Archives for January 2019

Markets Not Waiting on Fed Statement Today

Powell Turns 180 Degrees and Loses Credibility

Fed statement day is here once again. Yippee! Chair Jay Powell did something I don’t think I have seen in 30 years in the business. He did an almost 180 degree turn in just three weeks after raising rates and forging full steam ahead with more asset sales on December 19. When the markets, both stock and credit, accelerated to the downside, Powell eventually walked back his very hawkish stance to try and appease investors. That must be the third mandate of the Fed after maximum employment and price stability. Financial market appeasement.

Anyway, stocks have rallied sharply since Christmas and bonds have followed suit. It’s going to be fascinating to listen to the press conference today and watch Powell struggle through the questions without upsetting the markets, unless, of course, the Fed is done hiking rates and they are actually pulling back on asset sales. Don’t bet on it!

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. With pre-market action indicating a much higher open, the opportunity is there for a momentum trade to the upside from the open until 2pm or even 4pm although I have to admit that given recent activity, I am a bit gun shy about pushing the envelope intra-day. I want to give proper attribution for this Fed trend and I am pretty sure data miner extraordinaire, Rob Hanna and his supercomputers at Quantifiable Edges, shared it with me.

No Rate Hike

The FOMC is absolutely not raising interest today and I would be shocked if they raised them at the next meeting in March. Global economic growth has slowed substantially and I expect Q4 and Q1 GDP here in the U.S. to be weaker than the previous three quarters.

Let’s not forget that the Fed has never, ever, ever once correctly predicted recession in the U.S. or really anywhere for that matter. You could say that they are perfect in their incompetence. You could also argue that secretly they really do see problems coming down the road, but could never telegraph that publicly for fear of upsetting the markets. This is the argument I fall on the floor laughing my head off.

The Fed is always late. Had they started the rate hike cycle earlier or the asset sales, they could have avoided conducting them concurrently. I have said this from day one and never wavered; what the Fed is trying to do is like landing a 747 on I-95. It’s technically possible, but so beyond likely to be successful. In fact, as I have stated many times, it has and is creating a fertile landscape to grow recession.

Recession Coming in Late 2019 to Late 2020

The economic data in the U.S. may be decelerating, but it is certainly not close to recession as many people are now forecasting based on the stock market’s action. Germany may be in recession with other European countries to follow, but it seems like the U.S. will be last on the list.

Housing remains very challenging with higher mortgage rates, millennial behavior changes and the capping of state and local taxes at $10,000 from the 2017 tax cuts. Credit card and auto delinquencies remain elevated in the face of the good economy. The tariffs have certainly put a damper on trade, but they are a huge question mark as we approach the March 1 deadline with China to get a deal done. At the end of the day, I am sticking by my call for a mild recession beginning sometime between Q3 2019 and Q3 2020 although I am realizing that it may be later than sooner.

Janet Yellen & Jay Powell Are to Blame

Let’s get back to Jay Powell and the Fed. Longtime readers know that I was a very big fan of Ben Bernanke while I called Alan Greenspan the single worst Fed chair ever, or at least on par with Arthur Burns from the 1970s. I call it like I see it. For several years, I have been a very vocal critic of Yellen and Powell for trying to land a 747 on a postage stamp by raising interest rates AND selling fixed income assets, now to the tune of $600 billion a year. In the history of the world, no central bank has ever had the temerity to believe it could accomplish this without consequences.

Cue our Fed with Yellen and Powell.

This group is and has been either arrogant or ignorant or both. Look, the Fed is behind 90% of the recessions. They begin a rate hike cycle and push and push until the landscape is so fertile for recession that all it takes is a little spark. They did it leading up to the financial crisis. They did it during the Dotcom burst. They did it in 1990 with the S&L Crisis and Iraqi invasion of Kuwait.

This time, the pomposity has been taken to new heights by adding the program of what’s been labeled Quantitative Tightening. The Fed is now selling the securities in the open market that they purchased during Quantitative Easing. These sales are effectively interest rate hikes by themselves. The markets and economy cannot withstand the Fed conducting both.

