Archives for July 2016

What’s SUPPOSED to Happen versus What ACTUALLY Happens

Earlier this week, I mentioned that stocks were coiled up and looking for a big move. Since then, only the NASDAQ 100 has done anything and that was really just on Apple’s earnings beat. Overall, it’s been a very quiet week without any volatility at all. That’s likely to change sooner than later, but unlikely to be today.

As I have mentioned over and over, the post-BREXIT thrust, pullbacks are likely to be shallow as the masses were caught off guard and are now clamoring to buy. Those waiting for a 10% correction will probably be waiting a while unless an exogenous event hits, in which case, they won’t buy anyway!

The government reported that Q2 GDP clicked at 1.2%, well below estimates of 2%. I won’t rehash my long-term theme about the typical post-financial crisis recovery which I have been spot on about since 2009. On a day like this, I always find it instructive to see what’s supposed to have versus what actually happens. Treasury bonds should rally. The dollar should fall. Gold should rally. Crude oil is a toss up.

On the sector front, utilities, staples, REITs and telecom should lead as they are all defensive and provide yield. Industrials, materials and discretionary should lag as they more economically sensitive. High yield bonds should lag.

Let’s watch what bucks what is supposed to occur for signs of change.

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Not so Special, Special Fed Update

Let me begin this special FOMC update by saying that all three very short-term markets trends based on the Fed’s meeting ending today have lower probability of success this week although there may be a sign pointing to lower prices by the end of the week. Stay tuned.

Without a crisis like 2008, Janet Yellen & Co. will find it tougher and tougher to discuss an interest rate hike during the heat of the political season. While the Fed is supposed to be apolitical, we all know that couldn’t be farther from the truth. It has even become blatantly public as Fed Governor and Clinton family buddy, Lael Brainard has donated to three times. Want to guess who would be Hillary’s treasury secretary or successor to Yellen?!?!

Anyway, here we are again; six weeks hence from the last meeting with the world not ending after the vote to BREXIT. Stocks are at all-time highs and the employment picture improved dramatically in June. While the economy is not back to trend growth, it’s certainly stable and able to withstand a rate hike. However, the Fed heads have been very quiet this month, very unusual if a rate move was being seriously considered. As such, the markets are expecting no hike today with a bit more positive (hawkish) statement from the FOMC.

Long-time readers know that I am record since 2008 that the Fed should NOT raise rates until the other side of the mild recession that will follow the Great Recession. The world is a dramatically different place post-financial crisis and we are seeing some of things I was very concerned about start and continue to proliferate, like negative interest rates in Europe and Japan.

As I mentioned several times before, I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the long-term chart below.


Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.


Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

With so much more still to say, I need to hit the send button without comments much about the stock market. As you know, I pounded the table hard at the BREXIT lows, May lows and February bottom to buy stocks for a run to new highs. That’s worked out well. The market is pausing to refresh here and that’s not a bad thing. Until proven otherwise, weakness should be bought.

Leadership is changing from the defensive utilities, staples, REITs and telecom to more aggressive sectors like semis, software, materials and discretionary. Even the “left for dead” banks and biotech are starting to show signs of life. Don’t underestimate this as a sign of fresh leg higher in the bull market.

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Stocks Coiled Up for a Move

Good Monday Morning!

If you looked for me on FOX Business last Friday, I wasn’t there as the attack in Germany meant more geopolitical news and less market discussion. My segment was rescheduled for 2:50 pm this Wednesday which is right after the Fed concludes their meeting and announces no change in interest rates.

There’s not a whole lot new today to review. Stocks remain very overbought, but an awful lot of investors are looking for that pullback to buy. Having been in that position more than a few times in my 28 year career, it can be very frustrating. Thankfully, it’s not something I have to worry about right now. I can find other things to bother me!

Heading into the new week, the major stock market indices are “coiled up” as my friend Tiny would say. That means they have traded in a narrow range after a big move and they are building up energy for a good move. The best example of this is with the S&P 400 as you can see below and the Russell 2000.

Coil

While the this coil looks to be very bullish with an upward resolution, given how overbought the stock market is, I would be on the look out for a possible move to the downside first. That could shake out some weak handed holders and then immediately reverse and break out to the upside. All speculation at this point so we will watch it closely.

