Archives for February 2014

2014 Fearless Forecast

It’s really embarrassing that it’s been almost two months since I began speaking about my thoughts for 2014, yet I have been unable to mass distribute them. Shame on me! So far, to those folks who have read them, the comments and questions have been great. Keep them coming!

Regular readers of Street$marts and this blog won’t be surprised at most of the forecast, but I did throw in a few new items. As always, I had a lot of fun thinking about it and creating it, although it has no bearing on how we manage money for our clients.

U.S. Stock Market – After an epic 2013 for the stock market, what can we expect for an encore? To begin with, it’s a mid-term election year and the second year of the president’s term. Historically, that hasn’t been so kind to investors with some of the largest declines in history as well as the end of some bear markets. More recently, however, 2010 and 2006 were kind in the end, but volatile during the year.

Looking at the big picture, there are no signs yet that the old and wrinkly bull market is ending anytime soon and my analysis still has upside projections to at least 17,000. We typically see a number of warning signs with various leads times, but only one of those are in place today and that may be corrected. Those warnings signs may set up later, but at this time, stocks remain the place to be on any dips. With that said, a routine, normal and healthy 5-10% bull market pullback should be seen during the first quarter that leads to more all-time highs later in the year.

On the index front, although the major US indices are highly correlated to each other, it’s time for the Russell 2000 index of small caps to cede leadership to its large and mega cap cousins.

U.S. Stock Market Sectors – Technology is usually the group of choice each January and I continue to rank it as a market performer at best. I wouldn’t run out and load up on this sector unless we saw a sizable market correction. As the economy and markets are late in the cycle, sectors like REITs and energy should provide solid relative performance, especially later in the year. Even perennially hated utilities should grab a bid.  With my long-term positive stance on the dollar, it makes liking commodities more difficult but I do believe 2014 will reward buying the dip and selling the rip in this area.

On the wild side, biotech, pharma and healthcare should go parabolic during the first half of the year with the social media group also a possible candidate. Investors should keep in mind that parabolic rallies like the Dotcoms never, ever end by going sideways to rest.  They end in disaster and ruin like we saw with crude oil in 2008.

It’s rare for me to really hammer on sectors in the annual forecast, but after five years of strong outperformance, I am very negative on consumer discretionary and retail. I think 2014 will be the beginning of the end for this trade and similar to my stance on the small caps in general, I would pair this with a long in large or mega caps.

All in all, 2014 looks to be more of a digestive year, like 2011, 2004 and 1992 than a full fledged bull or bear year.

Volatility – There are many ways to discuss volatility, but the one that resonates well with me is that of a sine wave. It moves fully from one side all the way to the other, like a pendulum. While the market may not operate so neatly, low periods of vol are usually followed by higher periods of vol and vice versa Put another way; volatility compression leads to volatility expansion and volatility expansion leads to volatility compression.

2012 was largely a non volatile year, but 2013 was downright boring from a volatility standpoint. That can be traced to the Fed’s QE Unlimited, which will be going away. So 2014 looks to be a whole lot more volatile than 2013 and probably 2012. If so, that will likely lead to 2015 being even more so as volatility normalizes.

In short, the investment play is to buy vol anytime it heads back to the low end of the range and sell it into spikes, which there should be many.

Long-Term Treasuries -I am so beyond sick and tired of hearing the pundits proclaim that “bonds are in a bubble”. Statements like those absolutely wreak of ignorance. Bubbles are all about greed, clamoring and fear of missing the boat. They are formed in many stages with the final one being a total rush into the asset, primarily by the public. During the modern investing era, new products are launched to give greater access to Main Street. Your neighbors all own the asset and it’s all over the media. There is nothing about bubbles that has pertained to the bond market and there never will be.

The secular bull market in bonds may have officially ended in mid 2012,  but that doesn’t mean and shouldn’t mean that interest rates are heading higher in spike fashion. Clearly, over the coming years and decades, rates will normalize and head back to mid single digits unless the Fed makes a huge blunder like the Arthur Burns led Fed did in the 1970s.

I envision rates heading higher like we saw in the 1950s and 60s, slowly and gradually. Two steps up and one step back. We have already seen the 10 year note yield double as the first stage of the bear market began. I do not believe we will see anything close to a doubling anytime soon. Rather, as I first wrote about and publicized last November, bond market sentiment had become so negative that a rally in bond (decline in yields) wasn’t too far off.

