Pullback in Motion. Dow by Itself.

The Dow has now seen three straight days of negative behavior but the index remains a whisker from new highs. The big picture reveals some almost precedent setting behavior in the Dow as more stocks are closing lower than higher as the Dow was hitting all-time highs. That’s not your typical sign of strength.

The S&P 500 and S&P 400 are a little weaker with the Russell 2000 and NASDAQ 100 a little more so. The pullback I have been discussing all month is here as I mentioned on Monday. I still not expect it to be anything major, significant or worrisome. In fact, it could even just be a sideways pause.

While overall sector leadership remains very constructive, semis are extended and transports and discretionary need some time here. Banks are stepping up and they should see new highs later this quarter. High yield bonds finally pulled back and the NYSE A/D Line looks to be rolling over in the short-term. This is all happening against the backdrop of strong earnings which are being sold into. Buy the rumor, sell the news.

Long time readers know my theme of a secular bull market in the dollar that has been put on hold in 2017. Don’t let the media fool you. The bull market ain’t over. The greenback bottomed and is rallying again. The euro is in big trouble as is the yen. They should both be going sharply lower next year and after that. It’s going to get ugly.

If you would like to be notified by email when a new post is made here, please sign up HERE

Stocks Looking Down After Rate Hike

Everything happened as expected on Wednesday. Stocks stayed in a tight range until 2PM. The Fed raised rates. Yellen spoke about reducing the balance sheet. And the bullish Fed trend was significantly muted. Given how stocks closed, there is a very short-term trend which indicates lower prices today and possibly into next week. However, with the stock market set to open lower, the opportunity to take advantage is likely gone.

The Dow is now the leading index and that’s not the index which typically leads in the healthiest of markets. I don’t expect this to continue. Mid caps have really started stepping up with small caps not looking as dead as they did a short time ago. The NASDAQ 100, on the other hand, looks like it has more downside ahead with some sideways movement coming after that.

As I always say, it’s not what the news actually is, but rather how stocks react. On Fed day, we saw good behavior from industrials, healthcare, home builders, banks, staples, discretionary, REITs and utilities. Read that sentence again. For the most part, those are not the same leaders as we have seen. Rather than the rally ending, it looks like it’s morphing after two “shock” days (big down days out of nowhere) in tech over the past month.

Now, tech may be done leading for a while, but it doesn’t look like the rally is over. Sure, we could see a pullback, but that would be yet another buying opportunity in a long line of successful opportunities.

If you would like to be notified by email when a new post is made here, please sign up HERE

Fed to Hike Rates Today In Spite of Falling Inflation. Dow 23,000 Next

Model for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Five meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 75%, however with the bulls using a lot of energy over the past few days, that trend’s power has been muted significantly.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

It’s also June option expiration week which has historically added a nice tailwind to stocks. So far, that tailwind has been seen just on Tuesday.

1/4% Hike Against Mixed Economic Picture

Janet Yellen and her friends at the Fed have done an excellent job of preparing the markets for another rate hike today. They have been chatting up a storm in their speeches and it’s also Yellen’s quarterly news conference and economic outlook update. I would be shocked if more than Neel Kashkari dissented.

While most pundits forecast two rate hikes in 2017, I have been very clear that those expectations are too low. In my 2017 Fearless Forecast, I offered that,

“While the market is pricing in at least two rate hikes this year, I think they are on the low side. I would not be surprised to see a minimum of four increases in 2017 with the risk to the upside.”

The flaw in my thinking is that I did not believe a change in the balance sheet would be a 2017 event. We will likely hear otherwise from Janet Yellen today. Markets are expecting to learn of a plan outline to begin to curb asset purchases by the Fed sooner than later. That should eventually lead to letting assets organically roll off the balance sheet rather than outright sales in the open market. The markets would be very surprised and caught off guard if Yellen speaks about a plan to sell bonds in the open market any time soon.

I would say that today’s move has a 95%+ certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Banks will then raise the prime lending rate and other rates will move off that. While the economy continues to improve, Q1 GDP was less than stellar although recently revised higher. My own work suggests that Q2 could see GDP grow close to 3% with Q3 perhaps even higher.

Monthly job creation has been very strong in four of the past five months. Only March was a lemon. I expect the growth trend to continue. The official unemployment rate hasn’t been lower since 2001 and the “real” rate or U6 is down to 8.4%, the lowest since 2007. This data certainly support a hike.

