Archives for June 2017

NASDAQ 100 Still Ugly

Those looking for volatility certainly got their wish this week as moves were seen Monday, Tuesday, Wednesday and Thursday. With Friday being the start of an unofficial four day weekend, I doubt there will be much action without a major news event. In Wednesday’s piece, I offered that stocks could bounce into the 4th holiday and then see some more downside, especially in the NASDAQ 100. Well, Thursday didn’t work out so well for that forecast!

At the open, all of the major stock market indices opened flat to a little higher except for the NASDAQ 100 which was hit by a wave of selling from 7am right through to 1pm. And it was UGLY! By the close, all of the indices had pared their losses somewhat, but there was still damage done. And as I mentioned the other day, it doesn’t appear to be all done.

On the good side, the NASDAQ 100, where the issue lies, reached my first downside objective by clearing out all of the sellers who congregated at or just below the June lows. The next stop should be the May low sometime in July.

Keep in mind that while the bears are loud and clear now about the lack of cash to propel the market higher and how everyone is “all in” and how tech looks like 2000, the bull market’s underpinnings remain very solid. Junk bonds continue to recover. The NYSE A/D Line is strong. Weakness should be bought until proven otherwise. The bull market ain’t over just yet!

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NASDAQ 100 to Bounce and then Fully Correct

As has been the case since the big “shock” day in the NASDAQ 100 on June 9, I have been a little cautious (neutral) on that index and more positive on the Dow and S&P as it looked like leadership was rotating. In healthy bull markets, this is normal and a good thing. The problem comes when leadership stops rotating into the more aggressive sectors and heads into the defensive ones like staples, utilities and REITs.

Tuesday saw follow through from Monday’s sharp reversal in the tech space, leaving a glaring and ugly day for the bulls to overcome in the NASDAQ 100. The same was not seen in the other major indices. With the NASDAQ 100 revisiting the June lows yet again, the bulls are going to be hard pressed to fend off sellers for long.

I think we can can generally see stocks bounce until after the 4th holiday, but then we could or should see the NASDAQ 100 and tech follow a path somewhat like I show below in light blue. There could be a stair step decline which will feel and look worse than I offer, but in the end, it will take the former leader below the first “shock” day in May. IF my scenario is even remotely correct, that should set the stage later in Q3 for the NASDAQ 100 and tech to resume leadership and soar beyond the June peak.

Regarding the other indices, I do not believe they will head higher with the NASDAQ 100 fully correcting, but I don’t believe there will be any decline of significance so soon. Keep a close eye on high yield bonds which have bounced back over the past few days. And don’t forget that the NYSE A/D Line hit yet another all-time high this week. Bull market don’t end this way regardless of what some of the idiots say publicly!

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Fakeout or Breakout

Friday saw the most constructive market action of the week with the little pullback seeming to come to an end. Early indications are that the bulls will continue moving stocks higher today. Starting with the NASDAQ 100, for now, until the June high or low is closed above or below respectively, I am going to remain in the neutral camp although I continue to believe that new highs will be eventually seen. It looks like the index’s leadership role has been diminished, again, for now. On the flip side, the Dow and S&P 500 continue to behave very well, however, the real story would be if the S&P 400 and Russell 2000 become leaders again. That could and should give the bull market another shot of energy to eclipse 22,000.

On the sector front, as technology has stumbled, industrials, healthcare, biotech, REITs, utilities and transports have all stepped up to pick up the slack. Without much of a decline, this kind of sector rotation is very healthy and usually portends higher prices for the major indices. Energy and energy related instruments are probably the biggest concern in the short-term with crude oil down to $43. I can easily make a case that sub $40 crude is right around the corner. That should further hurt high yield bonds, however, I do not believe we are seeing anything close to what happened in 2015 and early 2016. You should expect to hear cries of a global demand collapse putting the economic expansion in jeopardy. I totally dismiss that.

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Pretty Good Little Fight

It’s been 24 years since I moved out of New York City to the calm and quiet of CT. I love hearing nature at night in my pitch black bedroom instead of the horns and trucks driving down the avenues. I stayed in the city last night as I had an early conference for our custodian this morning at the NYSE and I wasn’t really interested in getting up at 4:30am to train in. Well, I forgot how loud the city is all night and I am operating on very little quality sleep. So, please excuse any typos, grammatical errors or just plain stupid comments.

Very quietly, the Dow and S&P 500 has been down three straight days. In this market, that could be accused of being a correction or even a bear market! While the S&P 400 and Russell 2000 have declined more, they look like they are in the very early stages of stepping up to lead. That would be a much welcomed development if it happens.

Meanwhile, the NASDAQ 100 is behaving in textbook fashion after the second “shock” day in a month. That index remains volatile but nowhere near so as two weeks ago. As the tech sector works through this consolidation, it’s interesting to note that essentially all trading activity has remained in that tall, red candle from the “shock” day as well as below the mid point of that day. Meanwhile, a very defined trading range has been established as you can see below. It’s tough to get really excited for the bulls or the bears until one end of the range is closed above or below. I do expect, however, that the ultimate resolution will be to the upside, regardless of what happens over the next month or two.