For 2014, the bond market should offer a solid risk/return profile, at least for the first half of the year as inflation remains nearly non-existent, our economy slows and Europe deals with deflation, all against the backdrop of the Fed reducing its purchase of treasuries, for now. While the 3.50% to 4% area on the 10 year looks like a good intermediate-term target, it should not get there right away and investors should not become perma bears on bonds.

Corporate bonds – This group has seen a much stronger rally from their 2013 lows than their treasury cousins, but still behaves well and should see strength during the first half of 2014. Further down the risk spectrum, high yield bonds will continue their 2013 position of lagging and underperforming as the slightest ripple in the liquidity stream could upset this apple cart quickly.

Dollar – I am posting the exact comments as I did last year. Since THE bottom in 2008, the dollar has been in a trading range which I have stated is the beginning of a new, long-term secular bull market. Anyone who has bought strength or sold weakness has been punished and that’s likely to continue for a while before the greenback finally breaks out above 90 on its way to target number one at 100 over the coming years.

I remain very bullish on the buck long-term and believe it can be bought into weakness for a long time, especially given the Fed’s exit from QE, the ramping up of QE in Japan and the anticipated QE in Europe.

Gold – The yellow metal’s secular bull market is not over and it will take another year or so to reinvigorate it. Gold saw twin price lows in the $1180 area that should lead to test targets of $1360, potentially $1440 with a chance of seeing north of $1500 before ultimately turning lower again. When the ECB hops on board the QE bandwagon, look for gold to break out above $2000 later this decade on its way to $2500 and higher.

Commodities – I continue to favor the agricultural and tropical commodities like wheat, corn, beans, sugar, coffee and cotton over the rest with corn being among the candidates for trade of the year. They have been under pressure for a while and weakness should be viewed favorably.

Inflation – I still feel like a broken record year after year after year after year, but I don’t have many concerns about inflation, at least not until we get to the other side of the next recession. The Fed is trying to engineer some healthy inflation, very unsuccessfully I might add. $5 TRILLION in QE didn’t produce any. Money velocity continues its downward spiral. Housing prices are stable. Wage growth is essentially zero and the banks are holding trillions of dollars on reserve with the Fed. This economy still has rolling whiffs of deflation, but nothing compared to the outright deflation in Europe and Japan.

Economy – As we start another new post financial crisis year, no one should be shocked to learn that the masses are positive on our economy yet again with projected GDP growth rates in the mid 3s. I think I have said it every year since the recovery began, but I will repeat it again. We are living through the typical post financial crisis recovery that teases and tantalizes on the upside and worries and frets on the downside. As with other post financial crisis recoveries around the globe, our economy will not return to an historical sense of normalcy until we get to the other side of the next recession.

Federal Reserve – It’s a whole new ball game for the Fed in 2014; or is it as Janet Yellen takes over for one of my financial heroes, Ben S. Bernanke. I believe history will judge Bernanke as the single greatest Fed chair of all-time who should have been given hazard for having to sit and endure so many hours in front of the incompetents in Congress.

With all of the permanent voting members but Jeremy Stein in the dove camp, Richard Fisher and Charles Plosser will have their hawkish hands full this year dissenting on any vote that doesn’t involve continued tapering. Keep in mind that Fisher, Plosser and Jeff Lacker were the three amigos who fought cutting rates and turning on the fire hoses during the summer of 2007 when the sub prime crisis was unfolding.

The Fed’s multi-year money printing program or QE will sadly come to an end in 2014 reaching my longstanding target of $5 trillion. I vividly remember throwing out that number almost four years ago on CNBC’s Squawk Box and was almost laughed off the show. That one comment generated more emails than any other forecast I have made on TV.

As I have said for more than a year, I absolutely do not believe the Fed should even consider tapering until we get to the other side of the next recession, even though QE is having diminished results. It’s the wrong thing to do at the wrong time. It was wrong in 1937 and that caused the Great Depression Part II. It was wrong in Japan more times than I can count over the past 25 years. The Fed should not stop QE.

Obviously, I am also 100% against even considering raising short-term interest rates at all in 2014 and likely much longer into the future. I am sure the three amigos of Plosser, Fisher and Lacker are foaming at the mouth in anticipation of higher rates, but if history has shown us anything about these bankers, they are usually dead wrong.

