Archives for February 2020

Coronavirus & Stock Market Playbook

As I mentioned the other day, I have been reading an incredible amount, just like many of you, about the Coronavirus. I even pestered a relative at the CDC as well as my friend who runs a research lab at Yale for their opinions. Interestingly, the professionals are a whole lot less alarmed than the masses. The two I annoyed both texted me science articles of why Corona is just another in a long line of bad viruses to be spread around the globe. And they both thought there would be more in the coming years.

Shortly, I will be flying internationally and then to California and I don’t feel overly concerned about my health and well being. Perhaps I am being complacent or just stupid. Coincidentally, we just updated our wills this week, having absolutely nothing to do with Corona. It was just time, and the need to make sure my kids vie for most favorite child status. Of course, I am kidding. My wife doesn’t like when I talk about my mortality. After all, the day before I was hit by that silver maple tree last May, I was reviewing my emergency business succession plans with great friend, Sam Jones. And then Teri had to call Sam from the ER to let him know what happened. As you would imagine, Sam thought she was kidding.

People at Risk

Anyway, I found the chart below interesting from LPL’s Ryan Detrick. As the experts have been telling us, the virus is most dangerous to those with compromised immune systems, including older people, smokers, diabetics, etc. If you believe the stats, while the virus has higher mortality rates than influenza and SARS, it’s still in the low single digits and that may be overstated.

I found this wonderful post on Twitter with comments from Professor John M. Nicholls, department of pathology at the University of Hong Kong. There is so much hysteria surrounding this because of the speed of the outbreak and difficulty in detecting it. Even our own officials are contributing. But Spanish Flu? Really???

EVERYONE should read it and judge for yourself. https://twitter.com/saxena_puru/status/1227065623139606533

When I read Professor Nicholls and get laughed at from the experts whom I know, I almost feel silly having discussions about “what if” with my wife if the virus doesn’t die out by the summer. But just like I try to do with our clients’ portfolios, there is always a point where action needs to be considered or taken. I just prefer it from strength instead of weakness.

From All-Time Highs to Three Month Lows in One Week

And that’s a good segue to the financial markets which have been under tremendous attack for the past 6 trading days. Just last week, stocks were making all-time highs. In just 6 trading days, stocks are making three month lows and down 10%. As recently as last week and for all of 2020, there has been a dearth of reasons why stocks could go down more than 5% as all of the big picture concerns had been eradicated.

Of course, we have seen market sentiment go from overly bullish in November, to giddy in December to exuberant and greedy in 2020. As I have said in the media and written about many times, markets with that kind of sentiment backdrop that just keep grinding higher and higher each and every week eventually get punished with a short, sharp and sometimes terrifying elevator shaft drop that usually scares all of the Johnny Come Latelys out of stocks and back to bonds or cash. The problem is that greed is not a good timing tool to forecast an imminent decline, just like valuation isn’t. Investors can get greedier and greedier just like stocks can and do get more and more expensive until here is always a catalyst to change course.

An issue for me this time, which is why I didn’t start pounding the table that a large decline lay ahead, was that the market’s foundation was fairly stable and arguably strong. I will be emailing part I of Canaries in the Coal Mine shortly, when market volatility calms a bit. The key takeaway will be that the while the bull market is wounded, it nevertheless remains alive and poised for Dow 30,000 before the election. That’s a big statement to make amidst a panic crash.

Carnage and Escape

To get a feel for the carnage on Monday and Tuesday which was extreme, only 10% of stocks traded higher on each day, meaning 90% went down on back to back days. As you might expect, 90% of the volume on each day was in stocks going lower. That just doesn’t happen very often and never so close to all-time highs. Really, the only way it could have happened was with the historic level of euphoria in stocks as everyone went all in.

What escaped the wrath? Certainly not gold as many pundits predicted. Gold had been very strong since early February, but began to look tired. On Twitter, I shared that I expected gold to see a short-term peak Monday morning. The sector has been down since.

Normally, during periods of market stress, the U.S. dollar acts as a safe haven investment. But not this time as the greenback has gone down over the past week and the yen and euro have rallied. along with U.S treasury instruments which see economic weakness and a potential Fed rate cut coming.

