Archives for November 2018

THE Bottom Right Now or Soon. ALL Paths Lead to Dow 27,000

Last week, I wrote about the chart below, Battle Lines Drawn, which had one more horizontal, blue line at the time. That was exceeded on the upside, so I removed it. We are left with the upper blue line that once exceeded and closed above will be late confirmation that the bottom is in and new highs are on the way. That’s going to take some time to develop. Stocks are at the first blue line which creates an opportunity.

After correctly calling for a mid to upper single digit decline as well as the potential for a bounce near the lows, it has become a little muddier for me. I did not like how stocks behaved at the October low. It didn’t look complete. However, there is no rule that says the market must accommodate my analysis and ego. Both the second part of the rally and current decline have been more difficult for me to get my arms around in advance which is all that matters. Anyone can analyze after the fact.

Since the correction unfolded, I made two very strong statements. First, I said that I did not believe the bull market was over and that Dow 27,000 would be seen late this year or in Q1 2019. The second statement was that if stocks raced right back to new highs from the October lows, I thought the 10-year bull market would end during Q1 2019. I don’t think we have to worry about any racing here.

At this point, there are two scenarios (yes, I love my scenarios) which look to be most probably. And for you bears out there, they are both bullish. The first one is in light blue above and it has the decline ending right now, plus or minus a day or so. The second one has stocks go all the way down to the October lows, perhaps even breaching them for a day or so and then bottoming. Regardless, both paths lead stocks to new highs although the duration will be different.

Finally, I have a Canaries in the Coal Mine all done and ready to email. It was supposed to be in this update, but it just became too long. I will get that out this week. I know. I know. You are waiting with bated breath!

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Bulls on Shaky Ground Today

After a fast and furious rally by the bulls, we saw a little change on Friday as “too far, too fast” became my theme. I thought the best case would be for a pause to refresh or some backing and filling. That appears to be the case as the new week begins. I am very keenly watching for the market’s reaction if and when it gives back all of last Wednesday’s huge, post-election gains. That should speak volumes about the next week or so. On the Dow, that’s roughly 25,600 and 2750 on the S&P 500.

Not a single thing has changed in my thinking that an immediate return to new highs could very well spell the end of the 10-year bull market. That remains in play, however, as I have been discussing, the odds do not favor that behavior. Rather, stocks are “supposed” to see another decline to build a better launch pad for the next rally to 27,000.

Where is leadership, you ask?

It certainly isn’t in the banks or semis. That’s a little troubling. High yields bonds are about to make new lows. The NYSE A/D Line isn’t much help at this point as it basically looks like the stock market. As I keep offering, the defensive sector is standing out. Utilities, staples and REITs. It’s great if you own them, but not comforting for the overall stock market. Another fun week ahead!

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Pause to Refresh

I had such a great time joining the good folks at Yahoo Finance on Market Movers yesterday morning, especially since I stayed put in my office and joined via Skype. I didn’t think it was possible to look worse than I do on TV without makeup, but yes, I got scared watching the replay!

After stocks huge sure on Wednesday, I thought that the market would pause to digest or refresh, perhaps back and fill. The Dow had been leading, but I am expecting leadership to change starting essentially right now. Semis and banks continue to disappoint me but transports and discretionary are acting better. Retail and materials, along with defensive sectors like telecom, utilities, staples and REITs are also behaving constructively.

Do not ignore my last comment. That may be very telling for things to come. Defensive sectors typically lead into a bear market and recession. More on that later.

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Not So Special Fed Day Update. Recession & Bear Market

Normally, I send out a very detailed update when the Federal Reserve concludes their every 6 week meeting. Given the volume of updates I have published lately, I am sure most of you have a little Paul Schatz fatigue. So for someone not known for brevity as my colleague,Renee, says all the time, I am going to keep this short and to the point and then work on a very important Canaries in the Coal Mine.

The Fed concludes their two-day meeting today with the statement released at 2 pm est. Jay Powell and company are not going to raise short-term interest rates today. In the statement, I do expect them to remain hawkish and set the table for another rate hike at their final meeting of 2018 next month. The economy continues to grow and perform very well over the past five quarters with an incredibly strong employment report from October that included 250,000 new jobs, a 50 year low in U-3 unemployment and annual wage growth over 3%. That’s about as good as it gets. Tax reform and deregulation are certainly working economically.

