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.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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.
If you would like to be notified by email when a new post is made here, please sign up, HERE.

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.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

Dow Theory Trend Change… Again

Last week, I wrote an article explaining how traditional Dow Theory worked, at least the way I learned that it worked. In that piece, Dow Theory confirmed a trend change to the negative side. While describing what transpired to give this warning, I also wrote that my own projections for the Dow were to the 18,000 level and I would be surprised if stocks didn’t see all-time  highs.

After the Japanese caught the markets off guard with their own shock and awe on Friday, we have yet another Dow Theory Trend Change and in doing so, wiped away any early warning sign that Dow Theory was giving. Both the Dow Jones Industrials and Transports are at new highs, a late confirmation for the bulls, but a confirmation nonetheless. This sudden shift from one side to the other and back again is often referred to as a whipsaw and definitely exposes one of the weaknesses in Dow Theory.

Below you can see what I tried to depict above in chart form. Stocks have run very hard, very fast and are certainly due for a breather. But as I have said for several years, the bull market remains alive. Any and all pullbacks are buying opportunities until proven otherwise.

Tomorrow, be on the lookout for a special election post!

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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…

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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.

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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!

If you would like to be notified by email when a new post is made here, please sign up, HERE.

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.

If you would like to be notified by email when a new post is made here, please sign up, HERE.