Post Fed Trend Says Down But Seasonals Suggest Otherwise

As was expected by just about everyone, the Fed raised interest rates by .25% on Wednesday in their final meeting of 2017. This was far from their final rate hike of the cycle which is not good for the economy over the long-term. The stock market gave up much of the gains post FOMC and there were a few little cracks seen. The Dow remains the strongest index, not a good sign, while the Russell 2000 looks like it’s trying to step up and begin a run into year-end. It’s still a little early for that trend, but its behavior is mildly encouraging.

Semis continue to act poorly after being so strong for so long. Surprising to me, the banks and financials had a dismal day which could lead to a little bout of weakness here. Discretionary and transports remained solid leaders. Both industrials and materials are also continuing to lead, a good sign for the economy. The dollar, however, fell hard. At the same time, both bonds and gold rallied which creates somewhat of a quandary. Are the defensive groups correct in sensing some economic weakness or are the economically sensitive sectors right and the economy will continue its winning ways. This is vaery unusual behavior for a Fed day.

For the hear and now, any and all weakness should be bought until proven otherwise, something I feel like I have said 1000 times. Not that there are never declines this late in the year, but it’s very tough to get that selling snowball rolling downhill with any velocity. Sure, stocks could peak and decline 1-3% into year-end, but the odds favor a mild drift higher into the New Year. There’s just not many potential catalysts for a meaningful decline. I guess investors could use some of the soon to be released elements of tax reform as cause to sell, but then they would have to pay capital gains so soon.

Finally, as I mentioned in the special update on Wednesday, there is a post FOMC trend which signals some short-term weakness starting today. It’s a little muted by strong seasonals, but it’s something we should be aware of.

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Fed’s Arrogance Leading to Disaster for Economy. All the Wrong Moves

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 immediately before and after were muted except for a moderate post FOMC trend last meeting which called for mild weakness.The S&P 500 gained fractionally over that period.
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 four months, the bulls exhausted a lot of energy, similar to what we saw at the last two Fed meeting 6 and 12 weeks ago. That trend’s power has been muted significantly to less than 50% which is not exactly the kind of trend worth trading.
Finally, assuming stocks close higher today, there is a trend setting up for a post statement day decline, although the seasonal strength of December puts a little damper on that.
Rate Hike Certain & Balance Sheet Reduction Update
 
Janet Yellen & Company are certain to raise the Federal Funds Rate by .25% today. It’s the worst kept secret and the markets are fully prepared. I also expect an update on the Fed’s progress in trimming its $4 trillion balance sheet although I do not believe they will make any changes.
All the Wrong Moves for Yellen & Co.
Remember the Tom Cruise movie, “All the Right Moves”? It was a football movie set in steel country PA with Cruise having to make a number of life decisions. Well, if the Fed’s plan was a movie, I would title it “All the Wrong Moves”. Their academic arrogance has sprung up again and it will not end well for our economy.
I want to stop for a moment and rehash an old, but still troubling theme. I am absolutely against the Fed hiking interest rates AND reducing the size of its balance sheet at the same time. It’s an unprecedented experiment and the Fed doesn’t have a good track record in this department. Pick one or the other. Stop worrying about ammunition for the next crisis. Given that the Fed has induced or accelerated almost every single recession of the modern era, I have no doubt that the recession coming in late 2018 or 2019 will certainly have the Fed’s fingerprints on it with their too tight monetary policy experiment.
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. 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 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. Without this chart turning up, I do not believe the Fed will sustainable inflation at 2% or above.

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. Being her last presser today, let’s hope that someone in the media steps up!

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Fed Begins Meeting. But Bitcoin!

The Federal Open Market Committee begins its final meeting of 2017 today. With the special election in Alabama and Bitcoin, does anyone really care about the Fed? For today, the stock market certainly doesn’t! With the Fed announcement that short-term interest rates are going up by .25% tomorrow at 2 pm, the market usually has a quiet day today with a slight edge to the bulls. More new closing highs in the Dow and S&P 500 but the same divergence in the S&P 400, Russell 2000 and NASDAQ 100. So much for the mild seasonal headwind so far.

Of my four key sectors, only semis continue to concern me. The others remain strong. Most of the secondary sectors are behaving just fine as well. High yield bonds are lagging, but they are not rolling over, at least not yet. The NYSE A/D Line continues to score all-time highs. The bull market remains alive and reasonably well my broken record theme of buying any and all weakness remains in place.

Bitcoin continues to be all the rage. Friends, clients, media, Uber drivers, barbers. They all want to know how to buy it. I will be writing an article about it before the holidays. So glad I mortgaged my house and put everything in Bitcoin at $50… 🙂

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But, But, But Say the Bears

Another month, another strong employment report. 228,000, new jobs were added in November, stronger than expected, as the impact of the hurricanes continues to weaken. The unemployment rate remain at a 17 year low while wages grew at an annualized rate of 2.5%, still frustratingly short of where the Fed and government wants it to be. Thankfully, it’s still slightly ahead of the inflation rate. Every month it seems like the bears get all hyped up into this report with all kinds of negative forecasts, only to be disappointed time and time again. Don’t worry. At some point, they will be right and I fully expect them to crow how they got it right all along.

