Stocks Peaking on Amazing Jobs Report

What a volatile, interesting and fun week it has been. I am about ready for some time to myself although I do board a flight on Sunday afternoon for a quick trip to Chicago. Deep dish pizza, here I come!

My plan coming in on Friday was to look for another big up day for the bulls and then begin to take some risk off the table, book profits or however you like to call reducing exposure to stocks. It appears as though part of the rally this week has been on hopes of a trade deal with China based on the president’s tweet. First, I don’t think that is happening anytime soon. Second, I do think it could happen once the next Congress is seated in January. Perhaps before Q2 2019 ends.

Critics of Trump have been tweeting that it’s all a ploy to juice stock prices ahead of the election in hopes of helping the GOP. While stock market performance is a good predictor of presidential elections, it has absolutely no correlation to mid-term elections. Long time readers know that my election model correctly predicted a Trump surprise, much to my disbelief. It hasn’t been wrong since 1992.

Earlier this morning, stocks retraced 50% of what they lost during the correction as you can see below on the Dow. That’s the first line of defense for the bears where you would expect them to put up a fight. The other major indices have not been as fortunate.

The October employment was absolutely stellar. 250,000 new jobs created. Unemployment at 3.7%. Annual wage growth hit 3% for the first time in 9 years. Even the habitually wrong Armgeddon, naysaying, gloom and doom crowd will have a tough time poking holes in this report. My only question is given how late we are in the cycle, is the economy peaking…

 

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Calling THE Bottom and the Bear Market that Lies Ahead

Before I dive in headfirst I want to start by saying that there are more bold and brash comments in this update, especially after the charts, than any piece I have written in a very long time. None of it is political.
Here is a taste and I respectfully ask you to read this update to the end. It spells out some very detailed scenarios for the bull market and impending bear market.
Let me state this very emphatically. If THE bottom is in and stocks go right back to new highs from here, I think the 10 year bull market will end in Q1 of 2019 and begin a massive decline into 2020. I want to be clear and on the record.  
 
Since before I called for stocks to decline mid to upper single digits in October, I said the bull market remains old and wrinkly but still alive. After the 10%+ correction during Q1 of this year, I emphatically pounded the table at every juncture that the bull market was absolutely not over. From Q1’s depths of despair near 23,000, I had no problem stating my strong conviction on CNBC, FBN and Yahoo.
While the January peak looked a whole lot better than the Q3 peak in stocks, I still do not believe the bull is over. The process may have begun for a bear market down the road, but I don’t think it started in October 2018 like the last one did in 2007. I will plead my case next week when I write Canaries in the Coal Mine from 30,000 feet on American Airlines.
Bull markets typically do not end with a bang like the decline we are currently seeing. Bull markets tend to roll and roll and roll with the market losing an important element each time. Bull market peaks are certainly not a single point in time. And bear markets do not initiate while the media has special reports on the end of the bull market.
Given all that, let’s face it; there has been a lot of damage done during this decline. It hasn’t been this ugly since the Q3 2015 / Q1 2016 correction and that really was a complex, 6 month affair to repair and recover. And before that, you have to go back to Q3 2011 for a decline with this much downside momentum and damage.
You can see the McClellan Summation Index below which is a long-term measure of internal market health based on the number of stocks going up and down. It is below -700. That reflects serious and strong internal damage.
Downside momentum in the number of NYSE stocks making new 52 weeks low hasn’t abated yet. This picture certainly needs to change before a sustainable rally can begin. Usually, we see price probe lower with the number of stocks making new lows less and less on each probe.
The percentage of stocks in a bull market has corrected to 25% as you can see below in red. That needs to show big improvement.
At this point, essentially all of the major stock market indices are in downtrends. My four key leadership sectors, banks, semis, consumer discretionary and transports have been hit hard and badly damaged. Usually, damage like this takes time to repair either by going sideways or rallying and declining in a range.
On the flip side, besides what I discussed yesterday in the very short-term, the percentage of stocks above their average price of the last 50 days is washed out. I would like to see the next decline show this number improving.
From a sentiment standpoint, I could probably name a dozen indicators which are now showing widespread fear and panic. However, as we know, they can always get worse. Below you can see how option traders are behaving over the last 10 days. They are in full blown panic and trying to position for more weakness.
Let me state this very emphatically. If THE bottom is in and stocks go right back to new highs from here, I think the 10 year bull market will end in Q1 of 2019 and begin a massive decline into 2020. I want to be clear and on the record.   

