An Opportunity for the Bears

Since mid-November, I have often discussed sentiment in the stock market. Plainly put, investors have been very confident to the point of being greedy and giddy to an historic extreme. We last saw that behavior in January 2018 which led to a 13% stock market decline to resolve the condition. Of course, there were other factors that led to that decline, like some cracks in the market’s foundation, something I am not seeing today.

When I have a little more time, I will post some charts to show the various indicators that scare me regarding sentiment. It’s really bullish out there. Besides comparing today to January 2018, we also sentiment like this in May 2011. Ultimately, we saw a 20% decline in Q3 that year, however, there were some pretty dark macro events like Greece, the U.S. debt downgrade and possibly U.S. default. Q1 2000, aka the Dotcom Bubble, was another time where sentiment was off the rails. However, the market’s foundation had completely crumbled by the time 2000 began. Today looks nothing like that.

Friday saw what is commonly known as a “key reversal” in the major stock market indices, many sectors and hundreds of stocks. You can see that on a chart as the market gapped open to a fresh all-time high and then closed near the lows for the day. One day set ups do not usually have all that power, but as I have already mentioned, we do have some extreme sentiment.

This makes the “trade” fairly easy to execute. For now, until and unless the various indices, sectors and stocks close above last Friday’s high, the short-term is neutral at best, negative at worst. Below, I grabbed one index and one sector for you to see.

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Early January Indicator Calls for More Upside While Oil & Gold Hit Peaks

With the much ballyhooed Santa Claus Rally out of the way which I really reduced to meaningless in the grand scheme of things, the media has turned its attention to the Early January Indicator (EJI). As Yale Hirsch of Stock Trader’s Almanac fame discovered, as goes the first five days of January, so goes the rest of the year. Since 1990 when the EJI is positive, stocks end the year higher 78% of the time versus 74% for any random year since 1990. That’s not exactly the layup it seems on the surface. If we look at more recent data since 2000, the percentages don’t change very much. As we have seen with a number a catchy seasonal stats and studies which look great on the surface, they often don’t give you the edge when compared to random.

Turning to the Iranian situation and its impact on oil and gold, as I mentioned in media segments this week, when commodities rally into an event like we saw, we usually see some type of peak as missiles begin to fly. The opposite is true when they fall into an event. All week I spoke about watching for a peak in crude oil which had rallied hard since early October.

On Monday, Tuesday and Wednesday, crude closed lower than where it opened all three days. Wednesday’s emotional session was truly one for the records books. Early on crude oil scored a 9 month high and a 17 day low on the very same day. That’s some wildly volatile action that isn’t seen very often. I feel confident in saying that the peak is in for a while and the risk is to the downside. I also wouldn’t be surprised to see crude trade in a range bound by the high and slightly lower than the low to calm things down.

Gold, which was also on a tear of late, also saw some truly historic, emotional action on Wednesday, but not quite the range of crude. On the far right of the chart, just like crude, you can see what was a huge early rally to $1610 before the bears came to work and pushed gold all the way down to $1560. I think gold also looks to have put in a top for a while.

One more thing to add. Both crude and gold have seen historic levels of positive sentiment over the past few months to the point of real and tangible greed, much like we are seeing in stocks right now. While stocks haven’t seen their peak yet, I do think the giddiness of traders in gold and crude coupled with the emotional downside reversals have put a temporary ceiling on the two to let things settle down and hopefully wring out some of the weak handed holders and Johnny Come Latelies before the next meaningful rally can begin which I do see happening in the first half of 2020.

I will have more on the historic sentiment readings in stocks shortly, but remember that extreme sentiment readings alone won’t cause a change in trend. There is always a catalyst. As you know, I have been arguably the most bullish person out there for many years, first calling for Dow 30,000 when the Dow was barely at 20,000. Now, it seems like every pundit is revising history to get on board the freight train. While this is not 2000 again, it does have the look of early 2018 and mid 2011.

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Santa Called. Bulls Excited on Wall. Could There be a Fall?

Although it wasn’t much for the bulls to celebrate, Santa Claus did call to Broad & Wall. The last five days of 2019 plus the first two days of 2020 finished slightly in the green for the &P 500 by 0.34%. The media would have you believe that this 7 day trading period now holds untold fortunes for stock investors versus any old random year. That’s simply not the case, even when giving the bulls the benefit of the doubt by including the first two days of the year in the calculations when it would be impossible to invest until the Santa Claus Rally (SCR) ended.

Let’s take a deeper dive.