Unemployment – If you told me that the unemployment rate would fall towards 6.5% in 2013, I would have fallen on the floor and passed out from shock. The economy would have to have grown at 4% or more. Had I any inclination that the labor participation rate would fall to levels not seen since the mid 70s, I would have questioned the accuracy of the government’s numbers. Both occurred last year and those trends should continue in 2014 creating a conundrum for the Fed and economists. The raw unemployment number is strong, but certainly not for the right reasons.

Japanese Yen – And I thought Bernanke’s QE was the greatest financial experiment of all-time. Silly me! That title now belongs to the Bank of Japan. Not only is the yen in a confirmed bear market after a 15 year secular bull market, but the Bank of Japan remains committed to an historic money printing program that will dwarf that of the Bernanke Fed.

It’s Abe, Abe and more Abe. The yen has much, much farther to fall and all rallies can be sold until further notice. The BoJ has learned from their mistakes of the past when they prematurely ended QE. Look for them to go overboard in hopes of ending what has essentially mounted to 25 years of economic malaise and rolling bouts of deflation.

As the world saw in the previous “greatest financial experiment of all-time” with leverage, mortgages, artificially low rates, the alphabet soup of exotic financial products that no one understood and on and on, they rarely end well. Long-term, I have serious doubts, but for now…

Japan – If the Bank of Japan is going to print baby print, it’s very difficult not to be positive on the Nikkei for 2014. If their economy doesn’t respond quick enough or if their markets fall too fast, the BoJ will just crank it up a notch until it works. I remember arguing on TV that investors should never fight with the guy who owns the printing press and that certainly holds true in Japan. The Nikkei should be a leading developed market index in 2014.

Europe – Euro zone problems are far from over, but have taken a breather over the past year. ECB chief Mario Draghi’s jawboning to save the Euro currency has certainly worked in the short-term with sovereign bond yields declining precipitously in the PIIGS countries. At the same time, however, austerity is causing all sorts of economic issues with deflation being chief among them. If that genie gets out of the bottle in meaningful way, look out below!

Additionally, all is not well beneath the surface as a major, major crisis looms in France possibly late in 2014, 2015 or even into early 2016. Germany was certainly not happy about the bailouts in Greece and Cyprus or the ECB programs designed to save Spain and Italy.  The big test comes when the Germans have to figure out how to save a country that is too big to fail and too big to save. I smell a constitutional battle brewing to allow the ECB to outright print money.

Emerging Markets – Coming off an horrific 2013, emerging markets begin the new year on their heels with continued unrest, currency dilemmas and slowing growth. I will go out on a limb and forecast that the sector sees a significant low in the first half of 2014 and outright leadership and strength during the second half of the year led by the secondary countries. The macro trade would be owning a broad emerging markets ETF against a short in the US small caps.

Bulls Surprise to Upside

I should probably qualify that title with “me”. Bulls Surprise Me to Upside. After Wednesday’s action, it looked like IF the bears were going turn the tide back in their direction, that was the time. Almost 90% of NYSE stocks were trading above their 10 day moving averages while the vast majority was below their 50 day moving average. With stocks opening sharply lower on Thursday, that scenario started to play out.

However, someone forgot to tell the bulls that their time was up. By the end of the day, they not only reversed the open, but closed solidly higher on the day, a sign to me that more upside was coming. Friday saw another victory by the bulls and the odds now favor new highs in many, if not all, of the major indices. That will be very telling, which indices confirm and which don’t.

I do not believe that the stock market will see new highs and then rocket higher, at least not yet. There is still more work to do on the downside, probably this quarter although in the short-term, you have to respect the move until it reverses.

Having been positive on bonds since Q4 of 2013, that asset class remains the quiet winner. On the long-term treasury front, the February pullback should have refreshed the bulls for another move higher shortly. The dollar is approaching its fifth test of the downside over the past few months and it is supposed to stabilize this week.

Gold has also quietly rallied and should visit $1350 before long, a place where a logical pause should begin. Gold’s bottom last year was very atypical and that theme has been seen in other asset classes as well.

It should be another action filled week with emerging markets at the put up or shut up level.

Bounce and Then Some! Two Possible Scenarios

In the middle of last week, I posted a piece about the potential for a very short-term rally, which you can see here, http://investfortomorrowblog.com/archives/1002. Stocks had come down very hard and very fast relative to what we have seen over the past year. I didn’t believe the ultimate low was seen, but the market could certainly bounce for a few days to a week.