What’s going on today “feels” a whole lot more unnerving that the Fed being too restrictive or a war in the Middle East or China slowing. This market correction is based on a health crisis that can impact more than just our investments. However, I am anything but a scientist, let alone an epidemiologist, and regardless of the reason, markets trade between fear and greed. Human behavior hasn’t changed in generations and it’s not changing now. The markets don’t know Coronavirus from Corona beer and nor do they care. They are trading lower on extreme fear which will eventually lead to an extreme bottom and strong rally. In fact, I believe we will see fresh, all-time highs by summer. That forecast is predicated on the virus slowing and then dying out as the weather in the northern hemisphere warms.

9/11

This correction looks a lot like what we saw post 9/11 when the media had a constant barrage of scary headlines that it was unsafe to travel and the whole world would tailspin into a deep recession. Of course, it didn’t and the recession was mild, barely noticeable by people outside the travel and hospitality industry. In the here and now, Corona could certainly end up being that very mild recession I have been forecasting. However, the origin would be from not being able to get supply rather than the usual  plunge in demand. I can’t find another instance in the past 100 years.

Market Playbook

The market is pricing in some very nasty Q1 and Q2 earnings reports and economic numbers. We will start to hear from thousands of companies warning of this very shortly. I sense that the stock market will begin to hammer out its internal or momentum low in the coming few days. From there, a strong bounce should follow with perhaps another bout of selling later in March or April, something we did not see post 9/11. After that, new highs are in order for summer. While volatility should continue to run high, I think the market is in the worst of it right now. Again, crash mode usually means that the market is close to a low in time, but price is another story. That’s the playbook.

Market declines are always a good time to take your temperature on risk tolerance and investing objectives, something we have been doing with clients for a few months. If the volatility is too much for you to comfortably handle, then perhaps your risk tolerance and investing objectives should be taken down a notch or so.

 

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Putting 1000 Points into Perspective & Selling Gold

Stocks are set for a feeble bounce at the open today after a 1000 point drubbing to begin the new week. 1000 Dow points today equals roughly 3.5%. While Monday was the third largest point decline in history, it only ranked as 254th of all declines since 1896 according to my friend Ryan Detrick from LPL. Since 1950 there have been 103 3%+ declines in the stock market.The crash of 1987 was 22.5% in one day. Today, that would have equaled 6500 Dow points! It’s all about the law of large numbers.

After a massacre like we saw on Monday, I would have much preferred another ugly down opening than a feeble bounce like looks to be the case. Another big red open would caused more panic, probably cleaned out short-term sellers and then allowed the market to attempt to stabilize and begin to repair. Unless we see a massive snapback today, I think the decline will continue in the short-term and the bottoming process will take more time to develop.

On Twitter yesterday, I opined that gold looked to be peaking at the open and that was confirmed, at least for me, during the day. I felt even more comfortable when I saw gold pundits in the media all recommend buying the metal. Below is a chart of gold. You tell me. Would you rather be a seller or buyer yesterday?

People always assume that I was swamped on days like Monday. The truth is usually the opposite. If I wasn’t smart enough or our models didn’t position ahead of the decline, it’s highly unlikely that I would be doing any selling, except for things like gold and gold stocks which had gone vertical and warranted a sale. On the buy side, if the decline was longer in the tooth, I would have used the down open to buy 1/2 the position I wanted to own and then look to the close to add the other half.

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AH HA! The Gap of Recognition? Corona Crash

Global stock markets are red and very ugly as the Coronavirus has been spreading to European countries like Italy. I think the problem is that the markets don’t know what they don’t know. In other words, there is a world of uncertainty out there and that’s unlikely to change anytime soon. As I wrote last week, the market doesn’t care until it cares and then it really cares.

Over the past two months, I have repeatedly written about bullish sentiment that became giddy, euphoric and finally greedy last month, the likes of which haven’t been seen since the Dotcom Bubble. However, historic sentiment didn’t imply an impending market peak. It rarely does. It sucks people in over and over and over again until something sparks a decline and the excuse is there for stocks to go down. When markets grind higher like we have seen since October, that first decline quickly wipes out the Johnny Come Lately investors in a severe bout of punishment, like we are seeing right now. Corona may be blamed,  but stocks were just looking for a reason to go down.

I think another issue with the virus is that there is not a chorus of scientists and experts all concluding the same thing. That group seems to be all over the map, including some who believe the virus was created in China’s bio-weapons lab in Wuhan and accidentally released. There was even an uber conspiracy theory that the “deep state democrats” created Corona and somehow shipped it to China in hopes of tanking the global economy so Trump would lose. I spent a few hours reading various science articles online to get a feel for the best and worst case scenarios.