With all that said, nothing has changed in my forecast for a mild and consumer-driven recession beginning between Q3 2019 and Q3 2020.

The Fed’s DNA will be all over it. Right now, I am concerned about auto loans and credit card delinquencies as well as mortgage rates. The housing market is softening or outright turning down. Some dismiss that because tax reform is hurting states with high state and local taxes. I don’t like to qualify data. For whatever reason, something is wrong in housing.

The stock market model for today for today is to see stocks trade between plus and minus .50% until 2pm and then a rally. However, with the huge move over the past 7 days, that trend has been muted to but a coin flip. There is a chance to see a negative trend develop for the next few days, but I need to see where stocks close today.

Finally (see I can be brief!), I wanted to show you the last time the day after a mid-term had such a huge move. You had to go all the way back to Ronald Reagan, my favorite modern day president, in 1982 when stocks soared 4% after the GOP lost House seats but gained a Senate seat. What happened back then is very different from now as August 1982 was the dawning of the great 1980s bull market after a 14 year slumber. Sentiment was close to an all-time low. Few owned stocks or even cared.

I am sticking by my bold forecast that if stocks race right back to new highs, the bull market that began in 2009 will end in Q1 2019. More on this next week when I publish the long awaited Canaries in the Coal Mine.

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Election Model Right Again!

Last night, I flew back from one of the best conferences I have ever been to in Chicago for the National Association of Active Investment Managers. Besides offering my outlook on many asset classes and themes for 2019, I sat through some really great presentations as well as networked with some of my closest industry friends and new acquaintances. So many bright and talented people. Some really good deep dish pizza at Gino’s East and tasty craft beer on tap.
On the flight home, in my usual aisle seat in the back without any legroom surrounded by all these folks who flew to the Dallas Cowboys (my team) game in Dallas, I was apparently the only who paid $6 to watch Direct TV on the two hour flight from Chicago. It was election night and I wasn’t missing a minute of it, not to mention not being able to open my laptop because the person in front of me reclined her seat and it almost hit me in the mouth.
Every 10 or 15 minutes someone in the back would yell out, “how’s it looking?” I would then give then a quick rundown of the earliest races. I toggled back and forth between FOX and MSNBC to get all views. Boy did that seem like night and day! The interesting part was in between my updates, random people started having political conversations without anyone yelling or name calling.
Someone would turn to their neighbor and ask who they were supporting. I heard everything from “only Democrats” to “anyone Trump likes” to “splitting the vote up”. The disagreement was, well, very agreeable and civil. It was really amazing and almost heartening. The discussion, certainly not my Cowboys who have become an embarrassment with no quarterback, no coach and the worst owner in football.
As of now, the Democrats have control of the House by somewhere between 5 and 10 seats and the GOP added to their control of the Senate by at least two seats. News programs have been reporting live from all over the country with every major political pundit sharing their views. It’s been like an army of people and opinions with millions of dollars spent.
But, hey, if they learned their lesson when our presidential election model forecast a Trump victory, they could have just read my Special Election Update and collectively saved their networks time, effort, energy and money. After all, what has transpired is exactly what the model predicted. It cost me basically zero to conduct my research and realize that what works so well in presidential elections does not work well in mid-term ones. However, I was able to model social mood which told me not to expect a red or blue wave.
Each party is feeling emboldened today. They both claim victory but also realize that they now have to work with each other to get anything done. All this talk of uniting and bipartisanship and mutual respect. Honestly, it makes me ill. We have seen this movie before and after a few weeks, we will be back to the same old divisiveness. It’s the same cycle. Rinse and repeat.
Jason Goepfert of Sentimentrader.com put out some research focused on mid-term elections with an unpopular president. Reagan’s, Clinton’s, Bush’s and Obama’s popularity right before a split Congress was 42, 48, 37, 45. Trump’s is currently 44.
Lost seats in the House were 28, 52, 30 and a whopping 63. While Clinton, Bush and Obama lost 6, 6 and 8 seats in the Senate, Reagan actually gained one seat. Trump looks to gain two or three.
In Reagan’s case, stocks skyrocketed almost 4% the day after election day, but keep in mind that a massive bull market had just really begun in August. The other presidents saw muted movement which is what I thought was going to happen today. Clearly, I was wrong on that front as stocks soared right out of the gate and never looked back.
Below is an update of the chart I showed in Battle Lines Drawn the other day. Stocks are now above all but one line, putting short-term control in the hands of the bulls.
As I have mentioned before, stocks are now in the most favorable time of the year from several perspectives. First, Q4 has a nice seasonal tailwind. Second, that wind is even stronger after mid-term elections. Third, it’s blows even harder when there is a decline in the prior month or two. Finally, when we look at the four years of a presidency vis a vis the stock market, November of year two through May of year three is the strongest period of the entire four year cycle. In other words, the stars are aligned for one heck of a rally.
With all that said, given today’s strength and really the 2000 point rally since the lows, one of our short-term models may turn negative, once again, over the coming few days or so. Now that would be an interesting development during a very seasonally favorable time of year. We’ll cross that bridge when we get there.

