Archives for January 2016

2016 Continues to Look Like 2008

Several weeks ago when I was ranting how 2016 looks nothing like 2008, 2016 not a 2008 Redux and later The One Comp to 2008 that Does Hold Water I compared the January 2008 period to that of 2016. It’s a comp that continues to make the rounds so here it is updated, yet again.

2016 2008

If this comp continues to work, which they seldom do to fruition, here’s what’s coming next.


Remember, the January 2008 decline was 20% all in and 2016 was roughly half that if you are looking to forecast the magnitude of the current rally.

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Will the Doves Assume Control of the Fed Today?

It doesn’t even feel like the world has recovered from the hangover left by Janet Yellen and the Fed after their ill-fated and poorly timed December interest rate hike, but now, it’s FOMC announcement day again. However, unlike December when a rate increase was widely expected, the Fed is not going to take any action today.

The Fed’s post-announcement commentary is what everyone will sink their teeth into for clues of future rate hikes or the committee’s possible move back to the dovish side. With stocks correcting sharply in January along with the global economic uncertainty, it’s very hard to believe that the hawks will win out today in any way, shape or form. Given the Fed’s hints at four interest rate increases in 2016 and the markets only pricing in one or two rate hikes, it will be interesting to see how that gap is bridged.

As with previous announcement days, the model for today is plus or minus 0.50% for the S&P 500 until 2pm before a few sharp moves are made and then a rally into the close. That’s the historical trend 75% of the time.

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Internal Bottom Confirmed but Volatility FAR from Over

Last week I wrote about the internal or momentum low being put in on Wednesday. Thursday’s action was essentially a stand off between the bulls and bears although the bulls had to be pleased that stocks stopped going down. Friday was the big point gainer for the bulls, but there wasn’t much upside after the big gap opening.

Assuming I remain correct in my assessment of the bottom, stocks usually see a day or two of red before exceeding Friday’s high this week. From there, we are supposed to see more upside lasting at least a few weeks or more into a trading peak in February before another decline sets in. The beginnings of these rallies are littered with the most beaten down names running the hardest as short covering initially causes the move. Real leadership takes some time to develop so don’t prematurely hop on the former losers as new leaders.

Stocks are going to stay volatile for another 4-6 weeks. Buying weakness and selling strength is the strategy I most want to follow until the markets settle down. Stay nimble and don’t be stubborn. I am not loving the action in the financials, industrials and materials, while healthcare,  biotech, staples and  REITs behave better. The next few weeks are also going to be an important period for high yield (junk) bonds to make a stand. I continue to believe that this key canary in the coal mine sees a major bottom in 2016.

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Internal or Momentum Bottom Being Hammered In

Stocks continue to be very volatile, one of the primary casualties of higher interest rates, but certainly from the dislocations in the energy market, which has seen an epic and historic collapse. I imagine that the large oil-based sovereign wealth funds in Norway, Saudi Arabia, Kuwait and Qatar have been massive sellers of global equities this month to continue to fund their social programs in the face of imploding energy prices.

The relentless and indiscriminate selling has all the hallmarks of push button forced selling and not the selling with keeping market impact small. Since the mid 2000s, I have often heard that when the Middle East funds want out, it’s immediate and not over time.

The crash in energy prices has also wreaked havoc on many inter-market relationships, causing all sorts of market-related issues this month. It has been a very ugly few weeks for the bulls.

For the past two weeks, I have pounded the table that this is absolutely not a repeat of 2008. I won’t rehash the comments, but you can view here if you like along with a valid price comparison from 2008.$marts20160119.pdf

What totally astonishes me is how the masses have completely abandoned stocks to the likes of which have only been seen a handful of times in history and mostly at either major bottoms or significant intermediate-term lows. I am used to seeing the “buy the dip” crowd out in force on CNBC and Fox Business during market corrections. But not this time. It seems like everyone is advising to sell the rally now.

In my 26 years in the business, I have survived two 50%+ multi-year bear markets and a whole of 20%+ declines. Never before have I had so many calls, emails and request for meetings from clients who have been shaken to the core by the headlines. That is shocking to me. Stocks are down a little more than 10%, but investors have emotions like they did in the middle of the financial crisis.