 

However, I do not see this scenario as being a likely one, but it is possible.
Rather, I think this current nascent rally will peter out sooner than later with another decline on much lower downside momentum coming. The ultimate low should be somewhere between Dow 24,300 and 23,800. From there, I continue to see my next upside target hit of Dow 27,000. While I originally thought it would be in December or January, I may have to push that out into Q1. It’s just too early for me to opine.
I have not updated the chart below but you can still see what I view as the most likely scenario.
 
Stocks have priced in a House victory by the Democrats and a relentless Fed along with the Trump tariff tantrum ending poorly with China. A change on any of those fronts would certainly be a boon for stocks. I am not predicting it, just stating it.
Q4 is typically very strong for stocks. This year, there is the added very strong tailwind of being post-mid-term elections. In the entire four year cycle for stocks, the single most positive period is right now through April. Simply put, once this correction ends, stocks could not be in a better position to rally sharply and significantly.
I know. That’s a pretty bold statement.
Like the Fed does with data, I will follow the indicators and models. They are not infallible. And on that topic, I received a number of emails asking me how I will know if I am wrong and what will I do if I am wrong. Well friends, being wrong is nothing new for me. It happens all the time. When you are as bold and brash as I am, you can’t be afraid to be wrong. I swing at an awful lot of pitches.
To answer the question, if the market does not respond to the time-tested conditions that have led to certain things happening, something is wrong and I will report it. If I am looking for a rally and stocks roll over, I will be wrong. Egg on my face an all, although I have acquired the skill of washing my face fairly well after the egg. In the big picture if price action remains below its short, intermediate and long-term trends for a week straight, that can be confirmation of a new bear. 

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Why Have Stocks Been Going Down

This correction has been very fast and furious. I talked about it yesterday and how downside momentum was beginning to wane. The old saying that stocks take the stairs to the tops and the elevator to the bottom definitely rings true here. This decline has been relentless with strong wave after strong wave of selling.
I can spend a lot of time debating why stocks have declined, but does it really matter? The stock market usually discounts economic activity 6-9 months down the road. However, it’s far from perfect. The media feels like they must assign a reason for each and every daily move in stocks. That’s not how markets work.
Several weeks ago, I published a blog piece about what was looking like an interest rate driven decline. http://investfortomorrowblog.com/archives/3825 The thing is, long-term rates peaked on October 5 and went straight down to October 26. They are not well correlated although perhaps there is a lead/lag relationship.
Many high profile companies have beat their earnings estimates, however their top line revenue numbers have missed. Investors didn’t sell because of what happened last quarter. That’s old news, history, in the rear view mirror. They sold because they believe that lower revenues will continue and begin a new trend.
I happen to believe that the election is causing more consternation in the investing community than people are publicly admitting. Although I will update my election model this weekend, it certainly looks like the House will go blue by at least 5 seats and the Senate will gain one or two red seats. Basically, that’s a return to gridlock and an end to the GOP’s pro-growth, low tax agenda. That’s one of the reasons I have been forecasting the ultimate low during the first two weeks of November. We have an election overhang.

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Early Signs of Waning Downside Momentum

The selling has been relentless. It’s come in strong waves with some of the most powerful moves in many years. If you watch the intra day “tick” indicator which essentially tells you the cumulative price move for all stocks on the NYSE, up or down, there have been two massive and historic waves where the tick exceeded -1600. That shows indiscriminate selling and it’s not mom and pop hitting the sell button.

