Archives for September 2016

Sell Signal Closed Out. New Leadership Emerged

Today is the last day of the month as well as the last day of the quarter. The S&P 500 closed down -0.12% in August and is on track to close down in September unless the bulls can mount a major offensive, which I am not ruling out, and close above 2071. That means a down August and September for the S&P in a presidential election year, something not seen since 1956. You can put that in the category of useless info.

Last Thursday, I wrote about a somewhat rare trend that forecast weakness from last Thursday’s close through yesterday.

As you can see below, it was a pretty good five day trade of more than 1%.


While stocks sold off hard on Thursday with German banking behemoth, Deutsche Bank, collapsing even further, this is absolutely not a Lehman moment. Unlike Lehman which had no asset base to keep them afloat when the institutions made a run on the bank, DB has a huge retail network. I also do not believe Chancellor Angela Merkel will risk DB becoming insolvent with the election coming in 2017.

Anyway, stocks remain in pullback mode which I have been writing about for several weeks. Remember, pullbacks can some in two forms. One is for prices to decline quickly and somewhat sharply, while the other is to see less price weakness and more lateral movement over a longer period of time. I think we are seeing the latter right now.

I  keep talking about leadership changing and look what has been doing well during this pullback. Semis, transports and energy. These are new and bullish leaders for the bull market as the defensive group has now transitioned from neutral to outright weak. And, high yield bonds continue to hang in very well right near their old highs.

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Clinton or Trump? Who the Markets Want

The happiest moment of my Monday evening was when Lester Holt said, “that concludes the first of three presidential debates”. Talk about painful. I was SO thankful that I had picture in picture so I could also watch an incredibly entertaining football game between the Atlanta Falcons and New Orleans Saints. High scoring and lots of action.

I thought Trump started off so well and I actually naively thought that it was going to be a real debate about policy. Silly me! It devolved into a reality show on both sides. While the #TrumpWon hashtag is all the rage on Twitter this morning and supposedly the polls called Donald the winner, I thought Clinton won but nothing overwhelming.

Trump had her on the ropes with her emails and nothing to show for herself after decades in government. She hit him good with his tax returns and all the personal nonsense. Trump clearly did not prepare enough and Hillary’s overly rehearsed one liners were mostly bad. Trump should have stuck to Clinton’s open wounds and not let up. Emails, Benghazi, immigration, higher taxes, ObamaCare, Foundation, etc. And what was that sniffling?

Clinton should stop arguing and let Trump rant. He digs his own holes. Tax returns, helping those who need it most, business bankruptcies, etc. What was that cord running down her back into that box? A mic? Hidden earpiece? Medical device?

Trump once again attacked Janet Yellen and the Fed for being political, as if they want Hillary to win. More nonsense. Without any factual base, I would surmise that the Fed is probably skewed slightly right of center and I 100% believe they do what they really think is right for our country. You don’t have to agree with them, but I don’t think there is any hidden political agenda. Fed Governor Lael Brainard is the exception as she has made three public donations to the Clintons.  Brainard clearly has an agenda to get Hillary elected so Lael can either succeed Yellen at the Fed or Jack Lew at Treasury.

Additionally, Trump continued to attack the Fed for propping up the markets with low interest rates and creating the biggest bubble ever. I find that to be 90% bunk. As you know, “bubble” is the most overused word in investing today. Everyone in my ever growing clown parade of doomsdayers, Soros, Druckenmiller, Icahn, Zell, Fink, Gundlach, Gross, Faber, Auth, Faber, Yusko, Singer and Donald Trump continuously use the word bubble and it’s absurd. Bubble equals greed. Mom & Pop clamoring for a certain investment. I would like to know what is being clamored for right now? And no, it’s not bonds. People don’t buy bonds because of greed. If anything, they buy them out of intense fear.

And to repeat a statement I have made more than a dozen times already, the markets really don’t care who wins the White House. By that, I mean that the market celebrates or pouts in a range of -5% to +5%, which is a just a bit outside the normal historic range. On the surface, Hillary means more business as usual and the same slow, uneven and frustrating growth. Wall Street is fine with that. Donald is clearly a wildcard, but I believe it’s mostly bark and no bite as he would have to work with Congress. Wall Street would eventually warm to that.

I do think that a sweep of the Oval and Congress by the left would be the worst of all scenarios for the markets as gridlock would be gone and the government could actually get something done. While it may be counterintuitive, the markets like gridlock and don’t like when things can get done and change.

