A Decline for the Ages – Turnaround Tuesday Possible

Seeing the Dow Industrials lose 2000 points in a single day was something that wasn’t even on my worst case radar as recently as last month. But as we have seen many times this century with the advent and domination of computerized trading, things change at warp speed. Declines that used to take weeks, months and even quarters to unfold and complete are now compressed into days and weeks. Risk no longer slowly builds; it happens all at once. I have discussed several metrics to put this decline into context and the latest should come as no shock. This correction is now the deepest ever coming from an all-time high.

While I have always been a proponent of the free market, that doesn’t mean there shouldn’t be any regulation nor safeguards. Until 2007, traders couldn’t just short stocks willy nilly. They had to wait until a stock traded at a higher price so there couldn’t be a piling on effect to drive a stock into the ground. That rule, the uptick rule, was changed to eliminate that for what seemed like all the right reasons. That was, until the computers took over and now dominate trading. Keep in mind, people only complain and cry foul on big down days. They love the computers on big up days.

On a closing basis, this correction is now approaching 19% which puts it in line with 2018 and 2011. Those declines lasted 108 and 65 days respectively. The current one is 14 days old. 2018’s correction was fully recovered in roughly four months. 2011 took five months.

Monday’s decline saw widespread panic on almost every indicator and metric I use. As I mentioned in yesterday’s post, it was downright ugly at the open. For a brief 15 minute period, the stock market was “limit down”, meaning it was down 7% and no trades could take place at lower prices for 15 minutes. That type of “circuit breaker” was put in place after the 1987 crash from President Reagan’s working group on capital markets, more affectionately known as the Plunge Protection Team (PPT), something I find preposterous. Where was the PPT during the 2000-2002 and 2007-2009 bear markets?

Anyway, on Monday, once stocks reopened from their 15 minute timeout, they began to stabilize as water always finds its level. By the end of the day, stocks closed basically where they opened. As ugly and difficult as the day was for investors, that was more than just a moral victory. I think there is a decent to good chance that we either saw a short-term bottom or we will with one more decline this morning.There are just too many historic extremes for selling to continue unabated.

If I had to offer one indication that something was beginning to change, it came from the Treasury bond market which has been rallying at strongest pace of all-time. Stocks have been held captive by this. At its low point yesterday, the yield on the 10 Year Note was just under 0.40%. That is per year! In other words, if you gave the government your money for 10 years, you would earn 0.40% in interest each year. That’s it. Talk about panic and fear.

In the chart below, on the far right, you can see what is a long red candle. That means the instrument began the day near its high and closed near its low. Remember, this instrument is the long-term bond which has been moving exact opposite to stocks. With stocks closing down 2000 points, I would have expected bonds to hold their own and close relatively well, not at the bottom of their daily range like they did. Again, even though stocks closed down 2000 points, the bears could not make any headway during the day. And bonds finally got sold which is a very early and preliminary sign some of the pressure is starting to abate.

This is anything but the “all clear”. It’s just a building block along with so many other indicators I watch that say stocks are in the bottoming zone. With stock futures up strongly in the pre-market as I finally finish this update, the bulls really need to make some noise and not let the bears push stocks back down into the close. If we see upside follow through during the day that lasts into the close, another “Turnaround Tuesday” could be in the cards.

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UGLY Open Ahead

Stocks are set to plummet at the open as crude oil collapsed overnight. The revisiting of the February 28 low is here and we need to see if divergences develop to indicate a successful retest and the next step in the bottoming process. Trading today and over the next few days is going to be frenetic. I imagine enormous intra-day moves with many bouts of panic selling and margin calls.

This correction continues to set precedents for its speed and depth. I have heard from many people asking if a long-term bear market has begun. Based on history, long-term bear markets do not begin with bang like we have seen over the past few weeks. While I absolutely do not believe this is anything like 2007-2009, even then, there were rolling 10%+ declines and rallies along the way.

Let’s say I am wrong.

