Stay Long & Strong

Similar to August 2nd when coiled up stocks broke to the downside and wiped out more than two weeks of gains, the S&P 500 did essentially the same thing on Wednesday. While it was only a .50% decline, the media turned it into a big deal; it’s not.

Could stocks weaken more? Yes.

Should we be concerned? No.

I won’t be surprised if this pullback is the largest since the BREXIT bottom, but keep in mind that we haven’t even seen a 2% pullback yet. It’s certainly not time to panic and sell. Rather, I would use this opportunity to see which sectors hold up the best for clues of leadership on the next rally, which should take the Dow to 19,000.

Remember when the pundits left the small caps for dead only a few months ago? See what’s been leading? Small caps. Just this week, we saw new highs in small caps, mid caps, NASDAQ 100, semis, software, retail, homebuilders, banks, materials and industrials. While not great, it’s still pretty good. The NYSE Advance/Decline line just scored an all-time high. Bear markets and significant corrections don’t begin with this kind of strength even though the number of stocks making new highs has waned of late.

Stay long and strong. I am off for a day with the family.

This whole controversy with Mylan and the Epipen is fascinating. I plan on writing about it tomorrow. Profits or people first???

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Don’t Fall Asleep

Heading into the new week, we have more of the same. Stocks are trading in an historically tight range. The longer this continues, the greater the move when the range ends. As I always mention, many times you will see the market move out of one side of the range and fake out the masses and then immediately head to the other side of the range like stocks did on August 2.

Very interestingly, smart money is gearing up for volatility to greatly expand after Labor Day. Although most people refer to volatility in decline terms, stocks could actually break out to the upside, causing volatility to expand. Volume has also been in the news lately as it’s not only anemic for this time of year but also on a relative basis for this time of year. As I often hear, “everyone is in the Hamptons”! That’s right, all 300 million citizens are packed into that tiny area on the end of Long Island.

While it is vacation time, there are plenty of people working and just last year, we saw the stock market collapse 15% at this time. While I am definitely not forecasting anything like that for 2016, investors should be in guard that geopolitical events can pop up and cause a quick move.

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Will the Island Top Kill the Bull???

It’s been a little longer in between updates as I was traveling in Florida for a board meeting as well as seeing some clients and visiting relatives. My 98 year old grandmother says “hello”. I feel like I need a break from eating after so many fantastic meals not to mention great conversation all around. Also, there really hasn’t been much to say. I like when the markets are calm and quiet when I am on the road. Makes life much easier.

For a a little over a week, I mentioned that a small pullback should be coming sooner than later. It wasn’t that I thought would be tradeable, meaning deep enough to take action, but stocks were a little tired. While not a common topic here, but one I wrote about once this year, a chart pattern called an island top appeared on the Dow and S&P 500 earlier this week. It did not appear on the other major indices. This pattern forms when stocks gap up one morning and gap down the next morning, leaving white spaces where price action did not occur.

Below is a familiar chart from when I was talking about the coil every day. That worked out fairly well. Some people who read charts are all hot and bothered that the Island Top just ended the rally. As you can imagine, I don’t agree.

island

What I think you can takeaway is perhaps that the Island Top paused the rally and a brief and shallow pullback is here. There isn’t much else to glean at this point. Semis continue to lead. Energy is really stepping up and most other sectors are behaving really well. Junk bonds, my favorite canary in the coal mine are scoring new highs again. This all bodes well over the intermediate-term. About the only bothersome indicator is that smart money is loaded up for volatility to increase substantially after Labor Day.

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Clown Parade Continues

On Twitter and www.investfortomorrowblog.com I have been fairly aggressive in calling out the so called “masters of the universe” in their widespread and uniform calls for a stock market collapse… for months. To me, it’s like a parade of clowns who have continued to lose credibility.

Being early is the same as being wrong. And as I often like to say, it’s okay to be wrong, but it’s not okay to stay wrong. That’s coming from someone who has made every mistake possible over the past 28 years and I know I will make many more before my career ends down the road. The markets have a way of humbling everyone from time to time.

I am talking about George Soros, someone who was once a legend and unfortunately, pulled a Michael Jordan and should have stayed retired. His once protege, Stan Druckenmiller, Sam Zell, Marc Cuban, Marc Faber, Carl Icahn, Bill Gross, Jeff Gundlach, Larry Fink, Steve Auth, RBS and even Donald Trump. With a little research, I am sure I can find a few more.

My point is that it is highly unlikely that the bull market will end with so many high profile pundits predicting it.

U.S. stock market – If there has been a bigger bull than yours truly, I would like to meet him/her. Maybe Jeff Saut comes close. For years, people laughed and scoffed when I forecast that the Dow would hit 20K before the bull market ended. I kept saying that the run wasn’t ready yet, but that all changed after the Q1 decline when we saw readings that only occurred before stocks blasted off. That was reconfirmed during the two-day BREXIT decline where short-term panic shook out as many investors as you would normally see during a 20% decline.

