Archives for January 2015

Heading into the Weekend

Some of the pop in volatility this week is starting to be wrung out as the markets close the week. On Thursday we saw a nice reversal across the board, however the internal numbers were nothing to write home about. Additionally, I would have much preferred to see the lows from at 2015, if not December 2014 breached before the reversal took hold. That would have given a good flush to weak handed holders.

For now, the major indices remain in the two month trading range without a huge edge either way. Sector leadership is also unwavering and favoring the defensive areas like healthcare, biotech, utilities and REITs. Homebuilding is the outlier leader on a short-term basis.

Unless something changes dramatically by 4pm, the stock market will close down for the second straight month with the “all important” month of January being negative…

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Fed Day Model and Trend

The FOMC concludes their two day meeting today, surviving the “epic” and “historic” blizzard. The model for the trading day is to see stocks in a plus or minus range of 0.50%, but generally we see mildly rising prices until 2pm and then increased volatility with an upward bias to the close.

The Fed trend is to be long the stock market from yesterday’s close to today’s close based on a variety of historical factors. That trend has an accuracy rate of 77%. Should the market end higher today, it would set up another trend for stocks to be lower tomorrow although not as strong as today’s trend.

Expectations are for the Fed to do absolutely nothing at today’s meeting, but everyone will be parsing the statement for clues that the FOMC will forestall raising rates until late this year or even into 2016. You already know that I vehemently disagree with any rate hike anytime soon and believe that QE should not have ended. I have said this for years, but I will say it again. Our economy and to some degree, our markets, are not strong enough to stand on their own two feet.

We can argue whether we should have QE’ed $5 trillion at all, but once the program began, it has to be seen to its rightful end. I don’t believe the Fed did that.

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Bears to Pounce at the Open

Stocks look to open sharply lower this morning on a variety of news events, although none that are singularly that bad. Greece is in the headlines yet again and frankly, if they are going to exit, let’s just get it over with. Their economy and market is not even a rounding error in the grand scheme of things, but a Grexit will open the door to the southern European countries saber rattling about an exit if they are not bailed out.

The open should put the major indices close to saying “hello” to last Thursday’s low, which is the line in the sand on a closing basis for the bulls over the short-term. On a day like this, I always look closely at which sectors lead and lag. I am most interested to see if the previous leaders are still leading or the previous laggards are still lagging.

I would fully expect to see treasury bonds and corporates rally today along with gold, REITs and maybe utilities. Tech should be under strong pressure given Microsoft’s big earnings miss. Most important, today’s close will be very telling.

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Lots of News This Week

While last week was certainly news filled, this week will be even busier as the northeast plans for another snowmageddon. At the bus stop this morning, our new neighbors who are from Dublin talked about the more than 10 cases of water they bought. When I stopped laughing, I asked them what they planned to do with all that water. And while they were at it, I asked them if they also bought canned goods and ammo! That conversation gave me a good chuckle to start my day.

After the blizzard prep, we will be hearing about the actual “epic” and “historic” storm until the clean up takes over. Although I would rather head to Vermont like I did when the 40 inch “epic” and “historic” storm hit two years ago, I promised my wife that I would stay home since they are forecasting high winds and possible power outages. What kind of father and husband would I be if I celebrated a powder day while my family was stuck home freezing?!?!

Anyway, besides the storm, Apple and Google are set to report earnings this week and both are potential market movers. We also have the Fed meeting on Tuesday and Wednesday with a 2 pm announcement on the 28th.

Looking at the stock market, the short-term line in the sand is remaining above last Thursday’s low on a closing basis. Should the bears muster enough energy to take stocks beyond that, the market is probably going to new 2015 lows and below the December bottom. But let’s cross that bridge if and when. For now, defensive sectors are leading and that is telling potentially two very different stories.

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Draghi & ECB Deliver

It’s a very busy week for the markets and economy coming off the ECB’s long anticipated announcement of Euro QE last week. On the one hand I thought it was smart to leak the $50B euros per month plan so that markets could digest it ahead of the official statement. It was also a great move to then exceed the number that was leaked by $10B euros.

On the other hand, I am not in favor of this piecemeal approach when everyone already knows that $60B euros per month won’t be enough. If Mario Draghi was truly committed to QE and saving the euro “at any cost”, they would have pulled all stops and done the shock and awe of AT LEAST $100B euros per month right away. It would caught everyone off guard in a positive way except for those who are positioned against QE, exactly the folks the ECB is trying to combat. It would have sent such a powerful message to the markets.

