***SPECIAL Fed Update – Rates Are Going Up Again & Then Some***

Stock Market 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. Over the past few meetings, many of the strongest trends muted although the system that said to sell on the close of the meeting hit a home run. The S&P immediately crashed from 2824 to 2645 or 6% during this quarter’s big market swoon. To be fair, although 6% was the return for the system, it certainly wasn’t due to the post-FOMC trend that the trade was based on. Sometimes, it’s better to be lucky than good!

As with most statement days, the model for the day 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.

With stocks somewhat on the defensive lately, the next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 80%+, especially after seeing weakness into statement day (today).

Rate Hike Coming Today – At Least 3 More On The Way After

This is Chairman Jay Powell’s first meeting as chairman. History has shown that markets typically test newly confirmed chairs very early in their term and 2018 was no different as stocks immediately collapsed in early February as Powell assumed the reigns. The change from Yellen to Powell should be fairly seamless as their views were very much in line. I do not expect Powell to deviate much from Yellen’s course.

As such, everyone is expecting another 1/4% rate hike today at 2 pm.

In my 2018 Fearless Forecast, I called for 3.5 interest rate hikes by the Fed this year. With the data so far this year, I am sticking with that forecast with the risk to the upside, meaning that four or an outside shot at five hikes could be in the cards.

After announcing their hike today, I also expect Powell et al to slightly upgrade their economic forecast, continuing to lay the groundwork for higher short-term interest rates. At the same time the Fed will forge ahead with their program to reduce the size of their massive balance sheet, accumulated through three rounds of quantitative easing. As I have said too many times to count, this experiment is going to end very badly.

The Fed should have chosen one or the other. Hike rates or sell assets. Conducting both is an horrendous decision in my view. There is absolutely no doubt in my mind that recession is going to hit by the election of 2020. While it may be mild like we saw after 9-11, it will still hurt. And the Fed’s fingerprints will be all over this as they have before every single recession of the modern era. It seems like the Fed just can’t help themselves. They are destined to screw up economic expansions. Of course, there is always some external final catalyst like the financial crisis, 9-11, S&L crisis, etc. However, the Fed has always been hiking rates right into those events, long after common sense dictated a pause.

Let’s remember that the Fed was asleep at the wheel before the 1987 crash. In fact, Alan Greenspan, one of the worst Fed chairs of all-time, actually raised interest rates just before that fateful day, stepping on the throat of liquidity and turning a routine bull market correction into a 30% bear market and crash. In 1998 before Russia defaulted on her debt and Long Term Capital almost took down the entire financial system, the Fed was raising rates again. Just after the Dotcom Bubble burst in March 2000, ole Alan started hiking rates in May 2000. And let’s not even go to 2007 where Ben Bernanke whom I view as one of the greats, proclaimed that there would be no contagion from the sub prime mortgage collapse.

Yes. The Fed needs to stop.

Velocity of Money Most Important

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 collapsed. It’s still too early to conclude, but it does look like it stopped going down in 2017 and might be just slightly starting to turn up. If 2017 does turn out to be the bottom, this could could eventually lead to the commodity boom I see for the 2020s, especially ex energy.

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. This is one chart the Fed should be focused on all of the time.

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 called the Fed out on this and certainly not Yellen at her quarterly press conferences. Hopefully, someone will question Chairman Powell on this!

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Scenarios Breaking Down

For the past 6 weeks, I have offered what has now amounted to three plausible scenarios for where stocks are headed over the coming three to four months. While the short-term ups and downs varied, all paths from my perspective ended up at new highs for the major stock market indices. Nothing has changed in this regard and I continue to expect Dow 27,000 by the end of Q2 (June 30).

As with almost every single market analog, eventually, they all break down and find their own path. Remember, markets rhyme all the time but never exactly repeat.

Let’s take a look at the three scenarios we have been watching as they all seem to be breaking down.

If you analyze all three scenarios, you may conclude that stocks seem to be behaving weaker than any of the paths suggest. I would agree with that in the short-term, but not alter my intermediate-term view at all. There are lots of crosscurrents right now, but aren’t there always?