Even then, stocks are still supposed to entering a bottoming period this month with a strong rally into summer before rolling over again. It’s that rally, just like every other rally from a 10%+ decline since the bull market began in 2009, that should indicate whether there is more downside ahead. In all of the previous 8 corrections since 2009, the rally indicated bull market staying power. We will see this time around as well after stocks have a chance to calm down from panic levels.

I will have more in a larger update tomorrow.

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Internal Bottom, More Downside Left, Dow 30K and Powell’s Blunder

On Monday, I spent a good deal of time publishing 9th Correction of the Bull Market – Dow 30,000 Coming in Q3. I think I did a pretty good job of putting the correction into proper context against the 8 other corrections during this bull market. So far, last Friday certainly has all the makings of the internal or momentum low I usually discuss during corrections. I will spare you and not post a deluge of charts, but here are some indicators that screamed.

Why the Stock Market Bottomed on Friday

Put/call ratios which widespread negativity, the exact opposite of the greed they showed for all of 2020 into the peak. Percentage of stocks above their 10, 50 and 200 day moving averages all plummeted to levels seen near lows. Down volume and stocks going down surged to 90% on two occasions. McClellan Oscillator, an indicator of stocks going up and down, saw one its lowest readings ever recorded. Only October 19, 1987 and August 11, 2011 were lower. Number of stocks making new 52 week lows spiked to more than 950.

Price sees its fastest move from an all-time high to a correction as well as four-month low. All (almost) assets collapse with U.S. stocks like gold, oil and emerging markets. Volatility as measured by the popular VIX soared to nearly 50, a level which always comes near bottoms in a bull market. Volume in ETFs which profit when stocks go down exploded higher as did volume in the most popular conventional ETFs, like SPY and QQQ.

Believe it or not, there is a lot more. So many things were lining up for a bottom coming. It was easy to know the market was close to a low in time as I wrote, but where in price was a different matter.

Lots of folks asked me why I wasn’t more concerned. First, I am always worried. That’s one of the things my clients pay me to do, their worrying. The big picture things I hold so importantly did not scream catastrophe at the stock market’s all-time highs. One of them is the behavior of the credit markets which usually sniff out recession coming long before stocks do. All year, those markets have been tight and while they loosened a bit during the decline, it was nowhere near the levels that would cause me to say something serious is in front of us. Additionally, the canaries in the coal mine I mention so often were not sufficiently dying at the peak to forecast the end of the bull market.

As stocks began to recover on Friday and several times this week, we have seen clear and present institutional buying in and around the 3000 level on the S&P 500 which usually offers intermediate-term ammunition, even if stocks breach that level.

Here is What to Expect

With the short, sharp plunge we saw last week, I expect a few things to happen. We should hear that corporate insiders bought their own stock like Jamie Dimon so perfectly did in December 2018. That usually clues the market in that there’s real value in a company if an insider puts their own money to work. In other words, it’s a sign of confidence. Companies should increase their share buyback programs which create a steady demand for a company’s stock each and everyday.

Assuming the internal or momentum bottom was last Friday which I believe it was, the playbook calls for stocks to regain somewhere between half and two thirds of what was lost. On the Dow, that’s 27110 to 27700. On the S&P 500, that’s 3125 to 3190. From there, it gets trickier. Rather than post all 9 charts again, please refer to Monday’s post for more information.

The vast majority of the time stocks will then decline again to revisit the internal or momentum low, sometimes staying above it like we saw in early 2018, 2016 and 2015 or fully breaching it for a short spell like we saw in 2010, 2011 and 2012. In rare cases like 2014 and late 2018, the initial bottom was the internal or momentum low and the final low. December 2018 as I wrote in Q1 2018 was the most unusual bottom I have seen in my 31 year career. When I look at our investment models, they usually turn positive around the internal or momentum lows. 2011 was the definite exception as they did not start ringing the bell until the second bottom was being hammered in.

My forecast remains unchanged. I am looking for all-time highs in Q3 with the Dow hitting 30,000. It’s that expected rally which I will be watching more closely than any since the bull market began 11 years ago. That next rally to new highs will have the highest potential of failing and possibly rolling over into a 20%+ decline that doesn’t quickly recover like the others have.