Yes, I know. The Germans are ardently opposed to QE. Blah, blah, blah, blah, blah. That may be their public stance with Merkel pounding the table in opposition, but in reality with their export economy on the verge of recession, a weaker euro is precisely what the doctor ordered. As I have long discussed, this is just another currency battle in what some have termed, “a race to the bottom”, meaning that countries are devaluing their way to prosperity. (Insert incredulous look, head scratch and head shake)

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7 Years Ago

As I drove home from Vermont today on Martin Luther King Day, I thought about past MLK Days, which is something I would normally do to pass the time away. My two boys were in the back seat napping and listening to music and I had Sirius on in the background. I vividly recall MLK Day 1994 as it was the single coldest day I have ever skied at Mount Snow, -25F with 20 mph winds that made it feel like -50F. I lasted all of two runs with an intervening break in the lodge on top. It was also the earliest I ever hit the bar and stayed there all day.

Market-wise, MLK 2008 is indelibly inked in my memory. Coming off a huge 2007 for our strategies in a difficult market environment, we began 2008 with a positive view of the stock market. At year-end, the market was finishing up its 2nd 10% decline in 5 months and I thought we would be a solid bounce to sell into in January. That didn’t happen.

Instead, stocks saw an orderly decline that appeared to end on the 9th. After a few days of pause, the selling floodgates started to open on Thursday and Friday before MLK Day. Over the weekend, the first major piece of financial crisis news hit. Previously, we had seen bits and pieces like sub prime loads beginning to default and two Bear Stearns hedge funds blowing up. But each time, the market digested the news and headed higher. MLK weekend 2008 it all changed.

When Japan opened Sunday night, I knew it was going to be bad. In fact, markets all over Asia were bleeding red to the tune of 5-8%. Our futures immediately signaled at least a 500 point decline when trading resumed on Tuesday from a Dow at 12,000. When I woke up Monday morning and saw Europe in collapse and our futures “limit down” which is the maximum point decline allowed pre-market, I knew our clients would be very concerned, especially if they didn’t hear from me with some kind of reassuring explanation. So I spent my MLK Day 2008 on the phone calling each and every client letting them know that I expected to see a 500-1,000 point decline in the Dow on Tuesday morning. I also explained that while there would be some short-term pain, I believed it was absolutely the worst time to sell. In fact, if anything, it looked like the final “flush” in the decline that began late on 2007 and a bottom should be at hand shortly. Investing is a marathon not a sprint and not only did I remind clients of that, I reminded myself as well!

Thankfully, every single client but one listened to my advice and some even bit the bullet and added money to their accounts early in the week. Stocks closed that post MLK Day Tuesday well off their lows and all seemed like it would be okay from there. Then Apple had a really bad earnings miss that afternoon and once again, overnight trading indicated another disastrous open. But a funny thing happened on the way to a crash as was being predicted. After another ugly open, buyers came storming in throughout the day and the Dow actually closed sharply higher, regaining all of the lost ground from Tuesday and the previous Friday.

Tuesday’s and Wednesday’s action post MLK was stage one in the stock market’s first quarter bottom that led to the May peak above 13,000 and the last good opportunity to sell before the crisis really unfolded.

January 2008 was the worst month I delivered to clients since launching my firm and the most difficult of my career at that point. There were a lot of “strange” messages being sent from our market models that didn’t make a whole lot of sense to me then. I just kept scratching my head wondering if our models were broken. In hindsight, they were dead on in warning of major systemic issues down the road that I had never seen before. After doing countless hours of research in spring 2008, the only comparison I could find was the period from 1929 to 1932 where the Dow lost 89% of its value. I am certainly glad I continued listening to our models in 2008!

While 2008 ended up being the year no one ever wants to repeat, MLK Day 2008 will always stick out in my mind as the day I chose fight over flight by calling all of our clients proactively. It was also a time where I knew I could handle whatever the market threw at me, good, bad or otherwise.

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Early Warning System & January Barometer

With the first five days of January officially in the books, the Early Warning System (EWS) pioneered by Yale Hirsch is flashing a positive sign for the rest of January as well as 2015. The theory says that as go the first five trading days of the new year, so goes January. And as goes January, so goes the year.

With help from my friend Carter Worth of Stern Agee (Carter did the heavy lifting and I peppered him with questions), he examined both the first five days as well as January since 1927. If the EWS was positive, there is a 76% chance that the whole year will be positive. If the EWS was negative, then the year was a 50/50 toss up.  Any random year has a 67% chance of being up. So right now, history says there is a 76% chance of 2015 being an up year.