It’s a week later now and boy did the market bounce! The NASDAQ 100 even made it to a new high for 2014, although the other four major indices I regularly discuss still have a ways to go. Market sentiment never got truly dire a week ago, just a bit pessimistic, and now it’s back to the bullish side of neutral.

While price has pretty much rallied in vertical fashion, market internals have been underwhelming, meaning that the foundation of the rally is shaky. The market is now in the zone where the rally is supposed to end, IF it’s going to end before new highs. See the chart of the S&P below with the two possible scenarios.

 sp1

The “All Important” Employment Report

Today is Jobs Friday and the pundits are usually out in force predicting the number of non-farm payroll jobs created. That’s one area I usually steer clear of as it is probably the most volatile, inconsistent and unpredictable economic number of the month. What’s even more futile is forecasting the market’s reaction, which is sometimes a head scratcher.

Last month’s number was a complete and utter disaster, but the stock market barely shrugged and tested the highs the following week. I keep hearing people blaming one area that is totally defenseless, Mother Nature. It seems like whenever the pundits are stumped, they blame the weather. Given the trend, last month’s number is supposed to be an outlier that potentially gets revised upward today with at least a decent number. As I said, this is all just guessing. We will see shortly. Regardless of the number, I do not believe for a second that it will alter the Fed’s tapering course, although as you know, I vehemently disagree with any taper!

In yesterday’s pre-market piece, http://investfortomorrowblog.com/archives/1002, I spoke about a very short-term rally beginning and the market did not disappoint. I do not believe THE bottom is in, but the bulls can certainly push a little higher if they want to today. This remains a “sell the rally” market until we do a better job of rebuilding the wall of worry. Sentiment numbers are well on the way and should be there with another push to new 2014 lows.

Bears Take a Breather

Here is the link to the segment I did on Fox Business the other day with Lori Rothman and Adam Shapiro. This pretty much spells out what I have written here regarding my thoughts on the market this quarter. Thanks to Adam and Lori for letting me articulate my forecast.

http://video.foxbusiness.com/v/3151668123001/ingredients-for-ending-a-bull-market/#sp=show-clips

Stock market action over the past two days gives a glimmer of hope to the bulls for a short-term rally. I do not believe the final bottom is in as I have mentioned before, but this is one of those times where the bears look a little tired and should let the bulls make a little noise. Some of the sentiment indicators are showing some excessive very short-term pessimism that could support a move, but given that I remain negative for more than a trading rally, holding above this week’s lows are key to that scenario. If the major indices close below those levels, the bears should quickly attack and it could be ugly.

In a perfect world, which, seriously, when do I ever get; stocks would rally for a few days to a week and then rollover again to new lows. Those lows would see some panic, much more negative sentiment, but not as negative technical indicators than earlier this week. Then we would have the ingredients in place for a better rally. That all sounds really nice, but Mr. Market rarely gives us exactly what we want.

For now, if we do get a rally, I am keenly focused on the quality of the move. As I mentioned on Twitter yesterday, the biotech and transportation sectors look like they are worth a “poke” on the long side as long as they do not close below Wednesday’s low.

Everyone is focused on tomorrow’s monthly employment report after the disastrous one we had last month. My initial take is that this report will be decent and we will see upward revisions from last month. This report is so beyond volatile, inconsistent and unpredictable, let alone trying to interpret the market’s reaction beforehand.

Ugliness & Carnage Continues… As Expected

The latest Street$marts has been posted.

http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20140203.pdf

Fox Business TODAY @ 1:05 PM

I am going to be on Fox Business’ Markets Now at 1:05 PM EST today, February 4, discussing the stock market’s plunge from the perspective of someone who forecasted it a month ago.

Yesterday’s collapse was very broad based with 94% of the volume on the downside. That’s the second 90%+ downside volume day of the decline and while a little late, confirmed that the stock market is in a corrective phase.

Sentiment has come way off the overly bullish and complacent levels we saw last quarter and we are just starting to creep past neutral into a tiny bit pessimistic. Another solid day or two on the downside should really move people into the fear and mini panic camp, which will help to establish a bottom in stocks.

Today has the potential for another Turnaround Tuesday. The last one fizzled in one day. With stocks closing at their lows yesterday, the last thing the bulls want to see is a higher open that continues higher all day. That’s a snapback rally, which is almost always followed by another selling wave within a week or so. Much more constructive action would have stocks opening lower and firming throughout the day, closing near their highs. Judging where the futures are now, I doubt we get the latter.

