1987 Again? Post Crash Playbook. Turnaround Tuesday

I am going to do something different today and start with my conclusion and work somewhat backwards. The bull market remains intact and fresh all-time highs should be seen next quarter. Buying into sharp downdrafts, while emotionally very difficult, should be rewarded over the intermediate-term.

Like a snowball rolling downhill, whatever this decline is going to end up being labeled, the market is right in the middle of the highest speed and maximum acceleration. As with the snowball, it is the largest and fastest right before it hits the bottom of the hill.

If Friday wasn’t volatile enough for you, Monday was a wild one in terms of points not percent. And that’s leading to what looks to be an equally or even more volatile affair on Tuesday as opening indications have ranged from the Dow being down anywhere from 400 to 950 points. In point terms, it’s going to be a day for the ages. However in percentage terms, Tuesday will likely fall within the realm of normalcy for a market decline.

This next comment may seem counterintuitive, but the best thing for stocks would be a 1000+ point decline at the open that creates the “whoosh” of cleaning out everyone and anyone looking to sell. From there, the market would then have an opportunity to back and fill and begin to create some stability. If that “whoosh” doesn’t happen at the open, there should be several selling waves during the day to create it with the potential for a Turnaround Tuesday this afternoon. The media would absolutely love it. The worst thing for stocks would be if stocks open sharply higher.

Yesterday, I wrote about my playbook for mini crashes. http://investfortomorrowblog.com/archives/3313 The pattern and most likely scenario remains very much in play and valid although I certainly underestimated to magnitude of the decline. As I mentioned yesterday, I am looking for the momentum or internal low in the stock market this week followed by a multi-week rally before the next decline to the ultimate bottom takes places.

If the market cooperates, that puts the final low sometime in March. There are enough “ifs” and time in that scenario to take it day by day and week by week. One thing continues unabated, volatility, my theme for 2018. Historically average volatility is here to stay with pockets of spikes.


Investors and the media have this fascination with needing to know why the decline occurred. What caused it? How can we prevent it from happening again? Most of the time, that’s a fool’s errand.

What we are seeing right now is financial market event. It is not fundamentally based and is absolutely nothing like 2008, which people have invoke during every single large decline since 2008. There is no underlying financial crisis. The economy is not teetering on recession, at least not yet. We have record corporate earnings and the global economy is sound, again, for now.

At the risk of creating some undue anxiety, 1987 was a market event. It had nothing to do with the economy or financial system. I do not believe this is 1987 again. I repeat. I do not believe this is 1987 again, at least  not right now. I do think something like 1987 on a smaller scale could occur much later this year, but that’s a topic for a different day.

This stock market decline began with the specter of higher interest rates, or at least that’s what the pundits have said. It took the 10 year treasury note to rally 100% before stocks noticed or so it seems. Last Friday, wage growth finally got back to normal levels, if only for one month. This has investors worried that a tight labor market with rising wages could lead to inflation, something we haven’t had in over a decade. And with inflation comes a very restrictive Fed with spiking short-term interest rates.

I laugh at that entire thesis. Certainly since 2009, the Fed has been desperately trying (and failing) to engineer inflation. The inflation isn’t even out of the bottle yet and people are worried. Looking at the long-term picture, since 1998 the velocity of money, something I write about every 6 weeks right before the Fed meets, has been in a perfect, secular bear market. I continue to argue that until velocity turns significantly higher, there will be no problematic or worrisome inflation.

Another reason behind the selling has been computerized trading, as it behind every single accelerating decline. That’s a sign of the times and one of the unintended consequences of technology. People don’t complain about high speed trading on the way up, only on the way down. If I had my druthers, I would slow down all computerized trading by 1/2 of one second. Playing field leveled. Edge removed.

Look at the chart below, especially in the middle, of what transpired over just two hours on Tuesday. 1300 Dow points from high to low. 600 Dow points in just 5 min, in both directions.

Finally, as with almost every decline, there are those out there who made overly leveraged (borrowed money) bets and who are at risk of insolvency. In today’s case, what started as tens of millions and then hundreds of millions and billions and tens of billions, betting against stock market volatility became akin to shooting fish in a barrel, until it wasn’t. Volatility happens all at once. It doesn’t quickly and methodically build.

There are derivative products who trade the volatility index or VIX, both with and against. Those that bet against volatility have blown up. completely. So much, that at least one product creator, Credit Suisse, is liquidating its XIV exchange traded note (ETN). XIV closed on Monday at 99. Now it’s been halted from trading and will be closed, literally overnight.

There are always casualties during periods of market stress. Leverage used properly can aid in portfolio construction. Leverage used without understanding the product and consequences is greedy and ignorant.

Assuming Tuesday is another wild day, (Turnaround Tuesday?), I will send a short update or a full canaries in the coal mine later this week.

