Stocks are opening sharply higher after Wednesday’s drubbing. We have not seen the ultimate low for a good rally. That looks to come in February. This little rally should be more than a one day wonder, but if it somehow fizzles out and closes in the red today, look out below! I think you could see one of those trap door, elevator shaft declines that forces a mini panic. I don’t think that scenario plays out, but it’s something to watch today.
Archives for January 2014
On Monday, I discussed how a very short-term rally was close at hand. I continued that yesterday morning about the prospects for a Turnaround Tuesday rally. The bulls came back to work on Tuesday in a very underwhelming way. The open was without conviction. Volume was anemic, further solidifying my stance that the market isn’t close to a low of any significance. With Apple’s disaster, stocks had a chance for a big gap down and short-term washout. But that wasn’t to be.
Today, we have the conclusion of Ben Bernanke’s final meeting as Chairman of the Federal Reserve. Fed statement day is typically a green day for stocks, especially when they are not at new highs, which they are not right now. The short-term snap back is supposed continue a bit longer before rolling over again and revisiting the recent lows, however not doing so would only add to my current intermediate-term negativity on the market.
Regarding the Fed, the market is expecting another $10 billion in taper to $65 billion per month. It’s no secret that I think any taper is absolutely the WRONG move and our markets and economy will suffer consequences from this. I have heard from people that the Fed is watching the stock market decline and will postpone the next taper. First, I think that is ludicrous. Stocks are up 10%+ just from October, let alone the roughly 150% from the March 2009 bottom. The Fed would lose even more credibility by worrying about a 3% decline without any signs of stress in the much more important credit markets. Sentiment has just notched back to neutral from being overly bullish for months. There is no way the Fed really cares about the stock market at this juncture.
It’s going to be an interesting day, especially after 2:00pm and coming from what looks like a very weak opening!
The carnage continued yet again on Monday, spilling over from Friday’s sharp decline. If you turned on the TV, you would have thought stocks are down double digits and in free fall the way the pundits are talking about this little decline. But you know better. Since the first of the year when the market started losing the positive calendar tailwind, I have been discussing a scenario for a routine and healthy bull market pullback of 5-10%. That’s where we are today.
Apple’s somewhat rotten earnings are the headline of the day, but that shouldn’t be a long-term drag. There are other, more important macro concerns at this point. Yesterday, I wrote about the likelihood of a very short-term bounce developing in the stock market, but the bulls are not making it easy. After declines like we have seen over the past few sessions, it is typical to see either a washout where stocks open sharply lower and then firm throughout the day or s snap back where stocks higher and continue higher all day. We have not seen either set up yet.
The possibility for a Turnaround Tuesday exists today although the Dow and S&P are not tipping their hand as we approach the open. The bulls are supposed to make a little stand today. With bonds weakening yesterday during the decline, that is another clue for some attempted firmness today. I would become more concerned if we see rallies fail during the day and the major indices close at their lows.
The latest Street$marts has been posted.
Stocks closed last week on a very ugly note with an across the board rout after underwhelming earnings and continued problems in the emerging markets. This is exactly the type of decline I spoke about for the past few weeks. All of the necessary ingredients were there and price finally succumbed.
Friday was so ugly that it can actually be construed as okay in the very, very short-term. Days like that either lead to higher openings on Monday to relieve the little oversold condition or one more hard down day followed by Turnaround Tuesday. Either way, history says that stocks should be close to a very short-term bounce. Stress short-term.
Until proven otherwise, the bull market remains alive and is undergoing some routine and normal leadership rotation. At some point energy is going to lead before the bull market ends and that may be just around the corner.
For now, keep your powder dry and enjoy the rally in bonds!
Here is the link to my segment on Fox 61 in CT, Top 5 Tips for Financial Fitness in 2014
Since the start of the year, I have been very cautious on the stock market, primarily due to market sentiment being at rally killing levels along with finally losing the tailwind of the positive calendar effects. The risk/reward looked so unfavorable that we took across the board action in many of our portfolios raising cash to even 100% in some cases, levels not seen since 2012.
