Archives for November 2016

1980 a Good Analog for 2016

Since the election the financial media and pundits have been fascinated with labeling the stock market’s strong run as The Trump Rally. I get it. And it’s really only a silly name anyway. However, the market isn’t rallying just because Donald Trump was elected. If the Senate went blue, I would argue that we would seen a muted response. Equally, if not more important, is the fact that the GOP now controls Congress and similar to how the government looked in 2009 & 2010 when the democrats were in the same position, the republicans have at least the next two years to pass their highest priority legislation and jump start the economy.

I went back 100 years to try and find similar stock market behavior post-election as well as during the year and the only remotely close parallel was 1980 when Ronald Reagan defeated Jimmy Carter as you can see below. In 1980, the Senate went to the GOP for the time since the mid-1950s, however the House remained blue.

I added a chart of 2016 so you can see how they line up. Take away the BREXIT decline at the end of June and they look interesting.

The important takeaway is found on the far right of the charts. In both cases, stocks rallied to new highs after the election, however the current rally is stronger and longer than the one in 1980. Perhaps that is because Congress is all red now, but was split in 1980. If this analog is to continue, stocks should be peaking shortly as they typically do during this time of year and pullback for a few weeks. I would only expect a mild bout of weakness in the 2-3% range.

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Stock Market Yawning at Recount

After a small gain on Wednesday, the seasonality bulls got their work done on Friday as the strong trend held to form. Without any weakness leading into that trend, it made it too tough for me to play it. However, I did tweet on Friday that taking a small short position at the close for seasonal weakness on Monday seemed like a better risk/reward play.

Heading into the new week, we have to be on the lookout for the typical post-Thanksgiving hangover early in the week and then the jobs report on Friday which is the final major data point before the Fed raises rates on the 14th. Stocks remain extended and overbought as I mentioned last week, but it doesn’t mean they have to go down right now. They can become even more overbought and extended or they can simply pause and go sideways.

As everyone has been quoting everywhere, the Russell 2000 has been up for 15 straight days, a feat I would never, ever have predicted at any time. At some point, the streak will end. At some point the index will close below the previous day’s low. I am way too chicken to buy that without a meaningful pause or pullback.

The rally continues to look fine and my window for a decline is quickly approaching. Leadership is strong and the internals have improved. High yield bonds are stepping up as well. The stock market doesn’t seem to care about the recount about to take place in several states. Should that Hail Mary gain any steam and possibly reverse the election, that would make the Bush/Gore fight look like a walk in the park compared to a full-fledged constitutional crisis unfolding. Stocks would crater. That scenario is not something I think will happen. It is interesting, however, that Jill Stein has raised more than $5 million that she doesn’t have to give back if it’s unspent or more than needed.

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Seasonals Favor Bulls into Weekend

Today and Friday are well known and widely followed seasonally strong days for stocks. That doesn’t mean we should just blindly buy and hope things work out. Stocks have been almost straight up since the election so you can certainly argue that a lot of fuel has been used up, including the last two days. As I mentioned on Monday, if the stock market was down on Tuesday I would have wanted to be long on Wednesday and Friday. That’s not the case.

Stocks are super overbought, but they can still get even more overbought. The signs of a tired market price-wise aren’t showing up just yet although that doesn’t mean there can’t be a pullback. There’s just no solid edge here. Almost every non-defensive sector except healthcare and biotech is breaking out. Leadership is very strong.

High yield bonds are finally stepping up, but more work needs to be done. The NYSE A/D Line is making new post-election highs, but it’s still not close to the all-time highs it needs.


IF the window for a decline closes over the coming few weeks, I would expect the aforementioned high yield bonds and NYSE A/D Line to score all-time highs by mid-January. That would give the bull market another strong indications of staying power.

Wishing you a happy, healthy and meaningful Thanksgiving surrounded by those important in your life!

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Bulls Not Done

The bulls came back from the weekend in a good mood as stocks are rallying into lunch on Monday. While banks are taking a little breather, commodity-related sectors are leading with energy, metals & mining and materials all doing well along with some of the beaten down Hillary sectors, utilities, staples and telecom. High yield bonds are finally showing some oomph and emerging market countries are bouncing. The NYSE A/D Line is showing decent participation.