Finally, I do think that career politicians and bureaucrats are terrified by the thought of a Trump victory as their ability to buy their way (in one way or another) to those cushy posts will be all but gone. DC corruption would be in for some trouble. That’s why so many of the GOP are supporting Hillary. The devil you know. Take care of yourself first. Those comments can easily be extended to the mainstream media as well who overwhelmingly support Clinton.

The bottom line from my perspective is that I can’t believe anyone changed their minds from that one debate.

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Post-FOMC Sell Continues as Does Pullback Mode

Our post-FOMC sell signal from Thursday’s close remains in place. That short-term trade will end this week.

Stocks begin the week on the defensive as Europe and Asia are showing red. The media will likely blame it on pre-debate jitters, but that’s just nonsense. Pullback mode remains in place as it has been for the past few weeks. As I keep mentioning, it should not be a big deal. The Dow and S&P 500 continue to be the weak sister indices while the NASDAQ 100 and Russell just hit new highs last week. Additionally, the NYSE Advance/Decline Line also just scored yet another all-time high.

Of the four key sectors, semis and transports are the strongest with discretionary next and then banks which seem to be fickle. Telecom, REITs and utilities have resumed leadership, but I do not believe this will hold up into year-end. Rather, it looks like a temporary thing. Interestingly, staples are not joining that party which could mean more dire intermediate-term consequences before long.

High yield bonds are acting fine and treasury bonds have bounced back very well over the past two weeks. If treasuries are putting in a more significant peak, this rally should end soon with new lows seen by election day.

On a personal note, the world lost one of all all-time great sportsmen, the King, Arnold Palmer, a man who transcended golf and sports. Palmer and Jack Nicklaus had legendary battles with Arnie’s Army always overwhelming Jack’s fans. They were intense rivals who became the best of friends later in life. In all my years being a golf fan, I never heard a single unflattering rumor or story about Arnold Palmer. He would always go out of his way to help people and give back. A true role model.


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Fed Trend Says Sell but Fedex Gives Thumbs Up

After Thursday’s strength, one of our post-FOMC trading systems gave a sell signal and that calls for weakness over the next 3-5 days. This has a high degree of accuracy, greater than 75%. If stocks rally further on Friday, it will trigger another trend calling for lower prices with a hit rate above 85%.

If correct, this should just be a quick and relatively mild bout of weakness that can be bought for another move to new highs on the way to Dow 19,000 and then 20,000. After all, NYSE breadth the past two days has been very powerful and high yield bonds continue to rally. Leadership, while strong, has been a little schizophrenic this week, but something I am worried about at all.

I rarely mention bellwether stocks, but Federal Express caught my attention as it broke out this week. This single stock has a pretty good track record of forecasting the broad market. Unless the breakout fails somewhat immediately, we have yet another confirming sign of higher prices to come.

Get ready to hear from the doomsday crowd next about how the US dollar is doomed and China is taking over because their currency finally gets included in the SDR. It’s 100% NONSENSE from where I sit. One day, the dollar will no longer be the world’s reserve currency, but it certainly isn’t now or even by 2030!

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I Screwed Up

Yesterday, I said that all of our Fed related trends were muted to less than 60% accuracy. That was wrong. One of our best Fed systems said there was a 78% likelihood that stocks rallied. I didn’t realize this until well after 2pm when it was too late to email and take advantage.

What a powerful response to the Fed not raising rates and issuing a more hawkish statement, exactly what I and most others predicted. I did find it laughable that a number of pundits like Bill Gross and Danielle DiMartino Booth thought that Yellen & Co. could hike rates yesterday. You can add those folks to the clown parade with George Soros, Stan Druckenmiller, Carl Icahn and the rest who continued to call for the end of the world.

Anyway, one thing that did surprise me was the number of dissenters, three, in the voting. I did not see that many coming. I figured there would be one. That tells me that more voters in that room would have raised rates if Janet Yellen didn’t have such strong conviction to leave them alone. Since the next meeting in November is less than a week before the election, I don’t think November is on the table. That puts December squarely in focus for Yellen & Co. to hike, something I am vehemently against. If that happens, it will be a full year in between hikes, making this rate hike cycle the gentlest glide path in history.

Getting back to the markets, I was surprised at just how powerfully everything reacted, as if investors were somehow caught off guard. Stocks, bonds, gold and oil all rallied hard post the 2 pm announcement. That’s very unusual behavior in general, but even more so for a Fed day. There aren’t enough instances to make it statistically significant, but typical response has been very favorable beyond the short-term. That’s also confirmed by the recent contraction in volatility pre-Fed meeting.