For the first time since March, my favorite canary in the coal mine, high yield bonds, is under pressure. While it would be very easy to dismiss this because of the collapse in energy prices, I usually don’t buy the whole “qualifier” argument. The energy sector has a significant percent of high yield bonds. Think about all those mid and small size U.S. energy companies drilling for oil in the shale. Many used debt to finance those operations and when oil goes down in price, their ability to profitably drill becomes an issues. If theses companies can’t drill profitably, their ability to service their debt gets called into question.

Anyway, junk bonds are falling and regardless of the reason, it’s a short-term cause for a little concern right here until they stabilize. If they continue lower, and some other pieces fall into place, I will have to reassess my intermediate-term forecast for stocks, but that’s putting the cart way before the horse. To counter the high yield bond concern, the NYSE A/D Line scored yet another fresh, all-time high this week.

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Seasonals Say No, But Bulls Say Yes

The major stock market indices closed last week on decent footing and should be poised for further gains with the Dow and S&P 500 seeing new highs first . Even the recently hit NASDAQ 100 hung in and remains above the line in the sand I drew last week. However, this week is a seasonally weak one as it’s the five days immediately following June option expiration. We’ll see how that plays out as pre-market indications show a higher open.

On the sector front, it remains the “bizarro” world with the opposites now in charge. As semis and discretionary ceded, the bears were all over this “collapse” in leadership. However, as has been the case so many times during this epic bull market, rumors of its demise have been greatly exaggerated! Transports, banks, healthcare and industrials are now leading stocks to Dow 23,000. High yield bonds are chugging along and there continues to be broad participation. Don’t overthink it. Buying the dips is the correct strategy.

FYI. I have received lots of emails regarding Amazon and should people buy it. My short answer is NO. I am not a fan at $1000 after seeing it rally more than 100% in 18 months. While it will ebb and flow with the NASDAQ 100, I think there are better risk/reward opportunities elsewhere.

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Bulls Still in Charge (as is Amazon!)

The major stock market indices put in a very constructive day on Thursday with stocks opening at their lows for the day and closing in the upper end of the range. The beaten down NASDAQ 100 saw the best behavior as it tries to repair itself from two unexpectedly large and volatile down days over the past month from all-time highs. One clue will be a weekly closing price for this index and the semiconductors near the high for the week. That won’t happen today. As long as the major indices and tech sector do not close at new June lows, the bulls have the ball, even if that means some sideways movement for a bit.

Leadership continues to rotate with the banks and financials really stepping up along with transports, industrials, REITs and healthcare. High yield and the NYSE A/D Line scored all-time highs this week. All of this gives me additional confidence that after this pullback ends, another leg to 22,000 is coming.

The big news of the day is Amazon’s proposed buyout of Whole Foods which is certainly a landscape changer. Amazon being the disruptor that it is getting into the grocery store business? That is not going to make Costco and Kroger’s and WalMart and Target very happy! It will be interesting to see what happens with the Blue Apron IPO. Who really wants to compete with Amazon? Look what WalMart did to its competitors!

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Stocks Looking Down After Rate Hike

Everything happened as expected on Wednesday. Stocks stayed in a tight range until 2PM. The Fed raised rates. Yellen spoke about reducing the balance sheet. And the bullish Fed trend was significantly muted. Given how stocks closed, there is a very short-term trend which indicates lower prices today and possibly into next week. However, with the stock market set to open lower, the opportunity to take advantage is likely gone.

The Dow is now the leading index and that’s not the index which typically leads in the healthiest of markets. I don’t expect this to continue. Mid caps have really started stepping up with small caps not looking as dead as they did a short time ago. The NASDAQ 100, on the other hand, looks like it has more downside ahead with some sideways movement coming after that.

As I always say, it’s not what the news actually is, but rather how stocks react. On Fed day, we saw good behavior from industrials, healthcare, home builders, banks, staples, discretionary, REITs and utilities. Read that sentence again. For the most part, those are not the same leaders as we have seen. Rather than the rally ending, it looks like it’s morphing after two “shock” days (big down days out of nowhere) in tech over the past month.

Now, tech may be done leading for a while, but it doesn’t look like the rally is over. Sure, we could see a pullback, but that would be yet another buying opportunity in a long line of successful opportunities.

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Fed to Hike Rates Today In Spite of Falling Inflation. Dow 23,000 Next

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. Five meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 75%, however with the bulls using a lot of energy over the past few days, that trend’s power has been muted significantly.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

It’s also June option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has been seen just on Tuesday.

1/4% Hike Against Mixed Economic Picture

Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. They have been chatting up a storm in their speeches and it’s also Yellen’s quarterly news conference and economic outlook update. I would be shocked if more than Neel Kashkari dissented.