As always, please don’t hesitate to call or email with any specific questions about your portfolio or financial situation. Investing is a marathon not a sprint and pockets of weakness in the markets will always occur, whichever side of the market you are on

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Post Mini Crash Stock Market Playbook. All-Time Highs Around the Corner

The Dow Jones Industrial Average “crashed” 666 points on Friday, at least that’s how the media portrayed it. And it’s on track to open another 1%+ lower this morning. In 1987, 666 points would have been more than 25%. In 2018, that’s all of 2.5%. 2.5% moves used to mostly occur monthly and certainly quarterly. During extreme periods of volatility, like 2001, 2002, 2008, 2009 and 2011, a 2.5% move would barely get noticed. Today, it’s BREAKING NEWS.


Recent volatility. For 24 months, stocks have been in their least volatile period of all-time. In 2008, investors got used to these outsized moves. In fact, we even saw a 10% move in a single day. Today that would be more than 2500 Dow points. However, since February 2016, the stock market hasn’t even declined 5% which will end this morning. And it’s been the longest streak in history without even a 3% decline.

So Friday’s mini crash (in points not percent) is somewhat of an outlier, a number that doesn’t really fit in the normal range of daily returns. More importantly, it occurred from new all-time highs five days earlier. Please re-read that sentence as declines like this do not typically happen so close to all-time highs. The chart below shows you what’s happening with the subsequent ones indicating a theme.

The next chart below is my favorite and one that I think is the best rhyme. It’s from 2007 when stocks collapsed at the end of February due to China’s market plummeting. The reasons do not matter. I repeat. The reasons for these declines are of absolutely no significance.

In 2007 stocks made an all-time high and then saw a mini crash five days later. Stock market internals were very strong before the decline. In math terms, it was a five sigma or standard deviation event. In other words it was a huge decline relative to the normal price behavior over the past year, just like today.

While the mini crash wasn’t the absolute bottom, it was pretty much most of the price damage. Stocks saw a short-term low a few days later, rallied and revisited that low shortly thereafter. And then stocks soared higher again.

Remember that.

In 1994 as you can see below, stocks were at all-time highs and saw a mini crash four days later from a period of very low volatility. But that was just the beginning of a larger decline and more challenging period.

Why show this? Was anything different?

There was a significant difference. In 1994 stock market internals were poor and had been deteriorating for months. The January 1994 peak was accompanied by a wide ranging group of divergences or non-confirmations. The market’s foundation was already crumbling, very much the opposite of today.

1991 is next and as with the previous charts, we have an all-time high followed by a mini-crash two weeks later. Market internals were strong before the decline. The ultimate low took a little longer, but the results were still the same. Stocks bottomed and then soared to new all-time highs.

1989 is the final comparison and although my data provider clearly has some incomplete data, I think you can get the gist of it. Stock market all-time high, mini crash a week later, rally, revisit and then stocks soar to all-time highs.

See the theme yet?

Markets never exactly repeat, but they certainly rhyme. Below you can see what I drew in as the scenario I see as most favored or likely at this point. Stocks are not done going down and they should continue lower early this week. A low should be formed, followed by a bounce of one to three weeks before the decline to the ultimate low takes place.

The key is not that the Dow exactly follows my arrows, but that once the low is in, stocks soar again. Yes, stocks soar again to fresh all-time highs and the bull market remains intact. The bull market is not over. This decline could speed up its ultimate fate, like it did in 2007, but that’s way too early to state right now.

Besides valuation, which is a horrible timing tool and sentiment which was certainly euphoric but can be corrected with this mini crash, stocks have done nothing wrong to indicate the bull market is over or even close to ending. Ignore the hysteria and focus on reality. Buying weakness remains the correct strategy until proven otherwise.

Assuming today is the volatile affair it is setting itself up to be, I will likely send out a brief update by tomorrow’s open. There were a good number of short-term indicators that flashed “imminent low” for this week I will discuss

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And Stocks Go Down AGAIN

More than a week ago, I started discussing the idea that a trading range was setting in with modestly lower and higher prices as the range. For a few session, stocks blew right past that idea. Before today, the stock market had very, very quietly pulled back for four sessions without much fanfare except for some weak internal readings.

That all changed as a solid employment report with finally some real wage growth further spooked the bond market, sending yields on the 10 year note to 2.85%. There is fear that 3% will be next and that will make bonds more attractive again and give stocks competition. I don’t buy that at all.

The issue is not that yields hit 2.85%, but rather that they are doing it in spike fashion. If yields had taken two steps and one step back on their way to 2.85% in orderly and boring fashion, I doubt the stock market would really care. It’s the same thing with oil. When oil either surges or plummets, the stock market usually follows suit. Markets are very good at adjusting and adapting to new levels as long as they get there slowly and orderly.

The long, long, long awaited stock market pullback is here. It should be a mid single digit affair and conclude by the end of the quarter. Because of how large the numbers are on the Dow, the point decline will make headlines. But remember, the Dow is down 4% right now and that’s over 1000 points. It’s not the end of the bull market and certainly not the end of the world.

