Bulls Plow Ahead Despite Major Issues in Washington

Stocks opened strong and surged all the way to 2pm on Thursday, as the bulls sprung back to life. Small caps led in a big way and the NASDAQ 100 scored an all-time high. Perhaps most importantly, junk bonds saw a huge day and began to repair the damage inflicted over the past month.

On the sector front, semis are back to within one good day from new highs. Consumer discretionary which I left for neutral last month is also at fresh highs. Transports and banks put in nice days, but they have much more catch up work to do.

The most important thing for today is that the bulls don’t give too much back. Markets are heading into a seasonally strong week with my favorite holiday of the year, Thanksgiving, on tap. Unless the bears can make some noise today which is also option expiration day, stocks should be on decent footing next week.

All year long I have discussed reality over rhetoric. As I posted on Facebook yesterday, in spite of Roy Moore begin abandoned by the GOP in his Senate race for allegedly having sex with a minor and pictures of Senator Al Franken groping a woman and Senator Bob Menendez’ jury deadlock on corruption charges and the House passing their version of tax reform which will be D.O.A in the Senate, the economy and markets continue to forge ahead. Dow 25,000 in the first half of 2018…

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Bounce on the Way. Will It Stick?

After nothing more than one really bad day in most of the major indices, stocks look like they want to bounce, at least a little. The key index to watch will be the Russell 2000 which peaked in September and has seen an orderly 3% pullback ever since. For the past week, the small cap index has been trying to put in a low. Additionally, although early, this index will also have a seasonal tailwind next month and into January.

Additionally, on the sector front, the Dow Transports have been beaten down, losing more than 5% over the past month. They are also important to watch as their failure to meaningfully bounce will likely spell a quick end to any rally.

Finally, high yield bonds put in the most constructive behavior on Wednesday, reversing sharp early losses to close in the upper end of its daily range as you can below by the last green candle. Along with the Russell 2000 and transports, junk bonds led stocks to halt their rally, so any bottoming action could help lift the major stock market indices.

We’ll see if a bounce develops and can be sustained. The bull market isn’t over, however the concerns I have discussed for the past month remain real and unrepaired, three of which are shown above. I really want to see any future rally correct the problems and not add to them. Having more stocks participate, especially on up days at new highs would be a good step.

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Strong Case for Bears But Bulls Could Be Ready Again

And the pullback continues. Everything I have mentioned lately is still in place and uncorrected. We have sentiment that’s a little too bullish. High yield bonds under pressure. Sector leadership weakening. And a very split market with the same percentage of stocks doing well as poorly. Except for price momentum and the positive time of year, the stock market does not look good. Yet with all that, the Dow is less than 1% from all-time highs. Bulls have something to support their cause. Bears too. While this behavior is definitely indicative of an aging bull market, it can and has lasted for almost two years in the past.

Over the coming days, it will be interesting to see if the bears can make any headway. On the surface, this looks like their best opportunity of the year, especially with junk bonds struggling. However, if semis have a good day and see new highs, that would damage the bears’ case. Additionally, the banks look like they are going to rally more. Discretionary, which I left for neutral to dead last month, just scored an all-time high. And the battered and beleaguered transports are trying to bottom after a 6% pullback.

Lots of crosscurrents.

I did an interesting interview on the Nightly Business Report on Monday regarding GE and dividend paying stocks. As I will be in the car for 5 hours on Wednesday, hopefully I can get that piece done and out quickly. It’s not often you see a bellwether, mainstay like GE taken out and shot on a billion shares traded.

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Lots of Concerns Abound

For the past 5 weeks I have often written about the elusive stock market pullback and the reasons why we shouldn’t be surprised to see it occur.  We had seasonal headwinds post-September. We had strength into earnings season. We had overly bullish sentiment. Nothing really mattered for more than a day. And just because stocks are seeing some weakness here, I am not beating my chest with “I told ya so”. Being early still equals being wrong.

Over the past two weeks, we have seen some other negative behavior in the Dow, S&P 500 and NASDAQ 100. Essentially, as each index hit new highs the number of stocks declining outpaced the advancing stocks. That’s not exactly healthy, especially when it’s happening over and over again.

Additionally, as I will write about in the next Street$marts, take a look at the two charts below. In the healthiest of markets, the Dow Industrials and Transports make new highs at or around the same time. Last month, the transports peaked and began to correct as the industrials continued higher. That’s a warning sign. Furthermore, this week we see the industrials score a fresh all-time high, but the transports are making a 30 day low. Again, that’s not exactly the behavior you see in strong markets.

I could continue on and talk about the banks or high yield bond warning or NYSE A/D Line, but I will leave that until next week. For now, these are all short-term concerns of mine and I continue to believe that the bull market remains alive, but a little less well than it had been. Dow 25,000 is next.