While most pundits forecast two rate hikes in 2017, I have been very clear that those expectations are too low. In my 2017 Fearless Forecast, I offered that,

“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.”

The flaw in my thinking is that I did not believe a change in the balance sheet would be a 2017 event. We will likely hear otherwise from Janet Yellen today. Markets are expecting to learn of a plan outline to begin to curb asset purchases by the Fed sooner than later. That should eventually lead to letting assets organically roll off the balance sheet rather than outright sales in the open market. The markets would be very surprised and caught off guard if Yellen speaks about a plan to sell bonds in the open market any time soon.

I would say that today’s move has a 95%+ certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Banks will then raise the prime lending rate and other rates will move off that. While the economy continues to improve, Q1 GDP was less than stellar although recently revised higher. My own work suggests that Q2 could see GDP grow close to 3% with Q3 perhaps even higher.

Monthly job creation has been very strong in four of the past five months. Only March was a lemon. I expect the growth trend to continue. The official unemployment rate hasn’t been lower since 2001 and the “real” rate or U6 is down to 8.4%, the lowest since 2007. This data certainly support a hike.

The chink in the armor and what Neel Kashkari may cite if he votes against the hike is the recent decline in inflation. From a 5 year high of 2.7% in February, the consumer price index declined in March, April and May to 1.9%. That is exactly what the Fed does not want to see as it tries to normalize interest rates.

Velocity of Money Still Collapsing

Turning to a chart I continue to show time and time again, below is a 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 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. While Dollar Index bounced around between the blue lines after that huge rally on the left side of the chart, all was very well and that was normal and expected behavior. When price broke above the blue line late last year, I thought the next big move had started. I was clearly and definitely wrong.

In the strongest bull markets, price should not have declined much below 100. This has been an unexpected turn for the worse. However, I am not ready nor close to being ready to abandon my long-term positive position. If my view is going to continue to pan out, the dollar will likely spend some time going sideways before gathering itself for a run to 104 and then much higher in 2018 and 2019.

I still forecast that the final bull market price peak lies ahead and at least towards the 120 level. Nothing has changed in my long-term view that the Euro will ultimately fall to all-time lows below .80 and the Pound under par. Those are the same long-term targets from 2008.

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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Another Tech Wreck

Between the ECB, UK and Comey, there was lots of news to digest. However, stocks really didn’t seem to care. The ECB did nothing and hinted that the European economy was improving. Comey testified and you couldn’t turn left or right without hearing “expert” commentary from the pundits. As expected, it was much ado about nothing.

The big shocker came from the UK where PM Theresa May underestimated her constituency when she called for a general election. Hoping to strengthen her position in BREXIT negotiations, the UK people removed her party’s majority, forcing a coalition government. Not many people saw that coming!

Stocks really didn’t care as Friday began and I don’t think they will by the time Friday ends. The story will end up being the one day tech wreck. Pull up any chart you want of any momentum stock or ETF and they will all look the same. In one, big, red fell swoop, a few hours erased several weeks of gains as we have seen many, many times before during a creeper market.

Apple NVIDIA Netflix Google Facebook QQQ MTUM SOXX IGV and on and on and on.

Although it’s only one day, the selling and volume are vicious so far and the rotation out of the highfliers and into the value stocks is extreme today. Just look at the banks, healthcare, energy and the small caps. You would normally expect to see staples and utilities rally, but not today. This looks purely like a rotation into the laggards. With junk bonds quiet and the NYSE A/D Line positive, I am not going to view this with the bears. Let’s see if the rotation in leadership is a short-term thing or not as well as if it’s a warning sign for the overall market, which I think not.

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What Else is New? The Bears are Wrong!

Two whole days of consolidation. In modern terms, that sounds like a correction! Of course, I am kidding as pullbacks have been few and far between lately, not to mention shallow and brief. The Dow and the S&P 500 are digesting in textbook fashion with the S&P 400 and Russell 2000 still not behaving the way I would like. The former is starting to show very early signs of leading, but we have been down this road before. The NASDAQ 100 continues to march to its own beat and resemble 1999 more than anything else. But before you ask, the answer is NO. I do not believe we will see a similar outcome to the Dotcom bubble implosion.

Semis, software, discretionary, industrials, materials, healthcare, staples and utilities are all at or close to new highs and either leading or behaving very well. So much for the bearish pundits who opine that the rally is “narrow”. It is also great to see the transports moving higher and trying to to lead again. With high yield bonds and the NYSE A/D Line just short of all-time highs, it’s hard to see anything more than routine and healthy pullbacks.

Thursday is set up for a plethora of news with Comey’s testimony, the ECB meeting and the election in the UK. I am going to go out on a limb and say that whatever the news is, the markets won’t really care. The bull market isn’t over. This rally isn’t over. My next upside target of Dow 23,000 remains. Don’t overthink this.

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