Archives for July 2014

2nd Fed Trend a Success… Pullback is Here

Yesterday, I wrote about the Fed statement day trends. History suggested, a pre announcement market of +-0.50% which was spot on with the day closing green; it closed neutral. Today, the post Fed model called for lower prices which is spot on as well. This is all in the context of the pullback I forecast two days ago.

Today’s action so far is nasty with my entire screen red except for the items that go up during a down market. Days like this bring the market closer to the eventual bottom, but it’s not there yet. Patience…

What is a little different right now is that very few sectors look appealing into the weakness, something that hasn’t been the case since 2011. Additionally, the treasury bond market, which I have been bullish on all year is flirting with the unchanged level when it should be sharply higher.

This will all sort out sooner than although I am very, very glad that we raised so much cash just a few days ago!

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Fed Statement Day Trend

That certainly felt like a quick six weeks since the Fed’s last statement day and press conference! Today, Yellen & Co. conclude their two day meeting with a statement to be released at 2:00 pm est and no press conference. As has been the case since the first taper last December, the Fed will reduce their assets purchases by another $10 billion to $25 billion per month on their to wrapping up quantitative easing this fall.

There has been a strong and playable trend during Fed statement days and today that trend is live. Stocks typically trade in a -.50% to +0.50% band until after 2 pm and then close today in the green. This trend has been successful more than 70% of the time since 2007. It has been noted of late that stocks push higher straight into the announcement and then sell off  through the close but still end higher.

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Beginning to Feel Like a Pullback

As you know, I have been uber bullish on stocks here for a long while. It’s time to temporarily temper that enthusiasm for the market to repair a bit of short-term damage.


Sorry to yell, but I know that is going to be the first question I get. From my seat the bull market remains reasonably healthy, albeit old and wrinkly, and should live on into 2015 with much higher prices seen in the Dow. It’s probably time to do a full canaries in the coal mine update to see where everything stands. Hopefully, I can get to that later in the week.

For now, it’s time to play short-term defense, raise cash and add some hedges. A better buying opportunity lies ahead and we should not even see a 10%+ correction here, but if we do, we are prepared.

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Something for the Bears to Hang their Hats on

The Dow hit yet another all time high today and there hasn’t been a 10%+ correction in 35 months. When stocks opened sharply lower on July 10th, the bears came roaring out of hibernation calling for everything from a 10% correction to the end of the bull market. It was a sea of ugly red prices on my screen due to Portuguese bank worries, and weak China data. That decline didn’t even last a full day. Nor did the decline based on the -2.9% GDP print or Yellen’s previous press conference or a host of other headlines that were quickly absorbed.

I just cannot understand why more people are not excited about this market. It has truly been a bull market for the ages. The masses just keep hating and disavowing and predicting doom and gloom while the rest of us are smiling ear to ear for as long as we can. Bull markets do not end overnight and while this one continues to be old and wrinkly, it is generally healthy.

Because I am running out of ways to celebrate after all these years, I thought I would spend some time exposing some of small cracks in the pavement.

What can the bears hang their hats on?

For now, the S&P 400 and Russell 2000 are seriously lagging the Dow, S&P and Nasdaq. High yield bonds, a major canary in the coal mine, have been lagging for almost a month. The NYSE advance/decline line has not confirmed the recent all time highs and has been lagging all month.

Is that enough to end the bull market? Hardly, but it could certainly spell market pullback at any given time. Have we had these types of warnings before? Yes, many, many times during this bull market with most common outcome being a short-term pullback.

Weakness remains a buying opportunity and the Dow should continue to power higher to 17,500, 18,000 and perhaps even higher before all is said and done.

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Bears Out of Hibernation

Stocks open the day with the largest down opening in some time due to Portuguese bank problems, slowing Eurozone concerns and less than stellar data out of China. As hard to believe as it is, I have already seen a few articles calling this the beginning of a new bear market. Geez, how many time have we heard that over the past 64 months!

What we are seeing now is a routine, healthy and normal 3-7% pullback. Short-term downside risk looks to be above 16,200. After the market bottoms, the quality of the next rally to all time highs will decide whether there is a 10%+ correction later this quarter or not. Remember, at the peak only the other day, there were almost none of the usual warning signs seen to indicate any major decline let alone the bull market ending.

For months and months and quarters and quarters, investors have been waiting, hoping and even craving for a decline to get invested. Now that it’s here, I doubt many of them will even take advantage of the temporary sale in stock prices. They will rationalize why they shouldn’t buy with all of the bad news out there, only to regret it later and buy at higher prices.

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No Inflation Seen in Energy Prices

With the various global tensions impacting the energy market, I thought it was appropriate to write a few articles about crude oil and how viewing different time horizons yield very different opinions. This is part I to be followed by part II next week.

To begin with, energy and more specifically, crude oil, has an enormous impact on the global economy. From common sense items like heating our homes and powering our cars to more derivative things like chemicals and asphalt, crude oil is a vital ingredient in the global economy.

It still seems like yesterday that the pundits confidently proclaimed oil above $40 a barrel would cause a severe recession and $75 would spell depression. That was when Iraq invaded Kuwait in 1990 and of course, they were wrong. From its generational bottom at $10.65 in 1998, oil almost quadrupled by mid 2000 without any economic pause.

From the post 9-11 low at $17, oil once again quadrupled by 2006 to $78.40. And again, there was no economic slowdown let alone recession, save depression! It wasn’t until oil went parabolic in 2008, straight to $147 that, combined with the financial crisis, spelled doom for the economy.