As I have said all year, the theme of reality over rhetoric continues to be in play and accurate. If you get caught up in all the nonsense on Twitter and congressional infighting and North Korea, etc. you would think that things cannot be good. However, the economy is growing faster than it did in 2015 and 2016 and we all know what the stock market has done.

The Dow and S&P 500 finished the week at new closing highs, but did not make new all-time highs. That won’t matter for more than a week or so, max. The other three indices performed fine and should see new highs this month. The only serious concern I have right now is that the semis have ceded leadership and are struggling. The market can continue higher with that group, but it makes it easier if they went along for the ride. We’re seeing really nice behavior from many other sectors.

In the very short-term, there are two small headwinds to deal with. One continues to be that stocks have a very mild seasonally weak period for another week or so. Two is that rallies, especially to new highs on an employment report day often are signs of some short-term exhaustion. By that, I mean we could see a 1-3% soft patch, nothing really significant although with volatility at all-time lows, it would feel much worse than it is.

The week ahead will be squarely focused on the Federal Reserve’s final meeting of 2017 with the expectation for another 1/4% rate hike. That meeting ends on Wednesday at 2:00 pm. More on that during the week.

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Vicious Rotation and Wicked Reversals Dominate

2017 has been the year without volatility. Who would believe that stocks haven’t declined even 5% on a closing basis, let alone 10%. It’s crazy! And once the calendar gets to November, downside volatility becomes that much more difficult to see as potential catalysts for a decline go down significantly. Yes, of course, there is always that stray geopolitical event, like the infamous “Fiscal Cliff” in 2012 which I dubbed the equivalent of the Y2K hoax. The 2012 chart is below.

2017 has a potential government shutdown looming as well as some fairly fierce sector rotation as the proposed tax reform gets through Congress. I guess stocks could get a tiny bit cranky if the House and Senate cannot successfully get the bill out of conference this month. I just cannot believe there will be a December government shutdown.

Much  more importantly, we have seen a rush into the banks, discretionary, homebuilders, industrials and transports at the expense of technology, utilities and REITs. This is exactly what we saw after Trump won, but so far, on a much smaller scale. Interestingly, this time around, bonds are not plunging like they did 13 months ago.

Remember, stocks have a bit of a seasonal headwind for another week or two. We saw wild action on Friday with the erroneous Flynn announcement and then the largest downside reversal since 2000 on Monday, according to sentimentrader.com. Rather than show my usual daily chart, below is a 15 minute chart so you can see just how volatile the action has been.

In the end, the bull market isn’t over. This rally isn’t over. A small dose of vol is here. Semis ceded their leadership position, but banks, discretionary and transports have stepped up. We just need to see high yield bonds score new highs to further insulate stocks from a correction.

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Can Flynn End the Bull Market?

One month to go in 2017. Lots and lots of underinvested people chasing returns now. What the heck do they do? Especially when pullbacks have been few and far between. We haven’t seen a 10% decline since February 2016. There have been no pullbacks of 5-10% at all since then. The biggest decline we have seen was in Q3/Q4 2016 and that was 4.63% in the S&P 500. Hardly what people have been waiting for to invest their cash and that was under Dow 18,000.

This morning, news broke that Michael Flynn pleaded guilty to lying to the FBI and is prepared to cooperate with the Mueller investigation. Immediately, stocks and the dollar plunged while bonds and gold rallied. As Mike Pence supporters are readying President Pence, the bears are hoping that this is the big one. The end of the “Trump Trade”. Phooey I say! The bull market isn’t over.

Seasonally, there is a soft patch from today through December 15. That means that historically, stocks have a headwind for the next two weeks, not that they have to plunge. Countering that is that stocks just closed the month at their highest level of the month. Historically, that has led to strong upside over the next week roughly 70% of the time.

Stocks have been uber strong for a long, long time. The Flynn news will increase volatility and give a little downside nudge to the market. However, tax reform will still pass. Corporate earnings are setting records. The economy is getting stronger quarter by quarter. Buy any and all weakness until proven otherwise. Donald Trump didn’t create the bull market or feed it. The credit goes to the GOP.

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Decisive Breakout in Stocks but Bitcoin…

First, it seems like all of the talk lately and this week is about Bitcoin and the crypto sector. Do you care?

Regardless,, will you take 10 seconds to answer three short questions?

TAKE SURVEY

With post-Thanksgiving being slightly seasonally weak, Tuesday’s action was a pleasant surprise for the bulls. Yesterday, I mentioned that while there were a number of very short-term crosscurrents, the intermediate-term remained positive. Four of the five major indices saw decisive and significant breakouts to new highs while the NASDAQ 100 lagged behind and seems to be in for a short-term struggle.