The chink in the armor and what Neel Kashkari may cite if he votes against the hike is the recent decline in inflation. From a 5 year high of 2.7% in February, the consumer price index declined in March, April and May to 1.9%. That is exactly what the Fed does not want to see as it tries to normalize interest rates.

Velocity of Money Still Collapsing

Turning to a chart I continue to show time and time again, below is a long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates

Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in www.investfortomorrowblog.com and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years.

As I have written about, I truly believe that one of the main reasons Yellen and her inner circle worry about raising rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom.

Below is a chart I continue to show at each FOMC meeting. While Dollar Index bounced around between the blue lines after that huge rally on the left side of the chart, all was very well and that was normal and expected behavior. When price broke above the blue line late last year, I thought the next big move had started. I was clearly and definitely wrong.

In the strongest bull markets, price should not have declined much below 100. This has been an unexpected turn for the worse. However, I am not ready nor close to being ready to abandon my long-term positive position. If my view is going to continue to pan out, the dollar will likely spend some time going sideways before gathering itself for a run to 104 and then much higher in 2018 and 2019.

I still forecast that the final bull market price peak lies ahead and at least towards the 120 level. Nothing has changed in my long-term view that the Euro will ultimately fall to all-time lows below .80 and the Pound under par. Those are the same long-term targets from 2008.

A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S.-centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000 (my most recent target), 25,000 and possibly 30,000.

What’s so bad about that?

Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

If you would like to be notified by email when a new post is made here, please sign up HERE

Fed to Hike Rates But All Not Well

Model for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Two meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, the upside edge is just outside a coin flip and certainly not worth playing based solely on this. While it’s also December option expiration week which has historically added a nice tailwind to stocks, that edge has also been a bit muted by the strength seen on Monday and Tuesday. On the bright side, there could be a strong and playable short-term trend to the downside starting by the end of the week, but we will have to see how the next few days play out.

1/4% Hike Against Mixed Economic Picture

Janey Yellen and her friends at the Fed have done an excellent job of preparing the markets for a rate hike today. I would say that it’s a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Whether you want to attribute it to the Fed making an independent decision based on the economic data at hand or that Donald Trump’s agenda is assumed to be very pro-growth or that Paul Ryan will be running tax policy or even that stocks have become a bit frothy, short-term rates are going up today and next year.

Looking at what the Fed is supposed to be basing their decision, the economy, we see a mixed bag. Over the past three months, we have created 156,000, 161,000 and 178,000 jobs in the U.S which seems pretty good on the surface. However, that’s 200,000 less jobs than 12 months earlier. The manipulated unemployment rate is down to 4.6% with the real or U6 rate at 9.7%. And while the consumer price index (CPI) has finally started to uptick after percolating for years, it’s hardly hot and worrisome. Our economic output, GDP, is improving and now stands at just over 3% which is also finally good news. I fully expect that to click between 3% and 4% in 2017.

Velocity of Money Still Collapsing

Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates

Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years. As I have written about, I truly believe that one of the main reasons Yellen and her inner circle don’t want to raise rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.

A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S. centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000, 25,000 and possibly 30,000.

What’s so bad about that?

Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

I understand why the Fed is going to raise rates. I truly do. However, given our current mixed economic picture and the weakness, deflation and accommodative stances of central banks elsewhere, I believe that Yellen and her minions are barking up the wrong tree.

If you would like to be notified by email when a new post is made here, please sign up HERE

Fed Model Says Rally. A November Surprise from Yellen?

Before I dive into the meat of the article, our market model for today is a plus or minus .50% move until 2 pm and then a rally into the close. Two of our Fed Statement Day (today) models are live and are very bullish with a success rate of 80%. We’ll see how that works out before long.

With the election just around the corner, it would be almost impossible to believe that the Federal Reserve would raise interest rates at the conclusion of their two-day meeting meeting today at 2 pm. And I do not believe they will move on rates. However, I would have thought the same thing about the FBI going public with their restarting the Clinton email investigation. It’s just been the most precedent setting election season of all-time and it’s not over. Who knows what else comes out between now and Tuesday morning?!?!

The surprise from the September meeting was that there were three public dissenters to the vote. That is the highest number I can recall and a shot across the bow for  Chair Yellen that a move, likely in December, is coming. We’ll see what the vote is today. It’s been pretty amazing that there has been almost none of the usual chatter on Twitter or on the financial channels regarding the meeting. Normally, my feed would be lit up with prognostications and commentary and the media would have multiple segments an hour. Hillary and Donald are sucking up all of the media’s bandwidth.