Lots of people want to know when all will be clear. When will the green light come? From a stock market perspective, you can follow the playbook I just offered. However, the real confirmation will be when we see awful economic reports, but stocks don’t go down. Companies announce bad earnings or warn and their stock doesn’t decline. Finally, at the end of the crisis we should see the stock market go up in the face of bad headlines regarding the virus. When those things all happen, we will know that the market has priced in the worst and that scenario isn’t going to happen. That’s what happened during Q1 2009.

The Fed to the Rescue

Yesterday, the FOMC made an emergency rate cut of 1/2% at 10am. When I first saw the headline waiting to join FOX61’s morning show, I thought it was fake news. What knucklehead would cut interest rates during the trading day? And after a 1300 single day rally in the Dow? I thought Jay Powell should don some makeup and put on a red nose and wig. The Fed had all weekend to meet and perhaps coordinate with other central banks around the globe. After all, stocks had just collapsed from an all-time high to a four month low in record fashion along with correcting in only 6 days.

How could the Fed not cut rates on Sunday night if they were in such a hurry?

From my seat, Powell just continued to erode whatever credibility was left. If they couldn’t cut rates on the heels of one of the worst weeks ever before the stock market opened, why wait until a 1300 point rally? Why not then just sit tight until the stock market declines again, if it does.

Here is what I said to Investment News yesterday.

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9th Correction of the Bull Market – Dow 30,000 Coming in Q3

Before I begin the update as planned, I want to repeat what I have said to folks who have called and emailed. I think the bull market remains alive. I think Dow 30,000 will be hit during the summer. That anticipated rally may be the one that signals a new bear market. I think this week will be up for the stock market. It is quite possible that Friday’s low was the internal or momentum low from which the first real bounce of significance will begin. That bounce could regain as much as 50% of what was lost. Volatility will remain sky high.

It is often said that the stock market takes the stairs to the top and the elevator to the bottom. This has never been accurate than the last 7 days as stocks have gone from an all-time high to what the media deems as correction territory, down 10%+, in just 6 days, a record. That is also an all-time high to a four-month low in one week. Last week, I wrote about the gap of recognition and that was certainly confirmed as the “AH HA” moment.

The speed and depth of the decline has truly been historic, something that seems to be more and more commonplace in the age of exchange traded funds (ETFs) and supercomputers accounting for the vast majority of trading activity in the stock market. I remember writing similar notes in December 2018 during that decline for the ages. Markets definitely evolve and it has been very evident during this bull market. Once corrections start, they are mostly linear affairs, rather than the three steps down, one step up of yesteryear.

This decline seems to have impacted people more than previous ones because of its speed and impact on the population’s health. People seem much more unnerved now than during the Ebola correction of 2014. Lots of folks asking me if the stock market is going down 50% like 2008 or if it will ever recover. I feel confident that this is in no way a repeat of the 2007-2009 financial crisis. Banks are sitting on more than $2 trillion and it’s really, really difficult to have a moderate or serious recession with banks having more capital than at any time in history. I also feel confident that stocks will recover from this correction and right now, my best estimate is sometime in Q3 which is subject to change when I get a little more information. Anyway, I found this video to be really helpful regarding the virus and its spread.

Over the weekend, I took so many notes of things I wanted to share which were relevant that I will probably break them up into a few updates. Regarding Corona or COVID-19, as investors, I feel confident in saying that the while the headlines are likely to get much worse, especially in the U.S., at some point the markets will have priced in the worst case scenario. I imagine we will see headlines of widespread contraction of the virus and death but stocks will have stopped going down. Then, we will likely see stocks ignore or even rally on Corona headlines. That’s not a today reaction but I do think it’s something to look for later this month or in April.

Let’s put this correction into context. Since the bull market began in 2009, and we can certainly argue whether new bull markets began in October 2011 and December 2018, there have been 8 previous declines of at least 10% from intra-day high to intra-day low which I will post below. You can see the year, the depth of decline and the duration from high to low. I also added enough chart space so you can see how long it took for stocks to recover with the exception of 2015 because that rolled into the 2016 decline.