Friday selloffs always concern people because they have snowballed in the past. Wherever stocks close on Friday, it is unlikely to mark the final bottom. Dow 25,000 is a logical target. The volatility Genie is out of the bottle and should be the rest of the year. Pullbacks are good to allow you to jettison investments that are lagging or you no longer like to rotate into better performing or higher quality ones.

Anyone still talking about the “melt up”???

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Fed Statement Day Disappoints. Defensive Groups Lead.

Fed statement day was certainly atypical and a volatile affair. Early strength was sold into which accelerated after the 2pm announcement. And Just when it looked like the bears would turn the day into a rout, the 3pm bell rung and the bulls came roaring back to life. What was most interesting was that while the Fed didn’t say much in their statement and actually was slightly more positive on the economy, it was the defensive groups, like REITs and utilities that acted the best on the day.

Two very reliably bullish short-term studies did not deliver on statement day which sets up a mildly negative trend for today and possibly longer. Keep in mind that the bull market remains intact as does this leg of the bull market. The rally is not over just yet. Leadership continues to be strong and only high yield bonds are offering any warning. It will be interesting to see if the defensive groups stay strong today, not to mention on Friday when we have the employment report. Unless it really lays an egg, the Fed will be raising rates 6 weeks from now.

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Stocks Can Go Down?!?!

On Monday we learned that stocks can actually decline in 2018. On Tuesday, we are about to find out that stocks can go down on back to back days and accelerate lower. People seem to have forgotten that!

With a trading range/pullback setting in, I am looking at Dow 25,800 as a logical downside target, but of course, we could go a bit lower. Semis, banks and discretionary are acting well and transports aren’t horrendous. There is news just out about Amazon, Berkshire and JP Morgan getting into healthcare on a non for profit basis so I would expect significant weakness in the healthcare sector today.

Tonight, we have the State of the Union and tomorrow the Fed will conclude their two day meeting without any action in rates. It will be interesting to see where stocks close versus where they open to get a feel for short-term mood. Any sign of the “melt up”?

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Don’t Confuse Brains with a Bull Market

On Wednesday at 9:20 am I will be with Laura Hutchinson on WTNH (ABC in CT) unveiling my top financial resolutions for 2018 with a special focus on those directly impacted by the tax reform bill passed last month.

It has been one heck of a start to 2018 in the stock market with some of the strongest momentum in history. As I have mentioned a number of times, animal spirits were released into the economy and markets a year ago and they seem to have been re-released late last year. Historically, those are not extinguished so quickly.

In short, all five major stock market indices are in sync to the upside. All four key sectors are leading and acting very powerfully. There is broad participation in the rally as measured by the New York Stock Exchange’s Advance/Decline Line. And high yield yield bonds are behaving at least okay.

While pundits have been calling the stock market a “bubble” for years, price behavior isn’t supportive of that just yet. My primary concern is that after an almost 20,000 point rally in Dow, the masses have finally embraced the bull market and are going “all in”. Sentiment surveys and individual investor behavior in the options market are showing euphoria. When the historic momentum begins to fade, the euphoric mood will matter, but that should not be right now or soon.

I keep hearing from the remaining naysayers that “this is going to end badly”. Well, no kidding! All, and I mean every single bull market ends badly or they wouldn’t end. Not a single bull market in history ended quietly without ensuing pain. Those who are late to the party and do not have a plan to book gains, hedge or play defense will certainly see decimation in their portfolios, just as they have during every single bear market in history. That’s just the way investing goes. Just ask all those Bitcoin investors who thought it was a one way street to untold riches. The 50% decline happened in the blink of an eye.

While stocks will likely see a full-fledged correction later this year and an increase in volatility well before that, the landscape still favors the bulls as even the slightest signs of weakness are immediately bought by those who have been sitting on cash. As the saying goes, “don’t confuse brains with a bull market”.

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Permanently Higher Stock Prices

Last week I offered the idea that stocks may be settling into a little trading range before resuming the rally. Well that lasted all of one day as the bulls continue to press higher to begin the new week. Time and time again this market has punished any and all who dare to hold cash or, heaven forbid, short the market or hedge. As continue writing my year-end report to clients and I review commentary, I realized that for 20 months, the stock market has completely steamrolled almost all of the short-term negative studies as well as the seasonal (calendar) ones. That’s pretty incredible and something without precedent in my 100 year database.

So here we are with all five major stock market indices at all-time highs. There’s not much more to say. Semis, banks and discretionary at new highs. Transports not far behind. NYSE A/D Line at fresh highs. Only junk bonds are lagging, but they look like they could score new highs sooner than later.

2017 was relatively easy for the bulls. 2018 has started off even easier. I am concerned that few others are concerned and people are starting to believe in a new paradigm of permanently higher stock prices. That’s very dangerous. I hear pundits saying that all this won’t end well. While that’s true, no bull market in history has ever ended well or it wouldn’t have ended! Everyone should enjoy what’s going on in the stock market, but realize that this behavior is generational and won’t likely be repeated for a long, long time.

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