Archives for March 2017

Bulls Put Up A Stand

Yesterday, I wrote about the pullback getting a little old and the opportunity for stocks to find a low and rally. I offered that Dow 20,200 to 20,400 could provide some cushion. The Dow hit 20,400 yesterday morning and rallied nicely into the close with some follow this morning.

Was that it? Pullback over?

I am not certain, but we did do some buying yesterday to take advantage of the biggest bout of weakness this year. And it wasn’t much. Stocks could rally for a few days and then rollover one more time or the rally could have already started. I am okay being a little early, just as long as we don’t see a full scale melt down below 19,800.

As I mentioned the other day, high yield bonds bottomed last Wednesday and are now leading stocks over the very short-term. That’s a good thing. Defensive sectors are lagging with my four key sectors, banks, transports, semis and discretionary stepping up again.

Finally, I am keeping an eye on the Japanese yen as it has rallied the most during the stock market’s pullback. If that comes under pressure, I will feel better that the little low is in and new highs are coming.

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Pullback Getting Long in the Tooth

Stocks are set to open sharply lower today as the media and pundits assign blame to the GOP’s failed healthcare bill. I am not sure I really buy that notion as the bill was confirmed as dead during trading hours on Friday, but really, stocks began pulling back four weeks ago and accelerated lower as healthcare reform seemed less and less likely. Remember, it’s not the actual news, but rather how markets react.

As I have been writing about this pullback for some time, it’s just about starting to become long in the tooth if my assessment is correct and it’s just a modest bout of weakness in an ongoing bull market. The major stock market indices should begin to see some stabilization very soon. Using the Dow Industrials, 20,400 to 20,200 should offer a strong cushion to support the bulls. To repeat what I keep writing over and over and over. The bull market is not over. Weakness should be bought. Buy the dip until proven otherwise.

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Two Vital Canaries

After Tuesday’s “big” decline, there was some short-term damage done to most of the major indices. Rather than return immediately to new highs, I think we need a period to repair, which is not the worst thing in the world. A likely scenario is to see movement in both directions, perhaps into April, before the next leg higher begins.

On the key sector front, semis and discretionary escaped most of the damage and should be poised to lead again. Banks and transports are a bit more wounded, but by no means fatal. While software and homebuilders remain strong, telecom and retail are hurting. Industrials and materials are still okay. Interestingly, the defensive utilities and staples are quietly very solid. I am not going to guess on healthcare and biotech until we see how they react to the vote. Remember, it’s not the news but how they react to it.

Let’s turn to my favorite two canaries, high yield bonds and the New York Stock Exchange Advance/Decline Line along with the S&P 500 so you can see if we have any divergent behavior.

High yield (junk) bonds are below and you can see that they just recently peaked in early March and have been in a pullback all month, down roughly 2% since the highs.

The NYSE A/D Line is next and it has almost the exact same behavior as junk bonds with the early March peak and decline. The only difference is that the little bout of weakness this week has not been as noticeable. In other words, this indicator looks a little stronger.

Finally, the S&P 500 is below and just like the two canaries above, it peaked in early March and has been pulling back ever since. The index has seen its lowest point this week which creates a short-term positive indication with the canaries showing a little more internal strength.

The takeaway from this confirms what I have said, am saying, and will continue to say. As long as the two canaries peak coincidentally with the S&P 500 and the other major indices, the bull market will live on. If and when they begin to diverge, the clock will start on the potential end of the bull market, but there will absolutely need to be more several more canaries dying before the bull market does. It’s just not that easy to kill a bull.

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Teeth of the Pullback

As you know, for the past few months I have written about this overdue pullback to refresh the stock market. While I have written much about it, I am certainly not taking credit for getting the timing correct as I started discussing it many weeks before it began. Until Tuesday, the pullback, which began three weeks ago, has been about a shallow and mellow decline that has just gone sideways in consolidation mode.

Tuesday was the ugliest day of 2017 for the bulls. If you look at charts, the day printed thousands of downright awful days. The talk in the financial media was all about the “Trump Rally” being over and a large correction possibly unfolding. Let’s be real here. Stocks finally declined 1% for the first time in four months. 1% should be a normal daily move, not a cause for the “Special Report”.

Let’s get one thing out of the way. I absolutely do not believe the bull market ended or is about to end. This is a normal, healthy and expected pullback that just turned from a mostly shallow and sideways move to a price decline. Weakness should be bought. Buy the dip.

Price-wise, all of the major stock market indices got in gear to the downside after the NASDAQ scored fresh new highs on Tuesday morning with CNBC exclaiming that stocks were “soaring”. They weren’t. The downside could be another 2-3% lower, but I wouldn’t hold my breath for that. After the largest down days in months, stocks usually trade in both directions over the next day or two and then bounce over the next week or so. Lots of short-term indicators are in or approaching oversold territory.

As I wrap this up, I see the media dubbing this pullback, the “Trump Dump”. It is no more the president’s fault right now than it was his credit for the post-election rally. The rally was in response to a sweep by the GOP which would set the stage for the strongest pro-growth agenda since at least Bush II’s first term, if not back to the mid 1990s. In other words, it was Paul Ryan’s rally more than any other single person.