Sector leadership shifted back to the pre-BREXIT yield chaser leaders of slow growth, utilities, REITs and telecom. Curiously, staples did not follow suit. Banks were on the other end as they sold off on the news and then lagged the rally the rest of the day. I still cannot believe that people positioned for a hike and bought banks in hopes of this. I guess that’s why so many money managers do such a poor job.

High yield bonds also caught fire after 2 pm and this has very positive intermediate-term implications for stocks. The NYSE Advance/Decline Line is now just a good day away from yet another all-time high. Yesterday’s performance is another confirming sign that the markets are long and strong and a bear market or even full-fledged correction is not close.

Finally, Donald Trump is one person who is probably unhappy with yesterday’s lack of Fed action and across the board rally. The recent pullback/consolidation has definitely helped his poll numbers and I believe the only way he can win is if stocks struggle into November.

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Yellen Set to Raise Rates, But…

As the Fed’s Open Market Committee meeting heads into day two, our own trends and systems for the trading day are surprisingly mute. Today typically sees stocks trade in a +.50% to -.50% band until 2 pm before the market gets a shot of volatility. Usually, we see a strong upside bias into the close, but the odds of that are under 60% from the usual 75%+. In other words, the edge just isn’t there today. Tomorrow, Friday and early next week are a different story as a trend or two may trigger to signal lower prices ahead.

Turning to the actual meeting and announcement, the Fed is not going to raise interest rates today. That’s the bottom line. We have heard countless speeches from the various Fed Governors and regional presidents on the need to raise rates or wait, but the truth is that unless Chair Janet Yellen wants to hike rates, it’s very hard to believe that her underlings will actually vote against her. That’s akin to mutiny.

With all that said, however, they are absolutely going to offer some of the most hawkish (supporting higher rates) commentary in years to set the table for a December hike, which gets us well passed the election. I find it impossible to believe that Yellen & Co. would ever consider a rate move the week before the biggest election in four years which is when the FOMC meet next.

So expect no move but strong commentary and a hike in December.

What’s wrong with the economy?

Clearly, the economy is no longer in crisis mode and hasn’t been for some time. Since 2009, I have repeatedly stated that the economy is and will remain in a post-financial crisis recovery until the other side of the next recession. That means very uneven growth that sometimes teases and tantalizes on the upside and terrifies once in a while on the downside. It’s very frustrating, more so now because we have complete, total and utter dysfunction in government that makes the Fed the only game in town.

With my view, people have always asked me if I thought a President McCain or Romney would have mattered economically. The short answer is yes because not only would we not have spent almost a trillion dollars on a failed stimulus plan, but ObamaCare would not have been passed. I am not going to argue the social merits of the program, but almost every economist agrees that it has hurt the economy to some degree. I believe significantly.

Additionally, our tax code is another hot mess that has hurt the economy and the regulation pendulum has swung not back to neutral, but all the way to the other side. We’re not creating businesses. We have severely hindered the entrepreneurial spirit which has always helped kick start the economy after recession. I think a GOP president would have had different results, but wouldn’t have been able to sidestep the full effects of the post-financial crisis recovery.

Should the Fed raise interest rates?

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. I do believe that Yellen & Co. will hike rates in December which is absolutely the wrong move.

Against the problems abroad, we have seen more of the uneven growth I mentioned already. One month (May), the employment report is recessionary and the next two months it’s hot and higher rate supportive. GDP still behaves like it’s stuck in quicksand and inflation remains below the Fed’s 2% target.

What concerns the smart people?

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 left side of 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.

As I end this piece, I need to take my usual shot at Fed Governor Lael Brainard who has blatantly and publicly embarrassed the Fed’s supposed political independence by contributing to Hillary Clinton three times. Everyone knows the two are buddies, but did it have to publicly pollute the Fed like that? Will anyone be surprised when Brainard is chosen to succeed Jack Lew at Treasury or Yellen at the Fed?!?!

A full Street$marts with canaries in the coal mine are due out next week. As I write about all the time on, I care much more about the markets’ reaction to the news over what the news actually is. Keep a close eye on what leads and lags from 2:30 to 4 pm today.

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Bulls Continue to Ready Their Arsenal

The major indices begin the week without being on the same page as the multi-week pullback theme remains in place. This is very typical of a market that is digesting gains. Below is the S&P 500 where you can see the big red and green bars on the right side. Those were huge spikes in volatility in both directions. Over the past week, however, the bars have become shorter and shorter, meaning less movement from high to low each day. That is volatility waning. All of the activity has taken place within the confines of that tall green bar 6 days ago.


On the other hand, you can see the NASDAQ 100 below which tells a very different story. This important bellwether index is just shy of its 2016 high which would be the highest level since 2000, the Dotcom high. In my 2016 Fearless Forecast, I forecast that this index would finally score new all-time highs and I think that still happens this year.


