Archives for October 2015

Yet ANOTHER Bullish Q4 Study

After my research on post-crash behavior was complete, I turned to stock market performance. With both August and September closing lower, I wondered if there was any trend for Q4. Over the past 35 years, there were only 6 occurrences and all led to a positive Q4 by an average of +10.86%! You can view the study here.

With the help of my friend and colleague Dana Lyons,, I analyzed stock market returns since 1950 when the S&P 500 dropped at least 10% in 6 days, like we saw in August. The average results are below.

3 months later +5.6%
68% of the time returns positive

6 months later +12.5%
81% of the time returns positive

12 months later +21.4%
81% of the time returns positive

24 months later +37.5%
90% of the time returns positive

Three independent studies all conclude the same thing over the intermediate-term. The bull market and this rally are far from over and my longstanding target of at least 20,000 is achievable in 2016.

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Fed Day Again?!?!

Boy did six weeks fly by!

Here we are again. At 2pm we will hear from the Fed that interest rates remain unchanged, but their economic outlook is probably on the positive side. I also expect a comment or two about China and then the laying of groundwork for a possible rate hike six weeks from now. I still do not agree with any rate increase, but it seems like it’s coming.

The stock market model for the day is plus or minus .50% until 2pm and then a mild rally. Given the sharp run into the Fed announcement, my Fed trend isn’t as powerful as it could have been.

Stocks continue to behave very, very well and the rally shouldn’t be over by a long stretch. As I have said each and every week since the August mini crash, don’t be surprised to see fresh all-time highs sooner than later.

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Catching Their Breath

After a huge win for the bulls last week, stocks have become very short-term overbought. I don’t think the rally is over nor do I think any meaningful weakness will unfold. Rather, I think the bulls need a pause to refresh which can be accomplished by going sideways for a period of time or seeing a quick pullback. Either way, new highs should be up next and buying any weakness is the strategy until proven otherwise.

Am I certain that stocks will hesitate right here?

No, but that’s the preferred path to keep things healthy, especially into the Fed meeting this week. I am keenly watching gold as it held up very well in the face of a strong dollar last week. Gold has nicely digested the big rally from my sub $1100 target and could be setting up for a $100 move higher. “Could” is the operative word here, not “will” just yet.

Finally, as I mentioned before, strong high yield bond performance is essential for this rally to run right into 2016. So far, so good, but the junk sector needs to hang in during any stock market short bout of weakness.

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My Broken Record Continues

Same ole story here folks. Stocks bottomed. Bears trapped. Investors disavow the rally. All-time highs in sight. Dow 20,000.

Talk has certainly turned from questioning me on how the market could possibly rally to when the rally might end to now finally embracing the rally. I love how the naysayers dismiss and disavow the move because there was some “external force” like the dovish talk from the ECB or China cutting rates. That’s what happens!

Another huge week from the bulls and yet another win for my bullish scenario. I feel a little slighted that the financial channels don’t want to let me do my victory lap and won’t follow up with the only person who got on board this move before it happened. Oh well…

Leadership continues to change and that can be a good and bad sign. Biotech and healthcare have been big laggards and given that we own them, I can’t say I am all that happy. However, semis, transports, banks and discretionary have all stepped up in a very positive way.

I couldn’t be more pleased with the action in the high yield (junk) space. I said this before, but there is a real possibility that a rally could run right into January.

Now, stocks have rallied really hard, really fast. A breather is more than okay at this stage. The bears’ line in the sand was just crushed on Thursday so some mild pause to refresh should be expected. One thing that concerns me in the back of my mind is that no one seems at all worried about the debt ceiling because every other time, it has worked out. It will this time too, but complacency seems especially high, where there is typically some worry out there.

Enjoy the weekend!

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Pain for the Bears

After two straight down days and four days of pause overall, the bulls roared back to life on Thursday as you would normally expect during a powerful move off a bottom. It’s that first mild pullback from a significant low where the bears get a little excited that it could be another leg down, but all of the Johnny Come Lately bulls realize it may be their last chance to get on board. More pain for the bears.

Recent sentiment data has not revealed a large shift from bearish to bullish sentiment. Investors remain skeptical about this rally. Stocks are still being shorted (play on lower prices). This is all further fuel for higher prices. Weakness should be bought, possibly right into the New Year.

Thursday was a very strong day internally for stocks as well as sector leadership. With options expiration on Friday, it’s unlikely that another strong day will follow. Looking at my four key sectors, semis and consumer discretionary are already above their September peaks. The transports have come back from the dead after being in their own bear market all year. Only the banks haven’t really stepped up yet, but I wouldn’t count them out.

At this point, I want to see high yield bonds really get in gear. As my favorite canary in the coal mine, their strength would further support my continued forecast for all-time highs in the major indices with Dow 20,000 on tap for 2016.

