Archives for October 2019

Fed to Cut Rates, Indicate Pause & Move to Neutral

What to Expect Today

The Federal Open Market Committee (FOMC) is going to cut interest rates by another 1/4% at 2:00pm on Wednesday. The market is expecting it and the cut has already been priced in. Any other action would be a shocker. With stocks essentially at to all-time highs, this continues to be reminiscent of 1995 when the Fed came from an overly restrictive monetary policy in 1994 to realizing they screwed up and quickly played catch up. Stocks had long understood and priced this in with 1995 being one of the all-time great investing years in modern history.

Right after the Fed announces their decision, all eyes will be on the statement for clues of future interest rate cuts or signs that the Fed may be close to being done. Given the data and stock market behavior over the past 6 weeks, I do think Jay Powell and company will offer some hawkish comments or indications that a pause in the rate cutting cycle may be in order into 2020.

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. I fully expect that to be the case today. Besides that, there is also a strong long-term trend for stocks to close the day higher, although that is not as strong as it used to be. Additionally, with stocks at all-time highs and significant upside progress over the past month, the bulls have even less dry powder than normal, not to mention how poorly stocks have done under Jay Powell on Fed day. In his short tenure as Fed chair, Powell already has the weakest stock market performance of any Fed chair in history on Fed day.

Countdown to a Trump Tweet

It’s certainly no secret that the President isn’t the biggest fan of Jay Powell, even though Donald Trump appointed Powell as Fed chief. Trump has been as misguided as Powell when it comes to interest rates. The President has been publicly trying to shame the Fed into copying the failing and disastrous European model for negative interest rates, something I hope and pray never, ever happens in the U.S. Low or negative interest rates are certainly not an economic panacea.

On the other hand, whether intentional or by accident, President Trump has been ingenious in creating a natural scapegoat for any potential economic weakness before the election. If the economy strengthens over the coming quarters, Trump will certainly take credit for it, in spite of his perception that the Fed had been working against him. If the economy weakens from here, the President will obviously blame Powell & Company as Trump has been publicly campaigning for more aggressive action by the Fed. In either case, Trump likely wins in the court of public opinion.

Jay Powell’s Arrogance & Ignorance

As I already mentioned, everyone knows what the Fed is going to do at 2:00 pm today. That’s not in debate. And right now, the market is pricing in at least another rate cut. Long time readers know that I have been very critical of the Fed, more with Yellen and Powell than Bernanke although Big Ben did make perhaps the single greatest imbecilic comment in 2007 when he said the sub prime mortgage crisis was “contained” and there would be “no contagion”. It would be impossible to have been any more wrong than that and on an epic scale.

Anyway, I think the Jay Powell led Fed is among the worst groups since 1988 when I entered the business. Greenspan may have been the worst Fed chair since Arthur Burns in the 1970s but Powell is certainly working on his legacy and it’s not an enviable one.

For 6 years I have pounded the table that raising interest rates AND selling assets which is now being referred to as quantitative tightening is the mistake of all mistakes. Selling assets is akin to also hiking rates as it reduces liquidity and tightens financial conditions. Janet Yellen should have chosen one or the other. Pick your poison. Instead, she forged ahead with both.

Jay Powell continued on that path except he, in a grand stroke of additional arrogance, decided that rates should go up at a quicker pace. Arrogance and ignorance are among the two worst character traits and I think Powell has them both. We all saw what happened last December when the Fed added that one additional rate hike and did not temper the asset sales. The global financial markets collapsed like hadn’t been seen since the Great Depression.

The Fed – Savior of the Financial Markets

Now, you can argue that it’s not the Fed’s job to appease the financial markets and you would technically be correct. The Fed has a dual mandate from Congress. Price stability (inflation) and maximum employment. However, the Fed, for the most part, usually follows what the markets want and have priced in. I say “usually” because there have been a few times when the Fed has gone off book.

Remember, the Fed doesn’t want to upset the financial markets. These markets are absolutely vital the U.S. and global economies. And despite what you may hear from Lizzie Warren and Bernie Sanders, a healthy and vibrant Wall Street community is an absolute necessity to a growing economy, even though that same group is prone to bouts of greed and bad behavior which can have a periodic and significant detrimental impact on the economy (see chapter on how the financial crisis began in 2007 and 1929).

When politicians from both sides talk about how Wall Street “wrecked” the economy, they always forget how many direct and indirect jobs were created from Wall Street’s work. The problem is that we (the U.S.) always seems to reward bad behavior and don’t punish it. And so many politicians continue to pat themselves on the back for the Dodd-Frank piece of legislation which did good by increasing capital standards but failed miserably by declaring victory that the days of Wall Street bailouts were over. Not a chance.