In my view, not only is this absolutely not the time to withdraw money from stocks, I believe we are approaching an opportune time to add money and perhaps take on a little more risk. It’s very hard to understand why folks are so focused on taking losses and standing aside. Stocks were down more last August, a lot more in 2011 and more in 2010. Each time led to a robust recovery.

What has the masses so spooked this time?

During these types of periods, I often suggest that if the volatility becomes too much, then lowering portfolio risk over time is a better strategy. Investing is a marathon not a sprint, but the desire to accept the ups and downs changes over time. I never like to move my own portfolio around during periods of outsized returns on the upside or downside. Rather, I like to wait until the environment is calmer and I can proactive not reactive.

Wednesday has the potential to be a key day for the stock market. There is a decent likelihood that an internal or momentum low was just seen as the relentless selling wave hit extreme panic and capitulatory levels. Internal lows are when the majority of stocks have seen their maximum damage. It’s when selling is the harshest. The maximum pain threshold for investors.

We will know more definitively in a few days.

If I am right, it doesn’t mean stocks are out of the woods and new highs will following next month. Rather, the markets should bounce and decline a few times, but the downside should be limited as a foundation is built for a stronger rally later this quarter and into April.

And if I am wrong?

I still do not believe now is the time to sell. That’s crazy in my opinion. At some point sooner than later, stocks will bounce and for those who just cannot stand the pain anymore, there will be a better opportunity to exit.

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Tuesday’s Binary Outcome

On Friday, we finally had the “puke” opening. There was some panic, desperation and despondency. In the “fight or flight” debate, there were more than a few investors taking to the skies! Given the very heightened volatility, Tuesday’s trading should not be quiet. Rather, the stock market should see another large move. Scenario A has the bulls putting up a real stand right from the opening, perhaps an old fashioned “gap and go” snap back rally. On the other end of the spectrum, Scenario B would look similar to August 24 where stocks see a mini-crash. I don’t see much in between which is why I used the word “binary” in the title.

Why way will stocks go?

It’s not exactly a coin flip, but the evidence is not overwhelming either. There were a few lights at the end of the tunnel on Friday for the bulls. The most beaten down indices, Russell 2000 and S&P 400, closed down much less than  the Dow, S&P and NASDAQ, a clear break from the meat of the decline. Additionally, both laggard indices closed Friday significantly higher than where they opened, another possible sign of at least a short-term trend change. Biotech, energy, utilities and healthcare sectors all did not make news lows on Friday, a definite change in the relentless, indiscriminate selling of the past two weeks.

Tuesday is yet another one of those “key” days for the bulls. Let’s see if they can stem the tide and mount a little offensive of their own.

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Puke Opening is Here

As the relentless selling pressure in stocks continues, my last few pieces talked about getting closer to at least a trading low, but not quite there yet. Even as stocks bounced back on Thursday, the tune was the same. I was waiting for that really ugly, panic driven opening where stocks saw there largest point decline of the correction. As I type this, the Dow looks to be down 400 points and this certainly qualifies as a “puke” opening.

While I hate to invoke 2008 because I absolutely do not think 2016 is like 2008, this kind of price action was also seen right into the MLK weekend with the first low coming immediately after. I think it’s possible the market will behave similarly.


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Stocks Bouncing But No Bottom Yet

I won’t rehash what’s been plastered all over the media. Selling in stocks has been relentless and the worst start to any year ever. It “feels” like the market is collapsing and harkens back to 2008. As I like to repeat from time to time, feel is not real. Yes, the major indices are down upper single digits in 2016, but I would argue that if this decline occurred any other time of the year, it would not be getting the press it is now because it’s the beginning of January.

Blame has been laid on China and North Korea and energy. The way I see it, energy has been the real culprit, but we will know for sure if stocks rally with energy still falling or stocks don’t rally when energy does. The latter will be very disconcerting!

In the short-term, stock are rallying today, but it’s not very convincing and I do not think it will last. The NYSE A/D line is just 2:1 positive for a Dow up more than 250 point as I type this. That’s disheartening for the bulls. Financials are up but lagging and consumer discretionary looks sad. The bulls need a much better effort to mount a real rally.

This bounce looks temporary and should lead to new lows when it peters out. A real bottom should have some panic associated with it during the morning with gradual firming towards the close. So far, those levels have not been seen.