On average the major indices have gone nowhere for the past month with the Dow being the weakest and the Nasdaq 100 being the strongest. Over the past two days, the stock market has fallen with a slew of international news and earnings being blamed. That’s only partially true. If stocks were emerging from a low, they would have ignored the “bad” news and powered higher. Stocks were looking for an excuse to pullback and they got it.
My target has been for a 5-10% decline, the largest since 2012, and that’s still the case. I reference the lows hit in December when the Fed announced the taper as price levels to watch in a general sense.
While the carnage has been real this week, market internals remain very solid and should lead to much higher prices after the weakness ends. I remain steadfast in my belief that while the bull market is old and wrinkly it is very much alive. The DNA markers we typically see when a bull market ends are simply not there at this time and they will take weeks, months or even quarters to appear.
For now, the short-term decline continues and we will begin looking for signs of a bottom at the -5% mark.
I like to take things at face value. It’s makes life so much easier that way! But every once in a while, and probably more so in this business, some things just make you go “hmmmmmmmmm…”. Two weeks ago, Goldman Sachs issued a very public call on the biotech sector. If it was almost anyone else, you would shrug your shoulders and move on. However, with Goldman, I sometimes take the “curious” stance, rightly or wrongly so.
Goldman downgraded biotech as it digested a series of all-time highs. While it wouldn’t have been the place I would have downgraded a group, it’s certainly their prerogative. Curiously, that day saw biotechs’ lowest close of 2014 and a breakdown from the pattern which presumably caused some stops to be hit and more selling. But the very next day, the sector began a 9 day, 10% nearly vertical rally.
So the question that begs to be asked is, did Goldman downgrade to force stock from weak hands to strong hands before the big rally? OR, did Goldman just make an embarrassing bad call in the short-term?
I will let you decide…
Like a broken record, stock market sentiment remains at rally killing levels as it has for the past two months or so, but that certainly didn’t prevented us from taking full advantage of the Santa Claus rally. Now that the calendar turned and the most bullish period of the year has ended, the tailwind for stocks isn’t as strong. As the market has been for some time, it is stretched, very overbought and in need of good 5-10% pullback.
The very short-term can probably go either way with one more all-time high push this week or an immediate decline, but I do not believe a push higher will ignite another leg higher. Once last week’s low is closed beneath on a daily basis, the market should smack in the middle of the 5-10% pullback. Again, the bull market is not over and any weakness remains a buying opportunity until proven otherwise. Dow 17,000 or higher remains in sight.
The secular bull market in the dollar turns a very quiet 6 years old in March and we should see some real upside fireworks this year. I am most intrigued by the Treasury bond market here as sentiment continues to be awful and price is just starting to percolate. We have already seen very strong moves in the investment grade bond market which you can see using LQD and the much maligned muni bond market is showing some good signs this year. Use MUB as a proxy for that.
While I do not like commodities as a whole, copper has a short-term set up that has at least 2:1 risk reward to the long side. Corn looks really interesting here as sentiment has been at bear market killing levels and price is just beginning to turn around. Hmmmmm. That could be just a short-term play or end up being the trade of 2014.
The overly anticipated employment report showed a disappointing 74,000 jobs being created in December. I have already heard the pundits argue away ad nauseam this report as an outlier that will be revised higher in subsequent months, something I don’t rule out. However, they also reason that all is great and our economy is about to go into warp speed.
I could not disagree more as I have since the economy bottomed in 2009. All was not ok in 2009 or 2010 or 2011 or 2012 or 2013 and not now. We continue to live through a very typical post economic crisis recovery that will a full economic cycle to normalize. As I have said ad nauseam, when we get to the other side of the next recession, all will be back to whatever normal is, but that is a ways away.
Even if Friday’s number wasn’t pathetic at 74,000, the biggest concern is that the participation rate considers to hit multi decade lows. The unemployment rate may have dropped to 6.7%, but it got that way because workers are leaving the pool. They have stopped looking for work and are no longer included. The participation rate is down to the worst levels since 1978, certainly not an enviable time in our history when President Carter and the Fed made disastrous mistakes with our economy.
Moreover, according to the USA Today, we have now seen only the third time since 1948 when the participation rate has shrunk year over year. Of course, many of the perma bullish pundits explain all this away as demographics instead of despondency of the inability to find a job. I am not an economist and not an expert on the issue, but even if it is a combination of both, it is cause for concern.