The reasons are not important and we never truly know anyway. Right now, it’s “get me out at any price!” The magnitude has certainly exceeded my call for a mid to upper single digit decline.

In the very short-term, there should be a rally and I don’t mean a few hundred Dow points. It could be significant. However, I think this rally also fails and leads to a final selling wave over the coming two weeks or so.

If you are looking for bright spots, there haven’t been many.

Banks have not made new lows since last week.

The Russell 2000 small cap index did not make new lows on Monday.

The Volatility Index (VIX) remains below the levels seen on October 11.

There are more signs like this, but not enough. My point is that downside momentum is just starting to wane. That rarely happens right at the bottom. It is usually a leading indicator. Patience is needed now. The “thrashing around” I keep calling for is here. It’s easy to make emotional mistakes. Don’t do it!

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Squawk Box, Yahoo Finance & Correction Update

I started out my day with a visit to CNBC’s Squawk Box at 6:15am. I should have the link to post later today. I will be with the good folks at Yahoo Finance on Midday Movers either right at 11:30am or noon, live from Heritage Capital’s global headquarters via Skype. There’s an inside joke in there which I am always willing to share in person.

As you know from all of my posts, markets have been very volatile and even unnerving for some. I am going to discuss when I think stocks may find a bottom, how and at what price zone.

I had hoped to have an update done on Friday with some indicators to watch for a low in stocks but the depth of the decline forced me to wait until after the close and the weekend has been kind of insane with two bar mitzvahs in Saturday and the final weekend of baseball with party to follow at our house. To make matters worse, both my wife and I have been a little under the weather. On a happier note, however, Mount Snow opened on Saturday so ski season is here with one of the earliest openings ever. If you’ve never skied during fall foliage in Vermont, it’s definitely a bucket lister!

Back to the stock market, I said on Wednesday and Thursday that the ultimate low from this pullback, now correction, was still in front of us and lower prices were still ahead. Friday’s action was interesting as it had something positive for both the bulls and bear during the day.

The bulls, once again, staved off the mini crash scenario while the bears were able to push off the final low. The bulls really need a stand on Monday, ESPECIALLY if stocks open higher. I don’t think the bulls can afford an up opening and then downside rout. That would open up lower targets that I had not considered this year. Alternatively, a weak opening followed by some firming would also be okay for the bulls.

The bears, on the other hand, want to aggressively sell any morning strength and press it after lunch. They could also win by seeing a lower open and then a heavy trading day where stocks stair step down right into the close. Those are your four scenarios for Monday. It should not be a quiet day!

Looking at my four key sectors, banks transports, consumer discretionary and semis, they all basically look like death. After this correction bottoms, it’s going to be really interesting to see if they regain bull form. If not, that will be a telling sign that this old and wrinkly bull market will likely die during the first half of 2019.

Remember, I still have a projection of Dow 27,000 after the Dow closed above 25,000 for five straight days. I am not abandoning that down here.

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Crash Scenario Avoided BUT Where is THE Bottom???

Well folks, it’s been quite a week so far. After stocks tried to hammer in a low on October 11th there was a rally as I expected. In fact, that October day was the first day our shorter-term investment models started turning positive with the Dow at 25,000 after having been negative since the all-time high peak on October 3rd. As I wrote at that time, I didn’t think 25,000 was going to be the ultimate bottom, but the majority of the price damage was done.

Moreover, my biggest concern would have been that stocks headed straight back to new highs from 25,000 and that would likely have spelled the end of the bull market. That’s still a possibility from Wednesday’s low, but I don’t believe that’s a likely one. Additionally, there were two scenarios I was looking at that from 25,000 that called for rallies and then more downside. Both are open today, but I favor the more bullish one.

Speaking of today, it was vitally important for stocks to rally, something I very rarely say. I use the word “vitally” because mini crash scenarios unfold from oversold conditions like we saw on Wednesday. If the bulls didn’t make a stand today, I would be very worried that a snowball was already in place to the bottom, meaning more weakness on Thursday and Friday with a climax early next week. Thankfully, I don’t think that’s now a valid scenario.