Enjoy the weekend! I am just back from Chicago and New Orleans where I was sick in both places. There’s is nothing fun about traveling when you’re under the weather. The night before I left was the first time since the 1990s where I had a fever. Happy to be home in my own bed and hope to shake this thing soon!

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New Highs Abound But a Few Cracks Developing

Suffice to say that the bulls have basically stampeded any and all attempts to take stocks lower since mid-August. However, for most of that period, the market’s foundation was rock solid and bears were just fighting against strong momentum. Recently, that has changed. Because I have been traveling since late last week and a bit on the sick side, I haven’t spent the time to create the charts to support my point. The Dow, S&P 500, S&P 400 and NASDAQ 100 are all at new highs. Yet with the succession of new highs last week, the number of stocks advancing versus declining on a number of days was actually negative. That means each of those highs was made with less participation, not exactly what you normally see in a healthy uptrend. However, keep in the mind that this behavior can and has continued for days, weeks, months and quarters before the market lost steam.

Turning to high yield bonds, we can see that they are not confirming recent new highs and have actually experienced a little pullback. It’s nothing big or significant yet, but it’s worth noting.

The NYSE A/D Line tells a similar story and looks a lot like JNK above. While the level of participation is diverging from the new highs in the indices, it is certainly not at an alarming level. Additionally, as with junk bonds, we have seen and can see this kind of behavior to last as long as 20 months before it matters to the market.

The bottom line remains the same. While there are a few cracks in the pavement with stocks very extended, momentum has been historic and difficult for the bears to easily end.

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The Next Fed Chairman & Post Fed Market Decline

Trump to Announce Fed Choice This Afternoon

Love him or hate him, Donald Trump certainly is not behaving like his predecessors when it comes to most things, but definitely not the selection of the most powerful banker on earth. During the campaign, Trump harshly and unfairly criticized Janet Yellen for keeping interest rates too low and creating a “fake stock market”. That was until he became president and miraculously embraced low rates and the surging stock market as a referendum and report card on his presidency.
Right after the inauguration, I published a fairly outside the box list of my Top 8 Shocking Surprises Under Donald Trump plus two bonus surprises.
Yellen Earned a Second Term
Bonus #2 had Trump reappointing Janet Yellen as Fed chair for a second four-year term. When Ben Bernanke, one of my all-time favorites, was not reappointed for a third term by Barack Obama, my choice was the underdog, Janet Yellen. Four years later, I believe she absolutely earned a second term. So I am sticking with her as my choice again although the odds are definitely against her in a huge way.
A Very Public List of Finalists
I don’t ever recall such a public list of potential chairs with so many comments. Former Goldman Sachs president and current cabinet member, Gary Cohn, was a shoo-in until his critical comments of President Trump following Charlottesville. Then former Bernanke right hand man, Kevin Warsh, was all the rage until his hawkish (favoring higher rates and less accommodation) stance became too unpopular. Now, current Fed Governor Jerome Powell is the heavy odds on favorite to be appointed by Trump this afternoon with Stanford professor John Taylor and rules based system for choosing interest rates picking up the rear.
Jerome (Jay) Powell is Heavy Favorite
Powell is the choice the markets are expecting. And I guess that if Yellen loses, I am more okay with Powell than anyone else. Taylor or Warsh would cause the most short-term upheaval, but even then, I don’t think we would see anything significant. Powell is the most similar of the finalists to Yellen although definitely not as dovish (favoring low rates and accommodation). Some have argued that a Powell/Taylor duo would be very strong. I am not convinced although with Powell in the chair role, Taylor’s rules based system would have little chance of implementation.
Don’t get me wrong. I am not against rules based systems, especially since we run our 12 investment models that way. I very much support and endorse, non-emotional, well researched, systematic strategies. However, I believe there needs to be more research and stress testing of a system Professor Taylor backs.
The markets like Janet Yellen. She is the known quantity and has done a good job in my opinion. Let’s not fix a problem that doesn’t exist. It’s not like GDP is growing by 5% and Yellen is loathe to cool it down by raising rates. And she is certainly nowhere near the disasters that Alan Greenspan or Arthur Burns were. Now those two men should headline the Fed’s Hall of Shame as among the worst chairs in history.
I am sticking with Yellen as my choice although Powell is the one that almost everyone expects to succeed Yellen in February. As always, nothing Trump does or says is perfectly as expected. We’ll see in a few hours.
Post-Fed Trend
In yesterday’s update, I discussed the various models and trends from Fed day. http://investfortomorrowblog.com/archives/3114
As we saw at the previous meeting and this one, the most powerful trends were muted because of the strong rally into the Fed meeting. Today, we have a rare trend which calls for stocks to trade lower after the Fed meeting. While it’s still only a short-term trade, it does bare watching, especially to see which sectors lead and lag on the downside to properly position for the next leg higher into year-end.
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***Special Fed Day Alert. No Rate Hike. No Surprises***

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. Eight 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 sitting at all-time highs with barely a hiccup in two months, the bulls exhausted a lot of energy, similar to what we saw at the last Fed meeting 6 weeks ago. 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 rally factors that still need to line up.