I heard a few pundits as well as anchors opine that Monday’s rout by the bears was all tied to the Facebook news. If that isn’t the single most asinine market statement of the year, I don’t know what is! While Facebook certainly impacted tech stocks, especially those in its own sector, the Facebook data scandal will have absolutely no impact on inflation, GDP, liquidity nor 95% of the companies in the rest of the stock market. You just can’t fix stupid.

Stocks did decline on Monday and Facebook was the story of the day. I am definitely not saying “so what” to the decline as 90% of the volume was in stocks trading to the downside, but I am also not concluding that it was some seminal day and a bear market has begun. Remember, the NASDAQ100 hit an all-time high last week.

Leadership in my four key sectors has been strong with semis seeing an all-time high last week. Banks saw new highs last week. Discretionary and transports are chugging along. With the Dow being the weakest major index, it is certainly not out of the realm of possibilities that it could decline another 1000 points or more and retest its 2018 low. However, in that case I would still expect the other indices to hang well above their 2018 lows. Things will settle down sooner than later.

The Fed is meeting today (Tuesday) and tomorrow with the big announcement at 2:00 PM. I will have my usual special update out shortly.

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Nasty, Ugly Reversal

Stock market action on Tuesday printed a classic nasty and ugly reversal when looking at the charts. Stocks opened at the highs for the day and closed at their lows. Additionally, the move from high to low completely enveloped the previous day’s activity. While this does look really bad on a chart and people will often say it’s a classic key reversal which ends rallies and bull markets, research doesn’t support that claim. Sure, you can see and have seen this behavior at some market peaks. However, it has been seen so many other times that it’s track record is very poor. As with many claims, it worth paying attention to, but not always actionable.

Let’s start with the S&P 500 below. You can see what I am talking about just below the arrow. Additionally, the same thing occurred at the little peak in late February.

The Russell 2000 small caps are next and you can see four “key” reversals on the chart with the one at the highest peak leading to the correction. The others led to nothing.

Finally, the NASDAQ 100 is below.

Taken in a vacuum, “key” reversals have more bark than bite. However, when combined with other indicators and research, they may be able to support a thesis. In today’s case, I think we could see some mild weakness which ends up totaling 1-3%, but that should be another buying opportunity for a run to new highs. The NASDAQ 100 is already there and the Russell 2000 was a whisker away.

Tomorrow, I will review sector leadership along with junk bonds and the NYSE A/D line.

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2018 Looking A Lot Like 1997

As you know, I have been hanging my hat on two scenarios for the market since early February. I updated those yesterday. While both scenarios still lead to Dow 27,000 by the end of Q2, I searched long and hard for further evidence to support my thesis. I love finding market analogs, but there haven’t been many to what transpired over the past 6 weeks.

1997 seems like the most favorable comparison and when I lined them up, it looked fairly strong. Below you can see 1997 followed by current stock market action. I added labels for emphasis. While the rally in 1997 wasn’t as powerful as we saw recently, it was still a solid rally, mini crash, reversal and mild retest. That mild retest fooled a lot of people into thinking that more weakness was coming toward Dow 23,500. On balance, stocks should continue higher although a brief 1-2% pullback should be expected this month.

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I’m Back! Dow Still Going to 27,000

I want to start off by thanking everyone for the overwhelming support, compassion and number of condolences on my dad’s passing. It has been a difficult few weeks both pre and post funeral and Shiva,  but my family and I were tremendously comforted by so many people coming out of the woodwork with calls, cards, texts, emails, donations to his favorite charities and an amazing amount of stories about my dad, many of which I was hearing for the first time.

While my writing had gone dark for the past 10 days we have been very active with our portfolios. When I left off on March 1 we had dramatically reduced our exposure to stocks just as the market was beginning it’s last little 1000 point plunge. I mentioned that we were keenly watching events unfold for an opportunity to redeploy that cash. Little did I know that the moment would come less than a day later as stocks were hammering out a bottom just above Dow 24,200. So far, both moves seem to have been very fortuitous.

Let’s return to what has become my favorite two charts and scenarios. The first was the preferred path until I relegated it to number two a few weeks ago. Stocks were closely following my arrows for a while.

