Archives for December 2019

3224 the Key Number for Santa

Friday’s action in the stock market wasn’t the victory the bulls were claiming. After another higher opening, the bears made a tiny stand and managed to fend off higher prices for a few hours. That’s about all you can say besides there were more stocks declining than advancing. I know; I am grasping at straws into year-end. However, make no mistake about the historic sentiment readings we are currently seeing now. This is the polar opposite of what we saw one year ago when the masses were screaming about a 2008 redux. Caution will be warranted in Q1 of 2020.

I shared my research on the last five trading days as well as the Santa Claus Rally (SCR) and the bulls need the S&P 500 to close above 3224 on January 3rd for Santa to officially call. As my work showed, it won’t be surprising to see the S&P 500 close below 3224 on December 31st. This is what usually happens when stocks are up strongly during the year as well as Q4. There will be another seasonal trade coming up on Tuesday’s close through the first five trading days of 2020. I will share it as soon as I know what it is!

With month, quarter and year-end just about here, I am about to enter the busiest time of my year. Add in my report to clients and Fearless Forecast, there will be a lot going on over the next month. And I am still rehabbing my ankle and shoulder 6 days a week. I mention this as posting here may be a bit erratic, but I will do my best as always.

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All Looks Terrific But Be Careful

I hope everyone had a great Christmas, Hanukah, Kwanzaa and Boxing Day!

As I wrote about the other day, the Santa Claus Rally and last five days of the year are not the absolute layup the pundits keep predicting. In strong years, the last five days trade is not even a coin flip, however, Santa still comes calling about 70% of the time. That puts added bullish weight on the first two days of 2020 if the last five of 2019 are down.

It is amazing that even the bears are conceding how bullish the stock market is right now. Almost every measure of sentiment I look is showing extreme greed. My Twitter feed has been full of the CNN Fear/Greed needle which is pinned on extremely greedy. However, the masses aren’t doing their homework because that indicator has done a poor job at market peaks. The other measures, like put/call ratios, sentiment surveys and money flows are all looking very similar to January 2018, late 1999 and other extremes.

While I don’t think the conclusion is to sell everything here, risk has certainly increased dramatically and it pays to dance very close to the door. That will likely be a theme of mine when I release my 2020 Fearless Forecast in a week or so.

Index leadership has been very strong from the NASDAQ 100, but the S&P 400 and Russell 2000 has been disappointing although they both met my forecasts by achieving new highs.

While the stock market has pressed higher and higher, it’s worth noting that semis, banks and transports, three of my four key sectors, are not making new highs for the rally. Tuck that under your cap but don’t forget about it. Discretionary on the other hand is a sector I offered as a solid trading opportunity on December 16. At that time, it looked coiled up and ready to bust higher. Today, we can see it below and it has been a nice little run.

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The Masses are Wrong! The Truth About Santa and the Last 5 Days of 2019

Let me begin by wishing all those who celebrate a Merry Christmas and Happy Hanukah!

Historically, the last two weeks of December is one of the most favorable times of the year and that lasts through early January. The traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve and last until the close on January 3rd. In other words, the last five trading days of the year and first two of the new year.

Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” Well, I am not going to go into that now. Let’s see if Santa decides to reward all his little investors. I will quickly say that while Yale posited that a bear market would ensue without Santa, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.

For my research, I separate the SCR from the last five trading days of the year (L5). While they have significant overlap, we often see larger than normal moves during this time and SCR and L5 can yield different results. What I try to assess is what is likely to occur over SCR and L5 each year based on the stock market’s performance during Q4 to date as well year to date.

2019 is very much the opposite of 2018. Going into this period last year, Q4 and 2018 were negative which led to positive SCR and L5. This year, we have Q4 and 2019 being very strongly higher as we enter SCR and L5.

Based on history and a little filter I added, here are the probabilities of higher prices.

Using just Q4, there is a 68% chance SCR is positive and only 42% chance L5 is positive.

Using 2019 YTD, there is a 71% chance SCR is positive and only 40% chance L5 is positive.

This says that putting new money to work for what is perceived to be a slam dunk into year-end is anything but. However, if L5 is negative or if there is a a quick rinse lower, there is a better likelihood that stocks bounce the first two days of 2020. I know. I know. Who really cares about the next 7 trading days? You’re right, but it’s still interesting to analyze.

