Archives for December 2014

Homestretch

This is it. Three more trading days and 2014 will be in the books as they say. Just 8 trading days ago, the bears were beating their chests yet again about how the bull market ended or the stock market was in 10%+ correction or a whole host of other nonsense. I wrote it right at the October bottom and I did the same thing 8 days ago; the bull market is old yet alive and weakness should be bought right away. Don’t count out Ole Saint Nick! If you followed that advice you were instantly gratified.

Dow Industrials – All time highs

S&P 500 – All time highs

S&P 400 – All time highs

Russell 2000 – All time highs

Reread that last one. Russell 2000 all time highs. The index that was left for dead by all the bears. Where are all those naysayers now? Awfully silent!

The only major index still waiting to celebrate the New Year at a fresh high is the Nasdaq 100. The odds do favor this laggard stepping up over the coming weeks to join its cousins.

Year after year, I have written about the many crosscurrents this time of year to go along with some very powerful trends. Are they perfect? Not even close. Do they win 9 out of 10 years? Nope. But they do provide a much better than average result when followed properly.

Interestingly and uncharacteristically, we don’t really have a standout leader index since the December bottom. All of the major indices have basically seen returns in the same range, something I do not expect to continue. I am sure you are now wondering if I think everything is hunky dory and we should just mortgage the house and go all in to stocks. Absolutely not. The time to do that was in October or last January or many other short-term bouts of weakness since 2012.

As I wrote about over and over and over during the fourth quarter, it is beyond unusual to see a major peak late in the year, especially during an uptrend. There is little impetus to sell. And let’s not forget about the pension and mutual fund managers trailing their benchmark and in dire need to pay performance catch up.

But the calendar is turning this week and I do see some minor market cracks that need to be fixed. I don’t like that over the past three days stocks lost momentum during the afternoon and closed in the lower end of the daily range. I also want to see the high yield bond market regain its footing in the face of volatile energy prices.

This won’t be the last time I write this next comment. 2014 was hard to lose a lot of money and it was a tough year to make a lot of money. I don’t think we have the same landscape in 2015. Things are about to get really interesting…

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Santa Ain’t Messin’ Around

The stock market bottom this week wasn’t as pessimism laden as the one in October,  but it was certainly fun nonetheless! And just like I did in October, I gave readers a few days notice to prepare for the low. Frankly, this was easy.

While it was a slightly soft seasonal time, the market sold off a few percent more than it should have which is part of the reason the rebound has been so robust. December is a haven for strong trends and several collided this week with a focus on Wednesday, Fed day. It was Santa’s turn to propel the market and boy did he deliver with the S&P 500 just a whisker away from all time highs to close the week. Yes, you read that right, ALL TIME HIGHS.

It was only a few days ago when friends, colleagues and pundits were all telling me that the quant models were wrong; bull market was over and stocks were not going to rally like they usually do this time of year. I don’t know; the bears are the ones who look to be the wounded party.

In any case, it was a great three days for the bulls, but now comes the time where I really want to see the Dow, S&P 400, Russell 2000 and Nasdaq 100 step up and grab new highs. If we fast forward to January and these indices are still lagging, I will certainly become concerned.

It was also good to see the high yield (junk) bond sector turn on a dime and take off. This group is vital to the long-term success of the bull market.

On the sector front, the news is less robust with plenty of sectors still not leading like I would like to see. As with the major stock market indices, let’s give them into January to get themselves healthier. Earlier this month, I sold our position in the transportation sector when it stopped rallying as crude oil collapsed. That sector needs to repair itself. Today, I sold half of our long-term position in semiconductors as they went from strong leader to laggard.

Have a good weekend and be safe!

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Santa Claus is Starting to Call… Right on Time

Over the past few weeks as stocks declined I remained firm in my forecast that Santa Claus would pay the markets a visit as he typically does in bull markets. One by one, I heard from people why this year was different, why stocks are already in a bear market, why oil would consume the market. I targeted this week and early next for the low as history suggests and for the rally to begin. Yesterday was also a very strong trend based on the Fed meeting for stocks to rally. Given Wednesday’s very impressive showing, stocks should have seen the bottom.