From what I read, the best case scenario is that while the disease has spread outside of China, cases in China are declining and the mortality rate continues to be relatively low at less than 5%. As the weather warms in the northern hemisphere, similar to influenza, Corona will begin to die out much like SARS did 17 years ago. On the flip side, there are concerns abound that the virus will not die out and the spread will only get worse as it mutates. If Corona is still headlines in June, we are talking global pandemic with the associated economic, financial market and geopolitical fallout.

While stocks are down, the major indices have barely hit the 6% mark and just about erased 2020 gains. So far, it’s anything but the end of the world or even the bull market for that matter. People are actually talking about the Fed “rescuing” the markets with another rate cut next month. That’s a head shaker for me. With record low unemployment, the Fed is going to cut rates?

I understand the big picture is about Corona disrupting supply chains and causing a massive global slowdown for Q1 and Q2. And that could even be the catalyst that tips the US into the mildest of recessions, something I mentioned last week. Remember, the landscape for recession was doused with fuel when the yield curve first inverted last summer. Corona could be that spark, something I did not consider as recently as last month. FYI, after steepening the yield curve is once again inverted, meaning that short-term interest rates are higher than long-term rates which chokes off growth as banks lose the incentive to borrow short-term and lend long.

In the here and now, we have a cranky stock market which opened sharply lower, creating a gap or window on the chart below. Long time readers know that almost every single 10%+ decline is accompanied by what I call the gap of recognition. It’s the point where investors realize they either own too much or not what they really want and don’t know how to untangle their mess as stocks open down in a big way.In essence, investors have the “AH HA” moment that stocks are correcting and they’re not prepared.

By the time stocks come back up to fill that gap or close that window, the decline is long over and the market is well on its way to new highs. We will know sooner than later if today’s open was in fact that gap of recognition. The next few days will be key as there was some damage done. The problem with my gap of recognition i that there are plenty of times where it looks like something bigger is unfolding, but that gap of recognition turns out to be the beginning of the end of the decline.

For the bulls, the best scenario would be another ugly opening, followed by firming into lunch and strength into the close. On the flip side, the bears would like a higher open that fails before lunch where sellers reemerge for another wave of lower prices into the close.

Finally, as I already mentioned, the bull market ain’t over. Bull markets do not end with a giant, outside the norm, putrid day so close to all-time highs. The rally from October may have ended, or at least the steepness of the advance. We shall see shortly.

 

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Coronavirus Back on Top. Japanese Yen Causing Dislocations.

Stocks had been trading pretty much immune to the daily headlines regarding Corona even though everyone had known there would be economic impact. It’s like everything else in the markets. It doesn’t matter until it matters and then it matters in a huge way. That was best seen in 2005, 2006 and 2007 with the financial crisis. Don’t misunderstand; I am not saying that Corona is anything like the financial crisis.

On Thursday and at least the morning on Friday, stocks are red and under pressure with the media blaming Corona. I get it. They have to blame something. I think the quiet culprit has been the Japanese Yen which has collapsed of late against the dollar as you can seen below.

Most people don’t know anything about the yen nor do they care. In the modern era, it has been a safe haven currency in times of financial stress, like 2008. For decades, there has been a common trade called the yen carry trade put on by big money more often than not. In short, investors borrow money in yen because rates were essentially 0% and then convert to another currency, usually the dollar, and invest that money in treasuries, MBS or even stocks. There is a mathematical relationship which investors use to control position size and risk. All goes swimmingly until the currency makes a huge move.

On Wednesday and Thursday, the yen made a huge move, like it has before, but the magnitude may have caused portfolio managers to take quick action without regard for price. Market dislocations catch many off guard. I am just speculating.

Anyway, stocks are clearly under pressure. All year, I have discussed the historic level of greed and euphoria in the market. Stocks only needed a spark to begin a pullback. I don’t think this will be a big one, but wiping out all of 2020’s gains would not be surprising. Mid and small caps have trailed for a long time, but they are outperforming now, including closing higher on Thursday with the market down.

Semis and tech getting hit the hardest. Lots of constructive action elsewhere. Defensive groups at or near all-time highs. Biotech looking good. Even materials look like they want to go up shortly.

It’s easy to not want to own a lot going into a weekend with Corona hanging out there. What if it doesn’t go away in the spring? What if China manufactured it in its bio-weapons lab in Wuhan? Lots of unknowns that won’t be known for a while. In a worst case scenario, this could be the catalyst that tips the globe into recession.