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FOX Business TODAY & Dow 20K

I am going to be on Fox Business’ The Intelligence Report with Trish Regan today (Friday) at 2:50 pm edt discussing my forecast for stocks and the markets, especially with the Fed set to meet next Tuesday & Wednesday. Trish is heading back from Cleveland so Ashley Webster is filling in.

It has been truly amazing what a little rally has done to market sentiment. At the BREXIT bottom, as the pundits, masses and media all panicked and headed for the hills with cash, our models could not have been any more positive and stronger. I pounded the table to commit cash and resist the urge to sell. I laid out a very bullish road map which was the most positive forecast anyone could find.

http://investfortomorrowblog.com/archives/2294

Even that wasn’t bullish enough!

To me, there was only one path post-BREXIT; stocks were going to fresh all-time highs this quarter on the way to my longstanding target of 20,000. Thank you to the Dow and S&P 500 for cooperating already. Look for the S&P 400 to follow shortly. Today, after a very broad-based and historic rally, the pundits and masses are suddenly positive and looking to buy. The clown parade is full of clowns!

Leadership has most definitely changed from the purely defensive camp to more offensive with more changes on the way. And high yield (junk) bonds continue to lead and exhibit strength. This is one fun market.

As we all know though, trees don’t grow to the sky and stocks will likely pause to digest or even pullback a few percent here and there. I do not believe the stock market will see any significant downside here. It looks like weakness should be limited to the low single digits on a percentage basis at most. Could we see 4-5% down? Sure. However, there are so many investors waiting to buy that dips are likely to be shallow and bought fairly quickly until proven otherwise.

Finally, I want to thank FOX61 in CT for accepting my suggestion to do a BREXIT segment on the local news. I thought it was really well done and focused on the mom & pop investor. Here is the link.

http://fox61.com/2016/06/28/whats-next-after-the-brexit-vote/

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And NOW They Want to Buy?

Although fresh all-time highs are making headlines, making it seem like there’s a lot of action, the past week has been fairly quiet for stocks. On the surface, it looks like the first leg of the post-BREXIT rally has ended. However before you think about turning negative, I remain very positive on the intermediate and long-term. It’s the short-term that looks like a pullback or coin flip as sentiment has become a little too giddy and the pundits have all come full circle to power of the bull.

That initial move off the BREXIT low when the masses were panicking and I was pounding the table to buy created some historic thrust readings which typically indicate more strength and higher prices for a while. As I have said since the market bottomed in February, weakness should be used as a buying opportunity until proven otherwise. With so many investors caught off guard by the melt up, pullbacks are likely to be shallow for a while. That doesn’t mean stocks will continue to soar in the short-term. I can certainly see a scenario where 1-3% bouts of weakness are the floor with 1-3% rallies as the ceiling for now.

Sector leadership is also changing dramatically. The defensive leaders in REITs, telecom, staples, metals and utilities are beginning to cede to semis, software, retail, builders, healthcare, industrials, etc. That’s very healthy even though banks and financials remain absent. And let’s not forget the continued importance of high yield bond leadership and credit spreads narrowing.

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Like a Broken Record

I read a stat last night that said only 1% of Americans hold off taking social security until 70. That low number really surprised me as it means 99% of Americans do not get the maximum amount of social security. When I meet with clients and prospects, one of the foundation conversations is when to take social security and why. If you are approaching retirement or already take social security, do yourself a favor and spend some time researching this!

Back to the markets, stocks have run harder and faster than even I thought. And that’s saying something! Of course, the revisionist pundits have been out in force changing their tune from selling after the BREXIT vote to knowing it was the time to buy. I call this the clown parade. One thing is clear from reading this blog; not only did I stay firmly in the bullish camp, but our models gave reinforcing buy signals at the bottom. MUCH better to be lucky than good!

The major stock indices are extended and could use either a pullback or pause to refresh, but momentum has been very strong. Some would call it historic and I could not easily disagree. Strength begets strength until it doesn’t. Since the BREXIT bottom, small caps and technology have led with mid caps following closely. The Dow and S&P 500 are trailing which is very bullish over the intermediate-term as it shows investors taking on risk.

