Apple & The Fed. A Volatile Concoction…

The FOMC begins their regularly scheduled two-day meeting today. Typically, stocks are quiet with a small upward bias. However, Apple reports earnings after the bell and that almost always provides some movement as the tech behemoth has an outsized weighting in the S&P 500, Dow and NASDAQ 100. I have absolutely no opinion on how their earnings will be and I really only care about how the market reacts anyway. The fact that it has sold off into earnings gives the bulls a slight edge to reverse the weakness by the end of the week.

Getting back to the Fed, expectations are that rates will remain as is for now with June as a less than 50% of a hike. September should be off the table as it is an election year and there is no clear and present danger to fight. So that really means that if Yellen & Co. do not hike rates in June, December is the next viable option. What a far cry from four rate hikes in 2016 as first forecast by the Fed!

Regarding the stock market, I remain in the cautious camp since last week as I believe the major indices are in the process of peaking. Apple will have a lot to do with the short-term direction of the NDX which is underperforming. None of the four key sectors are rolling over which is one reason I believe we will just see a modest pullback. Previous defensive leaders, staples, utilities and REITs are all bouncing back, but it looks like they have seen their peaks for a while and strength should be sold.

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Yellen Dousing Dollar & Stocks

After a big day for the bulls on Tuesday that did not close above the levels I spoke about to cause a spurt, stocks reversed on Wednesday and it looks really ugly on a chart. Bears will point to similar reversals at the major peaks in 2000 and 2007, which is true, but these kinds of reversals also occur routinely throughout a bull market. In analyzing their predictive power, they certainly have led to some short-term weakness, but the longer the time horizon, the less effective they are.

With Janet Yellen renewing her warnings that the Fed will raise interest rates for the first time since 2006 on December 16, the stock market is looking a tiny bit tired. The odds favor a very mild 2-4% pullback to set the stage for Santa Claus to come calling. This is a good time to prune and make sure you love what you own.

I am sure there will be lots of talk about the enormous rally in the Euro (fall in the dollar). It became a very crowded trade, especially in the hedge fund space (sheep & lemmings) on a leveraged basis. I do not believe the dollar trade is over, not by a long shot. I still think the Euro is heading to all-time lows below 80 by 2018 and the Yen will drop by another 25-50%. This is a shake out to rid the trade of weak handed holders.

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Spurt or Pullback???

Stocks continue to digest the gains made in early November without giving up against the negative news backdrop. That’s a well supported, resilient market. When the major indices close above their November highs, we should see a quick spurt to the upside. If they fail to do so this week, I would not be surprised at all to see a mild 1-3% pullback lasting a week or two to set up the Santa Claus rally into 2016. My theme remains the exact same as it’s been since late August. Buy weakness!

Sector leadership remains very strong and encouraging, despite what I keep reading about a narrow stock market rally. Semis are breaking out. Consumer discretionary is near all-time highs. Banks should break out later this month. Transports seem to be gearing up for a move.

My main concern continues to be the putrid performance of the high yield (junk) bond sector. With energy, metals and mining in real danger, those bonds are at risk for default, not to mention the very real possibility that some of these companies won’t be able to refinance next year.

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Stocks are no Turkey

I hope everyone had a great and meaningful Thanksgiving. As I type this, my stomach has settled down and I am just about ready for an evening snack at halftime of the Packers/Bears game before they honor Brett Favre.

Friday is another seasonally strong day on the heels of Wednesday. Don’t forget that the stock market closes at 1pm est. In my previous post I mentioned that the seasonal stats don’t forecast magnitude, just direction. What a perfect example as the Dow closed up a scant .01%! It looks like the Dow, S&P 500 and NASDAQ 100 are biding their time nicely and consolidating the big gains from a few weeks ago. At the same time, the S&P 400 and Russell 2000 have stepped up in a big way as I thought they would.

Next week should see some more significant action when everyone comes back to work. Until proven otherwise as I keep offering week in and week out, weakness should be bought for further price advance. Yes, I know that the geopolitical news is bad and the pundits say our economy is heading into recession and Europe is a mess and Japan is about to fall off the cliff. Someone must have forgotten to tell the stock market!