While leadership from the semis remains absolute, the other key sectors, discretionary, transports and banks are still in pullback mode. That’s to be expected. Bonds have been the real story as the long-dated treasury has been kicked in the teeth over and over. It’s at the point where it is supposed to bounce back, if only to work off the oversold condition. It certainly looks like the high is in for a while, if not for decades.

Seasonally, this is the weakest week of the year in the weakest month of the year according to Rob Hanna of Quantifiable Edges. As I mentioned before, September did not set up to be a particularly poor month and I think that is still the case.

The bulls are getting closer to resuming the advance, but I don’t think it’s just quite yet.

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Volatility Remains Elevated Until the Bulls are Ready Again

While stocks didn’t much on the surface on Wednesday, it was definitely disappointing for the bulls that there hasn’t been any follow through from Monday’s big reversal. The bulls should make another attempt on Thursday. The pullback theme remains intact, but we are starting to see some more encouraging readings in the sentiment area, specifically on the ETF volume side. The most prominent ETFs, SPY and QQQ have seen volume spike lately which means that investors are favoring the liquidity of the basket of stocks over the individual stocks themselves. That usually occurs near at least short-term lows. Additionally, volume in ETFs that go up when stocks go down has also spiked as traders position for more downside. This behavior, too, is typically seen as the market tries to find at least a short-term bottom.

I still expect volatility to remain elevated as stocks continue to work through this short-term bout of weakness that doesn’t have the feel of being done just yet. Of interest through this is that the currency market has been relatively quiet. There has been many postings about LIBOR and the TED spread showing strain in the financial system, but the currency markets aren’t confirming this. Our banks continue to lead and trade fairly well.

There is probably a little upside and another shake out to the downside coming before the uptrend resumes, but I remain of the opinion that weakness should be bought.

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Questioning Brainard’s Ethics Again

What a show of strength by the bulls on Monday. After what looked like a continuation of Friday’s bloodbath, the bears folded like a cheap suit shortly after the open. Credit is being giving to Fed head, Lael Brainard, who gave a very dovish (against raising rates) speech, but the truth is that stocks were already moving up long before she took the podium after lunch. Her comments just added fuel to the fire.

By the way, this is the same Lael Brainard who contributed to Clinton’s campaign as a sitting Fed Governor. Talk about conflict of interest! To me, this is a desperate attempt to garner favor with Clinton in hopes of becoming her Treasury secretary or succeed Janet Yellen when her term is up. For that reason alone, I would remove her from any short list. If Brainard’s judgement is that poor now, imagine how it would be as a cabinet member or most powerful banker on earth.

Anyway, after Monday’s huge reversal, pre-market indications show another large down opening. I have seen a number of studies which point to a red day today for stocks followed by a rally and then another decline before the major indices head back to all-time highs. That is pretty much in line with what I discussed yesterday. The volatility genie is out of the bottle for a spell. Expect it and accept it for now.

The path of least resistance remains up and the vast majority of the damage has already been done at Monday’s low. Sure, we could see slightly lower prices this month, but that should be it. I continue to favor buying weakness and rotating into new leadership.

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Not the Fetal Position

Last week, my theme focused on a pullback in the stock market. More importantly, my strong opinion was that it wasn’t a bout of weakness where people should sell in to, but rather to use that opportunity to buy the dip or re-position a portfolio to where it should be over where it was.

Friday was an ugly day across the board. Overwhelmingly red. 96% of the volume on the NYSE was in stocks that were down. Besides stocks, bonds and commodities were hit very hard as well. If you came in owning positions, there was nowhere to hide. Few pundits I heard or read said to buy. The bulls and bears are debating whether this was just another scary short-term wonder or if this is the shot across the bow for much more downside. I think you know where I stand.

As of Friday’s close, stocks are down a grand total of 3%. Key sector leadership in transports, semis and especially banks remains strong. High yield is extended but still look good. There is broad participation. This is not the time to build a bunker, stock it with canned goods and water and get in the fetal position. The bull market isn’t over. The rally isn’t over.

Volatility has certainly spiked. I expect that to remain elevated as the market digests Friday’s rout by the bears. Early indications point to a lower opening for stocks, but it’s unlikely we will see a repeat of Friday’s decline. Look for early weakness to subside and see if the bulls want to step in by lunch. The next few weeks should see a number of ups and downs, especially with the Fed meeting, but Dow 19,000 shouldn’t be that far off. Focus on the horizon and don’t let those loud and habitually wrong perma bears cloud your judgement.

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