Those stats alone seem valuable, but they left a big question unanswered for me. If the EWS was positive and then January was positive, how much did January’s return borrow or steal from the full year? Remember, we really don’t know the full results until January 31 and by that time, the stock market could already be substantially higher and potentially cannibalize the full year results.

After continuing to annoy my old friend Carter, we learned that when January is negative, the rest of the year is actually positive by an average of a paltry 1.6%. However, when January is positive, the rest of the year is also positive by an impressive 8.6%.

Although stocks began the year on a sour note, the bulls rose to life over the third, fourth and fifth days of the year to close the first five days marginally higher. As I type this, January is currently down less than 1%. The next three weeks are obviously key for this historical study in determining the outcome of 2015. After watching the Dow reach my longstanding 18,000 target, I am now patiently waiting for five consecutive closes above 18,000 to set the stage for a run to at least 20,000.

My own 2015 Fearless Forecast is being edited now and one thing is for sure, I do not see a repeat of 2014 in any asset class!

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Another “V” for the Bulls… Must Run from Here

As I have written before, since mid 2012 the stock market has seen more “V” bottoms than in all previous years combined. “V” bottoms went from being very rare to becoming the norm. With each successive low, investors are changing their buying behavior to accept the “new” behavior as the norm. In my view, this is setting up the masses for yet another 2000-2002 or 2008 style wealth decimation.

So now that we have yet another confirmed “V” bottom, which for full disclosure, I continue to use as trading opportunities, where are the markets headed? Two days ago, I wrote about the markets lacking the warm an fuzzy feeling. While I remain fully invested, I am dancing closer to the door than I have in a while. The bulls must take the major indices to new highs right here, meaning this month. Any failure to see new highs and subsequent rollover to the downside should result in a full fledged 10%+ correction. And even if we do see new highs, there needs to be higher conviction. Market internals are not positioned strongly and need to improve dramatically. By that, I mean the number of stocks advancing and declining as well as the volume in those stocks. We also need to see the number of stocks hitting new highs expand on any new high in the major indices.

For now, the ball is in the bulls’ court and they must run hard. The monthly employment number hits before Friday’s open and I am looking for a “much ado about nothing” reaction. After increased volatility over the past week, it would be a good sign to see a few quiet days in the markets.

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Waiting for Warm & Fuzzy

The “traditional” Santa Claus Rally ended in the red for the stock market and that’s not a warm and fuzzy sign heading into 2015. Through the first 3+ days into 2015, small cap stocks are not leading their large cap brethren and that’s not a warm and fuzzy sign. Stocks sold off hard to begin the year and that hasn’t been a warm and fuzzy sign.

Today, the bull are trying to make a stand after seeing yet another 5% pullback in stocks that is being gobbled up. Could we have just seen a successful revisiting of the December lows that leads to new highs this month? It’s certainly a plausible scenario and one I am positioned for. However, I am not yet convinced that the decline is over.

The market looks too sloppy. Two of the three key sectors, semiconductors and banks, are in need of more repair. And the transports are no prize either yet. High yield bonds saw more weakness than they should have, causing some pain in our strategy, and they too, look like they need to stabilize before trying to rally.

It’s not my strategy to try and protect against 5% or less declines. I tend to ride them out which is why I may sound a little cavalier right now. That is, until the market proves me wrong and forces my hand. At this point, it looks like any new high seen quickly will lead to a larger than 5% decline and one I will take against. Further weakness from here should complete the decline and set the stage for a better rally.

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First “Key” Day of 2015

It’s only the second trading day of 2015, but I am going to get a little dramatic and say for the short-term, it’s somewhat of a key day. The second trading day of the year is seasonally a very strong one. Given the 1%+ down day to end 2014, there is a trend to see significant strength during the first week of the New Year to counter that unusual down day. Today is also the end of what many refer to as the Santa Claus Rally.

Overnight, the futures point to a red opening which is something I like to see when I am looking for a rally. Let stocks open mildly lower and give the bulls a chance to gather steam throughout the afternoon. Sector leadership and rotation are typically all over the map this week so it’s definitely worth paying close attention here.

If the bulls don’t get their act together shortly, stocks are probably looking at what they saw last year, a 5-9% pullback from where a better low can be formed. But that’s getting ahead of ourselves.

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