What’s the takeaway from this very basic and brief study of energy prices?

*As we have seen since 1990, higher oil prices do not equal higher inflation.

*Runaway oil prices over a period of time don’t equate to a recession.

*Third and perhaps most important, in my opinion, the American consumer is very able to cope with higher energy prices as long as they occur over time and not in the form of a shock. Obviously, if gas was $10 a gallon, that would severely impact the economy, but $100 oil did not stop the global economy and I would argue that if the financial crisis was not unfolding, the economy may have paused and perhaps even mildly recessed, but it would not have collapsed solely due to oil prices.

Today, I am often asked where I believe crude oil is headed and at what level we should worry that the economy will be adversely impacted. First, it certainly looks like oil is headed higher, right from here at $104. Oil traded to fresh 2014 highs last month and is now resting. Once $108 is exceeded $115 should be next before long. That level is really the “put up or shut up” spot for energy and as a consumer, my “hope” is that the rally ends there. Surpassing $115 opens the door to some much higher scenarios that most of us do not want to see!

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Bull Market’s Peak

The stock market hits the new week with a tiny headwind from post holiday seasonality. Last Thursday’s solid employment report finally got at least some bulls to celebrate, but it’s still very muted. At Dow 17,000 after a 10,000 point rally in the market, you would think that the majority would be in a good mood, even giddy. But that’s just not the case.

Before the bull market ends, history suggests a 10%+ correction, which we haven’t seen yet. And before the 10%+ correction, we are supposed to see a 4-6% pullback, which we haven’t seen. Bull markets typically do not peak out of nowhere and certainly not with the solid foundation this one still has.

I continue to scratch my head when I speak with, watch or listen to all this negative market chatter. At some point, probably sooner than later, we will have some weakness in stocks. Maybe that’s 500 points or 1000 points or even 1500 points. But the bull market should not end out of the blue without warning.

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Dow 18,000 Next as Twitter, Investors, Advisors and Media Root for Bears

Small Caps Play Catch Up in BIG Way

When we last left off, the major stock market indices were all playing nicely together except for the small cap Russell 2000 which had seen a full fledged 10% correction, but was beginning to bounce. The performance of that one index was a key ingredient to the bears’ negative stance on the market. At that time, here and on the blog, I dismissed the Russell’s warning and went so far as to call for all time highs before long.

On the first day of the new month and quarter, the Russell 2000 joined the S&P 500, S&P 400, Nasdaq 100 and Dow to score fresh all time highs. At the same time, the New York Stock Exchange Advance/Decline Line, which is a barometer of health on the NYSE also saw a new all time high along with many other sectors and indicators. This continues to be intermediate and long-term positive for the bull market.

More shorter-term, the market can best be described as grinding or creeping higher day after day. When you are on the correct side, there is nothing better. This kind of market has been seen many times since 2009 but rarely before that. The most common ending is a sharp and fast decline that wipes out a lot of gains in short order but does not end the bull market. At some point that scenario will become more likely.

The Market People Love to Hate

Remember, as I have now said for two years, this bull market may be old and wrinkly, but certainly not unhealthy or about to die. It continues to be the most unloved and disavowed bull market of my lifetime. Instead of friends asking me for the latest or greatest “hot” tip which I would expect at Dow 17,000, I am frequently pushed to opine as to when this all ends or when the big correction is coming.

And it’s not just individual investors. On a daily basis I speak with other advisors as well as the media. It really surprises me how many peers have been negative, are negative and will be negative. This is a market where people in my industry should be raising lots of money. Markets have been “easy”, meaning there has not been any significant downside since June 2012.

I think it’s very hard to run an investment management business being a perma-bear or holding on to the belief that although stocks have rallied, they remain in a secular (long-term) bear market that began in 2000 with the Dow at 11,750. That’s crazy in my humble opinion.

On the media side, they may have finally realized that I have a better face for radio than TV, but it certainly feels like they are not as interested in my bullish stance anymore now that the market has rallied. I have lost several opportunities lately because my opinion wasn’t bearish or I wouldn’t forecast some kind of doom (my word) on the horizon.

You can accuse the Fed of manipulation or supporting the market or anything you want. But the reality is that this has been one of the most powerful bull markets of all time. From my seat, as long as investors ask questions about the downside, advisors are bearish, the media only wants to sell negativity and my Twitter feed is full of bears, the bull market will live on.

How It Usually Ends

Yes, the market is 33 months from its last 10% correction and some surveys show complacency, but bull markets do not usually end with a whimper. There are typically many warning signs long before the bear comes out of its cave. Today, we have almost none. Additionally, the market historically sees a 10% correction where the end of the bull market is claimed by the masses, only to see yet another rally to new highs take shape. We haven’t even seen the correction yet. And before the 10% correction, there should be a modest 2-4% pullback.

Don’t get me wrong. Investors need to remain vigilant and active and on top of their holdings. Or hire someone like me to do it! (Shameless plug) Throwing caution to the wind and taking a “get me in at any price” mentality will likely end in ruin. Eventually, stocks will pullback, probably sooner than later, and finally correct 10% or more. But as I have been saying for years, any and all weakness remains a buying opportunity until proven otherwise. These kinds of markets are rare and should be fun. It’s too bad that so many can only see negativity.

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Squawk Box @ 6:05am Monday

Looking forward to joining Joe, Becky and Andrew at 6:05am on Monday discussing the Dow hitting my 17,000 target (18K is next), Thursday’s solid employment report and what’s in store for the second half of 2014.

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