No Rate Hike & No Balance Sheet Taper Update

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 as the economic evidence certainly supports another 1/4% hike with GDP at 3%, unemployment at new lows and consumer confidence at new highs. I also don’t expect any news on the Fed’s plan to taper the size of its balance sheet.
Six weeks ago, I offered that the Fed would announce the cessation of reinvestment of certain instruments, if not all, to the tune of $300 to $500 billion a year. It turned out that my forecast was too aggressive as Yellen’s plan began last month with a paltry $4 billion in runoff and scales up to only $20 billion per month later in 2018.
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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Q3 GDP Sees Another Resurgence & Energy Looking Sweet Again

On Friday, the government released a first look at Q3 GDP which I had been looking in the 3% range before the hurricanes hit. It wouldn’t have surprised me if that number was a quarter to half point lower. However, even with the hurricanes, the resilient U.S. economy still grew by 3%. All year, I have written about the economy accelerating to the upside in Q2 and Q3 with the election as the catalyst. Way too many people underestimated the powerful impact of the GOP sweeping the board last November.

Of course, the president wants to and will take the credit for the resurgent growth; they all do But I firmly believe that almost anyone in the GOP would have seen the same or similar results. It’s the sweep that mattered. Anyway, not only is the U.S. economy accelerating higher but so is the rest of the world. Japan and Europe are showing growth that far exceeds analysts expectations and the best numbers in years.

This all translates into booming global stock markets, but that’s nothing new. Remember, stocks move long before the data do, roughly 6 to 9 months. Today, stocks are a little jittery after Kevin Brady offered that a “phase in” of the corporate tax cut is on the table. That’s the same Kevin Brady who once thought the border tax was an absolute certainty. We’ll see. I still think comprehensive tax reform gets passed by mid February, but I am losing a little faith that it will be as good as I once thought.

In the markets today I am looking at a small pullback in stocks, but the energy sector looks to be ready for another leg higher. That could be 10%+ into year-end if the stars line up properly.

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Pullback in Motion. Dow by Itself.

The Dow has now seen three straight days of negative behavior but the index remains a whisker from new highs. The big picture reveals some almost precedent setting behavior in the Dow as more stocks are closing lower than higher as the Dow was hitting all-time highs. That’s not your typical sign of strength.

The S&P 500 and S&P 400 are a little weaker with the Russell 2000 and NASDAQ 100 a little more so. The pullback I have been discussing all month is here as I mentioned on Monday. I still not expect it to be anything major, significant or worrisome. In fact, it could even just be a sideways pause.

While overall sector leadership remains very constructive, semis are extended and transports and discretionary need some time here. Banks are stepping up and they should see new highs later this quarter. High yield bonds finally pulled back and the NYSE A/D Line looks to be rolling over in the short-term. This is all happening against the backdrop of strong earnings which are being sold into. Buy the rumor, sell the news.

Long time readers know my theme of a secular bull market in the dollar that has been put on hold in 2017. Don’t let the media fool you. The bull market ain’t over. The greenback bottomed and is rallying again. The euro is in big trouble as is the yen. They should both be going sharply lower next year and after that. It’s going to get ugly.

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Stocks Continue to Creep But Best Opp for Pullback is Now

It’s really the same old story as we begin the new week and the final full week of October. The intermediate and long-term continue to look strong as they have for days, weeks, months and quarters. Nothing has changed. The short-term is the time frame where it’s neutral at best. I have said all month that the bulls need a little rest, but they haven’t seemed to care.

Today, as I look at the five major stock market indices, the Dow is looking more and more like a tech stock and the NASDAQ 100 like a stodgy Dow stock. That’s not exactly the behavior normally seen in the healthiest of markets. However, as I wrote last week, the bulls have been running like they’re in Pamplona!

At this point, there aren’t many cracks to concern me more than just a cessation of the advance or the modest pullback I have been wrongly writing about all month. Key sector leadership is good. Secondary leadership from industrials, materials, energy and healthcare is even better. High yield bonds and the NYSE A/D Line are at all-time highs.

It’s been one of those “creeper” markets as Jason Goepfert of Sentiment Trader calls it, where day in and day out, stocks just slowly climb higher and higher. Martin Armstrong, one of the few outside reads I have, calls it a “vertical market” where everyone “gets drunk at the party but no one is really having a good time”. It’s the kind of market where is you are long, you just sit back and grin. If you have been waiting to buy, it hasn’t been any fun. Having been on the wrong side of a creeper years ago, it was one of the most frustrating periods in my 20 year career.

The bottom line is that stocks remain a little tired and if that modest pullback is coming, it should be here right now.

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