When push comes to shove, the political will is never there to let a Morgan Stanley or a Goldman potentially take down the economy. In real time in 2008, my thesis was that AIG should not have been saved which would have sent Goldman down with it. I thought letting more institutions be punished would have caused more short-term pain, but the free market would picked up the slack and the economy would have seen a much, much better recovery than it did. A topic for a different day.

Dual Mandate

As I already mentioned above, the fed has a dual mandate from Congress. Regardless of what President Trump believes or wants, the Fed’s instructions are from Congress. When we look at the Fed’s dual mandate, Congress essentially directs the Fed to keep inflation manageable and seek to have the country fully employed.

Right now, unemployment is at or near record lows with minority unemployment also at or near the lowest levels since records began. That is maximum employment, a point where the Fed would normally worry about a labor shortage and a spike in wages. While wages are finally rising, we are not seeing a squeeze and nothing like McDonalds paying signing bonuses like we saw years ago. With half of the Fed’s mandate pointing towards a rate hike, it’s makes me wonder.

Looking at price stability (inflation), we see the same trend that has been in place for more than a decade; inflation cannot seem to get going. While many people are familiar with the Consumer Price Index, the chart below is a much better gauge and you can Google if you want more info about it. The blue line excludes food and energy and this CENTURY you can’t find a single year of 3%. The very random Fed target of 2% has barely been met since the financial crisis.

So, the second half of the dual mandate is certainly amenable to a rate cut although the most recent data was just a tad “hotter” than the market was expecting. You have the dual mandate at odds. In my world, that would mean a neutral stance by the Fed. Leave rates unchanged and stop selling assets, which they did announce at the July meeting.

Jay Powell & Company at Odds

Jay Powell and the majority of the voting members of the Fed want to cut interest rates by 1/4%. There is a minority faction that wants to leave rates alone. Powell has spoken about an “insurance” rate cut which in my mind means a single cut. Today, we are look at cut number three. He discussed weakening economies in Europe and Asia that eventually could impact the U.S. He is worried about the trade war with China. I just want to know where in the dual mandate it says that the Fed should worry about China and Europe. The rest of the world is now loosening financial conditions so now Powell wants to follow them.

ECB chief Mario Draghi is on his way out of Dodge, leaving Europe in worse shape than when he began 8 years ago. With more than $15 trillion in negatively yielding bonds and a whole new round of bond buying starting, Europe is that fly in search of the windshield. That story ain’t gonna end well. However, the powers that be refuse to accept their fate. The Euro experiment is a failure, plain and simple. It should be dismantled, but I digress.

What I Would Do

My own economic forecast remains unchanged since I first offered it in late 2017. I think the U.S. will experience a very mild recession beginning before the 2020 election. Although there are so many doom and gloomers who forecast something much more ominous, it’s almost impossible with the banks in such great shape, literally sitting on more than two trillion dollars in cash. And if you want to know what I would do instead of cutting rates, I would stop paying the banks to keep their excess reserves at the Fed. This would force them put some money to work in the economy.

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All-Time Highs Are Here. WHO KNEW?!?!

The S&P 500 is poised to open at fresh, all-time highs this morning. Absolutely none of my readers should be the least bit surprised. I have written about it every single week this entire year. And the stock market isn’t done. I have made fun of and called out the bears every step of the way to outcries of “BUT, BUT, BUT” whenever presented with facts. They hate. They disavow. They call for the end of the world. They have been flat out wrong.

Stocks haven’t seen new highs since July and maybe this is one of those times where the masses get really excited and throw money at the market and then stocks see a short-term peak. I do not get that feeling, but I don’t have high conviction either. Rather, I could see stocks seeing some very nice strength this morning, leveling out and then not doing much until Wednesday afternoon after the Fed concludes their meeting.

My long-time favorite sector, semiconductors, scored all-time highs on Friday and looks to add on to that this morning. This has the potential to be one serious breakout and run if the stars line up. We’ll see.

I am a bit disappointed that REITs, which were in a similar position to semis, saw a classic breakout and then immediate failure as you can see below. It happens. Watch utilities and staples and read a lot into it!

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Stock Market Quiet. Earnings Volatile. Semis Getting Ready to Soar

Greetings from Baltimore where I am doing a quick one night trip to visit with some clients and an old friend and former colleague. As always, there is great food and wine. If all goes well and Southwest delivers, I should be home for Blue Bloods tonight and get a good night’s sleep for our final weekend of baseball and softball.

Stocks continue to trade very quietly this week, despite some wicked moves in individual stocks from earnings announcements. Twitter, Tesla, Texas Instruments, Amazon, Intel to name a few. Obviously, the news is on both sides since stocks cannot seem to make much progress in either direction. The major indices are very close to all-time highs, but it certainly doesn’t seem like earnings will be the catalyst to break out of that range to the upside, a scenario I still believe is coming sooner than later.

