Lots of Negativity But Stocks Close to Blue Skies

Stocks begin the new week with the Dow Industrials masking the overall strength of the S&P 500 and NASDAQ 100. Remember, the Dow only has 30 stocks and they are weighted by price. So, high prices stocks move the index a lot more than mid or lower priced ones. Boeing has been hit with the ugly stick for 40+ points over the past two days which equates to roughly 280 Dow points.

While the Dow has stalled out with a few stocks lagging, the S&P 500 and NASDAQ 100 areĀ  but one solid day from all-time highs. Most people find that hard to believe as there seems to be a sea of negativity these days. I was shocked to see option traders flood into negative put options last Friday, however, there may some undue influence from monthly expiration. Both the S&P 400 and Russell are still lagging, but they look like they want to play some catch up sooner than later.

My long favored semis are very close to new highs with the financials and transports really getting into high gear. Any one of these sectors could provide fuel for another leg higher, but if we get all four key sectors going at once, we could see a relatively fast 10% spurt over into January. Last week, I followed up on recent positive comments about REITs and right on cue, they broke out to fresh, all-time highs. Next up is to watch utilities and staples for signs that all defensive sectors are running again.

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Junk Bonds & the A/D Line Say All is Okay

From open to close, stocks have traded in a narrow range most of this week and around the same level each day except for Tuesday. As the old highs in the Dow Industrials, S&P 500 and NASDAQ 100 have come into reach, investors are pausing as they usually do to assess risk and reward. While I do not think it’s a layup for a breakout right here, I feel very confident that Dow 28,000 will be kissed this quarter with leadership coming from some of the key sectors like semis, discretionary and banks.

For all the talk about high yield bonds lagging and quietly forecasting doom, they are pretty close to an all-time high.

Additionally, let’s take a look at the NYSE A/D Line which is actually at new highs now. I have heard from pundits that the rally lacks participation, but the facts don’t support those claims. While stocks could always pull back, the odds favor the Q3 lows as being the lowest prices for the rest of the year.

 

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Deal? What Deal???

I am sure I am not the only one who is really skeptical about this “trade deal” with China being real. While I am sure the two parties agreed on some items, we are so far from a real deal, signed, sealed and delivered. This doesn’t even sound like an agreement in principle since the Chinese have a different recollection and their state run news service tells their own story. This saga is far from over.

The stock market was very strong on Friday in anticipation of a deal being struck. Almost too strong. I tweeted that I wished a deal would not have been announced until after the close so there could be a possible selling opportunity on a higher Monday opening. The Trump administration had other ideas. The Dow Industrials dropped 200+ points on the announcement to close near the lows for the day. That’s not exactly comforting and my gut says we could see some short-term weakness to give back all of those gains.

I still really, really like the action in semis, something I have discussed here over and over and over for most of 2019. There are a lot of things people can say about my opinion, analysis and forecasts, but being unclear on semis isn’t one of them. Nor is my call for Dow 28,000 this quarter. I may not get them all right, but I never, ever run or hide from any flops.

Finally, I am keeping a close eye on REITs as they seem to be the most constructive of the defensive sectors. As you know, I have been talking about a “barbell” approach for the past few quarters with semis, utilities, staples and REITs. Own the aggressive and conservative sectors. Leave the rest alone.

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Bears Wrong, Again?

On Monday, I wrote about the bulls thwarting the bears with another low forming in the stock market. I also showed some of the fuel that was building up for higher prices in the form of very negative options traders who are usually wrong. Couple that with my Twitter feed turning negative and the bears ostracizing my bullish view, I felt pretty good that stocks would rally. And rally they have in short order, catching the masses off guard.

I tell ya; these perma bears. I can’t believe they have any money left from continuing to hate and disavow the bull market. They continually whine about the markets being manipulated by the Fed and everything being fake. They warn that it’s a house of cards about to crumble. It would be one thing if they just started playing Chicken Little now, but this has been going on for the better part of a decade. Eventually, they will be right and crow about it, but what a joke they have been.