Stocks are overbought and have been overbought. Declines should be shallow and buyable until proven otherwise. Leadership continues to rotate from defensive groups like utilities, staples, REITs and telecom into more aggressive sectors like semis, software, materials, discretionary with the “left for dead” banks and transports even showing life.

Election – 70% likelihood that Clinton is the next president. If Trump was a tradable security, I would forecast a big move from here. Up or down you ask? YES! He either just hit bottom and will rally into the election or panic is about to set in and the bottom falls out.

Either way, as I have mentioned before, I do not believe the election will have any meaningful or significant impact on the stock market. By that, I mean that the typical post-Labor Day, pre-election bout of weakness should be limited to single digits unless some exogenous event hits.

Fed – Although I said for the past 8 years that the Fed should not raise rates until the other side of the recession after the Great Recession, I did think the Fed would make the mistake of raising rates too many times in 2016. At this point, the only real “live” meeting is December.

Economy – Same old, same old. Since 2009, I have called this your typical post-financial crisis recovery which is very uneven. It sometimes teases and tantalizes and occasionally terrifies. We won’t see sustained trend growth until the other side of the next recession which should be mild and originate offshore.

Side note. I do love it when the bears take a single weak report like the recent GDP and call for collapse, but totally explain away a stronger report like the employment report.

Europe – Crisis coming by 2018. French and German election more important than U.S.

U.S. Dollar – Long-term projection of 110, 120 and possibly higher remain firmly intact. Not a short-term play.

Gold – I thought gold would have pulled back much deeper than it has so far. Long-term projection of $2500 by 2020 remains intact although I wanted to see a strong correction by year-end.

Euro – Par (100) still on tap on the downside followed by all-time lows by 2020.

Pound – Long-term projection of par (100) by 2020 in motion thanks to the BREXIT.

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Is THIS the Week When the Sky Falls?

Roughly one month ago, after an historic lift off post BREXIT, stocks had become overbought which is a technical term for a little too far too fast. Most pundits in the media were calling for a pullback before they would buy. As I have discussed for longer than I have been writing this blog, the masses seldom get what they want or predict.

When stocks bottom, the first rally is usually very powerful as it catches the majority off guard. From there, the next period is usually very telling of what happens over the intermediate-term. If the bears get going and make progress, the next few weeks to months are neutral at best. However, if the bulls can keep powering ahead without ceding much downside, it typically leads to more upside.

Since this latest rally began, and really since February, I have said that any and all weakness should be used as a buying opportunity until proven otherwise. 1-3% are your typical pullbacks during bouts of unusual strength. With stocks coiling up for several weeks, I warned that a fakeout to the downside followed by an immediate move to the upside would be one scenario to watch for. That’s exactly what happened for all of the major indices except the Dow.

Stocks start a new week overbought yet again but with few cracks in the pavement. I have discussed leadership rotation before and we are definitely seeing what I wanted to see for the march to Dow 20,000. Defensive groups are ceding to offensive groups. Even the “long forgotten by me” banks have exploded higher and are threatening to actually lead. That’s something I certainly did not see coming. Let’s see if the transports can also step up to help semis, software, materials and discretionary. And don’t forget about energy as a laggard play to catch up.

Lots of good things continue to happen in the stock market. As long as Soros, Druckenmiller, Zell, Trump, Icahn, Cuban, Gundlach, Auth, RBS, Faber et al continue to boldly call for a worldwide financial crisis and Armageddon, pullbacks should be contained to 3% unless some exogenous hits.

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Hillary’s Impact on Stocks

Since the historic breadth thrust in stocks after the BREXIT, the market has certainly quieted down. I have written about the “coil” for two weeks and nothing has really changed. There is a big move coming sooner than later! I am keenly watching leadership for signs that a fresh leg higher towards Dow 20K has started.

Turning to the presidential election hysteria, it’s certainly been anything but quiet! BRUTAL is the first word that comes to mind. My opinion regarding the election remains unchanged. I do not believe it matters to the stock market who the next president is for more than a single digit decline.

Hillary is the epitome of establishment and is heavily supported by Wall Street, especially Goldman Sachs. Trump is the outsider who has riled even those in his own party. However, he is also a businessman who knows about the need for compromise. More bark than bite in my opinion. Convention wisdom holds that Hillary would be much better for the stock market than Trump.

Since the end of the DNC convention, Hillary has surged to a huge 10 point lead in the polls. Stocks haven’t responded at all. It seems like no one cares. And that’s something I believe will continue right into the election.

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Careful Getting too Negative

Last week, I wrote about stocks being “coiled” up and ready for a big move. I also warned that many times, we see a fake in the opposite direction of the trend that shakes weak investors out, only to see a reversal from there. Today, the major stock market indices are finally seeing the bout of weakness which has been forecast by the pundits for weeks. Remember, being early is also being wrong.