How will I know if I am wrong? That’s the question I always want to answer before committing client capital which I did this week. In the short-term, stocks should not fall back over the coming few sessions below yesterday’s low. Stocks are supposed to follow through to the upside almost immediately, which I believe they will.

Tax loss selling should have ended and the energy stocks are the best group to confirm this. They look like they are beginning a good bounce into the New Year. Was it THE bottom or just a trading low? It’s too early to tell, but I favor the latter right now.

As I mentioned before, more than 80% of portfolio managers are trailing their benchmarks this year which is why I did not believe the market could experience a large decline into year-end. Managers would use any pullback to commit cash and try and play the catch up game. The recent pullback gave them plenty of opportunities although I doubt they went all in, at least  not yet. Continuation of yesterday’s rally will likely force their hands at higher prices and further fuel the market higher.

We’ll see what today and tomorrow brings for stocks, but stocks are off to a good start thanks to Janet Yellen and the Fed.

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Fed & Yellen on Hot Seat Today

The Federal Open Market Committee (Fed or FOMC) concludes their two day and final meeting of 2014 on Wednesday with their announcement at 2pm and subsequent press conference with Janet Yellen. Interest rates will not be raised. Market watchers will parse the statement to see if Yellen & Co. remove the “considerable time” phrase for low interest rates from the release, signaling that rates may increase sooner than later. Should those words continue in the statement, I would expect stocks to move sharply higher.  As an aside, there is a strong trend in play today indicating that stocks should close solidly in the green.

I have ranted enough over the past 18 months that QE should not have ended and rates should not even be close to rising. The Fed will rue that decision if it’s made in 2015. However, with energy prices collapsing and inflation with it, the Fed could easily use this as cover not to change course anytime soon. It would be the best decision right now without even mentioning how bad Europe and China are presently.

The problem is that we have a divided Fed with the usually wrong Charles Plosser and Richard Fisher having voting power and loud voices. Add Jeff Lacker into the group and you have a triumvirate of policy makers who could not have been any more wrong in 2007 and 2008. Talk about asleep at the switch; these guys actually wanted to raise rates and reduce liquidity as the markets and economy were in collapse. It has been a profitable trade to take the opposite side of these “tenured” bankers.

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Santa Claus Rally Just Around Corner

Big picture. Late October through mid January is the strongest seasonal period to invest in stocks. That’s fact.

Over a similar but slightly different period, the semiconductors are the strongest group to invest in. Just since the October bottom, they are up 27% and I am very glad we own them in our sector program. They made up for some crummy positions we have held during the same time.

Early December shows some slightly negative seasonal headwinds, like we are seeing now. In bull markets, these headwinds usually turn to tailwinds over the coming week.

The much maligned and beaten down Russell 2000 index of small cap stocks has its most favorable period right now through early January, one of the “January Effects”. Tuesday’s wide daily range in the Russell turned the index from breakdown mode to possible breakout mode next week or the week after.

The traditional year-end or Santa Claus rally often seen in bull markets is set up to begin shortly and take the Dow above my longstanding target of 18,000 with the likelihood that small and micro cap stocks finally show some outperformance in an otherwise crummy year for them. I would be concerned and question that scenario if the Russell 2000 closed below Tuesday’s low, roughly 2.5% lower from here.

There are always many crosscurrents in December and this year is no different with most of the market doing well, while the energy sector is under severe pressure. Tax loss selling in energy stocks is supposed to wrap shortly and that group should see at least a reflex rally, regardless of where it is going next year. At the same time, with so many portfolio managers trailing their benchmarks, it’s very difficult for the bears to make any headway until next year. Any 1-3% decline should be quickly gobbled up, especially in the sectors and stocks that have performed the best in 2014.

