Key Sectors Holding Up Otherwise Weak Market

Last week, I voiced a little more concern about the stock market as the S&P 400 and Russell 2000 broke to the downside from their trading ranges. So far, they haven’t been able to regain previous levels. Now, we have the S&P 500 and NASDAQ 100 trading at the lower end of their ranges and it looks like stocks have further to go on thew downside before finding more solid footing.

As I have said for months, based on market history, the challenging party needs a lower stock market to have a chance to win. For this election, the number has been 18,000 although the lower the better for Donald Trump. At the same time, I have been using the biotech sector as a bellwether for Clinton’s chances of victory. Interestingly, biotech has been falling sharply since late September which runs counter to the polls and latest email scandal. Of course, fundamentals in the group could be overpowering political models.

On the key sector leadership front, semis, banks and transports have been strong and really holding up the market. Only consumer discretionary hasn’t been cooperating. While utilities have bounced back nicely, staples, REITs and telecom remain laggards which should be good stocks over the intermediate-term.

High yield bonds, which have held up very well are now under modest pressure, another small concern. Although stocks have struggled, treasury bonds are not providing the expected safe haven, even though commodities have also been hit. Adding it all up, you have a bit of a liquidity problem in the markets as it appears investors are building cash positions for now.

The Fed begins a two-day meeting today and it would be a complete shock if they raised rates tomorrow. However, given the political landscape and events of the past few days, nothing can be rules out!

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I Screwed Up

Yesterday, I said that all of our Fed related trends were muted to less than 60% accuracy. That was wrong. One of our best Fed systems said there was a 78% likelihood that stocks rallied. I didn’t realize this until well after 2pm when it was too late to email and take advantage.

What a powerful response to the Fed not raising rates and issuing a more hawkish statement, exactly what I and most others predicted. I did find it laughable that a number of pundits like Bill Gross and Danielle DiMartino Booth thought that Yellen & Co. could hike rates yesterday. You can add those folks to the clown parade with George Soros, Stan Druckenmiller, Carl Icahn and the rest who continued to call for the end of the world.

Anyway, one thing that did surprise me was the number of dissenters, three, in the voting. I did not see that many coming. I figured there would be one. That tells me that more voters in that room would have raised rates if Janet Yellen didn’t have such strong conviction to leave them alone. Since the next meeting in November is less than a week before the election, I don’t think November is on the table. That puts December squarely in focus for Yellen & Co. to hike, something I am vehemently against. If that happens, it will be a full year in between hikes, making this rate hike cycle the gentlest glide path in history.

Getting back to the markets, I was surprised at just how powerfully everything reacted, as if investors were somehow caught off guard. Stocks, bonds, gold and oil all rallied hard post the 2 pm announcement. That’s very unusual behavior in general, but even more so for a Fed day. There aren’t enough instances to make it statistically significant, but typical response has been very favorable beyond the short-term. That’s also confirmed by the recent contraction in volatility pre-Fed meeting.

Sector leadership shifted back to the pre-BREXIT yield chaser leaders of slow growth, utilities, REITs and telecom. Curiously, staples did not follow suit. Banks were on the other end as they sold off on the news and then lagged the rally the rest of the day. I still cannot believe that people positioned for a hike and bought banks in hopes of this. I guess that’s why so many money managers do such a poor job.

High yield bonds also caught fire after 2 pm and this has very positive intermediate-term implications for stocks. The NYSE Advance/Decline Line is now just a good day away from yet another all-time high. Yesterday’s performance is another confirming sign that the markets are long and strong and a bear market or even full-fledged correction is not close.

Finally, Donald Trump is one person who is probably unhappy with yesterday’s lack of Fed action and across the board rally. The recent pullback/consolidation has definitely helped his poll numbers and I believe the only way he can win is if stocks struggle into November.

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Yellen Set to Raise Rates, But…

As the Fed’s Open Market Committee meeting heads into day two, our own trends and systems for the trading day are surprisingly mute. Today typically sees stocks trade in a +.50% to -.50% band until 2 pm before the market gets a shot of volatility. Usually, we see a strong upside bias into the close, but the odds of that are under 60% from the usual 75%+. In other words, the edge just isn’t there today. Tomorrow, Friday and early next week are a different story as a trend or two may trigger to signal lower prices ahead.

Turning to the actual meeting and announcement, the Fed is not going to raise interest rates today. That’s the bottom line. We have heard countless speeches from the various Fed Governors and regional presidents on the need to raise rates or wait, but the truth is that unless Chair Janet Yellen wants to hike rates, it’s very hard to believe that her underlings will actually vote against her. That’s akin to mutiny.