Taking the S&P 500, you can see the very strong rally from January through April followed by the first of three moderate pullbacks and a final powerful run into the July peak. With the trading range beginning at that July high, the odds heavily favor an upside resolution and I think it’s this quarter.

Amazon disappointed with their earnings and forecast last night, however the stock had been behaving poorly since July. If the stock market was truly weak and on the verge of a large decline, news like Amazon’s would have caused widespread selling in the pre-market leading up to today’s open. That’s just not the case. So far, it’s being treated idiosyncratically which bodes well for the bulls.

Two days ago, Texas Instruments was taken to the woodshed and the semis were hit for a 2% loss. As you know, I have been very bullish on this key sector for much of 2019 and I wondered whether this could be the thing that derails the train for what I see as a new all-time highs and I big run higher. Well, the market trapped the bears once again as Tex In was a one day wonder and fully offset when other semiconductor names like Intel reported very strong earnings. You can see this on the chart below in the second to last candle on the right side. I fully expect the semis to breakout above the horizontal blue line and make a run into new high territory.

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Lots of Negativity But Stocks Close to Blue Skies

Stocks begin the new week with the Dow Industrials masking the overall strength of the S&P 500 and NASDAQ 100. Remember, the Dow only has 30 stocks and they are weighted by price. So, high prices stocks move the index a lot more than mid or lower priced ones. Boeing has been hit with the ugly stick for 40+ points over the past two days which equates to roughly 280 Dow points.

While the Dow has stalled out with a few stocks lagging, the S&P 500 and NASDAQ 100 areĀ  but one solid day from all-time highs. Most people find that hard to believe as there seems to be a sea of negativity these days. I was shocked to see option traders flood into negative put options last Friday, however, there may some undue influence from monthly expiration. Both the S&P 400 and Russell are still lagging, but they look like they want to play some catch up sooner than later.

My long favored semis are very close to new highs with the financials and transports really getting into high gear. Any one of these sectors could provide fuel for another leg higher, but if we get all four key sectors going at once, we could see a relatively fast 10% spurt over into January. Last week, I followed up on recent positive comments about REITs and right on cue, they broke out to fresh, all-time highs. Next up is to watch utilities and staples for signs that all defensive sectors are running again.

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Junk Bonds & the A/D Line Say All is Okay

From open to close, stocks have traded in a narrow range most of this week and around the same level each day except for Tuesday. As the old highs in the Dow Industrials, S&P 500 and NASDAQ 100 have come into reach, investors are pausing as they usually do to assess risk and reward. While I do not think it’s a layup for a breakout right here, I feel very confident that Dow 28,000 will be kissed this quarter with leadership coming from some of the key sectors like semis, discretionary and banks.

For all the talk about high yield bonds lagging and quietly forecasting doom, they are pretty close to an all-time high.

Additionally, let’s take a look at the NYSE A/D Line which is actually at new highs now. I have heard from pundits that the rally lacks participation, but the facts don’t support those claims. While stocks could always pull back, the odds favor the Q3 lows as being the lowest prices for the rest of the year.

 

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Deal? What Deal???

I am sure I am not the only one who is really skeptical about this “trade deal” with China being real. While I am sure the two parties agreed on some items, we are so far from a real deal, signed, sealed and delivered. This doesn’t even sound like an agreement in principle since the Chinese have a different recollection and their state run news service tells their own story. This saga is far from over.

The stock market was very strong on Friday in anticipation of a deal being struck. Almost too strong. I tweeted that I wished a deal would not have been announced until after the close so there could be a possible selling opportunity on a higher Monday opening. The Trump administration had other ideas. The Dow Industrials dropped 200+ points on the announcement to close near the lows for the day. That’s not exactly comforting and my gut says we could see some short-term weakness to give back all of those gains.

I still really, really like the action in semis, something I have discussed here over and over and over for most of 2019. There are a lot of things people can say about my opinion, analysis and forecasts, but being unclear on semis isn’t one of them. Nor is my call for Dow 28,000 this quarter. I may not get them all right, but I never, ever run or hide from any flops.

Finally, I am keeping a close eye on REITs as they seem to be the most constructive of the defensive sectors. As you know, I have been talking about a “barbell” approach for the past few quarters with semis, utilities, staples and REITs. Own the aggressive and conservative sectors. Leave the rest alone.

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Bears Wrong, Again?

On Monday, I wrote about the bulls thwarting the bears with another low forming in the stock market. I also showed some of the fuel that was building up for higher prices in the form of very negative options traders who are usually wrong. Couple that with my Twitter feed turning negative and the bears ostracizing my bullish view, I felt pretty good that stocks would rally. And rally they have in short order, catching the masses off guard.