I won’t rehash all the studies out there about Thanksgiving week, but this a seasonally positive week with Wednesday and Friday showing the best returns. If Tuesday is a down day, I would be interested in being long for the last two days of the week, making sure to sell or lighten up ahead of the weekend.

While I am not abandoning my recent concerns about stocks, I am recognizing that the window for a decline will start closing within a few weeks. If one the scenarios I offered last Friday is to play out, we should see weakness begin to manifest itself by the end of next week.

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Three Scenarios to Year-End

On the surface, you would think that the past nine days were nine easy days for the bulls. After all, the Dow was up more than 5%. What could be bad? Beneath the surface, there was much wrong with the post-election rally that began the day before the election. To begin with, the Dow was a leading index, followed by the Russell 2000. The S&P 500 and S&P 400 were nothing special. The NASDAQ 100 was actually down over the two post-election days and is lagging very badly. Reread that last sentence. With the Dow up 5% over two post-election days, the usually leading NASDAQ 100 lost ground over those two days. That is not a healthy market.

Internally, it looks even shakier with the average stock on the New York Stock Exchange closing lower post-election. Now the bulls will argue that it’s because the bond market has been hit so hard and there are a large number of bond-related issues trading on the NYSE. They are correct. The bears, however, will state that these very bond-related issues are the ones which have powered the NYSE Advance/Decline line to new high after new high and their fall from grace is definitely a strong warning sign. The bears are correct as well.

Below, I am going to depict this quandary in two different but similar ways. First, you can see the old tried and true NYSE A/D Line which is just a cumulative total of each day’s number of stocks going up and down. It peaked in late September but so far, has been unable to regain that level and confirm the market’s huge surge.


Next, you can see the S&P 500 with the 21 day moving average of the number of stocks going up and down on the NYSE. This is a shorter, but also valuable indicator of participation and health in the stock market.


This indicator peaked back in July and has been almost steadily in decline except for its recent uptick post-election. It, too, is not confirming the strength seen in stocks since the election.

Finally, below is the PIMCO High Yield Fund which is a good proxy for the high yield (junk) bond market. As you know, high yield bonds are perhaps my favorite canary in the coal mine. This sector peaked in October and has been very weak ever since, including post-election.

Something just isn’t right…

phydxOn the sector leadership front,banks, semis and transports, all key sectors, have celebrated the Trump victory in a huge way all soaring to new highs. Discretionary has been the lone key sector hold out, but that group is trying to get its act together as a late comer to the party. This strength in leadership somewhat mitigates the dire picture painted above.

When our research indicates a weak market while stocks are at new highs, I often refer to a “window of opportunity” for a decline. While that window is open, like now, a decline has a higher probability of occurring. Once that window closes, it becomes less likely. I was emailing with one of our adviser clients the other day and Mike asked what were the most likely scenarios I saw unfolding through year-end.

1 – Stocks peak now and decline 4-8% over the next month and rally strongly into year-end.

2 – All of the weakness I described above is absorbed by the market. Stocks pause for a week or so and then roar back to life right into January.

3 – Stocks meander around for another month and then rally modestly into January where they peak and see a 10% correction in Q1.

At this point, I am hesitant to score the scenarios, but the action over the next week or so should allow me to remove at least one scenario. The window of opportunity for a stock market decline has opened and it’s time to play defense. We will see what shakes out. This is not the time to be complacent.

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Clinton Scenario But Trump Portfolio

In several interviews before and after the election, I offered that stocks would decline 3-6% on a Trump victory and a better buying opportunity would come towards Thanksgiving. At the overnight lows as election results were being reported, stocks were 5%. That’s not how I envisioned the pullback occurring, but it did. I certainly did not see the market forming a low overnight and then rallying 8% like a rocket taking off. Overall market directional behavior last week was conforming to my Clinton victory scenario more so than my Trump one with stocks continuing to advance for a day or two before the rally peters out.