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***Special Election Update***

Greetings from 34,000 feet as I head to Chicago for a quick two day trip to attend the National Association of Active Investment Managers’ conference where I will be speaking about my preliminary forecast for 2019 as well as rubbing elbows with some of the industry’s brightest and most forward thinking minds. It’s an association I have been involved with since 1990 and their two conferences are always a highlight of my year.

Election Day is here again. Boy, was that a fast two years. My grandmother was right again. The older you get, the quicker time flies. She was rarely wrong and one of the smartest people I have ever known, especially when it concerned common sense things. After my grandfather died in 1999, my grandmother and I spoke on the phone almost every single night until she passed in December 2015. Some nights we would watch the news together or one of our favorite shows, like The West Wing. And then the political discussions would fly.

Anyway, one of her strongest pieces of advice to me over the years was not to get too emotional over things I have zero control over, like elections. Growing up during The Great Depression, she had a unique view of life and politics. What I always loved about her was that she was never a straight line party voter. Sometimes, she voted Republican while other times it was for Democrats. She voted for people she thought would be best for their constituency, even to her own detriment when it meant higher taxes although my grandfather was a very shrewd investor, looking for green shoots from a scorched earth in the bond market.

I remember holiday dinner conversation in the 1970s when New York City was on the verge of bankruptcy. My grandfather had just put an enormous amount of their savings into triple tax free municipal bonds which were being priced for Armageddon. I want to remember that yields were 20%+, maybe even higher. Everyone thought he was crazy. I remember him saying that the politicians would never, ever let the biggest and greatest city in the world go broke. And sure enough, at the 11th hour, the lenders blinked. For years and years, my grandparents enjoyed returns above 20% and paid zero taxes until the bonds began to be called away in the 1980s and 90s.

Back to the topic at hand after one of my usual digressions. Two years ago, I made a very bold and brash prediction that Donald Trump was going to beat Hillary Clinton and become the 45th President of the United States. This wasn’t my opinion as I could not see his path to victory on the electoral map. It was based on a model I created to forecast presidential elections based on the performance of the stock market over three different time horizons in the months leading up to the election. That model had only been wrong once in the modern era and that was in 1992.

As you know, I am a contrarian by nature. When the masses line up one way, almost regardless of the topic, you will oftentimes find me on the other side. Predicting a Trump victory was an easy one for me as almost no one thought it was possible. And as you all know, I am not shy nor afraid to take my forecasts to the media and stand my ground when being pushed back. So, two years ago, I joined any media outlet who would have me to state my case. Many refused to give me air time until after the election.

Today is very different. We are on the verge of the mid-term elections where seats in the House and Senate are up for grabs. I have spent an inordinate amount of time trying to model this election like I had done with the presidential ones. After exhaustive research I conclude that in mid-term elections, the country does not “vote its wallet” like it does in presidential elections. The issues are much more localized. However, I did find some indicators of overall social mood to determine if a “wave” was likely in a mid-term election. A “wave” being a surge favoring either red or blue, Republicans or Democrats.