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Stocks CREEP Higher – Waiting on Santa

Let’s start this article with the big picture. The bull market is alive and reasonably well and will live on into 2020. Next year will likely present some challenges, but we will cross that bridge when I start to work on my 2020 Fearless Forecast. One thing is for absolute sure in my opinion; there will be fireworks in 2020!

For roughly a month, mostly on the blog, I had been discussing a stock market that was a little ahead of itself and then a little tired in the very short-term. In my lexicon, that meant I would hold the positions I had, but not add any new money nor increase risk. I did a pretty good of sticking to this although I did put some new money to work last week.

Over the past month, it certainly “felt” like stocks surged higher as they crept higher and higher almost every day. Before checking, I would have guessed that the S&P 500 was up by 5% since Thanksgiving. However, the real number is 2%, certainly nothing to sneeze at, but also not the melt up so many pundits have been forecasting.

Markets that creep higher and higher feel like larger magnitude moves as they occur because the pullbacks are so brief and shallow. Creeper markets also tend to give back so much of the gains in one fell swoop down the road. I will not be surprised to see that happen sometime in Q1 2020.

Anyway, since the little post-Thanksgiving low on December 3rd, the stock market rally has occurred almost entirely at the open. That’s not a bad thing. That’s not a good thing. Below you can see an hourly chart of the S&P 500.

Look at all of the areas where there is no red or green candles. Those are the gap up openings. Each one is followed by the market going sideways for a period of time before gapping higher again. One thing we should look for is a change in character where stocks gap higher, but instead of going sideways and then higher, they just sell off and don’t immediately recover.

Now, my valued readers, before you stop reading and start thinking that the most bullish person out there has turned negative, think again. I am only talking about short-term noise, at least for now. Under 5% moves. There are many concerns about the frothiness of investor sentiment (and it’s really greedy out there now), but I am going to wait and cover that another time.

Historically, the market is in the midst of one of the most favorable times of the year from now through early January. And the traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve. That’s five trading days before year-end. Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” While Yale posited that a bear market would ensue, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.

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2019 A LOT Different from 2018 – Fedex Vomits on Itself

Stocks have really quieted down of late, but the bulls have been relentless. Each and every day seems like a slow drift higher. What has historically been a very reliable soft patch into mid-December is not arriving in 2019 or if I wanted to claim victory like those who can never be wrong, I would just say the two-day decline early in the month was it. That’s not exactly what I was looking for, but you always have to roll with the punches and take what the market gives you.

A year ago at this time, stocks were breaching critical price levels and beginning one of the most vicious selling waves of the past 100 years, not to mention the worst December since 1931. 10 straight days where the S&P 500 closed lower than where it opened. Almost no security was unscathed except for those involving fixed income.

Today, we don’t have the exact opposite, but it’s certainly in that direction with lots of stock market melt ups and taking on more risk chatter from the pundits. While they could and may happen, I don’t know how people wait so long in a rally before all of a sudden proclaiming that the good times are here. It seems crazy. Where were all these people when smart money was pounding so hard on the table for all-time highs this year when the Dow was below 24,000???

Last night, Federal Express missed earnings by a wide margin and the stock is in the toilet today on historic volume. The bulls really want to see the stock close where it opened, if not higher than that for any any hopes of a year-end bounce. For those wondering about tax loss selling in Fedex, I am not so concerned since the stock is less than 10% this year.

What I am concerned about is my call for the transports to play catch up and break out to the upside over the coming weeks. Fedex’s flop doesn’t make this easy as I was counting on Fedex not disappointing to at least not hurt the sector. Now, we need some big help from the rails and/or the airlines, which is possible but not as easy as I thought it would be.

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Bulls Powering Through Short-Term Fatigue

With the Fed, UK elections, tariff deadline and impeachment seemingly all out of the way, stocks continue to forge ahead, even in the face of some short-term fatigue. That’s obviously¬† bullish in and of itself. As I mentioned last week, it is very tough to see any kind of measurable selling this late in such a strong year. Something would really have to come out of left field.