Now we have Greenspan and Yellen both forecasting gloom and doom. “Run for cover.” “Crisis on the horizon.” What a joke! Yellen remarked on her way out of Dodge that she didn’t think we would have another financially related crisis in our lifetime. Now, all of a sudden, she sees a series of crisis.

Is this all in the name of selling books? Goosing demand for their 6 figure speeches? Or, do they really believe this, but just outright lied to the public when they were in charge? No matter how you slice it, Janet Yellen and Alan Greenspan are embarrassments.

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The “Easy” Trade in Apple

On January 3 Tim Cook shocked the investment by pre-announcing earnings problems and slowing iPhone sales. Fundamental analysis is above my pay grade so I am not going to go any further. It was shocking because I couldn’t find any other pre-announcement since 2002. There may have been one, but it wasn’t easily found.

The stock had already collapsed from $233 to $147 before the warning. That magnitude, 37%, is not what you normally see even during a 20% decline in the overall stock market. The market knew something was very wrong at Apple. Before the stock opened that day, CNBC’s Jim Cramer declared that investors should absolutely not buy the stock as it was heading to $120 where they should buy it. I found this advice so odd since Cramer has been such an ardent long-term bull on Apple.

It turns out that Apple gapped down and only traded $2 lower from where it opened. In other words, there wasn’t much selling after the open. Moreover, volume didn’t even match the level we saw on December 21. Odd indeed. I didn’t buy Apple on that day or around that news for full disclosure.

Heading into Apple’s earnings report, I tweeted that unless Tim Cook was incredibly incompetent or just plain stupid, there was no way Apple would disappoint for the second time in a month. Rather, Cook should have given himself a buffer to make sure more bad news wasn’t coming. For the aggressive trader, it was one of those “easy” buys if there ever is one. If the stock has poor action on Wednesday, it’s quickly sold.

Last night, Apple reported earnings which were basically in line with what was expected, but they did not guide future earnings or revenue lower. In after hours trading, the stock is sharply higher. It will be interesting to see the spin from Wall Street and the media as the vast majority turned negative in Q4 on the stock.

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Semis & Junk Bonds Say the Bears Are Wrong

After trying to score new recovery highs late last week, stocks are set to open modestly lower to begin the week full of earnings and the first FOMC meeting of the year. For now, I am sticking with the same theme from last week. The market is in pause or pullback mode. So far, stocks have done nothing wrong.

Leadership has been strong and constructive with all four key sectors contributing. I have to say; behavior in the semis is extreme right now. After the sector surged 6% last Thursday, Intel announced poor top line revenue yet the sector tacked on big gains on Friday. I haven’t seen this kind of action in a long time. And today, Nvidia also announced bad news, so we shall see what the bulls can do, if anything. Absence a lot of selling, the bulls would be firmly in control which portends good things for the tech and the market.

Finally, junk bonds have really come on strong and are trading at their highest levels since November, much stronger than the stock market. This is yet another sign that the bears are wrong over the intermediate-term. If the 20% decline in Q4 was just the beginning of the bear market, you would expect the credit markets to experience feeble bounces, not the powerful rallies we have seen in both high yield and bank loans since December 26.

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Risk in Both Directions is Small

In Monday’s post, I briefly discussed “V” bottoms and their rarity. I also mentioned that stocks had come very far, very fast and that a pullback or pause was due right about now. So far, stocks have perfectly paused and mildly pulled back. If the rally from the Christmas low remains fully intact, the pullback should be over with either some additional sideways action for the market or a return to new recovery highs next week. It’s that easy right here.

If stocks see any further weakness that closes at a new low for the week, then the market has more to go on the downside with the possibility for the initial thrust rally to be over at last Friday’s close. At this point, there aren’t any strong clues as to which way the market wants to go, but the risk is very small in both directions.