Speaker Ryan intends on holding a vote Thursday night for the ObamaCare replacement bill, however you want to refer to it. TrumpCare? RyanCare? Who cares? Some say the markets are concerned that if this bill fails, the corporate tax cuts won’t happen this year and then the individual cuts won’t happen and more regulations won’t be removed so quickly. I think that’s all a load of nonsense. A week after the bill fails, if it does, the world will move on to the next bill or another topic. If it’s one thing we learned about Donald Trump, it’s that he pivots from topic to topic as a dizzying pace, especially when he loses.

I am headed to the city tomorrow, but I will try to write a leadership update on the train which looks at the sectors and my favorite two canaries. Speaking of canaries, it’s the perfect time to do a full Canaries in the Coal Mine update and I will get working on that shortly.

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Going Nowhere

Well, at least last Wednesday was fun if you were a bull! The Fed raised rates by 1/4% as expected and stocks took off on the premise that there would only be two more interest rate hikes the rest of 2017. That hurt the banks and the economically sensitive sectors and gave a strong push to the defensive sectors. I remain skeptical of only two more hikes and stand by my forecast that four hikes are in the cards this year and the risk is to the upside.

Before the FOMC decision, I offered the model for the day which called for a plus or minus .50% move until 2pm and then volatility with a green close. One of our FOMC trends indicated a 75%+ likelihood that stocks would close higher. With March option expiration also last week and that being a separate and strong upside bias, the market had all of the ingredients for a rally.

However, as is often the case with outsized FOMC-driven moves, those gains or losses are usually reclaimed in the short-term. Through Friday, the S&P 500 has given back all of Wednesday’s gains. In short, the stock market’s pullback continues, however the weakness seems to be more about time than price. The major indices are moving sideways or consolidating instead of declining in price with the exception of the NASDAQ 100 which continues to power ahead, albeit at a slower pace. Both pullback scenarios serve the same purpose and should eventually lead to an upside resolution once the pullback ends, likely by early Q2.

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Fed to Hike Rates Today. Dow 23,000 Still On Track

Model for the Day
As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Three meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, there is a significant upside edge which has been accurate more than 75% of the time. Stocks also typically see a range of plus or minus .50% until 2 pm before volatility hits and a bigger move is seen.

It’s also March option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has not been seen which means that the odds favor strength into Friday’s close.

1/4% Hike Against Better Economic Picture
Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. After the December increase, the masses were not pricing in a March rate hike although I was very clear 6 weeks ago as well as in my 2017 Fearless Forecast.

“While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.”

I would say that today’s move has a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. The economy has definitely improved since the December rate hike and we have had back to back 200,000 jobs reports which are also stronger than at this time last year. The U6 or “real” unemployment rate now stands at 9.20% which is the lowest level since before the Great Recession. The stock market has continued higher. Even data from Europe is a little better.

Velocity of Money Still Collapsing
Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.


This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates
Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years.

As I have written about, I truly believe that one of the main reasons Yellen and her inner circle worry about raising rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.


A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S.-centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000 (my most recent target), 25,000 and possibly 30,000.

What’s so bad about that?
Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

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Pullback Remains in Place. Junk May Hold Key.

The short-term pullback I have seemingly written about for weeks and weeks remains in place although I am certainly not taking credit for calling it in a timely fashion. The Dow, S&P 500 and NASDAQ 100 have all pulled back constructively while the S&P 400 and Russell 2000 are uglier. The three stronger indices are just about to kiss their 21 day moving averages, while their weak cousins knifed right through the 21 as well as their 50 day moving averages. While the 3-5% pullback I keep talking about is here, the average stock is now off roughly 10% which is masked by the strength in the major indices.

Turning to the four key sectors, banks, semis and discretionary are holding up very well and only a solid two day rally or so from new highs. Transports, however, are under more pressure although certainly not bull marketing ending behavior.

Both high yield bonds and the NYSE A/D Line saw all-time highs in early March, but have since pulled back more significantly which is something I discussed recently. The junk bond decline definitely has my attention and should be watched very closely. The sector began to lag last week and is now down sharply this week.

The A/D Line, while weak, is still behaving constructively.

Stocks are finally pulling back and giving all those folks who sold last February, post-BREXIT and at the election a time to buy. I doubt they will until the train leaves the station again. The bull market isn’t over.

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Bulls Remain Large and in Charge Despite Pullback

We had a lot of negative news between Friday’s market close and Monday’s open, almost all on the geopolitical front with the vast majority surrounding President Trump. Of course, Deutsche Bank finally agreeing with the markets that they needed to raise capital was icing on the cake. In a weak market, that backdrop would have yielded a 1-2% lower opening on Monday. In a strong market, we’re talking about .25-.50% lower.

Stocks are due and have been due for a pullback or at least a pause to refresh. That looks like what’s happening right now. With so many investors on the outside looking in, any weakness should be mild and followed by further strength until more serious cracks in the pavement develop. I found it interesting that CNBC’s Fast Money midday report was all about the Trump rally ending. I think those pundits will regret those words.