The chart above became my number one scenario and except for the latest bout of weakness going a bit deeper than thought, this one seems to be on target for now. Remember, regardless of which scenario wins out or if a new one becomes possible, I have said all along that all paths lead to fresh all-time highs for stocks by the end of Q2. I have written it here as well as pounded the table about it on Fox Business and CNBC. No wavering here. The bull  market remains alive.

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Earlier this week, my dad, Richard “Dick” Schatz, passed away. He had been sick for a while, but just kept beating the odds with some amazing clinical trials at Memorial Sloan Kettering. If you called the office over the years, every once in a while he would answer our phone and engage in conversation with literally anyone who could fog a mirror.

Below is the most recent picture of my parents at a milestone birthday party for one of his best friends before Dick got sick. My dad loved a party and never wanted to miss a chance to have a good time, even with his two left feet, size 14 and complete lack of rhythm and tone.

Information about the arrangements can be obtained by calling the office.

While I have canceled all meetings for the next week (thank you for understanding), I am doing my best to respond to emails and return phone calls in a timely manner. Your portfolio is being run in the exact same fashion as it has been over the last week, month, quarter and year. We dramatically lightened up on equities about 1000+ points ago and are keenly watching for the opportunity to redeploy over the coming days and weeks. The bull market remains alive, whether stocks attempt to find a bottom above 24,000 or even below 23,000.

As always, thank you for your support, loyalty and understanding.


Breakout Alert for Stocks. Yields NOT Peaking

After Friday’s dominance by the bulls and the very early Monday morning follow through, the bulls are on the verge of negating what has been my preferred scenario and instead opting for scenario number two below. Since a called the bottom a few weeks ago, I drew the two horizontal blue lines on the chart below and have not changed them at all. Those represent a trading range where I thought stocks would bounce in as volatility began to subside here and there, but remain elevated from pre-correction levels.

If my preferred scenario was going to continue to play out, stocks should not close above the top of the volatility range. As you can see from the farthest right green candle, price is there right now. Should that remain the case, scenario number two moves to number one and number one becomes null and void.  Lots going on today and this week. It’s time to really pay attention.

As I mentioned on Friday, volume has been pretty pathetic on the rally, but leadership has been very strong. While both matter, I can reconcile these by saying that volume is more short-term than leadership. Semis, banks and discretionary all seem poised for new highs while transports have a lot of work to do to repair the damage that was done. They certainly are in no rush.

Finally, there has been way too much talk from stock pundits and analysts about the bond market. That always gets my ears up. The yield on the 10 year Treasury note had soared a tick below 3% which seems to be everyone’s line in the sand. However, over the past few days, it has settled back to 2.84%. I absolutely do not believe we have seen the peak in yields yet and 3%+ will be seen and fretted about sooner than later.

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Stock Market Approaching Critical Juncture. Eyes Open!

It’s Friday of a holiday-shortened week and even more so for me as I spent Tuesday and Wednesday in New Orleans with some fellow UCONN crazies eating, enjoying a few adult beverages, playing golf and watching the women dismantle Tulane, my wife’s alma mater. It was a good break from winter in New England, but Mother Nature seems to have lost her ferocity up here and it’s been more like March and April.


Speaking of my wife, Teri, I want to wish her the happiest of birthdays and the best year ever ahead! She’s my best friend, love of my life and most incredible mother, even when screaming at our teenage daughter. Until death do us part, or she kills me…

Tulane passed out these BEAT UCONN towels, so of course, we accepted ours. We took a bunch of pics holding these and all but the one below had us both looking at the camera with a somewhat normal pose. This one, however, pretty much describes our relationship. I am the jokester who starts everything and she joins in, almost in disbelief of feeding my immaturity. Anyway, the towels made great napkins for the muffuletta from Central Grocery.

Before I send a full canaries in the coal mine which will be print very long because of all the charts, I wanted to send this update on what’s becoming two very familiar charts. The first one below remains my preferred scenario which calls for the rally to end, well, right about now with a return to the bottom of the volatility range in March. My initial downside target is Dow 23,000. From there, I see a very strongly rally to all-time highs with Dow 27,000 by the end of Q2 and a shot at 30,000 by Labor Day.

How will I be wrong?

If the Dow closes above the top of the volatility range which is essentially above last week’s high, I think this scenario will move down to number two on the list. Let’s call that Dow 25,500.