We now have the Dow and S&P 500 at all-time highs, but the S&P 400, Russell 2000 and NASDAQ 100 still have some work to do. Like a broken record, until proven otherwise, weakness remains a buying opportunity.

On the sector front, semis, software, telecom, internet, discretionary, industrials, healthcare, homebuilders, REITs, staples, utilities and precious metals all are behaving very well. While I mentioned that the more defensive sectors might be under pressure after the stronger than expected jobs report, they have held up well as the more aggressive groups have come on strong. There is no debating that this rally has been very broad-based.

Junk bonds have also reengaged in leadership at the same time as treasury bonds are finally pulling back. Long-time readers know how much stock I put in junk bond performance. I am not quite sure what to make of the treasury bond rally rally and decline. It’s not your typical “risk off” or risk avoidance trade.

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On the Way to Dow 20K

With the short-term volatility over the past few weeks, this is no clear trend to take advantage of post today’s employment report. By that, I mean, our short-term trading system specifically created for this report has no strong edge. The report came in strong and pre-market indications are for a higher open which can sometimes point towards a short-term peak.

With the much better than expected report, the recent market leaders may be under pressure. Utilities, staples, REITs, telecom and precious metals all should be watched closely.

It’s been roughly four days of sideways action for stocks so the market could certainly push higher and press the bears. However, while I continue to be positive on almost all time frames, I just don’t think the major indices are ready right here to blast off to 20,000. That’s coming, but I would be surprised if it’s before Labor Day. (Cue to markets. PLEASE surprise me!)

Random things of interest. Amazing how the collapsing British Pound was the supposed cause for the the markets hitting the BREXIT skids. However, the pound has been down the last 6 days with stocks rallying. Media and pundits wrong as usual.

Crude oil seems to have put in an intermediate-term peak and may be transitioning from a trading range to decline. That’s important to watch and see how stocks react to that.

High yield bonds are hitting new highs for 2016 which is anything but bearish for stocks.

Separating Pretenders from the Contenders

Greetings from 34,000 feet as I head to CO for the weekend with my wife and some friends. Of course, they’re all her friends because who would really want to hang out with me?!?! As is typical when I take a day or two off, Mother Nature thumbed her nose at me with a forecast of rain, rain and thunderstorms with highs in the low 60s and lows in the upper 30s. Thanks!

We may have set a record for sentiment shift in a single week. Just one week ago after the Brits said adios to the EU, at least for now, and the global markets collapsed, the talking heads all “knew” this would happen. I saw forecasts of 10%, 15% and even 20% in the downside. By Wednesday, they all said they called the bottom. What a bunch of clowns. It is interesting to note that the very well-respected Lowry’s and Jim Stack who had been bearish for over a year used the two-day decline and two-day rally as cover to turn positive. Subscribers pay an awful lot of money for those services and I would have given them better advice for free right here!

It’s been a powerful three days for global stock markets and while today is starting out okay, I would be very surprised if we powered ahead after lunch with the long weekend looming. The bulls did a remarkable job into month and quarter-end which made me very happy, but I am not putting on my rose colored glasses just yet. Yes, I am still bullish over the intermediate and long-term. I think we will see all-time highs this quarter. However, I would not be shocked for stocks to pause sooner than later to digest and calm down a bit as most of the major indices approach the levels seen just before the vote. Nothing dramatic. Just a little pullback.

While I have been long and positive on most of the defensive sectors for months and they have been leaving, I would still like to see some of the more aggressive groups step up. I saw a fairly compelling study last week regarding the semis and it would be really nice to see them lead over the summer. The NASDAQ 100 has been lagging and that could really create some enthusiasm and excitement. Healthcare is quietly making a move that few are noticing while my aforementioned telecom, REITs, staples and utilities all seem a little extended here.

On the questionable side, I still don’t know what to make of banks and financials. Materials and transports are lagging for sure. The pilot just said to get ready for landing so I am cutting it off here.

Wishing you a very fun and safe July 4th holiday with lots of good weather!

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