By the way, before I offer some charts, some people ask why I sometimes use the Dow versus the S&P 500 and vice versa. It really doesn’t matter. They are so closely correlated, meaning they basically mirror each other’s moves. The general public prefers the Dow while others use the S&P 500. Truth be told, the Wilshire 5000, Russell 3000 or Value Line are probably the most representative.

Below is a chart of the Dow Industrials this year so you can see both the Q1 and Q3 declines. On the far right side of the chart, you can see the arrows I drew in to offer my most preferred scenario. In words, I think the rally that began today will continue into next week before rolling over again to the downside where new lows will be made. That means I do not believe the ultimate bottom or lowest levels have been seen yet. However, assuming the next decline is the last, our upside projections to Dow 27,000 remains in place for sometime in December or January.

During this entire 10 year bull market, every single time there has been a bout of weakness, the bears, gloom and doomers and those praying for armageddon come out of the woodwork to espouse their negativity. I have heard it all. First it was that all the banks were insolvent and they would steal our money. Then it was that all the money printing would create massive inflation and the U.S. dollar would be worth nothing. Then it was that the U.S. would default on her debt. And an Ebola epidemic. And who could forget that Trump winning would kill the markets and economy. Let’s not forget the countless times Chicken Little cried that recession was coming. Or that China was collapsing or taking over the world. I can’t keep that one straight. And now we have tariffs and rising interest rates and yet another economic slowdown.

The thing is, they are all valid reasons that make sense. They have just been embarrassingly wrong. Being years early is still being wrong. Sorry. One day, that permanently negative crowd will have their day in the sun again. And I fully expect them to beat their chests and claim how right they were all along. You will find them throughout the media taking their hollow victory laps.

The bout of weakness we are seeing now looks nothing more than your typical late stage bull market pullback. It is doing significant damage that perhaps won’t be recovered from, but I do not think the bull market is over just yet. I called for mid to upper single digits last month and stocks are right up against the top of that range although I think it will end up being 10%+ when all is said and done. Magnitude has always been more difficult for me than direction.

Finally, I received more than a few emails lately about the markets. The common question I got was what should investors do now if they never sold. Sorry, but I gave so many warnings of what I thought was coming, you’re on your own. I wrote that I was taking serious action in client portfolios. If that’s not leading the horse to water, I don’t know what is. Your greed got in the way.

My allegiance has been, is and always will be to clients first and foremost. That’s why they pay me for my services. I give an awful lot of information for free. My allegiance has been, is and always will be to clients first and foremost. That’s why they pay me for my services. I give an awful lot of information for free, like selling Facebook, Netflix and Tesla. Buying Ford, Gap Stores, Newmont and long dated treasuries. I am not about to offer more.

Tomorrow, I am hoping to post some free indicators you can find online to help guide you to the bottom I see coming.

As I finished this update, Amazon appears to have an earnings problem and the NASDAQ is collapsing after hours. Friday is going to be fun!

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“A” Bottom, “THE” Bottom or “NO” Bottom

Long time readers know that I am ALWAYS skeptical of bottoms where price ends the day in the bottom of the daily range. They rarely mark the ultimate low. When some of indicators turned positive at the of October 11, I wasn’t as full on bullish as I usually would be because stocks closed that day near their lows. In subsequent posts, I offered that while the majority of the price damage should be done, I would not be surprised to see a marginal new low made this month.

Tuesday’s action qualified as price made a marginal new low, but rallied smartly to close in the top 25% of the day’s range. That served to flush the sellers out. IF that was at least a short-term trading low, stocks would be stronger today. So far, that’s not the case. It’s not only technology taking it on the chin. The weakness is widespread with financials, biotech, transports, metals, materials and energy all seeing selling pressure.

My overall theme remains the same; the majority of the price damage has been done. Stocks should continue to be very volatile and thrash around somewhat violently until we get past the election.

