Archives for July 2017

Q2 GDP Frustrates Bears. Bezos Still Rich?

The government released its first look at Q2 economic output and the economy grew by 2.6% at first glance. While I would have been happier with more, it’s the second straight quarter that seems to be falling in line with my forecast. Earlier this year, I offered that Q1 GDP would come weak and below expectations with Q2 much stronger. That’s certainly the case today. I am also looking at Q3 to be stronger than Q2 with a shot at eclipsing the 3% mark. That won’t be easy. My forecasts were based on widespread deregulation and tax reform. While the former has been happening quickly but quietly, the latter isn’t even being discussed yet, a huge mistake in my opinion. I still believe tax reform is more than a 90% certainty, but it likely won’t have a positive impact on our economy until 2018.

All week long, the media fell over themselves, gushing that Amazon CEO, Jeff Bezos, was now the richest man on earth. As is often the case when something becomes so widely accepted or loved, the opposite happens. Amazon quickly gave back all of this week’s gains on a less than stellar earnings report. Classic buy the rumor, sell the news.

The tech sector, mid caps and small caps all saw reversals to the downside this week as all of the major stock market indices poked to new highs at the top of the trading range I have been discussing for a while. It’s likely that a pullback has begun and some mild weakness will ensue.

The two things that concern me most are below. First, I mentioned that semis need to make all-time highs as their software and internet cousins have. Rolling over first will definitely bother me.

Second, the Dow Transports are very quietly down 5% from the July peak. This bellwether index has definitely marched to its own tune for several years,  but I would still rather see it behaving a whole lot better. Thankfully, junk bonds continue to act well and confirm the new highs.

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Boring Fed Day On Tap

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. Six 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 weeks, that trend’s power has been muted significantly to less than 50%. That’s not exactly the kind of trend worth trading.

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.

No Rate Hike But Balance Sheet Taper…

Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for interest rate hikes this year. There haven’t been any surprises on that front. Recently, they have been chatting up a storm regarding a plan to reduce the size of the Fed’s $4 trillion plus balance sheet. You can expect to hear a little more about this in their statement today after they leave rates unchanged. With the Fed’s annual Jackson Hole retreat about a month away, Yellen and Company should continue to prepare the markets for a formal announcement in six weeks with lots of information released at Jackson Hole.


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.

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1996 Flashback

July 23rd marked the 21st anniversary of what I dubbed, the “Garzarelli Bottom”, which turned out to be one of the better stock market calls I made, especially earlier in my career. At that time, stocks hadn’t seen any real downside since 1994 and that year with littered with rolling 5-9% pullbacks. After the bears tried three times to take stocks lower in March, April and May, the bulls powered to yet another new high.

After peaking in early June, the stock market began its first real correction since 1990. At the July 16 low, stocks were down more than 10%. After a feeble bounce for a week, stocks rolled over again, however with much less velocity, participation and vigor. On the morning of July 23rd, legendary Wall Street strategist, Elaine Garzarelli, who was still revered for supposedly calling the crash of 1987, came out with another crash prediction. For contrarians like me, it was too good to be true as I was looking for a lame excuse to see the July 16th low revisited.

Stocks opened sharply lower on the 23rd, but steadily rallied during the day to close towards the high but not on the high. It was then I put out a missive about the Dow going right back to all-time highs and rallying into 1997. Thanks Elaine! I think that was last Wall Street heard from you. It’s always good when a plan comes together…

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Trading Range Continues But Lots Beneath the Surface

Stocks fared fairly well last week in the face of overbought conditions and a few tiny cracks in the pavement. As I continue to offer, I believe the bull market is alive and reasonably healthy, especially for one 9 years old. However, my shorter-term view is that stocks are in a trading range with perhaps a slightly upward bias for the time being. The stock market just doesn’t seem like it wants to launch a fresh leg towards my next target of Dow 23,000. On the flip side, while it’s long overdue for some kind of pullback, I do not believe it will be anything but shallow unless there is some kind of geopolitical event.

The four major sectors are behaving very differently. While semis have bounced back smartly from the June swoon, they are lagging tech and the NASDAQ 100 and really need to score a fresh high sooner than later. Discretionary is behaving much like semis and need a new high close as well. The transports have pulled back more than 2% and look very interesting from a bullish perspective. Only a close below last week’s low will change my opinion. Banks continue their 2017 trading range and do not appear to be ready for an upside thrust just yet. Finally, high yield bonds are quietly scoring new highs which has bullish intermediate-term implications.


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Stocks Tired. Energy and Transports of Interest

It’s been nothing short of amazing how many people keep calling for a bear market, correction or even single digit pullback. On top of that, we are now hearing calls that the VIX (volatility indicator) is either broken or no longer works. Lots of sour grapes out there! The bottom line is that the ingredients for a major decline are not present and have not been present for a long while. That’s going to change, but it will take some time to do so.

With all that said, stocks do look a little tired, but that doesn’t mean they have to go down. They could also move sideways to repair themselves. If we do get any weakness, it should be yet another in a long line of pullbacks to buy.