First, I have daily stock market data back to 1926 and while I could go all the way almost 100 years, I chose not to. I have always said that markets morph and evolve. What happened that far back when stocks traded on Saturdays and were closed for war has absolutely no bearing on today. Lots of folks use data since 1950. I do as well for some studies and when I am not lazy. My favorite periods to use are since 1990 and since 2000. I think a whole lot changed after the crash of 1987 and then again in 2001 and 2007.

Here is what I learned. Since 1990 77% of the calendar years have been up using the total return for the S&P 500. After a positive SCR, 81% of the years have been up. In other words, the difference is one single year, deeming it statistically irrelevant.

That disappointed me. So I went a step further.

I looked at all years where Q4 was positive, the calendar year was positive and the SCR was positive. There were 14 since 1990. Of those 14 years, the next calendar year finished higher 12 times or 85%. If you are curious, the failed years were the first and last in my study, 1990 and 2018.

Furthermore, 1990 and 2018 were also the only years in the 14 where there was a 10%+ stock market decline during the first quarter of the year.

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A Little Taste for the Bears – Santa Still in Play

Stocks roared out of the gate to begin 2020 and it certainly felt like the masses were buying hand over fist. However, let’s remember that this is a holiday-shortened week and I don’t think everyone is back to their normal schedules. With stocks closing at their highs for the day, it’s very unlikely that any peak of importance was seen.

Several times last week I mentioned my last 5 and Santa Claus Rally research. The last 5 was reduced to a coin flip in my work and well, the S&P 500 was basically flat. Today ends the SCR and the bulls want to see 3224 closed above for Santa to have officially called Broad and Wall as Yale Hirsch’s adage goes. Despite what looks to be a nasty open based on the U.S. taking out a top Iranian terrorist and tensions flaring in the Middle East, I think Santa is safe this year. I would be surprised to see a bad opening followed by afternoon selling below 3224.

With sentiment at historic extremes, greed is running very hot and only market weakness can cure that. I still find it hard to believe that any real pullback will start from news like this. Perhaps we will see a mild pullback right here and then another rally to new highs where a real pullback begins.

Finally, I left off on Monday with a tease about another seasonal trade about to unfold. One that has a very strong track record. Unfortunately, given the narrow difference in performance between the major indices to close the year, the trade is a bit muted through its period ending on January 8. That trade says to own the Russell 2000. We’ll see how it plays out.

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My New Year’s Message

With the end of 2019 signaling not only year-end but also the conclusion of a decade, I am reminded of something my grandmother said to me every year sine I was 7. Besides letting me know not to waste my younger, more active years, she always told me that the older you get, the faster time goes by. It took me a long time to really understand and grasp that.

I remember lying on the floor in the kitchen growing up staring at the elementary school calendar on the fridge as my mom made dinner. Several times a week, I would mark an X through the days I had just completed and count down until there were 0 days of school left. It seemed like the school year lasted forever.

Now, at 53, I cannot believe how fast the years go by. I cannot believe my kids are 16, 14 and 11. They were just born! In the car to and from Vermont I often think about lifecycle and business events from years past. I think of family and friends who have passed away. It all seems like it just happened. Reading books to the class at my kids’ nursery school. All those special holiday performances in their elementary school. Graduations. My dad will be gone two years next month and my grandmother four last week. That was quick.

10 years since I watched the Yankees beat the Phillies in the World Series. The financial crisis doesn’t seem that long ago although 2008 definitely did not fly by! D was born the morning when Fedex announced horrible earnings, like they just did last month, almost 12 years later. Ry was the easiest birth. My daughter? 40+ hours in labor during 100 degree heat. Those two Bear Stearns hedge funds blowing up on the heels of Bernanke confidently telling the country that the sub prime mortgage crisis was “contained” in 2007.

Another war in Iraq in 2003. Enron, 9-11, the Dotcom Bubble and getting engaged and married from 2000 to 2002. Global financial crisis’ in 1998 and 1997. My first TV appearance. I was awful. The single greatest investing year of my career in 1995. Iraq invading Kuwait. The U.S. liberating Kuwait. S&L Crisis. 1990. Was college graduation really more than 30 years ago?

Time has certainly accelerated, or at least it feels that way.

I remember everything, almost. From memory, I can give you the path of the stock market during any calendar year since the 1970s.

Most of you know I had a serious accident with a tree this past May. 34 broken bones and a collapsed lung, but it sounds much worse than it was. Seriously. It was a complete miracle that it wasn’t worse. Somehow, it missed my head, liver, spleen and spinal cord. The speed of my healing couldn’t be explained by my medical teams. Miraculous. They told me I wouldn’t ski at all this season. I skied 6 months later and before Thanksgiving. Accidents like that certainly make you think. What if…

Life can be fleeting. Regardless, it still flies by. Plan too much and wait for the future and you miss out on the here and now. Take time to stop, inhale, exhale and enjoy the moment. Bucket lists are meant to be checked off, not just stared at.