Last week, I briefly spoke about how the semis looked tired if I had to nitpick. That remains the case. Banks had a huge up day and are poised for new highs sooner than later, really good sign for the bull market. Discretionary continued its blistering run while the transports are not only playing catch up, but leading as well. Mostly very good news for the bulls.

High yield bonds have bounced back smartly from their two week drubbing, but they need to step up even more heading into year-end.

The NYSE A/D Line is back to new highs after so many pundits used the modest November pullback as ammunition to call for a correction or end of the bull market. When these jokesters finally avow the bull market after 8+ years of being perennially wrong, we will all know to watch out for a bear market!

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Bulls Remain In Charge

Stocks came back from the semi-holiday weekend in good spirits, at least for the morning. There was no follow through though as a post-Thanksgiving hangover is usually the theme for the first day or two of the new week.  We still have a variety of crosscurrents over the very, very short-term, but looking out one to three months, the picture is positive.

As you know, it’s very difficult to see an end of year decline, especially when the year has been up. Additionally, December is usually an up month when it begins in an uptrend as defined by price being higher than the average price of the past 200 days. Remember, mutual funds typically close their books their books at the end of October and often square up gains and losses. Additionally, in an up year investors will often wait to take gains until the new year to forestall paying capital gains. Finally, companies rarely warn regarding earnings in December. It would really take an exogenous event to cause a meaningful decline next month.

Given all that, the ongoing theme remains to buy any and all weakness until proven otherwise. In “normal” years, stocks will see a very mild pullback early in December where small caps become the leader to year-end and into January. 2017 has certainly not been a “normal” year as volatility as been essentially nil.

On a separate and final note, Jay Powell’s Senate confirmation hearing to succeed Janet Yellen as Fed chair is today. I would be absolutely shocked if Powell made any unexpected comments that impacted stocks. It should be very ho hum.

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Another Seasonally Strong Day but Europe Should Not be Ignored

I hope everyone had a great Thanksgiving with lots of good food, family and friends. As I wore the hypocrite hat this year, we celebrated ours on Wednesday night so my daughter and I could fly to Oregon on Thursday to watch the UCONN men and women play in the PK80 basketball tournament in honor of Phil Knight’s (Nike founder) 80th birthday. The men played such a great game to beat Oregon last night, something I definitely did not expect. The fun continues.

Turning to the markets and the holiday-shortened half day, as Wednesday was seasonally a very strong day, the same can be said of Friday. Stocks rally most of the time and certainly much more than random. I expect to see new highs by most, if not all of the major indices. High yield bonds continue to look good. We’re seeing broad participation in the rally. Key sectors are strong. If I had to nitpick I would say that they semis look a little tired and are in need of a pause or small pullback.

One thing I want to continue to keep on the radar screen in the hugely big picture is that all is definitely not well in Europe. While Merkel did end up winning the German election, she did so with only 33% of the vote. And now she cannot form a coalition government. At the same time, there are many problems in the Spanish and Italian banking systems which few seem to be discussing or even caring about. This is not a here and now issue, but it will certainly be one of those big picture things to keep an eye on in 2018 as this could have widespread impact on the markets and economy.

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Long & Strong for the Bulls. Happy Thanksgiving!

The bulls were long and strong on Tuesday with all five major stock market indices hitting all-time highs. You just cannot argue with price momentum. Semis, discretionary and banks were strong while the banks were just okay. We saw very good participation when looking at the NYSE A/D Line. High yield bonds were up but they could not add to their first half hour gains. Commodities, led by oil, just finished a little pullback and seem poised for a run to new highs by year-end. Because transports also look like they are ready for run, it will be interesting to see if we can get oil and transports to run together.

The day before Thanksgiving is traditionally one of the strongest days of the year. Because of Tuesday’s big surge, I wouldn’t be surprised if we just saw a mild drift higher without much fanfare. And Friday, where stocks are only open until 1PM, is one of the slowest days of the year.

The biggest news right now is that Angela Merkel cannot create a coalition government in Germany. For years, I viewed the 2017 election as the single most important geopolitical event since 1999. When she won, people questioned my take. Remember, Merkel won with only 33% of the vote,  not exactly a strong mandate. Don’t underestimate her inability to form a government. Elections may be called again for 2018.

Finally, I want to wish all of our loyal and devoted readers a very Happy, Safe and Meaningful Thanksgiving! It’s my favorite holiday of the year with family, food, wine and football. This year, I am donning the hypocrite hat as we are having Thanksgiving dinner on Wednesday so my daughter and I can travel to Oregon to watch the UCONN men and women participate in the Phil Knight (Founder of Nike) PK80 basketball tournament. Whatever you do, hopefully you can pause and realize that there is always something to be thankful for.

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