Archives for November 2016

8 Straight Down Days – Quiet Bear Market?

The S&P 500 is now down 8 straight days. Pundit chatter in the media and on Twitter has been fairly negative. Option traders are bearish. The volatility index is up almost 100% since September. Either a bear market has quietly begun or the market is approaching yet another good dip to buy in an ongoing bull market. I think you know where I stand.

Seasonality studies are abound that the market just entered the best six months. Additionally, it’s also the best three months. With stocks stinking it up, is something amiss? No. In election years, the seasonal tailwind doesn’t usually begin until well into November, sometimes as late as Thanksgiving. It’s been three consecutive down months for stocks, but the pullback I have discussed for months has just amounted to 5%. Better times are ahead sooner than later.

Finally, the stock market’s decline has put it within a few points of touching the average price of the last 200 days, also known as the 200 day moving average. While most people just use it to measure the long-term trend, more than a few investors actually buy and sell based on if price is above or below.

As you can see in the chart, stocks have been above the average since the post-BREXIT rally began in late June. The BREXIT decline was a quick poke below that line which caused more than a few investors to sell right at the lows. That is typical. The first foray below the average sees stop loss orders triggered and then stocks immediately reverse and head higher. Pundits in the media turn this into a “key” test, as if the whole bull market is on the verge of ending because price may close a few pennies below a line.

spy1

The takeaway is to watch if stocks trade below the 200 day moving average, cause a quick bout of selling and then immediately reverse. Long-term, I would be more concerned than I am now if price was below the average and the average was moving down.

Look for my special report on how the stock market is a better predictor of presidential election results than any poll or pundit.

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Stock Market Predicts Trump Victory

In what seems like the longest election season in the history of the world, the end is hopefully near on Tuesday although after 2000 and the endless surprises this year, that’s certainly not set in stone. Let me begin by stating that almost none of what I write in this report reflects my own political views. They are 100% irrelevant. I will do my best to keep that sort of editorial for another time.

As I have often mentioned over my 28 years in the business, what is popularly held as the truth does not often stand up to scrutiny when real research is done. For example, most people believe that gold is a good hedge against inflation. Or, the stock market doesn’t do well with a rising dollar. Neither one is correct when looking at the data over the long-term.

As election polling has dramatically changed over the years, so has its usefulness. Not only have the old tried and true polls gone the way of the Edsel, we now have a slew of new, high tech, quant-based ones with very little history and even less in the way of accuracy. Look no further than the recent BREXIT polls’ strikeout in the UK regarding leaving the EU to realize that many polls have lost their effectiveness.

Stock Market’s Prediction

When it comes to presidential elections in the U.S., the stock market has been a more accurate predictor than any poll or pundit I have found over the years. To that end, as I do with so many things in my life, I have developed several models which help determine who our next president may be. Thanks to my friend and newsletter writer Tom McClellan for his work on the topic and giving me ideas on how to model.

Without going into the Gorey details, the better the stock market does before the election, the better the chance that the incumbent party retains control. Over the last 16 presidential elections, my intermediate-term model is 12-4 and currently on a 5 election winning streak. It was wrong in 1956, 1968 and 1980. In 1992, every single model I have was dead wrong. When a sitting president can no longer run, 2008, 2000, 1988, 1956, the model is 3-1, only being wrong in 1956 with Ike.

For the past few months, I have used Dow 18,000 as the general level to watch. The higher stocks trade above that level, the more likely Hillary Clinton would be our next president. The lower the Dow trades below 18,000, the more likely Donald Trump becomes our next president. Interestingly, as the polls have swing wildly since the DNC convention, stocks have basically held 18,000 as the area of equilibrium.Based on data that will drop off today and Monday, the model says that Donald Trump will become our 45th president, which certainly runs counter to what the polls are current indicating.

Now, a few words of opinion. Based on the electoral map, I still cannot see a path to a Trump victory, 270 electoral votes. He would need a Truman-like outcome, but again, that’s a personal view not based on the research.

Stock Market’s Reaction to President Trump or Clinton

Should Donald Trump win, I don’t agree with the fear mongers like that windbag, Mark Cuban, that stocks will collapse. For months, I have said that if Trump wins, stocks will be declining into Election Day and bottom shortly thereafter for a rally into January. I still believe that today.

If Clinton secures the Oval, the markets should see a quick rally unless the democrats sweep Congress as well. That would not be good for stocks now or possibly over the intermediate-term. Believe it or not, the markets root for gridlock in Washington so one party can’t screw things even more than they already are. A mixed government ensures that nothing too far left or right will be accomplished. And when something is, it will truly be bipartisan like we saw with Bill Clinton and Newt Gingrich in the 1990s and Ronald Reagan and Tip O’Neill in the 1980s. Most people won’t argue with those market or economic outcomes.

