Archives for February 2020

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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