Here is the latest Street$marts that talks about Black Friday, Facebook, Apple, the “dreaded” Fiscal Cliff, how the bull market ends and some evidence of a weakening economy.
Here is the latest Street$marts:
Besides offering an essentially sideways forecast, which has been our thesis for a month, we also throw in another unusual economic indicator along with an interesting story from someone on the younger side!
Stocks have quietly seen a fairly strong selling wave over the past eight days. Coincidentally (or not), that has been ever since the European Union announced their latest rescue attempt from European Stability Mechanism. After that one huge rally day, stocks have not behaved well and after today (Thursday), they have given back the entire rally.
From my seat, the stock market is at an interesting juncture here. I wouldn’t say “critical”, but the bulls need to step up here and make some noise. Closing below the low we saw this morning, say 12450 on the Dow, would likely set off a quick and sharp multi hundred point drop before the next opportunity came for the bulls. Right now, the bulls have fought off the bears for two straight days. It’s for them to make some headway over the coming few sessions.
The latest Streetsmarts is out and if you subscribe to that letter (http://www.investfortomorrow.com/newsletter.asp), it should be in your inbox. Otherwise, I will post it here over the weekend.
Have a great weekend!
Earlier this week, I did an interview with Fox Business about the possible increase in taxes when the Bush/Obama tax cuts expire in December. Later in the segment, we discussed earnings season, which began this week with Alcoa, and how just one quarter off record earnings, investors are becoming so pessimistic.
While it certainly feels like a negative year in the markets, the major indices remain in the black for 2012. In fact, the year is very closely following the typical presidential election year with a Q1 rally, springtime low and summer rally. If this continues to hold, we should see a fall swoon to a bottom before the election and then robust year-end rally.
To view any and all previous spots in the media, please visit: http://www.investfortomorrow.com/InMedia.asp
On Friday’s CNBC segment, I spoke about the range bound market with the potential for a fall swoon before the election. But in any market, there are always opportunities and this time is no different.
So far this week, stocks have not behaved well, but it’s far from a rout and the trading range continues. On Wednesday, we get a peak at the minutes from the Fed meeting and folks will take any scrap of comments that leads to QE3 coming. As I have said since QE1 was launched, we will see QE2, 3, 4, 5 with the Fed’s balance sheet approaching $5 trillion.
On Monday, I was in the city spending some time with my friends at Yahoo Finance. As always, I thank them for their hospitality and Jeff Macke for the engaging conversation.
With the volume and velocity of information out there, trying to get a read on the stock market is like attempting to get a sip of water from a firehose. Thankfully Paul Schatz of Heritage Capital has three ways to check the health of the market and durability of its trends. They don’t work every single time but Schatz says these are great “tells” as to whether or not what’s happening from day to day is reality or a mirage.
1. High Yield Bonds (HYG)
More commonly known as “junk bonds,” high yield corporate debt has been one of the favorite plays for investors who want decent cash flow with slightly more safety than stocks. Historically low rates on U.S. Government debt have made junk bonds an attractive way to play in between bonds and equity.
That’s why junk is the canary in the coal mine according to Schatz. Risk appetites should be relatively consistent across the board. In other words, if stocks are rising, corporate debt should be moving higher as well.
“If the market rallies and high yield does not participate that’s worry sign number one,” says Schatz.
2. S&P 400 Mid-Caps (^MID)
The S&P400 is a measure of stocks not quite big enough to make the cut for the S&P 500 (^GSPC). Companies this size tend to be hit harder by economic fluctuations than those with larger balance sheets or more lines of business. This makes the mid-caps a way to gauge the real health of the earnings environment for corporate America.
“Traditionally in bull markets mid-caps lead,” Schatz says. When the S&P 400 isn’t leading, or at least playing along with a market rally, it’s time to take profits.