As the year and decade end, I am more thankful than I have ever been. And that’s not cliché. I am more candid than I have ever been and that’s certainly saying something for someone who has always been blunt. Life is too short to be surrounded by negativity and toxic people. I haven’t missed those folks.

Earlier in my career, I would take any prospect who met my minimum and could fog a mirror. No more. Life is too short to work with jerks and disrespectful, unappreciative people. I am so much happier being able to say goodbye to them.

Renee will attest that I truly like and enjoy my clients. There is not a single one I wouldn’t enjoy meeting for a meal, drink, basketball game or coffee. While my industry colleagues bemoan the dread they feel for certain clients of theirs, there isn’t a single one of mine I share that feeling.

As we enter the 2020’s, I thank you for your confidence, your trust and your loyalty, through good times and challenging ones. I appreciate your constructive criticism and respect. As I do at the end of every quarterly report, it is certainly a privilege to serve as your investment advisor!

I wish you and your family a very happy, healthy, peaceful and prosperous 2020!

Paul

P.S. I promise not to cut down any more large trees…

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3224 the Key Number for Santa

Friday’s action in the stock market wasn’t the victory the bulls were claiming. After another higher opening, the bears made a tiny stand and managed to fend off higher prices for a few hours. That’s about all you can say besides there were more stocks declining than advancing. I know; I am grasping at straws into year-end. However, make no mistake about the historic sentiment readings we are currently seeing now. This is the polar opposite of what we saw one year ago when the masses were screaming about a 2008 redux. Caution will be warranted in Q1 of 2020.

I shared my research on the last five trading days as well as the Santa Claus Rally (SCR) and the bulls need the S&P 500 to close above 3224 on January 3rd for Santa to officially call. As my work showed, it won’t be surprising to see the S&P 500 close below 3224 on December 31st. This is what usually happens when stocks are up strongly during the year as well as Q4. There will be another seasonal trade coming up on Tuesday’s close through the first five trading days of 2020. I will share it as soon as I know what it is!

With month, quarter and year-end just about here, I am about to enter the busiest time of my year. Add in my report to clients and Fearless Forecast, there will be a lot going on over the next month. And I am still rehabbing my ankle and shoulder 6 days a week. I mention this as posting here may be a bit erratic, but I will do my best as always.

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All Looks Terrific But Be Careful

I hope everyone had a great Christmas, Hanukah, Kwanzaa and Boxing Day!

As I wrote about the other day, the Santa Claus Rally and last five days of the year are not the absolute layup the pundits keep predicting. In strong years, the last five days trade is not even a coin flip, however, Santa still comes calling about 70% of the time. That puts added bullish weight on the first two days of 2020 if the last five of 2019 are down.

It is amazing that even the bears are conceding how bullish the stock market is right now. Almost every measure of sentiment I look is showing extreme greed. My Twitter feed has been full of the CNN Fear/Greed needle which is pinned on extremely greedy. However, the masses aren’t doing their homework because that indicator has done a poor job at market peaks. The other measures, like put/call ratios, sentiment surveys and money flows are all looking very similar to January 2018, late 1999 and other extremes.

While I don’t think the conclusion is to sell everything here, risk has certainly increased dramatically and it pays to dance very close to the door. That will likely be a theme of mine when I release my 2020 Fearless Forecast in a week or so.

Index leadership has been very strong from the NASDAQ 100, but the S&P 400 and Russell 2000 has been disappointing although they both met my forecasts by achieving new highs.

While the stock market has pressed higher and higher, it’s worth noting that semis, banks and transports, three of my four key sectors, are not making new highs for the rally. Tuck that under your cap but don’t forget about it. Discretionary on the other hand is a sector I offered as a solid trading opportunity on December 16. At that time, it looked coiled up and ready to bust higher. Today, we can see it below and it has been a nice little run.

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The Masses are Wrong! The Truth About Santa and the Last 5 Days of 2019

Let me begin by wishing all those who celebrate a Merry Christmas and Happy Hanukah!

Historically, the last two weeks of December is one of the most favorable times of the year and that lasts through early January. The traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve and last until the close on January 3rd. In other words, the last five trading days of the year and first two of the new year.

Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” Well, I am not going to go into that now. Let’s see if Santa decides to reward all his little investors. I will quickly say that while Yale posited that a bear market would ensue without Santa, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.