You can see a familiar chart, recently redrawn, below where I drew in those blue lines on December 21 to show the most logical area that the first bounce should head. In reality, the bulls pushed even further and now reside above it. I know this chart looks a little different. It’s because I somehow either deleted or moved my other chart template and I had to create this new one.

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“V” Bottom But Pullback Due Right About Now

Stocks closed at their highest levels since December 6th on Friday, wiping out 100% of the vicious and relentless selling wave I wrote about for so long. So far, the bottom has had the shape of a “V” which is not only rare, but generally uncomfortable for me as “V” bottoms are more characteristic of bear market than bulls. To counter that, there have been numerous confirmations that the rally since the Christmas low is a blast off of a new bull market leg. While I am much more inclined to side with the latter, I am also not dumb enough nor arrogant enough to believe I know better than the market. As I always do, we will take it day by day and week by week and see what the market tells us.

Stocks have come very far, very fast as I keep hearing from the pundits in the media. Well folks, that depends on your time frame. While the stock market closed at its highest level since December 6 and has recovered 100% of the vicious and relentless selling wave from last month, it’s right back at the price levels where we saw lows in October, November and early December. In other words, stocks went straight down and straight up. I also think they are due for a pause or pullback right here and now.

Looking at leadership I try to basically ignore it very early in a rally as we usually see the hardest hit stocks and sectors rally the most out of the gate. Now, don’t get me wrong. If we didn’t see those instruments run hard early on, I would certainly comment on it. However now, banks, biotech and energy have all led in 2019, two of the three sectors I like for 2019 in general. High yield bonds and levered loans have taken off and that adds more credence to the rally. The bulls have done nothing wrong to indicate anything more than a brief pullback is due, but with heightened volatility, it’s certainly no time to be complacent.

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Bulls Continue to Do Nothing Wrong, Yet

Stocks continue to do nothing wrong as they bounce sharply from the epic selling wave in December. On Tuesday most of the major stock market indices made new recovery highs. Leadership has been constructive, meaning the more aggressive sectors have been leading. Risk on, if you will. However, stocks have also rallied right into the zone I first mentioned on December 21 as the most logical area where the bears could put up a fight. From here we will see if the bulls begin to waver.

Some of you asked why I haven’t mentioned the NYSE Advance/Decline Line at all when I was so focused on it for most of 2018. It’s because I don’t find it all that helpful when stocks begin a rally. Almost every single time stocks lift after a significant decline, the NYSE A/D Line lifts as well as you can see below. The only help it would offer if in the rarest case, it did not rally with stocks. Now that would be a huge concern. From here, I want to look for points where the NYSE A/D Line goes down as stocks are making new recovery highs. That’s a warning sign.

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Equilibrium or End of Rally?

Almost on cue, stocks began to either stall out or moderate as they entered the lower end of the zone I first offered on December 21. That is a logical place for some to takes chips off the table if a revisiting of the Christmas lows is going to happen sooner than later. So far, stocks have done nothing wrong, especially with high yield bonds and bank loans snapping back so strongly in 2019, but I am not going to be complacent so easily. If bears continue to open stocks lower only to entice the bulls to step up in the afternoon and into the close, I will roll with it. However, if and when that tenor changes, I will likely become a bit more concerned.

As I keep mentioning, “V” bottoms are very rare and more characteristic of a long-term bear market. So not only am I not counting on one right now, I also do not believe it will happen because I don’t see this as a 2000-2002 or 2007-2009 affair.

Finally, our bear trend indicator for the NASDAQ 100 stopped flashing as of last week’s close. It’s not that big of deal because it moves from week to week. The Dow, S&P 500, Russell, Europe and emerging markets remain in place.

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Stocks into Zone Where Rally May Stall or End

It’s been one heckuva start to 2019. Just listen to the media and pundits tell you how stocks have rocketed  7, 10, even 12% since Christmas. While that is true, it’s a bit misleading as they forget the carnage from Q4. As I wrote about here and here late last year, there was certainly a preponderance of evidence to suggest a bottom and vicious bounce. That has come to fruition and I am glad the market is cooperating with the likely scenario.