With all that said, however, they are absolutely going to offer some of the most hawkish (supporting higher rates) commentary in years to set the table for a December hike, which gets us well passed the election. I find it impossible to believe that Yellen & Co. would ever consider a rate move the week before the biggest election in four years which is when the FOMC meet next.

So expect no move but strong commentary and a hike in December.

What’s wrong with the economy?

Clearly, the economy is no longer in crisis mode and hasn’t been for some time. Since 2009, I have repeatedly stated that the economy is and will remain in a post-financial crisis recovery until the other side of the next recession. 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.

With my view, people have always asked me if I thought a President McCain or Romney would have mattered economically. The short answer is yes because not only would we not have spent almost a trillion dollars on a failed stimulus plan, but ObamaCare would not have been passed. I am not going to argue the social merits of the program, but almost every economist agrees that it has hurt the economy to some degree. I believe significantly.

Additionally, our tax code is another hot mess that has hurt the economy and the regulation pendulum has swung not back to neutral, but all the way to the other side. We’re not creating businesses. We have severely hindered the entrepreneurial spirit which has always helped kick start the economy after recession. I think a GOP president would have had different results, but wouldn’t have been able to sidestep the full effects of the post-financial crisis recovery.

Should the Fed raise interest rates?

Long-time readers know that I am record since 2008 that the Fed should NOT raise rates until the other side of the mild recession that will follow the Great Recession. The world is a dramatically different place post-financial crisis and we are seeing some of things I was very concerned about start and continue to proliferate, like negative interest rates in Europe and Japan. I do believe that Yellen & Co. will hike rates in December which is absolutely the wrong move.

Against the problems abroad, we have seen more of the uneven growth I mentioned already. One month (May), the employment report is recessionary and the next two months it’s hot and higher rate supportive. GDP still behaves like it’s stuck in quicksand and inflation remains below the Fed’s 2% target.

What concerns the smart people?

As I mentioned several times before, 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.

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.

As I end this piece, I need to take my usual shot at Fed Governor Lael Brainard who has blatantly and publicly embarrassed the Fed’s supposed political independence by contributing to Hillary Clinton three times. Everyone knows the two are buddies, but did it have to publicly pollute the Fed like that? Will anyone be surprised when Brainard is chosen to succeed Jack Lew at Treasury or Yellen at the Fed?!?!

A full Street$marts with canaries in the coal mine are due out next week. As I write about all the time on www.investfortomorrowblog.com, I care much more about the markets’ reaction to the news over what the news actually is. Keep a close eye on what leads and lags from 2:30 to 4 pm today.

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Not so Special, Special Fed Update

Let me begin this special FOMC update by saying that all three very short-term markets trends based on the Fed’s meeting ending today have lower probability of success this week although there may be a sign pointing to lower prices by the end of the week. Stay tuned.

Without a crisis like 2008, Janet Yellen & Co. will find it tougher and tougher to discuss an interest rate hike during the heat of the political season. While the Fed is supposed to be apolitical, we all know that couldn’t be farther from the truth. It has even become blatantly public as Fed Governor and Clinton family buddy, Lael Brainard has donated to three times. Want to guess who would be Hillary’s treasury secretary or successor to Yellen?!?!

Anyway, here we are again; six weeks hence from the last meeting with the world not ending after the vote to BREXIT. Stocks are at all-time highs and the employment picture improved dramatically in June. While the economy is not back to trend growth, it’s certainly stable and able to withstand a rate hike. However, the Fed heads have been very quiet this month, very unusual if a rate move was being seriously considered. As such, the markets are expecting no hike today with a bit more positive (hawkish) statement from the FOMC.

Long-time readers know that I am record since 2008 that the Fed should NOT raise rates until the other side of the mild recession that will follow the Great Recession. The world is a dramatically different place post-financial crisis and we are seeing some of things I was very concerned about start and continue to proliferate, like negative interest rates in Europe and Japan.

As I mentioned several times before, 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 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.


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.

With so much more still to say, I need to hit the send button without comments much about the stock market. As you know, I pounded the table hard at the BREXIT lows, May lows and February bottom to buy stocks for a run to new highs. That’s worked out well. The market is pausing to refresh here and that’s not a bad thing. Until proven otherwise, weakness should be bought.

Leadership is changing from the defensive utilities, staples, REITs and telecom to more aggressive sectors like semis, software, materials and discretionary. Even the “left for dead” banks and biotech are starting to show signs of life. Don’t underestimate this as a sign of fresh leg higher in the bull market.

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***Special Fed Meeting Update & The Continuous Loss of Credibility and Clue***

Six weeks later and it’s Groundhog Day all over again! Or is that deja vu all over again?!?! It matters not. I began my Fed day comments with this in April.