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Historic Greed. Media Day & Stock Picks

I am excited to co-host Yahoo Finance’s On The Move from 11:30am to 1:00pm today talking about the DNC’s debate last night, an historic level of greed in the stock market, NFL playoffs and a reveal of an upcoming ebook I am writing.

After that, I get to join my old friend, Charles Payne, on Fox Business’ Making Money at 2:00pm for a segment discussing the meteoric rise in stocks and where to put your money.

Yesterday from the office, I joined TD Ameritrade Network for a spirited market discussion along with some of my usual outside the box stock picks. I keep saying that it is getting harder and harder to find stocks that I want to buy right away since so many have rallied so much and are super extended.

When giving picks over the years, I don’t just “sell my book”, which means to throw out something you already own no matter what. I try to find something unique that’s not being discussed nor overowned and it’s at a point which makes to buy right now.

Apple isn’t a stock I typically talk about because everyone loves it and owns it. However, I did give Amazon as a buy to open 2020 as sentiment had become so negative for no good reason. I also gave an energy play which I thought would be a second half of 2020 play. That segment is HERE.

The segment from yesterday can be found below where I made my first ever marijuana pick, a sector I forecast to collapse two years ago. I also discuss biotech and 4.5% dividend yielder. All three picks look like they have the firepower for huge gains in 2020 if you can stomach the risk and they fit in your portfolio.

HERE

While On the topic of the TDA Network, here is the other segment I have done in 2020 also giving a bevy of unique stock picks including Warren Buffet’s Berkshire Hathaway, a totally unusual selection for me. There was a China play (yes, I know about Coronavirus) and an old stodgy telecom with a fat dividend that looks to have really nice upside.

HERE

Also, please know and understand that my clients may already own some or all of the securities I offer in the media and I disclose that as appropriate.

Markets are a tad more volatile of late, but the bull remains large and in charge. The historic level of greedy sentiment remains in place and in fact, emboldened by each new high after a one or two day pullback. Greed gets punished severely, sooner or later.

After making literally hundreds of upside projections in the Dow Industrials since the bull market began in 2009, the last one, 30,000, remains in place. Surprisingly, unlike the past 11 years, the computer has not spit out an “if then” next target. I guess we will see what happens at Dow 30,000. Yes, I am still bullish over the intermediate and long-term.

Tomorrow, I will be working on Canaries in the Coal Mine.

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January Barometer – Another Indicator to Debunk or Not

During the end of January to early February each year, there is an annual discussion regarding the January Barometer, another indicator which supposedly has a great track record of predicting the return for the calendar year. This indicator was created and made popular by Yale Hirsch, founder of the Stock Trader’s Almanac. Basically, it says that as January goes, so goes the calendar year.

Simple enough, right?

The Almanac claims a “success rate” in excess of 80% which seems pretty darn good, at least on the surface. The first problem is that their research includes the month that just concluded. In other words, you couldn’t act on the January Barometer until February 1 to stay invested the rest of the year, but Hirsch included the entire year in his calculations.

Adding on to that, he never calculated just February through December returns to see if there was really a predictive edge. Finally, to make the study worthwhile, you would have to compare it to any random year being up or down.

There are all kinds of ways to massage and the manipulate the data. I am going to start with some big picture summary stats courtesy of Ari Wald from Oppenheimer, one of my favorite weekly reads on the markets and an all around nice guy.

Since 1928, February through December has been up 71% of the time. That’s the random number to compare. The median gain has been +8.2%.

Since 1928, February through December has been up 78% of the time following a positive January. The median gain has been +8.6%.

Since 1928, February through December has been up 59% following a negative January. The median gain has been +2.4%.

Based on the numbers from Oppenheimer, the January Barometer certainly looks actionable after an up January. Now, let’s massage the data a little differently and more granularly thanks to some help from my long-time industry friend Tom McClellan of McClellan Oscillator and Market Report fame with some truly outside the box analysis.

Tom broke up the January Barometer into various periods to see if there was consistency. Here is what he found.

From 1928 to 1949, an up January led to the rest of the year being up 50% of the time.

From 1950 to 1969, an up January led to the rest of the year being up 80% of the time.

From 1970 to 2019, an up January led to the rest of the year being up 64% of the time.

From 2000 to 2019, an up January led to the rest of the year being up 55% of the time.