On the sector side, all is not well, but it’s good enough to keep this aging bull market going. I discussed energy a few weeks ago as being in a position to form a low and it has rallied nicely. However, it’s now at the point where the bears should make their stand if they are going to. If not, this will be a good sign that a more significant low may be forming. At the same time, transports have quietly pulled back 2%+ this week. The bull should attempt a stand sooner than later and this index could give us a clue as to the market’s next move.

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Bears Move to VIX as Indices All See New Highs

The bears tried to put up a little fight on Tuesday, but that only lasted a few hours and it wasn’t much of a battle. On Wednesday, the bulls came right back with the big guns and a headline close that saw all of the major stock market indices see fresh all-time highs along with high yield bonds. While I had been looking for the Dow, S&P 500, S&P 400 and Russell 2000 to see these levels, I did not expect the NASDAQ 100 to do so this quickly.

The chart below shows the path I was looking for with one more small decline in the index just below the May bottom. As the index began to rally and lead, I offered that I would like to see the other indices lead the market lower on the next pullback and then see the NASDAQ 100 soar again. There was no next pullback which is still okay.

At this point with all of the major stock market indices seeing blue skies, the bears are focused on the volatility index or VIX which is showing overwhelming complacency, or at least that’s their take. The VIX is a funny animal and its behavior has certainly morphed over the years as tradeable products have been introduced. I don’t have a strong opinion right now on the continued value of the VIX, other than to say that we should be able to discern something a few months from now.

In short, I remain in the trading range camp with a slightly upward tilt and do not think the across the board new highs are the beginning of the next leg to 23,000. I think we need some backing and filling over time or a pullback first. This is definitely not how bear markets begin!

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Bulls Don’t Want to Quit, But…

The bulls had another strong day on Friday with now the S&P 400 and Russell 2000 on the verge of fresh all-time highs. Semis continue to bounce back. Transports remain strong and discretionary and banks are behaving constructively. Materials and industrials are quietly in high gear and long depressed energy is ticking higher. High yield is also picking up again and you know my feelings on that along with the broad participation seen on the NYSE. Just keep in mind that this is not a young bull market so it’s behavior won’t be as rock solid as one in its early stages.

This week we have option expiration, but I do not believe it is going to play a big role in market direction. Earnings season picks up and that should make for some fun. Although volume has lagged for a long while, given that it’s summer, I would expect it to get even lighter barring an external market event.

Although I continue to paint what seems to be a rosy picture, my intermediate-term forecast remains the same. I believe stocks are in a trading range until proven otherwise with perhaps a slight upward tilt.

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Another Good Day for the Bulls

After a number of short-term victories for the bulls over the past week, the Dow Industrials and Dow Transports scored new all-time highs together, triggering a Dow Theory confirmation or buy signal on Wednesday. While the Dow Industrials were the lone major stock market index to see fresh highs so far, I expect the S&P 500 to follow suit shortly. The S&P 400 and Russell 2000 should not be far behind which would add even more credence to my forecast of limited downside. However, I still do not believe that stocks are ready just yet to blast off on another leg higher. As the NASDAQ 100 repairs itself, I think the stock market remains in a trading range which will eventually be fully resolved to the upside.

Participation in the rally remains very, very broad and strong no matter what you hear differently from the pundits. These are the same pundits who were negative after BREXIT and the election last year and continue to scream about a major decline or bear market starting. The chart below says it all. The NYSE A/D Line is once again at all-time highs. While it’s not 100% perfect, this indicator rarely looks so strong as a bull market is ending. When I say “rarely”, I believe it has only failed once in the modern era. In any case, with high yield bonds stepping up again and the other evidence I continue to point out, buying weakness is the correct strategy until proven otherwise.

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Dow Theory Says to BUY

After staving off early morning selling on Tuesday, the bulls followed through with a nice little day on Wednesday. As I have discussed, the NASDAQ 100 continues to bounce back and resume leadership. That’s an intermediate-term positive, especially if the index does not lead on the downside during the next pullback.

While the Dow was the only major index to score an all-time high on Wednesday, the Dow Theory crowd will point to the transports also hitting an all-time high. That’s considered a Dow Theory confirmation and portends higher prices ahead. In that regard, the bull market is alive and well.

Besides the good sector leadership, high yield bonds also seem to have ended their pullback. While they are not yet at new highs, their behavior is constructive.

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NASDAQ 100 Right on Schedule. Gold and Energy Opportunity

For the past month or so, I have focused much of my commentary on the NASDAQ 100 as it had been the far and away market leader before getting hit with the ugly stick from late May to early July. Late last week, things began to change and I saw the NASDAQ 100 looking a little better in the short-term. On Friday, the bulls, especially in tech and the NASDAQ 100 did step up with the anticipated bounce beginning. That’s continuing today and a good sign overall, even though there could be some more weakness ahead.

While I still do not see a full scale correction of 10% or anything close just yet, I do think stocks have settled or are settling into a trading range until at least later this quarter. For the nimble, rallies to the upper end of the range can be sold while declines to the lower end can be bought. As this is taking place, it will be important to watch which sectors lead and lag each tradeable move.

I have long mentioned energy finding a bottom at some point, but I wasn’t going to be brazen enough to pick it just yet. There is some evidence that the sector is hammering out at least a short-term low right here and now. That’s lining up with the gold stocks as well. And all that is without any large currency moves. Hmmmm…

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