“The Federal Reserve Open Market Committee concludes their two day meeting with an announcement at 2 pm that interest rates will not change today. That’s what the markets are expecting. There has been all kinds of hot air coming from several Fed officials that rates need to rise now, but Chair Janet Yellen has been on the other side, sticking with her more accommodative stance. It would be very hard to believe that the majority of voting members would overtly vote against their chair.”

Before I get into the meat of this issue, I want to mention three independent studies surrounding FOMC meetings. All three short-term studies conclude that stocks are supposed to rally here. One is a one day trade. One is a two day trade and one is a three day trade. Their accuracy has been 70-90%.

Fed Officials and Wall Street Lost Credibility Again
For four weeks, we continually heard from the Fed heads and pundits that Yellen & Co. will definitely raise interest rates on June 15. Goldman Sachs, Merrill Lynch, UBS and the endless parade of analysts on the financial channels. It was a certainty. The Fed heads prepared us over and over and over again through their speeches. They publicly wanted to hike rates. They needed to raise rates. They thirsted and craved higher rates.

They were out of their collective minds and the word “quack” now comes to mind.

With the blink of an eye, one weak employment report and a June rate hike is all but off the table. And almost as fast, those same pundits and analysts are now forecasting with certainty that the Fed will stand pat at 2 pm on Wednesday. Did they forget about the vote across the pond on June 23 for the UK to exit the Euro? There was no way Janet Yellen was going to raise interest rates before then.

How fast can you say, total lack of credibility???

Leave Rates Alone
Since late 2008 I am on record all over the place saying that the Fed should unequivocally not raise interest rates until the other side of the next recession after the Great Recession. Since then and every moment after, I have firmly stated that the recovery would not be and is not your typical sharp snap back. Rather, it is a post-financial crisis recovery which is uneven, tantalizing, teasing and once in a while terrifying. They do not happen all that often around the world, but the path is very clear.

This is not new news for you, my loyal readers, nor is it new for anyone paying even the slightest attention to the real world. For years, I was convinced that the economy and markets could not handle higher rates. I am still not convinced. However, over the past year and a half, a few new reasons became clear.

WHY???

First and perhaps most important, I do believe that Janet Yellen is keeping the U.S. dollar under her hat. Fed officials rarely discuss currencies, but as I mentioned six weeks ago, I firmly believe that the really smart folks inside the room are worried that future rate hikes with the rest of world easing and/or accommodative with negative interest rates abound, the dollar could pull a repeat of the mid 1980s where it soared to almost 150 on the trade weighted index as you can see below.


Why does this matter?

Let’s say the Fed raised interest rates next month. Would you rather own the dollar where rates are increasing or the Euro where rates are becoming more and more negative each month? Where would your money be treated best?

You can make the same argument in Japan. The Japanese will continue to print and print and print, buy and own almost 100% of their government bond market and force rates well below 0%. Money flows where it’s treated best.

Dollar to Soar
In the short and intermediate-term, more rate hikes from the Fed would fuel another major rally in the dollar at least to the upper end of the trading range that’s been in existence since early 2015 as you can see on the chart below. That would not be bad overall. Sure, companies who export goods would struggle but the rest of the corporate world would do just fine.

The real concern comes once the dollar scores fresh highs and stays there for at least a few weeks. The scenario would quickly turn to the playbook from the mid 1980s but on a much grander scale. I contend as I have since early 2008 that the U.S. Dollar is in a secular (long-term) bull market that will carry the index well above 100 with the Euro first falling below par (100) on the way to collapsing to all-time lows below 80.


Dow Above 20,000

If I am right, we will see massive capital flows from Europe and Asia into the dollar sometime in 2017 or 2018 that will feed on themselves. After dollars are bought, money will flow into treasury bills and notes for those seeking safety. However, similar to the 1980s, I see hundreds of billions and ultimately more than a trillion dollars making its way into blue chip stocks. That’s where my long standing forecast of Dow 20,000 and above come into play. Investors will be partying like it’s 1985 – 1986 again.

Ultimately, as with any and all gargantuan capital flows, severe global market dislocations will appear and we all know how poorly they end. The crash of 1987 was how the 80s dollar boom ended.

Besides the dollar and the upcoming vote by the UK to leave the Euro, few seem to be talking about China. Forgetting about their weakening economy and real estate woes, let’s not forget that the Bank of China responded very decisively to the Fed’s December rate hike by devaluing their currency several times in January and February, adding further stress to the global markets.