This suggests that the 1950s and 1960s were more of an outlier than the norm. Like the First 5 Days of January barometer, this barometer looks much better on the surface versus random than when you dive into the details. As with so many historical trends, the markets have arbitraged the edge away over time.

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Bulls Running. All Not Great. Dollar Surges w/ Silent Media

After stocks peaked a few weeks ago and the Coronavirus was blamed, I talked about a trading range setting in as one of my three scenarios. That scenario was the most middle of the road. With the S&P 500 and NASDAQ 100 scoring new highs, the most immediate negative scenario has been ruled out. We are left with whether stocks will pause and remain in the loose range or accelerate to the upside and run higher.

There is clearly an issue with the S&P 400 and Russell 2000 so all is not as well as it has been. Semis are no longer leading and powering higher. Banks and transports are struggling. Only discretionary is looking strong from my four key sectors. To boot, defensive sectors like REITs and staples quietly lead, something I would rather not see.

High yield bonds are getting close to new highs and the NYSE A/D Line is confirming the rally in stocks, so it would be hard for the bears to make meaningful headway. Perhaps, stocks will continue to rally, at least in the short-term, to create more meaningful concerns before a real pullback begins. It’s very hard to bet against the bulls until more cracks in the pavement appear.

Interesting to note that the dollar has gone straight up since mid-December, something the media has completely ignored. I always find it funny when stocks going down and the dollar rallies, the stories all “of course. that’s what happens”. However, when it doesn’t fit their narrative, all you can hear are crickets.

It’s definitely time for a full canaries in the coal mine issue and I will try to get on this today or tomorrow.

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I Didn’t See That Coming

While I was looking for the stock market to begin the bottoming process on Monday, I definitely did not think that stocks would literally rip to new highs in three days. That was a much less likely scenario and one that would bother me. To be exact here, the NASDAQ 100 is at new highs with the S&P 500 right there. The Dow, S&P 400 and Russell 2000 are not. We will see where they end up at week’s end.

As far as leadership goes, we need to see a better job. Right now, only discretionary is pulling its weight. I also want to see some of the defensive groups back off. Energy has been absolutely decimated this year and regardless of where it may bounce in the short-term, the sector does need time to repair the damage before it can begin a sustainable rally.

What may be taken as me being negative is buoyed by looking at high yield bonds and participation. The former is close to fresh highs and it’s very difficult to begin a serious decline with junk behaving well. The latter, measured by the NYSE A/D Line, is also acting strongly and should run to new highs soon.

Unless my short-term concerns are completely unfounded and stocks are set to explode higher, the case for a trading range still makes sense, at least to me.  While I remain positive on the stock market over the intermediate-term, it wouldn’t be the worst thing to see some sideways activity this month.

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Not Looking Like a Full-Fledged Correction

On the surface Friday looked like one of the those “puke” days when anything and everything go down. It was an ugly day, but I didn’t see evidence of investors in full panic mode nor selling at any price just to get out and relieve the pain. Friday looked like the makings of an internal or momentum low where selling and would be at its worst for this decline. Of course, one day later, it’s only a guess until there is more to view.

Except for the NASDAQ 100, all of the other major stock market indices got in gear to the downside and wiped out all of January’s return. Yes, January was a down month which will spark cries that 2020 will now be a down year based on the half-baked idea of the January Barometer. I will have more on that in a different post. Right now, the NASDAQ 100 is the lone “go to” index” which somewhat flies in the face of my forecast that 2020 will not be nearly as rewarding for tech investors as 2019 was. It’s a long year and like my thinking that energy will be a later in the year positive story, tech must take some time to cede its leadership position.

Looking at sector behavior, I see a number of sectors which are behaving better than the stock market and they are not just the defensive ones, REITs, staples and utilities. Software, internet, financials and discretionary are all hanging in, something you would not see if this decline was just getting going and accelerating to the downside.

High yield bonds have been hit, but so far, they are holding well above last Monday’s levels, another positive.You can see the chart below.

Stocks are looking higher at the open as The People’s Bank of China, a name that always makes me chuckle, is injecting more than $100 billion into their system as markets reopen after being shut down last week for the Coronavirus. Between that and the feeling that markets might start becoming a little less sensitive to the virus, we could be in the embryonic stages of a little bottom forming.

We still have the Iowa caucuses, a slew of earnings and the employment report this week so I would not bet on a quiet week. I think buying the dip will be rewarded.

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