So far, this correction is nothing we haven’t seen before. The worst of it appears to be over, but that doesn’t mean we have seen the lowest of low prices. That more complex scenario would see a rally sooner than later with stocks rolling over again in late March or early April to the final low before the real rally to Dow 30,000 begins.

As I mention every single time there is a stock market decline, whether we planned for it or not, were successful or not, use the correction to take your own temperature on your risk tolerance and investing objectives. If you are watching the market trade all day because you are worried, that’s not healthy. I watch it every day anyway so that would be two people both watching the same thing and only one of us gets paid to do that.

If you are unnerved by the correction, then I would suggest reassessing your risk tolerance and making a change on the next rally rather than into the teeth of a decline. If you feel really comfortable and want to add more money or risk, I also suggest revisiting your risk tolerance, but taking action right here and now. For me, I am using this decline as an opportunity to begin adding my 2020 money for my retirement account although with adding more risk to my kids’ college funds.

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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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Critical 5 Days Coming Up for the Bulls

What a wonderful three days it’s been for the bulls since I posted Yet ANOTHER Potential Low last week at the bottom. In fact, it has been one of the most powerful rallies off of a low in history in terms of the number of stocks advancing and declining along with their volume. That gives us a very overbought market in the short-term, but one that just emerging from being very oversold intermediate-term.

After such strong thrusts off a bottom, there is a really a binary outcome. If the bulls can hold on and keep stocks from declining much over the next week, that will be a total change of character for this market and indicate that much higher prices are in order over the coming months. That would also create a fairly significant short squeeze.

On the other hand, if the bears can make any meaningful headway over the coming five days, it will be a huge blow to the bulls and jeopardize not only the rally so far,  but also the price levels seen at the bottom last week.

In short, it looks like stocks are either heading higher by at least 10% over the coming quarter and a half or on the verge of another collapse. Given the evidence at hand, I have to side with the bulls and look for the Dow to see at least 17,500.

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Yet ANOTHER Potential Low

For the second time in a week, stocks are trying to hammer out at least a trading low. Market action has not been good this whole quarter, but lately it has become so bad that it could be approaching washed out. February’s decline isn’t surprising given that down 5% months like we had in January typically lead to another lower month, but it has been on the ugly side for the bulls.

It now looks like the major indices have revisited or retested the internal or momentum low seen in January. Whether that’s successful or not remains to be seen. Stocks need to close above their February highs to signal a stronger and longer lasting rally and those levels are a good 5% higher. I mentioned before that if the major indices retest their January bottom too soon (I was looking for March) it may not create a stable enough base for a good rally to develop. Think of this like standing in a windstorm. If you are feet are close together, your base is narrow and you will be more easily blown over. However, if you widen your stance, you have better support and will be able to stand firmer for longer. That’s how the market operate after a decline. They a firm foundation.

On the sector front, I am not seeing “healthy” leadership from semis, banks and discretionary. Utilities and staples are leading with transports, materials and industrials in the early stages. That needs to change if any rally is going to last.

Bonds and gold have been the big beneficiaries of the decline in stocks and both have gone vertical of late in a supposed “flight to quality”. That is debatable. Both look like they peaked on Thursday and should see some short-term weakness or digestion before heading higher if that’s their ultimate path. Gold itself saw massive volume this week in what I see as a buying panic. Historically, that has spelled the end of the rally in most cases. However, if the gold bugs can fight off the bears and keep gold from declining over the next week or so, this could end up being one of the rare cases where strength begets strength. We’ll see and for now, I am favoring the former until proven otherwise.

Along with bonds and gold, the Japanese Yen has also gone vertical in what must make the Bank of Japan central bankers apoplectic after they kind of, sort of went to negative interest rates. Crude oil is really trying to bottom here, but I would rather see it start to go up on bad news than just see these short-term spikes on rumors of OPEC productions cuts.

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