Like I said, lots of crosscurrents through year-end…

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Feel is not Real

I have been playing golf for the better part of of 40+ years and I have taken my fair share of lessons. I can’t tell you how many times I have commented to my teacher that something “doesn’t feel right” or this “feels weird.” And each and every time the response has been the same; “feel is not real.” If you typically walk with a slight hunch, try walking really tall to understand what I mean. It feels funny, but barely noticeable to the eye.

As you know, I have been an unabashed bull for the past few years and that’s not changing now. I remain positive into 2015 with the chance for much higher prices next year. Over the past few weeks, it certainly “feels” like stocks have seen fresh all-time highs day after day after day. After all, stocks haven’t experienced more than a day’s hiccup since the bottom in mid October.

However, similar to what I mentioned about my golf swing, “feel” may not be real in the market right now. While the Dow Industrials have closed at fresh all-time highs three out of the last four days, the S&P 500, S&P 400, Russell 2000 and Nasdaq 100 have not matched the Dow’s short-term strength. They have been laboring along.

Seasonally, the period from late October through mid January is the most bullish time of the year to be invested, but on a smaller scale, early December has seen a few small potholes. Couple all that with a very solid employment report but tepid market response on Friday and you have a stock market looking a wee bit tired and in need of a little nap.

The healthiest and most bullish response would see the market do nothing for a days or so (essentially staying within a few percent of here) and then gear up for the traditional year-end (Santa Claus) rally. At the same time, we should see tax loss selling, the selling of losing positions for tax purposes like energy, begin to subside.

So while December always offers lots of crosscurrents in the markets, it’s almost always resolves itself to the upside to close the year. And to give the bears their fair share, should they mount an attack that lasts into year-end or the New Year, that would be a complete and total change of character for stocks and cause me to rethink my positive stance.

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The Greatest Financial Experiment Ever

This article is a follow up to emails I received after my segment on CNBC’s Squawk Box last week regarding the unexpected news from Japan. Here is the link. Japan in Recession… Who Cares

Japan has been in the news of late with the unexpectedly poor economic report indicating their economy has fallen back into recession. As I discussed last week on CNBC as well as Yahoo Finance, it really doesn’t matter at this stage. Japan has embarked on the greatest financial experiment of all time and they will just forge ahead with more and more quantitative easing or QE. In layman’s terms, that means the Bank of Japan is printing money to buy assets.

This tactic is not new there nor is it here, but Abenomics as it is referred to after their Prime Minister, Shinzo Abe, takes what our Fed has done and puts it on steroids, to a factor of 10. Abe is committed to printing and printing and then printing some more. And when that’s done, guess what? They will buy more ink and print again.

The Japanese are going to print money until either their economy awakens from its multi-decade slumber or the bond vigilantes push back and force interest rates higher. That’s going to be a big problem for the vigilantes because the Bank of Japan has essentially become the entire government bond market in Japan. It’s often said tongue in cheek, but never fight with the guy who owns his own currency printing press.

The end result in Japan, which is years away, will be fascinating. In a country that does not want or really allow immigration, demographics are so upside down that the youth cannot support the aging population. It has been the most widely predicted and anticipated disaster for decades, but now the rubber is meeting the road, hence the massive QE or money printing.

So far, the biggest mistake the Japanese made was to raise the consumption tax from 5% to 8% in hopes of raising money to combat sharply lower tax receipts. That’s always a tactic that makes me go “hmmmm” with incredulity. Although I am never really in favor of raising taxes, there is a time to do it and a time to certainly not do it. It’s pretty clear that governments should not raise taxes or balance budgets during challenging economic times. That’s when stimulus is needed most. The Abe government shot itself in the foot by allowing political opposition to win the tax increase. They printed money on the one hand and took it away with the other. That’s just plain stupid in my opinion.

News this week out of Japan that phase two of the consumption tax increase has been shelved with the poor economic report. No kidding?!?!

Japan’s economy is in an untenable position. Unless they open their borders or remilitarize, both very unlikely, their hopes to end 25 years of economic malaise rests solely in Abenomics and massive amounts of money printing. The world is watching; history is being made; and economic textbooks will be written on the outcome.

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