If you watch the stock market on a regular basis, you probably noticed some of the most vicious sector rotation during a rally of all-time. Investors clearly had their Clinton portfolios invested before Election Day. The past few days have seen banks, healthcare, biotech, homebuilders, industrials, materials and transports soar while semis, software, telecom, REITs, staples and utilities have either closed down a little or outright collapsed.

My interpretation is that investors viewed a Clinton victory as a continuation of Obama’s economy, only slightly slower. They are viewing a Trump victory and agenda as very pro-growth with individual and corporate tax cuts, repatriation of corporate cash overseas, infrastructure and defense spending along with the potential for higher budget deficits all leading to strong GDP growth for the economy.

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Another Wrong for Me

Besides misreading the research, my personal electoral opinion was wrong which was not based on research and cold, hard facts.In that email as well as in a subsequent article it just didn’t seem plausible for Trump to win the necessary 270 electoral votes. I said he absolutely needed Florida, North Carolina, Arizona and Ohio which had correctly predicted the last 13 presidential contests. Sweeping those four had a 6% chance of occurring. And even then, he would need to turn one blue state red. None of those blue states appeared that close coming into Election Day.

There is a reason we manage portfolios based on non-emotional, time and battle-tested quantitative models. It’s not because they are infallible; they certainly have their weak moments. It’s because opinions can ebb and flow based on the landscape. Emotional investing tends to buy near peaks and sell near lows. Markets don’t care about my opinions nor editorials. There is no foundational way to assess risk based what I think should happen. And that’s why my opinion on Trump’s path to 270 was wrong along with that of so many others.

Getting back to the election, if you followed me on Twitter during election night, it was fascinating to watch the overnight trading session reach historic levels of volatility. When early Florida returns came in, the S&P 500 quickly jumped almost 1% by 8 pm. Shortly thereafter, the results began to turn to Trump in traditionally blue counties.

Then, we saw a mini-crash or flash crash or free fall as the Dow was down 800 points and circuit breakers kicked in to prevent any further decline. It was ugly, but I wondered at the time if we were just seeing computers trade with computers.

And just as it looked like everything would become unglued when stocks opened on the 9th, bargain hunters stepped up and surely and steadily pushed stocks back up right to the NYSE opening. From there, the bulls overwhelmed the bears in a very volatile session.

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Election Model Correct… AGAIN

Thanks to FOX in CT for having me on the day before and the day after Election Day. Below are the two links to the segments.

The longest election build up in our history is finally over and the outcome was certainly not what the mainstream media and pollsters expected. Throughout October and early November, it was widely expected by ABC, CBS, NBC, MSNBC and CNN that Hillary Clinton would become our 45th president.

The major polls offered the same conclusion. However, there were three polls which favored Trump most of the fall. LA Times/USC, Rasmussen and IBD. Pundits dismissed those polls as outliers and not statistically relevant, but in the end, their methodologies embarrassed their mainstream competition.

Another correct prediction came from the stock market and our own market model. On November 4, I wrote Stock Market Predicts Trump Victory. Given the stock market’s behavior in the days, weeks and months leading up to last Friday, the model said Donald Trump would win the election.

The model had called the last five (now six) elections correctly. In similar elections where the sitting president could no longer run, I reported that a 3-1 record with 1956 being wrong. After reviewing my work, 1956 was a year where incumbent Ike ran for reelection. I should have reported 1960 where the model was again correct and now stands at 5-0 in years like this.

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The Path to 270 & Stock Market Reaction

Don’t forget to vote!

Thanks to NBC, ABC and FOX in Connecticut for having me on regarding the election. Each segment was very different and offered new information. The first two interviews are below and I will post the FOX one as soon as I have it.

Statistical Model Provides Hints at Presidential Outcome

Financial expert says election could have impact on stock market

It’s been a long two years since the midterm election and I think I can confidently state that the entire country has election fatigue. I would guess that the only ones sad about the election being over are the cable networks and social media platforms as they have seen enormous surges in viewership and usage.

Whether you like it or not, we are going to elect a new president today and the markets will react. If you are on Twitter, I will post comments as states are called and the Asian markets react along with the S&P 500 futures.