The other scenario I have offered is below and would move to number one if the Dow closes above 25,500 this month. This one calls for the bottom to be in with only mild weakness before closing well above the top of the volatility range on its way to Dow 27,000, all-time highs, sooner than later.

Both scenarios being offered end with new highs and at least Dow 27,000. The bull market remains alive and reasonably well. If the first scenario plays out, you can bet that the masses will be calling the end of the bull market right around Dow 24,000.

A few additional things of note. First, the rally in stocks has not been with enough enthusiasm. There doesn’t seem to be strong conviction. While there is no rule saying there absolutely has to, it does give me some background concern. Maybe a day where 90% of the volume is in advancing stocks is coming next month, or even two with 80%.

Stocks sold off into the close last Friday, the day before a holiday weekend. That’s atypical and suggests that all is not perfectly well. However, several times I said we need to watch which groups lead the market higher off of the bottom. So far, banks, semis, software, internet, discretionary, materials, biotech and healthcare have been leading. In other words, strong “risk on” sectors which usually lead a healthy advance.

On the flip side, staples, telecom, REITs, utilities, energy and transports have all lagged since February 8. The first four are all defensive in nature and healthy to lag at this stage. The last two are somewhat of a head scratcher as lower energy is good for transports but transports are very economically sensitive.

Stocks are approaching a critical juncture. Next week will be key.

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Is the Rally Over???

Here is a very quick and timely update to start the week. Time to be on our toes. I will have more tomorrow or Thursday, but there may be a change afoot.

Stocks did not end the day well on Friday. No big deal. They were up slightly but gave up big gains. That’s normally not unusual except that it was into a holiday weekend. That’s atypical. While the rally off of the lows has been significant it has lacked the true enthusiasm to confirm a low of importance. For several weeks I have offered two scenarios for the market to take, both ending with Dow 27,000. However, as counter intuitive as this may seem, the more bullish scenario has the rally ending or over.

Friday’s action should be viewed as disappointing but you won’t hear much of that in the media or from the pundits. There is a good chance the rally may have ended. That’s the assumption I would begin the week with.

How will I know if I am wrong?

For now, if the Dow closes above Friday’s high, that will signal the rally should continue. Until that or unless that happens, it’s time to play some defense and not stick our necks out.

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Two Scenarios Updated. Put Up or Shut Up

I had hoped to have a full canaries in the coal mine done today, but I failed (or lied as some could say) as I am only half done. It’s okay, though. Stocks are behaving exactly according to the footprints I first offered 10 days ago, making life a little easier, for now. And regardless, I am still forecasting Dow 27,000 next quarter with the chance of 30,000 later this year.

Below you can see the original chart with the Dow rallying smartly and heading towards the top of the volatility range I labeled with the blue horizontal line. Whether it goes a little north or a little short of it is irrelevant. From there, it gets dicey as stocks are “supposed” to peak and see a healthy decline to the bottom of the volatility range in March. If that ends up occurring, I would fully expect momentum to be weaker than the recent decline, less stocks making new lows, lower volume, lower volatility and less panic.

Just for the fun of it, I converted the chart above to a line graph below which only shows closing values of the Dow. It’s a less less noisy and perhaps easier to understand without the intra-day swings and colors.

Finally, as I first mentioned when I offered the scenario above as my most likely, I could be wrong, not about the bull market remaining intact, but about this anticipated decline into March. If you recall, I offered a second scenario which ultimately had much more negative implications. http://investfortomorrowblog.com/archives/3323

Below is that scenario with the potential footprints. Stocks still rally to the top of the volatility range, pause for a week or so and then head straight to all-time highs, probably in April.


How is this any different?

Why should you care?

The stock market always needs a solid foundation to keep rallies alive. Imagine a house where you remove 25% of the concrete or half the framing rots away. The house becomes less and less stable before a storm knocks it down.

In this case, a run straight back to new highs could look a lot more like August 2007, July 1990 (click on that link above) or another instance where a 20% or more decline is more likely to unfold. That’s certainly not what the majority wants to see, but it a possibility. Again, that’s not my most favored scenario and regardless, I think new highs are on the way in Q2.
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