The bottom line is that the correction is beginning to restore the wall of worry and there should be a tradable low this month.

Battered, Bruised & Beaten Up

After that “thrilling” Super Bowl, the markets come back to work kind of like Peyton Manning, battered, bruised, beaten up and in need of some TLC. Unfortunately, any TLC seen in the stock market should only be temporary and lead to more selling and lower lows.

I am starting to see some constructive things, but the market isn’t there yet. Downside targets are beginning to develop and the easiest one in the S&P 500 is the 1700 area, which represents a measured move as well as the widely watched 200 day moving average. That area falls nicely into what I forecasted to begin the year, a 5-10% pullback.

As Hannibal from the A-Team affectionately ended every episode with, “Don’t you just love it when a plan comes together?!?!”

For now, keep your powder dry as we are and look forward to buying at much lower levels that the pundits predicted just one month ago!

Thanks to my friend and business colleague/partner Dave Moenning (stateofthemarkets.com) for the Peyton pic.

Peyton-Manning-Super-Bowl-2014-650x400

Super Bowl

For all of the 90’s whichever team I thought would win, usually lost. Of course, my own team the Dallas Cowboys won three times and I never wanted to jinx them by picking them! When the century turned and my team began to stink, my Super Bowl picking record improved dramatically.

This year, I am very torn. My heart and family go to the class act of the NFL, Peyton Manning and the Denver Broncos. There are few stories as good as Peyton Manning’s. However, it seems like everyone is rooting for and picking the Broncos. Seattle’s defense, especially their loudmouth, trash talking secondary is the best in the NFL and among the greatest of all-time. So, my brain says Seattle wins a close and relatively low scoring game.

Canaries Quiet

canary-720x350

Thanks to my friend and business colleague/partner Dave Moenning (stateofthemarkets.com) for the canary pic.

It’s been a while since I last updated this column, but it’s not because I am lazy! There simply haven’t been enough changes in the data to warrant an update. The rally through year-end was very powerful and almost all areas we in gear to the upside. And even today, while there may be a few warnings, we don’t have bull market ending conditions in place. That potential climate seems to be months, if not quarters, or more away.

Let’s start with the indices and the Dow. All was well right into year-end and then something began to go wrong in a small way. The Dow has now given back all of the gains achieved since the last Fed meeting in mid December.

dow

The S&P 500 is next and you can see it was a touch stronger than the Dow to begin 2014.

sp

Turning to the S&P 400 Mid Cap below, a very different picture emerges as all time highs were seen last week.

mid

Next is the Russell 2000 Small Cap and just like the S&P 400 above, this index hit all time highs last week unlike the Dow and S&P 500.

rusFinally, the Nasdaq 100 is below and it looks very similar to the previous two indices except that it’s all time still remains from the Dotcom Bubble in March 2000.

naz

Looking at all of the major indices, we have two small warning signs from the large cap space.

Moving to the key stock market sectors, we can see the Dow Jones Transports and its recent all time high last week. On the surface, that is very good action, but traditional Dow Theory would call a non-confirmation or divergence since the Dow Jones Industrials did not also see all time highs. While this can easily be corrected on a subsequent rally, it is nonetheless a warning sign now.

tran

The semiconductors are below and they look very similar to most of the other charts with the last major high seen last week. This group is so crucial to the health of a bull market because historically, as go the semis so goes technology. And as goes tech so goes the market.

semis

Banks are last in the sector space and they have really kicked it into high gear since the October bottom. It’s hard to argue with their leadership or that of the semis.

banks

Another way to graphically see the underlying strength in the stock market is through the New York Stock Exchange Cumulative Advance/Decline Line which simply tallies the number the stocks going up and down on a given day and adds them to the previous day’s total. As you can see below, the NYSE A/D Line just recently made another all time high, which is not something we typically see at major market peaks.

NYAD

Lastly, let’s turn to the high yield (junk) bond sector, which is one of the primary canaries we watch. Junk bonds are among the riskiest and most volatile in the fixed income area and are definitely among the most sensitive to ripples in the liquidity stream. After being left for dead during the second quarter of 2013, they did a complete 180 and slowly and steadily marched back to all time highs, surprising many people, including me! It’s going to take another mini cycle before high yield warns again.

PHYDX

Summing it all up, the bull market is old, but alive and basically well. We have a few yellow lights from the Dow Jones Industrials lagging, but that can and may be corrected during the first few months of 2014.