For my research, I separate the SCR from the last five trading days of the year (L5). While they have significant overlap, we often see larger than normal moves during this time and SCR and L5 can yield different results. What I try to assess is what is likely to occur over SCR and L5 each year based on the stock market’s performance during Q4 to date as well year to date.

2019 is very much the opposite of 2018. Going into this period last year, Q4 and 2018 were negative which led to positive SCR and L5. This year, we have Q4 and 2019 being very strongly higher as we enter SCR and L5.

Based on history and a little filter I added, here are the probabilities of higher prices.

Using just Q4, there is a 68% chance SCR is positive and only 42% chance L5 is positive.

Using 2019 YTD, there is a 71% chance SCR is positive and only 40% chance L5 is positive.

This says that putting new money to work for what is perceived to be a slam dunk into year-end is anything but. However, if L5 is negative or if there is a a quick rinse lower, there is a better likelihood that stocks bounce the first two days of 2020. I know. I know. Who really cares about the next 7 trading days? You’re right, but it’s still interesting to analyze.

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Stocks CREEP Higher – Waiting on Santa

Let’s start this article with the big picture. The bull market is alive and reasonably well and will live on into 2020. Next year will likely present some challenges, but we will cross that bridge when I start to work on my 2020 Fearless Forecast. One thing is for absolute sure in my opinion; there will be fireworks in 2020!

For roughly a month, mostly on the blog, I had been discussing a stock market that was a little ahead of itself and then a little tired in the very short-term. In my lexicon, that meant I would hold the positions I had, but not add any new money nor increase risk. I did a pretty good of sticking to this although I did put some new money to work last week.

Over the past month, it certainly “felt” like stocks surged higher as they crept higher and higher almost every day. Before checking, I would have guessed that the S&P 500 was up by 5% since Thanksgiving. However, the real number is 2%, certainly nothing to sneeze at, but also not the melt up so many pundits have been forecasting.

Markets that creep higher and higher feel like larger magnitude moves as they occur because the pullbacks are so brief and shallow. Creeper markets also tend to give back so much of the gains in one fell swoop down the road. I will not be surprised to see that happen sometime in Q1 2020.

Anyway, since the little post-Thanksgiving low on December 3rd, the stock market rally has occurred almost entirely at the open. That’s not a bad thing. That’s not a good thing. Below you can see an hourly chart of the S&P 500.

Look at all of the areas where there is no red or green candles. Those are the gap up openings. Each one is followed by the market going sideways for a period of time before gapping higher again. One thing we should look for is a change in character where stocks gap higher, but instead of going sideways and then higher, they just sell off and don’t immediately recover.

Now, my valued readers, before you stop reading and start thinking that the most bullish person out there has turned negative, think again. I am only talking about short-term noise, at least for now. Under 5% moves. There are many concerns about the frothiness of investor sentiment (and it’s really greedy out there now), but I am going to wait and cover that another time.

Historically, the market is in the midst of one of the most favorable times of the year from now through early January. And the traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve. That’s five trading days before year-end. Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” While Yale posited that a bear market would ensue, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.

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2019 A LOT Different from 2018 – Fedex Vomits on Itself

Stocks have really quieted down of late, but the bulls have been relentless. Each and every day seems like a slow drift higher. What has historically been a very reliable soft patch into mid-December is not arriving in 2019 or if I wanted to claim victory like those who can never be wrong, I would just say the two-day decline early in the month was it. That’s not exactly what I was looking for, but you always have to roll with the punches and take what the market gives you.

A year ago at this time, stocks were breaching critical price levels and beginning one of the most vicious selling waves of the past 100 years, not to mention the worst December since 1931. 10 straight days where the S&P 500 closed lower than where it opened. Almost no security was unscathed except for those involving fixed income.

Today, we don’t have the exact opposite, but it’s certainly in that direction with lots of stock market melt ups and taking on more risk chatter from the pundits. While they could and may happen, I don’t know how people wait so long in a rally before all of a sudden proclaiming that the good times are here. It seems crazy. Where were all these people when smart money was pounding so hard on the table for all-time highs this year when the Dow was below 24,000???

Last night, Federal Express missed earnings by a wide margin and the stock is in the toilet today on historic volume. The bulls really want to see the stock close where it opened, if not higher than that for any any hopes of a year-end bounce. For those wondering about tax loss selling in Fedex, I am not so concerned since the stock is less than 10% this year.

What I am concerned about is my call for the transports to play catch up and break out to the upside over the coming weeks. Fedex’s flop doesn’t make this easy as I was counting on Fedex not disappointing to at least not hurt the sector. Now, we need some big help from the rails and/or the airlines, which is possible but not as easy as I thought it would be.

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