For 2018, there is no “wave” present, meaning that I am not predicting that the Senate and House flip from red to blue. I am, however, going against my contrarian nature and forecasting that the House goes from GOP control to control by the Democrats with a margin of 5-10 when all is said and done. Regarding the Senate, I see the Republicans adding to their majority by one or two seats. I also do not believe we will have the final tally for days or even weeks following the election. And don’t be surprised to see both parties and their lawyers head to court before Thanksgiving in some races. We keep hearing how this is the most important election of our lives. Well friends, that statement is used every two years for every election.

Just for the heck of it, here is how the S&P 500 behaved around the last two mid-terms.

The stock market is now pricing in a split Congress. Should Congress remain red or turn all blue, you can expect an outsized reaction. If the former, stocks should rally significantly as Trump’s pro-growth agenda will remain intact. If Congress turns blue, I would expect stocks to turn a little blue themselves, but not to any serious degree as the White House will remain under GOP control. It would almost impossible for the Democrats to gain enough seats in the Senate to override a Trump veto.

The most likely scenario would see the election’s impact somewhat muted and attention immediately turn to the Federal Reserve as they meet on Wednesday and Thursday to discuss raising interest rates again. It won’t happen this month, but it is likely to happen next month.

Finally, I want to repeat what I stated HERE last week. IF the final bottom in the major stock market indices has already been seen AND stocks are going to straight to new highs, I think the 10 year bull market in stocks will end in Q1 2019 and a massive decline will begin. Now, if you read what I wrote last week or just clicked on the hyperlink above, you know that I have a very different preferred and more likely scenario.

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Battle Lines Drawn

The bears made their first stand of the nascent rally on Friday as very early strength was immediately sold. The best thing about this is that we now have a few common sense lines in the sand drawn to determine short-term direction. You can see below that the most recent price is smack in the middle of the four lines. A CLOSE above or below the two closest lines to price will likely create a quick and sharp move in the same direction to the next line.

My theme remains the same. I believe that stocks are in the bottoming process right now with a big rally coming. I also think there should be a better buying opportunity later this week or next. HOWEVER, I remain firm in my forecast that if stocks race straight back to new highs from here, the bull market is likely to end in Q1 of 2019. How’s that for a binary outcome?!?!

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Stocks Peaking on Amazing Jobs Report

What a volatile, interesting and fun week it has been. I am about ready for some time to myself although I do board a flight on Sunday afternoon for a quick trip to Chicago. Deep dish pizza, here I come!

My plan coming in on Friday was to look for another big up day for the bulls and then begin to take some risk off the table, book profits or however you like to call reducing exposure to stocks. It appears as though part of the rally this week has been on hopes of a trade deal with China based on the president’s tweet. First, I don’t think that is happening anytime soon. Second, I do think it could happen once the next Congress is seated in January. Perhaps before Q2 2019 ends.

Critics of Trump have been tweeting that it’s all a ploy to juice stock prices ahead of the election in hopes of helping the GOP. While stock market performance is a good predictor of presidential elections, it has absolutely no correlation to mid-term elections. Long time readers know that my election model correctly predicted a Trump surprise, much to my disbelief. It hasn’t been wrong since 1992.

Earlier this morning, stocks retraced 50% of what they lost during the correction as you can see below on the Dow. That’s the first line of defense for the bears where you would expect them to put up a fight. The other major indices have not been as fortunate.

The October employment was absolutely stellar. 250,000 new jobs created. Unemployment at 3.7%. Annual wage growth hit 3% for the first time in 9 years. Even the habitually wrong Armgeddon, naysaying, gloom and doom crowd will have a tough time poking holes in this report. My only question is given how late we are in the cycle, is the economy peaking…

 

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Calling THE Bottom and the Bear Market that Lies Ahead

Before I dive in headfirst I want to start by saying that there are more bold and brash comments in this update, especially after the charts, than any piece I have written in a very long time. None of it is political.
Here is a taste and I respectfully ask you to read this update to the end. It spells out some very detailed scenarios for the bull market and impending bear market.
Let me state this very emphatically. If THE bottom is in and stocks go right back to new highs from here, I think the 10 year bull market will end in Q1 of 2019 and begin a massive decline into 2020. I want to be clear and on the record.  
 