Stocks are back into the middle of the Q3 trading range, but trying to close at their highest levels in October. Whether or not there is one more shot to the downside on a failed trade deal or some tweets from 1600 Pennsylvania Ave, I remain confident that Dow 28,000 is up next with a chance at 30,000 in Q1 2020. The bears just continue to have it wrong. And now, they’re getting nasty about it.

Sector leadership is very slowly and quietly improving. Semis, banks and discretionary are looking better and better. While transports are neutral, they look constructive and could certainly turn more positive later this quarter. High yield bonds are behaving fine and the NYSE Advance/Decline Line is poised for yet another fresh, all-time high sooner than later.

I may sound like a broken record, but use weakness as a buying opportunity until proven otherwise. It’s been an absolute loser’s game to sell weakness.

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Bulls Thwart Bears With Another Low

Last Wednesday as stocks had pulled back to the lower end of the recent trading range, I thought we were about to see a showdown between the bulls and the bears. That battle was fought one day later as an early morning mini-collapse triggered by a poor manufacturing number flushed out the sellers and allowed the bulls to come roaring back the rest of the day with a beautiful intra-day reversal. On Friday, the bulls added to those gains and put the major indices right back into the old range as you can see below on the far right of the chart. This is textbook behavior for ridding the market of short-term, weak handed traders.

At this point, in the strongest of strong markets, stocks should pause and then continue higher towards the old highs without any downside. I am not so sure that’s where we are today, but I wouldn’t sell the bulls short. Another scenario has stocks seeing some modest weakness this week and then beginning a more meaningful assault higher next week. I don’t see an immediate collapse right here.

With only a 6% decline, it’s a bit odd to see traders behave so bearishly in the options market. Below, you can see the S&P 500 on top with a 10 day average of volume in options looking for lower prices versus higher ones. Option traders are just as negative now as they were at market lows in August and June. While this is only one single indicator and doesn’t guarantee anything, it is certainly fuel for the bulls to move prices higher this month.

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The Truth About October

With Rosh Hashanah taking me out of the office for two days, I forgot to offer some stats as the sometimes nasty month of October begins. I cannot recall who first alerted me to the breakdown I am about to show so I will just say thanks to my usual cadre of characters whose work I value and respect. Rob Hanna, Ari Wald, Jason Goepfert and Tom McClellan.

Overall, October has been better known for stock market bottoms than any other month of the year. However, that usually occurs after a poor September. A month ago at this time, I debunked the myth and refuted the media and pundits’ claim that September was a universally poor month for stocks. The facts don’t support the claim.

Today, we will look at various stats from Octobers past. Unlike most months of the year, October actually performs better when it begins the month in a downtrend. In other words, when the S&P 500 starts the month below its average price of the last 200 days. When stocks are in an uptrend, they struggle to finish October in the black. When the market begins the month on its heels, October becomes the best month of the year, returning more than 2%.

With October beginning in an uptrend, let’s look at how the weeks shake out historically.

  • First 5 days +0.66%
  • Second 5 days -0.26%
  • Third 5 days -0.30%
  • Fourth 5 days -0.25%
  • First 10 days +0.35%
  • Last 10 days -0.91%

So far, October is conforming to a weak month, but it’s not following the strength first script. At this point, I expect an initial low to be formed by the end of the second week.

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Lower End of Range Hit – Can Bulls Make a Stand?

Last week was the single worst week of the year based on seasonal patterns and it certainly lived up to the billing I gave it several times here. Weak seasonality didn’t end last Friday. It extends to the first part of October. For the past few weeks I have been in the trading range / mild pullback camp with an eye on the upper and lower ends of recent range. After stocks failed to exceed the top of the range last month, I offered that a visit to the lower end of the range would probably be in line.

After a feeble bounce to close the month and quarter on Monday, the bears made a lot of noise on Tuesday after the ISM economic report came in much weaker than expected with a chorus of recession calls following. While I continue to expect a mild recession beginning in the next year, I don’t think it’s right here and now. And certainly, the markets are not forecasting recession just yet.