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January Early Warning for Rest of Year

We now know that the first five days of the year were down which became a popular indicator for the year as a whole by Yale Hirsch of Stock Traders Almanac fame. While waiting for the month of January to conclude, I went back and looked at the first five days of every down year since 1951. Then I looked to see if January as a whole was down. Finally, I found all the times where January’s weakness exceeded the prior year’s December low as well as when the entire first quarter’s low was below the prior year’s December low.

The idea behind the research was to see which triggers were common in poor years for the stock market, not necessarily the accuracy in all years.

Listed below are all down years for the S&P 500 since 1951. Here is the key for the abbreviations used.

5 – First five days of the year were down

Jan – January as a whole was down

Dec – January’s weakness undercut the lowest closing price of December

Q – The low of the first quarter exceeded the low of prior fourth quarter’s low

2016 (so far) – 5, Dec

2015 – Jan

2008 – 5, Jan, Dec, Q

2002 – Jan, Dec, Q

2001 – 5, Q

2000 – 5 , Jan, Q

1994 – Q

1990 – Jan, Dec, Q

1981 – 5, Jan, Q

1977 – 5, Jan, Dec, Q

1974 – 5, Jan, Q

1973 – Jan, Q

1969 – 5, Jan, Q

1966 – Jan

1962 – 5, Jan

1960 – 5, Jan

1957 – 5, Jan

1953 – 5, Jan

As you can see, almost every single down year in the S&P 500 saw January as a down month. 1994 and 2001 were the exceptions. That’s pretty remarkable. Of course, that’s not saying that just because January is down the whole year will be down. It just puts us on guard to look for other indicators.

What we also see is that for the more significantly down years, not only is January down, but the low of January and/or the low of the first quarter exceeds the low of the prior December.

2016 has gotten off to the worst five day start in history, but it’s still way too early to say it’s a harbinger of things to come.

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2008 Redux This is Not

2016 is just a week old, yet all I am reading and hearing is that it’s going to be a terrible year for stocks and similar to 2008. 2007 – 2009 was a generational bear market, the likes of which have only been seen during the Great Depression. These types of strong deflationary spirals take decades of mistakes to create and leave investors scarred even longer. In the western world, we have never, ever seen a repeat within 10, 20 or even 30 years.

Heading into 2008, the housing crisis was already in full bloom. Leverage at the banks and on Wall Street was at epic levels. Corporations had very little cash on hand to buffer any weakness. Today, the massive leverage has also been purged from the system. Banks are sitting on more than $2 trillion in cash and corporations have another $1.5 trillion. Housing is stable and lenders are tight with their money. The economy may not be hitting on all cylinders, but it’s far from teetering on collapse. There are no Lehmans, Bear Stearns, Fannies, Freddies, AIGs and the like hanging on by a thread.

To compare 2016 to 2008 is either grandstanding or just plain ignorant.

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Water Needs to Find Its Own Level in China

Last summer I included China’s stock market in a few pieces as it cratered lower and lower. Remember, as I explained, while China may be the second largest economy on earth, they are relatively new to the capitalist system. They have, are and will continue to experience “growing pains” as the powers that be seem to believe they know better when it comes to controls in their financial markets.

Over the summer as their market collapsed, the government instituted all kinds of manipulations to prevent further carnage. They tried injecting their own capital into stocks. They halted trading on hundreds of stocks. They eliminated short selling on others. They put circuit breakers in place to close the stock market totally if it fell by 7%.

At that time, I opined that all they were doing was prolonging the inevitable. Water finds its own level. You can’t prevent a selling stampede that’s all lined up. And just as their officials were  gearing up for the victory lap, sellers began to overwhelm the Shanghai index in late 2015 which has now spilled over to 2016. Instead of stemming the tide, the 7% circuit  breaker has led to pile on selling as investors try to get out as soon as the market opens to avoid getting shut out of selling when it falls 7%.

The first solution is to remove the 7% breaker which was hinted at today and let everyone sell. Rip off the Band-Aid. Be done with it. This may cause a mini-crash, but my sense is that a good buying opportunity will be closer at hand. The August lows are just under 2900 on the Shanghai index and I would be very surprised if they are not breached this month, maybe next week, in some type of waterfall, capitulatory decline.

Without any anecdotal data to back this up, I have operated under the premise that whenever a major stock market is down 50%, it’s time to start buying. Sock some away for retirement. Maybe some for the kids’ college. The Shanghai is close to that level again.

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