As I watch the major indices and sectors come off their morning lows, I can’t help but notice that high yield bonds are not following suit and lagging. One day or a few days means absolutely nothing, however, should stocks rally with junk bonds falling, I would become more concerned.

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Volatility Genie Trying to Pop Out

After what has been celebrated as this huge, epic rally on Wednesday, the major stock market indices gave back all of their post 9:30am gains and then some on Thursday. I mentioned the other day that volatility compression leads to volatility expansion and vice versa. When the volatility Genie finally gets out of the bottle, we will probably see a sustained increase. I think we’re close to that now. Please remember, volatility does not always mean decline. It means wider price movement in both directions.

Right now, the important takeaways from the week are that small and mid caps look the most vulnerable, relatively speaking. All of the indices remain overbought and stretched but I do not see a large scale decline unfolding. Emerging markets and commodities are under pressure with gold clearly failing at its 200 day moving average. I wrote about oil peaking the other day and the decline may be starting. High yield bonds and the NYSE Advance/Decline Line continue to act well which should buffer the downside. Three out of four key sectors scored fresh highs this with semis very close although banks saw a nasty reversal from new highs on Thursday.

Altogether, this behavior remains very typical of bull markets. Weakness should be bought.

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Hot IPO, SNAP, Comes Out. Time to Buy?

“Hot” IPOs like Alibaba, Twitter and Facebook are usually very emotional, much anticipated and huge financial media events.  Investors clamor for these stocks, usually throwing caution to the wind as fundamentals are trampled by greed. The media are usually camped out at the NYSE or NASDAQ with minute by minute updates as to where the stock may open.

As I have discussed over and over, emotion in investing can have a very detrimental impact on your portfolio! That’s one of the reasons I have always had a tough time advising people to buy a hot IPO on its first day of trading. My theory has always been that if a company is as good as advertised, there will be plenty of time to buy it down the road once it stabilizes, even if that means at higher prices. Of course, that strategy is irrelevant to those who just want to trade the stock for short-term gains.
With Snap (millennial social media dynamo Snapchat) coming public today, I went back and found similar, much anticipated, “hot” IPOs to show you what transpired over the coming few months. The term “hot” is subjective and I tried not to cherry pick the list, however, I am sure others can argue for inclusion of more companies. This research has absolutely nothing to do with the fundamentals of Snap, which definitely concern me, even though my daughter let me know that this is a must have app for all millennials.

With all that said, let’s take a walk down hot, tech IPO memory lane.

Square came public at the end of 2015 as stocks were trying to recover from their summer swoon. After a wild first day which saw Square’s high for the next five months, the stock traded as low as $8 before doubling. Patience was rewarded, my long-term theme.
Alibaba was the largest U.S. IPO of all-time, coming public in September 2014 to huge fanfare and expectations. I don’t recall an IPO ever getting that much media attention. I surmise that the vast majority of individual investors never heard of Alibaba until the days leading up to the offering. After another wild first day, the stock pulled back 15% for a few weeks before uncharacteristically soaring to its all-time high two months later. However, as we have seen time and time again, buying strength in IPOs was not a rewarding long-term strategy as the stock was subsequently cut in half before double bottoming in September 2015.
Twitter, another hugely popular and much anticipated IPO, also bucked the trend over the past few years. While it initially dropped 20% from its $50 first day high, that set off a very powerful rally of almost 100% to $75 before seeing the customary 60% IPO collapse to $30. End result: investors were mostly better off waiting than buying right away.

Facebook may have been the most high profile IPO since Google and had all kinds of problems right out of the gate. Talk about the epitome of what not to do! Here is one piece I did. (http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120525.pdf) As you can see, it was almost straight downhill, 60%, for four months before THE bottom was hit at $18. End result: investors were absolutely better off waiting than buying right away. Patience was rewarded.

LinkedIN is next and similar to Facebook, there was immediate and significant weakness before a good low was seen. End result: It was basically a toss up.
Just like with LinkedIN, Groupon experienced the ole buyer’s remorse right from the start with the first meaningful trough coming about a month later. End result: investors were better off waiting than buying right away.
Yelp bucked the trend somewhat with only a shallow initial pullback, but the stock didn’t escape the carnage as you can see over the first three months. End result: investors were better off waiting than buying right away. Patience was rewarded.
Zynga was just like the others with an immediate month long decline to a good trading low. End result: investors were better off buying sooner than later.
I added Google as it was before the financial crisis as well as arguably the hottest and most anticipated IPO of all-time or perhaps since Microsoft and Apple in the 1980s. This is certainly not a social media company like the others. It was also during a very different investing climate back in 2005 with vastly different results. It does not belong in the group above, but I figured I would answer the question before it was asked. End result: investors were rewarded almost immediately. The stock never returned to its first day’s or week’s range.
The moral of the story is that most of the time, investors are rewarded by having patience with hot IPOs. Personally, I would rather be late and pay up than be early and lose a lot of money.

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