I tell ya; these perma bears. I can’t believe they have any money left from continuing to hate and disavow the bull market. They continually whine about the markets being manipulated by the Fed and everything being fake. They warn that it’s a house of cards about to crumble. It would be one thing if they just started playing Chicken Little now, but this has been going on for the better part of a decade. Eventually, they will be right and crow about it, but what a joke they have been.

Stocks are back into the middle of the Q3 trading range, but trying to close at their highest levels in October. Whether or not there is one more shot to the downside on a failed trade deal or some tweets from 1600 Pennsylvania Ave, I remain confident that Dow 28,000 is up next with a chance at 30,000 in Q1 2020. The bears just continue to have it wrong. And now, they’re getting nasty about it.

Sector leadership is very slowly and quietly improving. Semis, banks and discretionary are looking better and better. While transports are neutral, they look constructive and could certainly turn more positive later this quarter. High yield bonds are behaving fine and the NYSE Advance/Decline Line is poised for yet another fresh, all-time high sooner than later.

I may sound like a broken record, but use weakness as a buying opportunity until proven otherwise. It’s been an absolute loser’s game to sell weakness.

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Bulls Thwart Bears With Another Low

Last Wednesday as stocks had pulled back to the lower end of the recent trading range, I thought we were about to see a showdown between the bulls and the bears. That battle was fought one day later as an early morning mini-collapse triggered by a poor manufacturing number flushed out the sellers and allowed the bulls to come roaring back the rest of the day with a beautiful intra-day reversal. On Friday, the bulls added to those gains and put the major indices right back into the old range as you can see below on the far right of the chart. This is textbook behavior for ridding the market of short-term, weak handed traders.

At this point, in the strongest of strong markets, stocks should pause and then continue higher towards the old highs without any downside. I am not so sure that’s where we are today, but I wouldn’t sell the bulls short. Another scenario has stocks seeing some modest weakness this week and then beginning a more meaningful assault higher next week. I don’t see an immediate collapse right here.

With only a 6% decline, it’s a bit odd to see traders behave so bearishly in the options market. Below, you can see the S&P 500 on top with a 10 day average of volume in options looking for lower prices versus higher ones. Option traders are just as negative now as they were at market lows in August and June. While this is only one single indicator and doesn’t guarantee anything, it is certainly fuel for the bulls to move prices higher this month.

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The Truth About October

With Rosh Hashanah taking me out of the office for two days, I forgot to offer some stats as the sometimes nasty month of October begins. I cannot recall who first alerted me to the breakdown I am about to show so I will just say thanks to my usual cadre of characters whose work I value and respect. Rob Hanna, Ari Wald, Jason Goepfert and Tom McClellan.

Overall, October has been better known for stock market bottoms than any other month of the year. However, that usually occurs after a poor September. A month ago at this time, I debunked the myth and refuted the media and pundits’ claim that September was a universally poor month for stocks. The facts don’t support the claim.

Today, we will look at various stats from Octobers past. Unlike most months of the year, October actually performs better when it begins the month in a downtrend. In other words, when the S&P 500 starts the month below its average price of the last 200 days. When stocks are in an uptrend, they struggle to finish October in the black. When the market begins the month on its heels, October becomes the best month of the year, returning more than 2%.

With October beginning in an uptrend, let’s look at how the weeks shake out historically.

  • First 5 days +0.66%
  • Second 5 days -0.26%
  • Third 5 days -0.30%
  • Fourth 5 days -0.25%
  • First 10 days +0.35%
  • Last 10 days -0.91%

So far, October is conforming to a weak month, but it’s not following the strength first script. At this point, I expect an initial low to be formed by the end of the second week.

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Lower End of Range Hit – Can Bulls Make a Stand?

Last week was the single worst week of the year based on seasonal patterns and it certainly lived up to the billing I gave it several times here. Weak seasonality didn’t end last Friday. It extends to the first part of October. For the past few weeks I have been in the trading range / mild pullback camp with an eye on the upper and lower ends of recent range. After stocks failed to exceed the top of the range last month, I offered that a visit to the lower end of the range would probably be in line.

After a feeble bounce to close the month and quarter on Monday, the bears made a lot of noise on Tuesday after the ISM economic report came in much weaker than expected with a chorus of recession calls following. While I continue to expect a mild recession beginning in the next year, I don’t think it’s right here and now. And certainly, the markets are not forecasting recession just yet.

Tuesday was an ugly day for the bulls. Looking at an updated chart of the trading range below, you can see that the lower horizontal blue line is where stocks closed. Wednesday will be a key day for the very short-term in determining if the bulls have enough ammunition to make a meaningful stand here or will they need to stand back and wait for lower prices to circle the wagons. If the uptrend is still strong, I would expect early morning weakness to be bought with the bulls coming in stronger after lunch. If not, then early morning weakness should lead to a mid-morning rally that is sold with lower prices after lunch and into the close.

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