I have spent a good deal of time on small caps of late, and more specifically small cap value. I continue to like that play into year-end. Semis have been my favorite sector for almost all of 2019, but it’s really hard to throw more money at it given its run and relentless surge this month. Banks and financials recently broke out and they should have legs higher. Transports seem to be teasing me, but I still have conviction that they will play catch up in a big way sooner than later. And discretionary which I wrote about here, are on the verge of a very interesting breakout. This could be a fun sector to trade with a very favorable risk/reward ratio.

I haven’t discussed the NYSE Advance/Decline Line lately, but just like so many other things in the market, it is behaving perfectly well. It just keeps scoring new high after new high. And as I have said time and time again for years and years and years, bull markets do not end with the A/D line at new highs, at least they haven’t 90% of the time. Those are odds I will take every single opportunity I can.


Finally, I can’t tell you how many people scoffed when I started talking about Dow 30,000 before all was said and done. Don’t look now. That’s only 1700 points away…

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Small Cap Value FINALLY Breaks Out – Stocks Tired

Going in to this week, the markets had four big issue to deal with. The Fed, UK election, Dec 15 tariffs and impeachment. I really thought one of the first three would have caused one of those 1-3 day shakeouts into the usual mid-December low this or next week. That certainly hasn’t been the case and as I have said all along, I think impeachment is a just a media distraction and nothing to take seriously for the economy nor markets.

We left off on Fed day and as expected, there was no reaction at all to the lack of action nor Powell’s press conference. Stocks were strong on Thursday after yet another one of President Trump’s tweets regarding the trade talks with China. And silly me thought Phase I was already completed and we were just waiting for the papering, at least that’s what we were told last month.

Stocks definitely look a little tired and I won’t be surprised if we see red arrows to close the week. Small caps are stepping up, something I have been mentioning as a precursor to the next leg higher. Below is a change from the Russell 2000 chart I have been showing, but it’s certainly very similar. It’s the Russell 2000 index of value companies instead of all companies. It was the last small cap component to break out above that blue horizontal line which it did on Thursday.

Bulls will argue that this is an important change that signals higher prices while bears are hoping that price immediately fails, traps the bulls and returns into the range. I won’t be surprised to see both parties win here.

Nothing is really changing on the sector front. My favorites remain strong with semis and banks leading the bulls’ charge. Discretionary continues to percolate while transports should be getting ready to bust higher. Since the little low 10 days ago, energy has quietly surged, but because of how decimated it has been, I am not getting too excited just yet.

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Fed to Stand Pat – Still Operating on Powell’s Dramatic Change

What to Expect Today

The Federal Open Market Committee (FOMC) is going to do absolutely nothing today at 2:00pm regarding interest rates. The market is expecting nothing and nothing it will get. Any other action would be a total and complete shocker. In fact, at this point, the market isn’t pricing in any FOMC action until the very end of 2020 where a rate cut is expected. Keep in mind that market expectations even a quarter out don’t amount to much, let alone a full year out.

With stocks so close 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,the usual parsing of every single word and change from the last statement on October 30 will take place. In this regard, I do not expect much in the way of market moving news.

Invoking Paul Volcker

On October 30, Powell & Co. basically said that they were not going to raise rates again until inflation at least met their 2% target. Moreover, they opened the door for inflation to exceed their target before they took action. In other words, the Fed is now okay with inflation running a little “hot”. How almost ironic that in the period that the FOMC not only begs for inflation, but wants it “hot”, former Fed Chair Paul Volcker passes away. Many will remember Volcker as the Fed savior in the 1980s who kept raising and raising interest rates to combat what had been very troublesome inflation. Some will remember those W.I.N. buttons which stood for Whip Inflation Now. Short-term interest rates rose to almost 20%. I personally remember money market rates in the teens as I first invested my bar mitzvah gifts before moving to stocks. You can look at the chart below to see the history of short-term interest rates controlled by the Fed.

I remember my grandfather buying a lot of triple tax free New York City municipal bonds in the late 1970s and early 1980s which were yielding more than 25% as the city was on the verge of bankruptcy. He told the family one holiday that the United States would never, ever allow the most powerful and prominent city on earth to default. I had no idea what it meant at the time, but he was certainly right. As the years went on, he would see bond after bond be called away and/or finally mature in what he always said was the investment of a lifetime. Until he passed in 1999, he would often complain about the paltry single digit yields from newer muni bonds although he ended up buying Mobil with its fat dividend yield with some of the proceeds.