Trump’s Path to 270

Looking at my own electoral map, Trump needs to almost run the table in the statistical dead heat states to get close or over 270. Florida is the absolute must, live or die state for Trump while Clinton can lose it and still win handily. Trump then needs North Carolina, Arizona and Ohio to just get him to 259. From there, he probably needs two more blue leaning states, assuming that Michigan and Pennsylvania stay blue as I think they will. The only ones realistically left would be New Hampshire, Colorado and Wisconsin. That’s an almost insurmountable challenge.

If Trump has any chance to become #45, it would likely come as a result of neither candidate achieving 270 electoral votes and the contest would then turn to the House of Representatives where the GOP and Paul Ryan have control. Should this very unlikely scenario unfold, it would be ironic that Donald Trump would need help from the republican he has most battled with and attacked since becoming the candidate to become leader of the free world.

Split Congress Likely

Turning to Congress which matters for the markets, the GOP has a 90% chance of retaining control of the House and thwarting Clinton’s agenda, should she win. The Senate, on the other hand, is essentially a toss up and the nod goes to the democrats, assuming Hillary Clinton is victorious. My count has it 51-49. If that’s the case, it will be extremely interesting to see how President Clinton, a quiet staunch ally of Wall Street, and new Senate Majority leader Schumer, also a Wall Street supporter, deal with Liz Warren and Bernie Sanders regarding the mighty Senate Banking Committee.

How Will Stocks React

Below you can see the possible scenarios and how I believe the stock market will react. They appear as president, Senate and House.

  • Clinton, democrat Senate, republican House (most likely scenario)

Stocks continue to rally for another day or so and then peak this week and gently pullback towards Thanksgiving before attacking 19,000 in December or January.

  • Clinton, republican, republican (2nd most likely)

Almost the exact same scenario as above although the rally will be a bit more muted.

  • Trump, republican, republican (3rd)

Stocks immediately pullback 4-6% to a bottom by Thanksgiving before gaining their footing for a strong rally into the New Year. All-time highs are seen.

  • Clinton, democrat, democrat

The most unlikely outcome causes the biggest problems over the intermediate and long-term as the left agenda goes unchecked with major tax increases on higher income earners, significant increase in regulation and huge expansion of social programs. Stocks become very volatile over the next few weeks before rallying into the New Year. Bear market begins by Q3 2017 and stocks fall by 30-40% by the 2018 midterm elections.

Watch the Reaction Not the News

As I have always said, as an investment manager, I am much more concerned about market reaction to the news than what the actual news is. As such, I will be keenly watching which sectors lead and lag the rest of the week and during any weakness next week. Additionally, healthcare and biotech were decimated over the past few months into last Friday on the prospects of Hillary winning. While they are snapping back sharply this week, it will be interesting to see if their rally has legs or if it’s just a dead rat bounce. Banks have become a vital leader since the BREXIT low in June. Interestingly, it doesn’t seem like this sector is concerned about Liz Warren or Bernie Sanders attacking them or regulating them so quickly.

I will have more this evening on Twitter (@paul_schatz) and tomorrow right here.

Don’t forget to vote!

Regardless of the outcome, the greatest country on earth will still be here tomorrow…

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Time to Buy or Wait

After 9 straight down days and a little help from the FBI, the stock market looks to soar higher at the opening on the increased likelihood of a Clinton victory on Election Day. While I completely understand the “devil you know” argument and continuation of much of the same from the past 8 years, I am somewhat surprised the market is so at ease with the prospect of higher tax rates on job creators and widespread social program spending. However, that could be because the market doesn’t believe that Congress will go to the democrats and without that, Clinton’s campaign theme to significantly raise taxes on higher earners and offer free college tuition is unlikely to happen.

Anyway, as I mentioned after stocks had declined for 8 straight days, another good bull market buying opportunity was close at hand. I’m just not sure that stocks are now launching the rally I see occurring into January. We’ll see in a few days how price responds to the election, where leadership comes from and how high yield bonds behave. The worst case as I see it would be for this rally to peter out in the days after the election, but bottom by Thanksgiving before hitting 19,000 by January or so.

I am sure I will have more to say tomorrow, including a look at my electoral map. My plan is to Tweet as the results come and see how the Asian markets react as well as after hours trading in the S&P 500.

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