For now, we are seeing stocks break to the downside. I wouldn’t get too negative right here as it’s just a single down day and there is a scenario for a quick decline and return to new highs. The media has been fascinated with the Dow being down 7 straight days. That’s all of 30 stocks! As usual, they are clueless. The S&P 500 saw an all-time high on Monday. The S&P 400 did on Friday. The Russell 2000 and NASDAQ 100 hits 2016 highs as well.

Friday’s weak GDP report did not set off any strength of significance in the defensive sectors. After this little pullback wraps up, I think there is a reasonable chance that new leadership emerges in the stock market.

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What’s SUPPOSED to Happen versus What ACTUALLY Happens

Earlier this week, I mentioned that stocks were coiled up and looking for a big move. Since then, only the NASDAQ 100 has done anything and that was really just on Apple’s earnings beat. Overall, it’s been a very quiet week without any volatility at all. That’s likely to change sooner than later, but unlikely to be today.

As I have mentioned over and over, the post-BREXIT thrust, pullbacks are likely to be shallow as the masses were caught off guard and are now clamoring to buy. Those waiting for a 10% correction will probably be waiting a while unless an exogenous event hits, in which case, they won’t buy anyway!

The government reported that Q2 GDP clicked at 1.2%, well below estimates of 2%. I won’t rehash my long-term theme about the typical post-financial crisis recovery which I have been spot on about since 2009. On a day like this, I always find it instructive to see what’s supposed to have versus what actually happens. Treasury bonds should rally. The dollar should fall. Gold should rally. Crude oil is a toss up.

On the sector front, utilities, staples, REITs and telecom should lead as they are all defensive and provide yield. Industrials, materials and discretionary should lag as they more economically sensitive. High yield bonds should lag.

Let’s watch what bucks what is supposed to occur for signs of change.

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Not so Special, Special Fed Update

Let me begin this special FOMC update by saying that all three very short-term markets trends based on the Fed’s meeting ending today have lower probability of success this week although there may be a sign pointing to lower prices by the end of the week. Stay tuned.

Without a crisis like 2008, Janet Yellen & Co. will find it tougher and tougher to discuss an interest rate hike during the heat of the political season. While the Fed is supposed to be apolitical, we all know that couldn’t be farther from the truth. It has even become blatantly public as Fed Governor and Clinton family buddy, Lael Brainard has donated to three times. Want to guess who would be Hillary’s treasury secretary or successor to Yellen?!?!

Anyway, here we are again; six weeks hence from the last meeting with the world not ending after the vote to BREXIT. Stocks are at all-time highs and the employment picture improved dramatically in June. While the economy is not back to trend growth, it’s certainly stable and able to withstand a rate hike. However, the Fed heads have been very quiet this month, very unusual if a rate move was being seriously considered. As such, the markets are expecting no hike today with a bit more positive (hawkish) statement from the FOMC.

Long-time readers know that I am record since 2008 that the Fed should NOT raise rates until the other side of the mild recession that will follow the Great Recession. The world is a dramatically different place post-financial crisis and we are seeing some of things I was very concerned about start and continue to proliferate, like negative interest rates in Europe and Japan.

As I mentioned several times before, I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the long-term chart below.


Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.


Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

With so much more still to say, I need to hit the send button without comments much about the stock market. As you know, I pounded the table hard at the BREXIT lows, May lows and February bottom to buy stocks for a run to new highs. That’s worked out well. The market is pausing to refresh here and that’s not a bad thing. Until proven otherwise, weakness should be bought.

Leadership is changing from the defensive utilities, staples, REITs and telecom to more aggressive sectors like semis, software, materials and discretionary. Even the “left for dead” banks and biotech are starting to show signs of life. Don’t underestimate this as a sign of fresh leg higher in the bull market.

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Stocks Coiled Up for a Move

Good Monday Morning!

If you looked for me on FOX Business last Friday, I wasn’t there as the attack in Germany meant more geopolitical news and less market discussion. My segment was rescheduled for 2:50 pm this Wednesday which is right after the Fed concludes their meeting and announces no change in interest rates.

There’s not a whole lot new today to review. Stocks remain very overbought, but an awful lot of investors are looking for that pullback to buy. Having been in that position more than a few times in my 28 year career, it can be very frustrating. Thankfully, it’s not something I have to worry about right now. I can find other things to bother me!

Heading into the new week, the major stock market indices are “coiled up” as my friend Tiny would say. That means they have traded in a narrow range after a big move and they are building up energy for a good move. The best example of this is with the S&P 400 as you can see below and the Russell 2000.

Coil

While the this coil looks to be very bullish with an upward resolution, given how overbought the stock market is, I would be on the look out for a possible move to the downside first. That could shake out some weak handed holders and then immediately reverse and break out to the upside. All speculation at this point so we will watch it closely.

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