Long-Term Rates
Finally (for now), long-term interest rates as measured by the 10 year Treasury note are back down to the 1.6% level as you can see below. That’s getting eerily close to the all-time lows levels of 1.4% seen in 2012. While the Fed controls the overnight lending rate, the market determines most other rates. How “interesting” that the Fed heads would even contemplate raising short-term rates with long-term rates in collapse. This would further serve to flatten the yield curve and damage banks.


I am all the way to the end and it’s time to hit the send button without diving into stock market leadership which has been solidly defensive of late. Both utilities and consumer staples (for full disclosure we own them) recently hit all-time highs as bonds prices rallied. Dividend paying blue chip stocks are in high demand as replacements for “safer” fixed income.

As I write about all the time on www.investfortomorrowblog.com, I care much more about the markets’ reaction to the news over what the news actually is. Keep a close eye on what leads and lags from 2:30 to 4 pm today. For the shortest and most nimble traders, selling long-term bonds, utilities and staples on the Fed announcement may be a good play.

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Fed Day Model and Trend

The FOMC concludes their two day meeting today, surviving the “epic” and “historic” blizzard. The model for the trading day is to see stocks in a plus or minus range of 0.50%, but generally we see mildly rising prices until 2pm and then increased volatility with an upward bias to the close.

The Fed trend is to be long the stock market from yesterday’s close to today’s close based on a variety of historical factors. That trend has an accuracy rate of 77%. Should the market end higher today, it would set up another trend for stocks to be lower tomorrow although not as strong as today’s trend.

Expectations are for the Fed to do absolutely nothing at today’s meeting, but everyone will be parsing the statement for clues that the FOMC will forestall raising rates until late this year or even into 2016. You already know that I vehemently disagree with any rate hike anytime soon and believe that QE should not have ended. I have said this for years, but I will say it again. Our economy and to some degree, our markets, are not strong enough to stand on their own two feet.

We can argue whether we should have QE’ed $5 trillion at all, but once the program began, it has to be seen to its rightful end. I don’t believe the Fed did that.

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Fed & Yellen on Hot Seat Today

The Federal Open Market Committee (Fed or FOMC) concludes their two day and final meeting of 2014 on Wednesday with their announcement at 2pm and subsequent press conference with Janet Yellen. Interest rates will not be raised. Market watchers will parse the statement to see if Yellen & Co. remove the “considerable time” phrase for low interest rates from the release, signaling that rates may increase sooner than later. Should those words continue in the statement, I would expect stocks to move sharply higher. ¬†As an aside, there is a strong trend in play today indicating that stocks should close solidly in the green.

I have ranted enough over the past 18 months that QE should not have ended and rates should not even be close to rising. The Fed will rue that decision if it’s made in 2015. However, with energy prices collapsing and inflation with it, the Fed could easily use this as cover not to change course anytime soon. It would be the best decision right now without even mentioning how bad Europe and China are presently.

The problem is that we have a divided Fed with the usually wrong Charles Plosser and Richard Fisher having voting power and loud voices. Add Jeff Lacker into the group and you have a triumvirate of policy makers who could not have been any more wrong in 2007 and 2008. Talk about asleep at the switch; these guys actually wanted to raise rates and reduce liquidity as the markets and economy were in collapse. It has been a profitable trade to take the opposite side of these “tenured” bankers.

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Bernanke’s Swan Song at Interesting Crossroad

On Monday, I discussed how a very short-term rally was close at hand. I continued that yesterday morning about the prospects for a Turnaround Tuesday rally. The bulls came back to work on Tuesday in a very underwhelming way. The open was without conviction. Volume was anemic, further solidifying my stance that the market isn’t close to a low of any significance. With Apple’s disaster, stocks had a chance for a big gap down and short-term washout. But that wasn’t to be.

Today, we have the conclusion of Ben Bernanke’s final meeting as Chairman of the Federal Reserve. Fed statement day is typically a green day for stocks, especially when they are not at new highs, which they are not right now. The short-term snap back is supposed continue a bit longer before rolling over again and revisiting the recent lows, however not doing so would only add to my current intermediate-term negativity on the market.

Regarding the Fed, the market is expecting another $10 billion in taper to $65 billion per month. It’s no secret that I think any taper is absolutely the WRONG move and our markets and economy will suffer consequences from this. I have heard from people that the Fed is watching the stock market decline and will postpone the next taper. First, I think that is ludicrous. Stocks are up 10%+ just from October, let alone the roughly 150% from the March 2009 bottom. The Fed would lose even more credibility by worrying about a 3% decline without any signs of stress in the much more important credit markets. Sentiment has just notched back to neutral from being overly bullish for months. There is no way the Fed really cares about the stock market at this juncture.

It’s going to be an interesting day, especially after 2:00pm and coming from what looks like a very weak opening!