You will notice that I didn’t write the same thing if Trump wins and Congress remains in the GOP’s hands. Given his political leanings, I don’t think a President Trump will simply rubber stamp the GOP’s agenda nor do I believe that Congress will give him the agenda he wants either.

Looking out past 2016, I believe the markets will perform better under Trump than Clinton. Trump seeks to cut taxes and probably raise the budget deficit. Clinton aims to raise taxes as a means to pay for her programs. Historically, stocks have done better with rising budget deficits and a lower trajectory taxes.

Opportunity in Biotech

I wish I had done research on which sectors would be helped and hurt by each candidate going back decades. Since Clinton’s tweet on September 21, 2015 where she attacked drug pricing, the biotech sector has never been higher. Since then, I started using that sector as a proxy for a Clinton victory. As you can see below, the sector has been brutally bludgeoned over the past year, losing 30% as well as almost 20% since mid-September. Clearly, investors have been preparing for a Clinton presidency for some time. Additionally, I think that regardless of who wins, biotech may offer some strong upside sooner than later.

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Fed Model Says Rally. A November Surprise from Yellen?

Before I dive into the meat of the article, our market model for today is a plus or minus .50% move until 2 pm and then a rally into the close. Two of our Fed Statement Day (today) models are live and are very bullish with a success rate of 80%. We’ll see how that works out before long.

With the election just around the corner, it would be almost impossible to believe that the Federal Reserve would raise interest rates at the conclusion of their two-day meeting meeting today at 2 pm. And I do not believe they will move on rates. However, I would have thought the same thing about the FBI going public with their restarting the Clinton email investigation. It’s just been the most precedent setting election season of all-time and it’s not over. Who knows what else comes out between now and Tuesday morning?!?!

The surprise from the September meeting was that there were three public dissenters to the vote. That is the highest number I can recall and a shot across the bow for  Chair Yellen that a move, likely in December, is coming. We’ll see what the vote is today. It’s been pretty amazing that there has been almost none of the usual chatter on Twitter or on the financial channels regarding the meeting. Normally, my feed would be lit up with prognostications and commentary and the media would have multiple segments an hour. Hillary and Donald are sucking up all of the media’s bandwidth.

Looking at the employment picture, the economy created 156,000 new jobs in September and 151,000 in August. That’s certainly not an overheating economy nor an economy on the verge of recession. It’s just below warm. While our economy grew at a higher than expected rate of 2.9% in Q3, that wasn’t enough to balance off a weak 1.1% number for the first half of 2016. Additionally, inflation has been well under wraps not only this year, but every year since the financial crisis.

Long time readers know that I have been in the deflation camp since 2007 and remain that way until we have another recession. I offered comments about the economic indicators not because there are any startling revelations, but as another way to support the position I have taken since 2007. At every single Fed meeting since mid-2007 I have been in the accommodative camp, which meant either lowering rates or keeping them as is after they essentially hit 0%. For the record, I am not in favor of negative interest rates for now.

While the crisis has long passed for the economy and financial markets, we are still in a typical post-financial crisis recovery which I have written about over and over and over. Our economy will remain that way until the other side of the next recession, which should be mild and occur by 2019. 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.

As I have mentioned many, many times over the past few years, not only is Janet Yellen & Company taking into account the U.S. economy, but Europe and Asia as well as they debate policy. We may not directly care what happens abroad, but our currency certainly does. 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.

dollar

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.

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Key Sectors Holding Up Otherwise Weak Market

Last week, I voiced a little more concern about the stock market as the S&P 400 and Russell 2000 broke to the downside from their trading ranges. So far, they haven’t been able to regain previous levels. Now, we have the S&P 500 and NASDAQ 100 trading at the lower end of their ranges and it looks like stocks have further to go on thew downside before finding more solid footing.

As I have said for months, based on market history, the challenging party needs a lower stock market to have a chance to win. For this election, the number has been 18,000 although the lower the better for Donald Trump. At the same time, I have been using the biotech sector as a bellwether for Clinton’s chances of victory. Interestingly, biotech has been falling sharply since late September which runs counter to the polls and latest email scandal. Of course, fundamentals in the group could be overpowering political models.

On the key sector leadership front, semis, banks and transports have been strong and really holding up the market. Only consumer discretionary hasn’t been cooperating. While utilities have bounced back nicely, staples, REITs and telecom remain laggards which should be good stocks over the intermediate-term.

High yield bonds, which have held up very well are now under modest pressure, another small concern. Although stocks have struggled, treasury bonds are not providing the expected safe haven, even though commodities have also been hit. Adding it all up, you have a bit of a liquidity problem in the markets as it appears investors are building cash positions for now.

The Fed begins a two-day meeting today and it would be a complete shock if they raised rates tomorrow. However, given the political landscape and events of the past few days, nothing can be rules out!

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