3. Dow Jones Transportation Index (^DJT)
As would be expected, the Transports are a collection of 20 American companies in the business of moving things from point A to point B. Railroads, airlines, and trucking basically. Even in a virtual age most traders regard the Transports, or “Trannies” as a good gauge of underlying economic activity.
By market tradition, real bull markets only come when both the Dow Jones Industrial Average (^DJI) and the Transports are breaking out together. At the moment there’s little risk of either happening, but Schatz suggests traders stay on the lookout.
“If the Dow Jones Transports can take out the April highs I think it’s a straight 5 – 10% shot higher,” he says. Though he concedes it’s a “long way to Tipperary” before they do.
The stock market will experience a summer rally, followed by a sell-off in the fall right before the election, Paul Schatz, chief investment officer of Heritage Capital LLC, told Yahoo.
Schatz said the first half of the year had a few unique twists, but it has been fairly typical for election-year market indices.
“It’s been an interesting first half,” he said. “We were vertical for a while and then we gave almost all of it back and now we’re kind of treading water in no-man’s land.”
Schatz predicted we already had a springtime low.
“The early June lows are going to be the lows for a while,” he told Yahoo.
“We will rally and peak some time at the end of July to the end of August. Then we’ll have the traditional sell-off before the election, postconventions.
“Stocks already had the summer declines we saw in 2011 and 2010,” he stated. “It’s rare when you see it three years in a row. … I don’t think it’s anything near what we saw last year.”
After the election, Schatz expects a year-end rally.
“So many of the bogeys for the market are known, everyone is worried about the same thing — the fiscal cliff, the euro, Greece, Spain, Italy — they’re all on the table now,” he added.
Schatz predicts that the problems in Europe will loom for the next several years.
“They’re going to get their act together this decade. It may take three, five or seven years to get their act together, because the alternative is nonexistence,” Schatz noted. “I mean Europe won’t exist. I’m not talking about the euro, I mean the continent.”
Europe will take its “sweet time,” but will be fine in five to 10 years.
“We’ve been underweight Europe forever and will stay underweight,” he added.
Regarding the fiscal cliff, Schatz said, “When push comes to shove, the lame duck Congress comes in, they make the middle-class tax cuts permanent, they extend the upper-class tax cuts for another six, 12, 18 months and let the next group worry about it.
“But I don’t think they’re going to solve that now,” he added. “There’s no impetus, there’s no catalyst for it.”
By the end of the year, Schatz predicts that the S&P 500 will be “1,400ish” and says he will keep an overweight position in biotechs.
Meanwhile, the so-called “fiscal cliff” looming at the start of 2013 with planned tax increases and spending cuts may begin to push the U.S. into a recession as early as the second half of this year, Bank of America’s top U.S. economist Ethan Harris tells Fortune.
Last month, the Congressional Budget Office warned the fiscal cliff could cause GDP to shrink by 1.3 percent in the first half of 2013, even as many economists are betting the politicians in Washington will cut a deal to avert the worst effects of the measures.
Harris says the fiscal cliff will begin to make itself felt long before it actually takes effect. Corporate earnings will slow in the second half and job growth may drop to nothing by October, pushing the United States towards the brink of another recession.
Read more on Newsmax.com: Heritage Capital CIO Expects Summer Rally, Pre-Election Sell-Off
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The latest Street$marts is out, “What would Thomas Jefferson Say to the Architects?” http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120625.pdf
Topics in this issue include a little known, but important economic indicator, the latest pullback in stocks and where gold is headed.
Today is Fed day with split announcements. At 12:30pm, the official announcment and statement come out and then Ben Bernanke will hold his press conference at 2:15pm.
The Fed is not going to move rates. They will likely downgrade their view of the economy.
So far in 2012, every single Fed statement day has been a big day for the bulls.
The market is anticipating some extension of stimulus or outright quantitative easing (creating money to buy securities, likely in the bond market). If the Fed obliges, I look for stocks to extend the week’s gains. If not, we should see a quick downdraft and then another rally attempt.
The latest Street$marts has just been posted!