Since before I called for stocks to decline mid to upper single digits in October, I said the bull market remains old and wrinkly but still alive. After the 10%+ correction during Q1 of this year, I emphatically pounded the table at every juncture that the bull market was absolutely not over. From Q1’s depths of despair near 23,000, I had no problem stating my strong conviction on CNBC, FBN and Yahoo.
While the January peak looked a whole lot better than the Q3 peak in stocks, I still do not believe the bull is over. The process may have begun for a bear market down the road, but I don’t think it started in October 2018 like the last one did in 2007. I will plead my case next week when I write Canaries in the Coal Mine from 30,000 feet on American Airlines.
Bull markets typically do not end with a bang like the decline we are currently seeing. Bull markets tend to roll and roll and roll with the market losing an important element each time. Bull market peaks are certainly not a single point in time. And bear markets do not initiate while the media has special reports on the end of the bull market.
Given all that, let’s face it; there has been a lot of damage done during this decline. It hasn’t been this ugly since the Q3 2015 / Q1 2016 correction and that really was a complex, 6 month affair to repair and recover. And before that, you have to go back to Q3 2011 for a decline with this much downside momentum and damage.
You can see the McClellan Summation Index below which is a long-term measure of internal market health based on the number of stocks going up and down. It is below -700. That reflects serious and strong internal damage.
Downside momentum in the number of NYSE stocks making new 52 weeks low hasn’t abated yet. This picture certainly needs to change before a sustainable rally can begin. Usually, we see price probe lower with the number of stocks making new lows less and less on each probe.
The percentage of stocks in a bull market has corrected to 25% as you can see below in red. That needs to show big improvement.
At this point, essentially all of the major stock market indices are in downtrends. My four key leadership sectors, banks, semis, consumer discretionary and transports have been hit hard and badly damaged. Usually, damage like this takes time to repair either by going sideways or rallying and declining in a range.
On the flip side, besides what I discussed yesterday in the very short-term, the percentage of stocks above their average price of the last 50 days is washed out. I would like to see the next decline show this number improving.
From a sentiment standpoint, I could probably name a dozen indicators which are now showing widespread fear and panic. However, as we know, they can always get worse. Below you can see how option traders are behaving over the last 10 days. They are in full blown panic and trying to position for more weakness.
Let me state this very emphatically. If THE bottom is in and stocks go right back to new highs from here, I think the 10 year bull market will end in Q1 of 2019 and begin a massive decline into 2020. I want to be clear and on the record.   

 

However, I do not see this scenario as being a likely one, but it is possible.
Rather, I think this current nascent rally will peter out sooner than later with another decline on much lower downside momentum coming. The ultimate low should be somewhere between Dow 24,300 and 23,800. From there, I continue to see my next upside target hit of Dow 27,000. While I originally thought it would be in December or January, I may have to push that out into Q1. It’s just too early for me to opine.
I have not updated the chart below but you can still see what I view as the most likely scenario.
 
Stocks have priced in a House victory by the Democrats and a relentless Fed along with the Trump tariff tantrum ending poorly with China. A change on any of those fronts would certainly be a boon for stocks. I am not predicting it, just stating it.
Q4 is typically very strong for stocks. This year, there is the added very strong tailwind of being post-mid-term elections. In the entire four year cycle for stocks, the single most positive period is right now through April. Simply put, once this correction ends, stocks could not be in a better position to rally sharply and significantly.
I know. That’s a pretty bold statement.
Like the Fed does with data, I will follow the indicators and models. They are not infallible. And on that topic, I received a number of emails asking me how I will know if I am wrong and what will I do if I am wrong. Well friends, being wrong is nothing new for me. It happens all the time. When you are as bold and brash as I am, you can’t be afraid to be wrong. I swing at an awful lot of pitches.
To answer the question, if the market does not respond to the time-tested conditions that have led to certain things happening, something is wrong and I will report it. If I am looking for a rally and stocks roll over, I will be wrong. Egg on my face an all, although I have acquired the skill of washing my face fairly well after the egg. In the big picture if price action remains below its short, intermediate and long-term trends for a week straight, that can be confirmation of a new bear. 

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