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 near 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 although stocks did rally on October 30th.

Below is a wonderful chart courtesy of the great Rob Hanna from Quantifiable Edges @quantedges which shows just Fed day stock market performance by Fed Chair. While Powell’s tenure is young, it is not enviable for the bulls.

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.

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.

Jay Powell began his term as Fed chief by essentially saying that enough was enough and he wasn’t going to be beholden to the markets. And to his credit, he did live up to that statement all the way to January 2019 when his famous or infamous 170 degree turn took place after stocks saw that very minor decline of “only 20%” in short order. Then, much to his supporters chagrin, Jay Powell turned into Janet Yellen, Ben Bernanke and good ole Al Greenspan all wrapped up into one. He waved the white flag, much to President Trump’s delight, and declared that he was simply going to give the market what it wanted going forward. The last part is an exaggeration, but that’s effectively what he did.

Something must happen when one becomes the most powerful central banker on earth. The term “not on my watch” is taken to a new level. No one wants to be the one who kills the golden goose of a rising stock market, extended business cycle if you can even use that term anymore and general prosperity. And this all happens with the quiet understanding of “whatever it takes”. So many of us have poked fun and criticized former European Central Bank Chair Mario Draghi for essentially saying the exact same thing when it came to saving the Euro currency. At least he had the gumption to overtly state it.

The Fed doesn’t want to upset the financial markets. And that’s understandable. 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.

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Small Stocks Continue to Look Interesting

For the past few weeks, I have been mentioning the action the Russell 2000 index of small cap stocks. Along with the S&P 400 index of mid cap stocks, this group has been lagging the returns of the more popular Dow, S&P 500 and NASDAQ 100. I continue to believe the Russell’s fortunes are changing, if only for a short period of time.

Below is a chart I have shown a few times before. It’s the Russell 2000 with the most widely watched horizontal line (blue) in the markets. The masses were watching to see if the Russell could finally break out above the line and stay above the line. While the jury is still out, I do believe that is happening and will happen this month.

Let’s also remember that seasonally, December and the first part of January is historically strong for small caps versus large caps. While that doesn’t mean it occurs every single year, 2019 certainly looks like good risk/reward.

Over the coming week or so, there are enough macro events that some downside volatility should not be surprising. The Fed meets on Tuesday and Wednesday. Impeachment proceedings continue. Trump’s deadline of December 15 for more tariffs looms. As I write about every year, it’s very difficult to see significant and sustained downside so late in the year. Obviously, it’s not 100% as 2018 and 2000 were ugly, but as you knows, the odds don’t favor it. And this year with stocks up by a healthy margin, it’s going to be even more difficult for the bears to make much noise until 2020.

Stocks could certainly revisit or even slightly and quickly breach last week’s lows, but that would present yet another buying opportunity for new highs into January.

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Was That All?

On Wednesday, I wrote that stocks were supposed to bounce and not to be surprised if they regained all they lost a few days earlier. However, the odds did not favor the whole pullback/consolidation being over. I am still in that camp although with this morning’s much stronger than expected employment report and the pre-market surge, I guess I have to be open to the notion that the little bout of weakness is over. We will certainly see in the coming days if all of the major stock market indices can hit fresh highs.

As I have mentioned for a month, by turning neutral to slightly negative in the short-term, it simply meant that I was basically in a holding pattern and not committing new money to stocks nor raising risk levels. In a perfect world, any pullback would be used to make some small modifications for the run into year-end I have been discussing.

I have been saying that leadership from the Dow, S&P 500 and NASDAQ 100 should cede to the lagging S&P 400 and Russell 2000. I continue to believe that with the two latters finally hitting all-time highs early in 2020. My four key sectors are all in good shape. Semis and banks continue to lead and be strong. Transports have a strong ceiling overhead but I expect that to be breached in early 2020.

Discretionary offers an interesting opportunity as you can see below. Price has been in a range for 6 months with continued compression. Highs are lower. Lows are higher. Think of a coiled spring. Usually, prices will ultimately continue with the previous trend, in this case, higher. Sometimes, prices breach one side first as a fake out and the immediately head in the opposite direction, trapping the masses. In this case, while I believe the upside will win out, it doesn’t pay to take a stance right here.

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