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Clear as Mud. Volatility & Patience.

I keep writing about volatility ruling and boy, it is not disappointing! The huge swings high to low and low to high are extreme. It’s all part of the makings of a bottom for a good year-end rally. We did a really good job calling the peak a few weeks and then offered that the majority of the damage should be done after the collapse on October 11, but perhaps not all of the damage.

The best I can put it is that the stock market needs some time to repair the damage done by the decline. I expect more thrashing around, but no meaningful upside progress made until next month. The Dow kissed its average price of the last 200 days. The S&P 500 is resting on that same average now. The mid and small caps are well below all important averages. And the NASDAQ 100 looks more like the Dow.

Yep. It’s as clear as mud.

October 11 saw a number of our key short-term indicators turn positive. However, the stars seem to be sloppily aligning. Semis still look ugly. Transports and discretionary are marginally better. Banks just look plain putrid. At some point, they will be so bad, it’s actually good. But that’s not now.

Finally, high yield bonds and the NYSE A/D Line are non-committal. I think besides volatility, the theme is really that of patience. Selectively position, but keep enough powder dry. About the only think I am really encouraged by has been the action in gold and the mining stocks. They have not disappointed. I also like treasury bonds here for a rental, but I wouldn’t give them much room on the downside. They are oversold, owned by smart money and supposed to rally now.

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Volatility Reigns. Building Blocks Needed

And just like that I am back at the airport and waiting to head home on Wednesday night. Just what I like, a jam packed two days and only one night not sleeping in my own amazing bed. As I keep writing about, volatility is going to remain elevated throughout this earnings season and into the mid-term elections. Wednesday perfectly epitomized this as you can see from the intra-day chart below. The major indices saw ranges from high to low between 1.5% and 2%. Continue to expect this.

Three of the four key sectors have outperformed during this nascent recovery although I am not putting a lot of stock in this just yet. High yield bonds have also led. The percent of stocks in healthy uptrends has taken it on the chin and this needs some time to repair and eventually rally back above 60%. That will be crucial for the survival of the bull market.

Again, the majority of the price damage should be over. An immediate return to all-time highs is unlikely and unhealthy. Stocks need time to thrash around and rebuild a solid foundation or the next rally could be the last.

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Pink & Blue Are Not Just for Baby Stuff

In yesterday’s post I mentioned that during most stock market declines, it seems like everyone turns to charts and technical indicators as their economic and fundamental indicators fail. They quote their own “key” numbers and speaking from 30 years of experience, if it’s obvious, it’s obviously wrong. In other words, when so many pundits turn to the same charts, the market does its best to punish the most people. I want to spend a few minutes explaining the most basic and easiest to understand technical indicators which is what you generally hear in the public domain because most pundits aren’t advanced enough to take it any further.

The three charts below are of the Dow Industrials, S&P 500 and NASDAQ 100 in that order. The pink lines represent the average price of the last 200 days, also known as the 200 day moving average. It’s “moving” because every day as one piece of data is added, one piece of data from 200 days ago falls off. Many people simply use the pink line as a gauge of whether stocks are in an uptrend or downtrend. When price is above the pink line, it’s said to be positive and in an uptrend while the opposite is true when price is below the pink line.

You will also notice three upward sloping blue lines which do nothing more than connect the lowest prices from earlier in the year. That’s also known as a trend line. The more times price touches a trend line, the more important that line becomes. Two times is obviously the bare minimum and not exactly all that important.

During the decline, I heard some pundits opine that computer driven algorithms or trading programs were the cause of the drop. They were said to be gunning for the pink line so others who buy and sell based on the pink would be forced to take action. I find that mostly nonsensical.

What you can see from the three charts below is that all three indices declined to briefly breach their average price of the last 200 days along with saying hello to those trend lines. What’s more important is that at least for now, the bulls put up a stand at the levels they are “supposed” to, namely those pink and blue lines.

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