Stocks now begin to face the zone I first offered on December 21 as a logical point where the rally may start to stall out or even end as you can see below. The market has done nothing wrong so far, but it has come very far, very fast.

In my 30 years, I have never  been a big believer in “V” type bottoms where stocks fall hard into a low and then rally straight back up, essentially unabated. They are rare and don’t have a super track record. The low after 9-11 was a classic “V” and that ended up failing after a very strong rally as you can see below.

Right now, I am keenly watching for signs that this very powerful rally off the bottom is stalling or ending. My concern remains that the stock market may want to head back down to the Christmas lows and say hello before a more meaningful and sustainable rally takes hold.

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Manic Market

It really is amazing how stocks go from never being able to rally to never being able to decline. After the stock market hammered out the bottom on December 26, the reaction by bulls has been easy to predict. I only wish I did a better job leading up to that low in December. Live and learn which I always do.

At this point, we have seen epic buying since December 26 with all kinds of very positive indicators triggering for the intermediate and long-term. Various breadth thrusts, which I will probably spell out in the next Street$marts, comparable post 20% declines without recession, high yield bonds, sentiment surveys and on and on.

On Christmas, I posted this piece which showed only a handful of comparable environments to the selling we saw in December. While the short-term was not consistent, the intermediate-term certainly was and was a bonanza for the bulls. Although I do believe the internal or momentum low was seen on December 26, I do not believe stocks are off to the races, never to look back. That behavior would be more in line with 2001 and the bear market which I do not believe to be the case today.

Below is an old chart that remains very much in play. You can see how much volatility spiked in December. The very first sign of the selling abating would be when the VIX index fell back into the Q4 trading range below the light blue line. It has already done that.

I think the real all clear sign comes if and when the VIX closes below 16 for a few days which is depicted by the dark blue line.

Stocks have bounced very hard, very fast. I think the easy money has been made in this very first rally off of the bottom. In fact, stocks are getting close to the point where paring back may be the best strategy.

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My Oh My. That was Quick

In my last blog post, Apple had pre-announced less than expected earnings news and stocks were looking sharply lower on Thursday morning. Besides commenting that it was probably a day to just sit back and watch, I also offered that historically, news like this from Apple usually comes near stock market lows.Thursday had an unusually dour feel to it. It seemed like the parade of pundits were all talking about an immediate retest of the Christmas week lows and that investors should be out buying bottled water and canned goods. My Twitter feed was full of Treasury bond bulls taking victory laps and calls for a much worse bear trend.

VOILA! Thursday ended up being a sweet bear trap.

There were three very good pieces of good news on Friday. First, overnight, the People’s Bank of China lowered reserve requirements which effectively puts more into the economy, a sort of stimulus. That got pre-market trading to indicate a much higher opening for the U.S. Then the December employment report was yet another blockbuster! 312,000 new jobs created. More people back in the workforce. Wages growth hit 3% again. These are just not recessionary numbers, at least not yet. Finally, and perhaps most importantly, Powell, Yellen and Bernanke all appeared on a panel at the Atlanta Economics Club where Powell reversed course very sharply from just a few weeks ago. It really is amazing what a 20% decline in stocks will do a hawkish Fed chair.

Boy did stocks respond, for the second time in two weeks.

While we didn’t have another 1000 point gain, stocks did soar more than 3% and again we saw 95% of the volume occur in stocks that were up. That is usually a very goo sign for the intermediate-term. With sentiment so negatively extreme, there is a good backdrop for the bulls over the next 3 to 6 months, even if that means a revisit to the Christmas week lows this quarter. I thought it was a very good sign that high yield (junk) bonds saw a lot of love and interest. That hasn’t happened in a long while.

The past two weeks have been good steps, but there will be other tests, likely at higher prices for the bulls to pass. I want to see the VIX close under 16 and the number of stocks in uptrends climb back above 60%.

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