Tuesday was an ugly day for the bulls. Looking at an updated chart of the trading range below, you can see that the lower horizontal blue line is where stocks closed. Wednesday will be a key day for the very short-term in determining if the bulls have enough ammunition to make a meaningful stand here or will they need to stand back and wait for lower prices to circle the wagons. If the uptrend is still strong, I would expect early morning weakness to be bought with the bulls coming in stronger after lunch. If not, then early morning weakness should lead to a mid-morning rally that is sold with lower prices after lunch and into the close.

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Stock Market Reaction to Impeachment

Here we go.
I remember writing about impeachment in 1998 and hoped and prayed the country wouldn’t have to experience this kind of political circus again. It took 21 years, but the circus is back in D.C.
Thankfully, since we only have two prior, modern day instances of impeachment, stock market results are certainly not statistically significant. Given that, however, let’s take a look at the environments surrounding each of the prior two along with where we are today.
First, let’s look at Richard Nixon in 1973. You can see on the chart below where the “official impeachment inquiry” began. At first glance, it certainly looks like the stock market unraveled immediately following the inquiry. However, correlation is not causation. In other words, just because it looks like one thing is tied to another doesn’t make it so. It’s like saying that at the stock market peaks in 2007, 2000, 1990 and 1987 sharks migrated west to east instead of north to south. Or that the path of the stock market is moving tick for tick with the migration pattern of wildebeests. It’s just coincidence.
The macro picture in 1973 was very poor. The U.S. was heavily dependent on foreign oil and OPEC began production cuts in October 1973 against all nations they perceived to be supportive of Israel. The embargo continued in late 1974 and oil skyrocketed 400% leading to a global recession.
While the stock market looked like it was strong right into the peak in early 1973, that was the time of the Nifty Fifty, 50 stocks that were soaring while the rest of the market had already rolled over into a bear market. At the peak in January 1973, more than 50% of stocks were already down 20%. In short, the stock market’s foundation had crumbled, but the house was still standing.
I would strongly argue that the stock market would have seen the exact same results had the Watergate scandal happened or not. If you want to push back a little, maybe I would cede that a single digit decline could have occurred, but certainly nothing like the carnage from the oil shock and serious recession.
Let’s turn to 1998 when Bill Clinton was impeached. Below, you can see the official inquiry began in October 1998 at the end of the stock market’s 20% decline. Some would very wrongly argue that the threat of impeachment weighed on stocks. In 1998, stocks collapsed in August as Russia defaulted on her debt. After a brief bounce, they fell once again when hedge fund, Long Term Capital Management threatened to take down the entire financial system with their staff of Nobel prize winners and 100x leverage on bets that a 1 in a 1000 year storm wouldn’t happen.
Unlike 1973, the economic backdrop was much more constructive in 1998 as the Fed slashed interest rates and created a Wall Street consortium to bail out the imploding hedge fund. GDP growth never missed a beat, continuing to click at 4%+ until the end of the century. The stock market was already at the end of the bottoming process when the impeachment inquiry became official in October 1998. Stocks literally soared like a rocket ship from that point as the Dotcom Bubble was just beginning to inflate.
I feel very strongly that Clinton’s impeachment had almost zero stock market impact because the market had a strong base and there was almost no chance of him being thrown out of office.
Where are we today?
Today’s economic landscape falls somewhere between 1973 and 1998, however the geopolitical backdrop is much more stable than 1973 and more closely resembles 1998. Economic growth is “fine” and I don’t see an imminent serious threat. Yes, I still believe a mild recession is coming next year, but nothing like we saw in the 1970s. The tariff tantrum may seem like the biggest concern on the surface, but with an election just around the corner, Trump will almost certainly capitulate before jeopardizing the economy.
Looking at the stock market, it is also somewhere in between 1973 and 1998. While price is near an all-time high, the foundation remains very solid and stable which is more like 1998. We see high yield bonds near all-time highs and the New York Stock Exchange Advance/Decline Line is also close to all-time highs. This tells us that any and all declines are buying opportunities.
So far, the threat of impeachment has had no effect on stock prices. And unless a “smoking gun” appears and Senate Republicans begin to jump ship, I continue to believe that the stock market will proceed higher to Dow 28,000 and perhaps 30,000 in Q1 2020. Impeachment makes for sensational headlines, drives people to the media and creates an even bigger country divide, but I believe this will be the third time without market impact.

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