Looking at the employment picture, the economy created 156,000 new jobs in September and 151,000 in August. That’s certainly not an overheating economy nor an economy on the verge of recession. It’s just below warm. While our economy grew at a higher than expected rate of 2.9% in Q3, that wasn’t enough to balance off a weak 1.1% number for the first half of 2016. Additionally, inflation has been well under wraps not only this year, but every year since the financial crisis.

Long time readers know that I have been in the deflation camp since 2007 and remain that way until we have another recession. I offered comments about the economic indicators not because there are any startling revelations, but as another way to support the position I have taken since 2007. At every single Fed meeting since mid-2007 I have been in the accommodative camp, which meant either lowering rates or keeping them as is after they essentially hit 0%. For the record, I am not in favor of negative interest rates for now.

While the crisis has long passed for the economy and financial markets, we are still in a typical post-financial crisis recovery which I have written about over and over and over. Our economy will remain that way until the other side of the next recession, which should be mild and occur by 2019. That means very uneven growth that sometimes teases and tantalizes on the upside and terrifies once in a while on the downside. It’s very frustrating, more so now because we have complete, total and utter dysfunction in government that makes the Fed the only game in town.

As I have mentioned many, many times over the past few years, not only is Janet Yellen & Company taking into account the U.S. economy, but Europe and Asia as well as they debate policy. We may not directly care what happens abroad, but our currency certainly does. I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the left side of the long-term chart below.

Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.

dollar

Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

If you would like to be notified by email when a new post is made here, please sign up HERE.

Yellen Dousing Dollar & Stocks

After a big day for the bulls on Tuesday that did not close above the levels I spoke about to cause a spurt, stocks reversed on Wednesday and it looks really ugly on a chart. Bears will point to similar reversals at the major peaks in 2000 and 2007, which is true, but these kinds of reversals also occur routinely throughout a bull market. In analyzing their predictive power, they certainly have led to some short-term weakness, but the longer the time horizon, the less effective they are.

With Janet Yellen renewing her warnings that the Fed will raise interest rates for the first time since 2006 on December 16, the stock market is looking a tiny bit tired. The odds favor a very mild 2-4% pullback to set the stage for Santa Claus to come calling. This is a good time to prune and make sure you love what you own.

I am sure there will be lots of talk about the enormous rally in the Euro (fall in the dollar). It became a very crowded trade, especially in the hedge fund space (sheep & lemmings) on a leveraged basis. I do not believe the dollar trade is over, not by a long shot. I still think the Euro is heading to all-time lows below 80 by 2018 and the Yen will drop by another 25-50%. This is a shake out to rid the trade of weak handed holders.

If you would like to be notified by email when a new post is made here, please sign up HERE.

Modern Day Cold War?

Geopolitical news now dominates the news cycle with nothing more front and center than the sudden and disturbing turn of events in Ukraine. It’s hard to believe that after spending $51 billion to showcase Sochi and build goodwill throughout the world, Russia has effectively hit the delete button on the whole winter Olympics with aggression in the Crimea. Is an invasion of the Ukraine next? The odds are probably 60-40 in favor. It’s something that really makes you scratch your head, not so much their actions, which are bad enough, but the incredibly poorly timing. Olympics and G-8 Summit all in your newly created destination resort have now been reduced to nothing more than a footnote. Is this a prelude to a new modern day Cold War?

World markets will likely open sharply lower on Monday with gold, the dollar and treasury bonds all expected to rally as safe haven plays. Is the bull market over? Not by my count. Is this the beginning of the long awaited 10%+ correction? Possible but not probable. Without any market action yet to factor in, this should be just another routine and healthy pullback to buy unless Putin really goes off the deep end. I will be keenly watching how the leading sectors behave this week as we head into the February employment report on Friday.

Speaking of Putin, I am sure every psychologist and psychiatrist on earth would like to examine him and his mental state for the timing of this action. I don’t think the action itself is totally surprising since he already knows that the U.S. and Europe will sit idly by as our interests are not at risk. Sure, there may be some economic sanctions, but I don’t think Putin really gives a hoot about them. He seems intent on rebuilding some facsimile of the old Soviet Union.

After President Obama warned Syria’s Assad against using chemical weapons on his own people and then double warned him and perhaps even triple secret warned him, what happened? He gassed his own people without even a single repercussion from the almighty United States of America. So it’s a pretty safe assumption that Putin isn’t really worried about America or Europe getting involved against Russia.