type of leaders we want to see. That reminds me of 2000. But it’s still early.

Treasury bonds also partied with stocks, something we haven’t seen in a while coming out of a bottom. Famed hedge fund investor, Ray Dalio from Bridgewater, who is often dour, commented that with stocks and bonds both declining, that looks depressionary. I wonder if that means explosive expansion with stocks and bonds both rallying lately?!?!

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2016 Continues to Look Like 2008

Several weeks ago when I was ranting how 2016 looks nothing like 2008, 2016 not a 2008 Redux and later The One Comp to 2008 that Does Hold Water I compared the January 2008 period to that of 2016. It’s a comp that continues to make the rounds so here it is updated, yet again.

2016 2008

If this comp continues to work, which they seldom do to fruition, here’s what’s coming next.


Remember, the January 2008 decline was 20% all in and 2016 was roughly half that if you are looking to forecast the magnitude of the current rally.

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Will the Doves Assume Control of the Fed Today?

It doesn’t even feel like the world has recovered from the hangover left by Janet Yellen and the Fed after their ill-fated and poorly timed December interest rate hike, but now, it’s FOMC announcement day again. However, unlike December when a rate increase was widely expected, the Fed is not going to take any action today.

The Fed’s post-announcement commentary is what everyone will sink their teeth into for clues of future rate hikes or the committee’s possible move back to the dovish side. With stocks correcting sharply in January along with the global economic uncertainty, it’s very hard to believe that the hawks will win out today in any way, shape or form. Given the Fed’s hints at four interest rate increases in 2016 and the markets only pricing in one or two rate hikes, it will be interesting to see how that gap is bridged.

As with previous announcement days, the model for today is plus or minus 0.50% for the S&P 500 until 2pm before a few sharp moves are made and then a rally into the close. That’s the historical trend 75% of the time.

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Internal Bottom Confirmed but Volatility FAR from Over

Last week I wrote about the internal or momentum low being put in on Wednesday. Thursday’s action was essentially a stand off between the bulls and bears although the bulls had to be pleased that stocks stopped going down. Friday was the big point gainer for the bulls, but there wasn’t much upside after the big gap opening.

Assuming I remain correct in my assessment of the bottom, stocks usually see a day or two of red before exceeding Friday’s high this week. From there, we are supposed to see more upside lasting at least a few weeks or more into a trading peak in February before another decline sets in. The beginnings of these rallies are littered with the most beaten down names running the hardest as short covering initially causes the move. Real leadership takes some time to develop so don’t prematurely hop on the former losers as new leaders.

Stocks are going to stay volatile for another 4-6 weeks. Buying weakness and selling strength is the strategy I most want to follow until the markets settle down. Stay nimble and don’t be stubborn. I am not loving the action in the financials, industrials and materials, while healthcare,  biotech, staples and  REITs behave better. The next few weeks are also going to be an important period for high yield (junk) bonds to make a stand. I continue to believe that this key canary in the coal mine sees a major bottom in 2016.

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Internal or Momentum Bottom Being Hammered In

Stocks continue to be very volatile, one of the primary casualties of higher interest rates, but certainly from the dislocations in the energy market, which has seen an epic and historic collapse. I imagine that the large oil-based sovereign wealth funds in Norway, Saudi Arabia, Kuwait and Qatar have been massive sellers of global equities this month to continue to fund their social programs in the face of imploding energy prices.

The relentless and indiscriminate selling has all the hallmarks of push button forced selling and not the selling with keeping market impact small. Since the mid 2000s, I have often heard that when the Middle East funds want out, it’s immediate and not over time.

The crash in energy prices has also wreaked havoc on many inter-market relationships, causing all sorts of market-related issues this month. It has been a very ugly few weeks for the bulls.

For the past two weeks, I have pounded the table that this is absolutely not a repeat of 2008. I won’t rehash the comments, but you can view here if you like along with a valid price comparison from 2008.$marts20160119.pdf

What totally astonishes me is how the masses have completely abandoned stocks to the likes of which have only been seen a handful of times in history and mostly at either major bottoms or significant intermediate-term lows. I am used to seeing the “buy the dip” crowd out in force on CNBC and Fox Business during market corrections. But not this time. It seems like everyone is advising to sell the rally now.

In my 26 years in the business, I have survived two 50%+ multi-year bear markets and a whole of 20%+ declines. Never before have I had so many calls, emails and request for meetings from clients who have been shaken to the core by the headlines. That is shocking to me. Stocks are down a little more than 10%, but investors have emotions like they did in the middle of the financial crisis.

In my view, not only is this absolutely not the time to withdraw money from stocks, I believe we are approaching an opportune time to add money and perhaps take on a little more risk. It’s very hard to understand why folks are so focused on taking losses and standing aside. Stocks were down more last August, a lot more in 2011 and more in 2010. Each time led to a robust recovery.

What has the masses so spooked this time?

During these types of periods, I often suggest that if the volatility becomes too much, then lowering portfolio risk over time is a better strategy. Investing is a marathon not a sprint, but the desire to accept the ups and downs changes over time. I never like to move my own portfolio around during periods of outsized returns on the upside or downside. Rather, I like to wait until the environment is calmer and I can proactive not reactive.

Wednesday has the potential to be a key day for the stock market. There is a decent likelihood that an internal or momentum low was just seen as the relentless selling wave hit extreme panic and capitulatory levels. Internal lows are when the majority of stocks have seen their maximum damage. It’s when selling is the harshest. The maximum pain threshold for investors.

We will know more definitively in a few days.

If I am right, it doesn’t mean stocks are out of the woods and new highs will following next month. Rather, the markets should bounce and decline a few times, but the downside should be limited as a foundation is built for a stronger rally later this quarter and into April.

And if I am wrong?

I still do not believe now is the time to sell. That’s crazy in my opinion. At some point sooner than later, stocks will bounce and for those who just cannot stand the pain anymore, there will be a better opportunity to exit.

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Tuesday’s Binary Outcome

On Friday, we finally had the “puke” opening. There was some panic, desperation and despondency. In the “fight or flight” debate, there were more than a few investors taking to the skies! Given the very heightened volatility, Tuesday’s trading should not be quiet. Rather, the stock market should see another large move. Scenario A has the bulls putting up a real stand right from the opening, perhaps an old fashioned “gap and go” snap back rally. On the other end of the spectrum, Scenario B would look similar to August 24 where stocks see a mini-crash. I don’t see much in between which is why I used the word “binary” in the title.

Why way will stocks go?

It’s not exactly a coin flip, but the evidence is not overwhelming either. There were a few lights at the end of the tunnel on Friday for the bulls. The most beaten down indices, Russell 2000 and S&P 400, closed down much less than  the Dow, S&P and NASDAQ, a clear break from the meat of the decline. Additionally, both laggard indices closed Friday significantly higher than where they opened, another possible sign of at least a short-term trend change. Biotech, energy, utilities and healthcare sectors all did not make news lows on Friday, a definite change in the relentless, indiscriminate selling of the past two weeks.

Tuesday is yet another one of those “key” days for the bulls. Let’s see if they can stem the tide and mount a little offensive of their own.

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