If you haven’t read my various pieces on post crash behavior and back to back negative August and Septembers, click on the blog icon up top. I have two more pieces I am about to publish and you won’t be surprised to learn that they, too, portend higher stock prices.

Have a great weekend!

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The Train has Left the Station

It’s been quite a week for the bulls and an almost straight up move from the nasty open last Friday on the weaker than expected employment data. Earlier this week, I posted a study that concluded a huge Q4 rally was underway. And that was on the heels of a series I have published on post crash behavior that was also strongly bullish.

The train has left the station.

Where are all the mouthpieces who were calling for a bear market? Where are all the people who kept arguing with me that my bullish forecast was nonsense? The naysayers have become eerily silent!

The move we are seeing from the lows has been nothing short of dynamic, as it usually is when the bottom is in. Relentless buying. Maybe a down day or two as a quick pause, but nothing more. Volume is high. Stock market internals are powerful. New sector leadership is trying to emerge.

The three key sectors, semis, transports and banks are behaving nicely. Consumer discretionary, left for dead over and over and over for six years, continues to lead. After several failed attempts, energy and materials have trapped the bears and are surging higher. Even high yield bonds, which have long concerned me, are showing signs of life.

Come on in. The water is nice!

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Down August AND September Equals HUGE Q4 Rally

Although I have been struggling to find enough stocks behaving constructively in the 9 major sectors to lead the next rally, I still do not see a meaningfully bearish scenario at this point for Q4. Besides the post crash trend, which can be viewed HERE, HERE and HERE, almost every sentiment indicator is showing excessive pessimism, which translates into positive returns going forward this quarter.

After the month of August closed down, I shared two separate studies that indicated that September would be down as well. Although September closed with a bullish bang, the month still closed down more than 7%, which leads to another study. When August is down and September is down, October typically continues lower early on and forms a bottom from which a significant rally emerges. Hence, October sometimes being referred to as a bear killer for bottoms seen in 2014, 2011, 2002, 1999, 1998, 1997, 1990, 1989, 1987 and on.

Down Augusts followed by down Septembers are not a common occurrence. Over the past 35 years, there have been only 6 occurrences.  I think you will be surprised at the outcomes below.

6 out of 6 times, the S&P 500 rallied sharply in the fourth quarter, averaging a very impressive gain of 10.86%!

My view continues to be that after this bottoming pattern is complete, all-time highs are in store for the major stock market indices. I also believe that Dow 20,000 is a reasonable target before Q4 of 2016.

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More on the Post Crash Pattern… Both Paths are Bullish

The only thing missing from a “perfect” pattern is for the S&P 500 to breach the August lows for up to a few days. I hesitate to use the word “perfect” because it rarely plays out exactly as I expect, but it certainly did so in 2011. Additionally, in both 1987 and 1989 which I partially dismissed, the final lows did not breach the crash lows before the big rally began.

As you can see from the chart above, I have two colored scenarios to the right of where the current price action ends. The light blue is the more immediately short-term bullish scenario and has the final bottom as being in and the rally beginning last week. The orange line is less short-term bullish as it has one more decline into the final low over the coming few weeks before blasting off to the upside.

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Post-Crash Behavior Still Following My Scenario

Immediately after the August 24 mini crash, I opined that the bottoming process could begin as early as that very week, which it did. I also wrote extensively and did a fair amount of media discussions on the topic. So far, the major indices are nicely following that scenario which had stocks rallying off the crash low into a September peak and then revisiting that low by the middle of October.

Remember the comparisons I offered from 1987, 1989, 1994, 1997, 1998, 2010 and 2011? You can read the full article HERE. ($marts20150902.pdf) I was also excited to share my findings on CNBC’s Fast Money.

At this point, I am totally eliminating 1994, 1997 and 2010 as the correlation (how closely the patterns resemble the current one) has broken down. I am also partially eliminating 1987 and 1989 as the rally from the crash bottom to the ensuing peak was a mere two and five days long as you can see below.

We are now left with 1998 and 2011 as the most likely comparable periods to today. Not surprising, they are very similar as I review the price action, number of days in the rally period and days separating the mini crash low from the final low.

Below is 1998 where we see the late August crash, followed by a 17 day rally and 28 days between the lows before stocks embarked on a powerful rally to fresh all-time highs.

2011 is next and similar. 17 days of rally with 40 days between lows.

Finally, 2015 is below. First, you can see how the rally period allowed me to partially or mostly eliminate 1987 and 1989 although 1987 still looks similar to 1998, 2011 and 2015 if you look at the days between lows.

While the higher highs in the rally from the August mini crash looks more like 1998 than 2011, 1998 also rallied further than what we saw last month. I would offer that a synthesis of 1998 and 2011 is probably the best fit.

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