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Bulls Come Back to Life

Stocks came into the week on their heels from the recent pullback and the horrific terrorist attacks in Paris. In my previous post, I offered that the odds favored some more weakness with a reversal this week. The market saw a quick bout of weakness to open the week, but quickly reversed into a very strong day for the bulls on Monday. While Tuesday saw some internal soft spots, the bears will have a tough time taking control unless stocks close below Monday’s low.

At this point on the index side, we need to pay close attention to the leader. Bulls like me do not want to see the Dow taking charge over the other major indices. I remain of the opinion that all-time highs are not too far away.

On the sector front, I am loving the action in consumer discretionary, transports, internets and industrials. I can’t tell you how many times I hear financial reporters or pundits say that industrials can’t rally with a strong dollar. Clearly, these people never do their homework because it’s happened many times before and right now as well!

High yield bonds remain a concern, but perhaps Monday’s reversal will give them some upward energy. I am not ruling out that this canary in the coal mine already peaked for this bull market and will assume a laggard role until the next bear market hits.

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Pullback Deeper Than Expected

Stocks continue under pressure as they pullback from the huge run last month. Last week, I offered that this week would be the buying opportunity, but the pullback has been deeper than I expected. “Relentless” would be an exaggeration, but there has certainly been some strong selling. While Friday’s action did show the major indices mostly down 1%+, the selling was less severe than Thursday.

Going in to next week, volatility should continue to be on the high side and I do not believe the bottom is in just yet. The market has the look and feel of wanting one or two more down days next week, but the odds do favor a reversal and rally by the end of next week.

Sector selling was downright ugly, but it was not across the board. In fact, materials, industrials, energy and biotech bucked the strong downdraft to close the week. The first three of those sectors, according to the pundits, should be hit even harder with a strong dollar, but that was not the case. It usually pays to confirm what you hear as absolute from the talking heads.

High yield bonds continued their decline and it looks like they are headed back to their 2015 lows in short order. This sector has been very frustrating to trade for the past 18 months and I would almost say that it’s been more difficult now than at any time over the past 20 years. For full disclosure, I run two high yield bond strategies that have been challenging so I may be a little close to the trees.

Have a great weekend! I am so looking forward to being local with my family!!

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Pullback Orderly and Constructive So Far

The pullback that began last Wednesday in the major stock market indices continues. It’s been orderly and constructive so far and if the super bullish case remains, it should wrap up sooner than later. The stock market is digesting the better than expected employment report and is coming to terms with a December rate hike by the Fed.

The banks and discretionary continue to lead which is a positive sign over the intermediate-term. Transports are transitioning to leadership and that’s also a good sign. Energy is trying to step up as I type this and that group offers a nice risk/reward.

I have gone from very positive to very concerned about high yield bonds. With the strong stock backdrop, they should be acting a whole lot better.

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Pullback to Buy

Stocks are finally seeing some pause in the relentless rally that began a little over a month ago. It should be mild, relatively painless and in the 1-3% range. As I continue to mention, any and all weakness is a buying opportunity until proven otherwise. And there’s a chance that the “proven otherwise” won’t be seen until well into 2016.

Internally, the stock market has been and is on solid footing. As you can see from the chart below, the NYSE Advance/Decline line continues to rally from early October. That shows more and more stocks are participating in the advance. The key thing will be if this indicator moves up to an all-time high, which would further insulate stocks from significant weakness and forestall any bear market.

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Right now, banks are holding up really well, anticipating a December rate hike by the Fed. Should the banks maintain their leadership, that would positive ramifications into 2016. Finally, high yield bonds are hanging in with energy pulling back. If this continues, it would be yet another plus in a long line of positives.

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Stepping on the Bears’ Throats

As bullish as I have been, and I don’t think many have been as positive as I have been, the stock market is now starting to surprise even me on the upside. Coming in to the week, stocks were looking a little tired and in need of some rest, either by going sideways for a few weeks or by seeing a mild pullback of 1-3%. Instead, stocks are continuing to move higher although the rate of acceleration has slowed. I keep hearing the bears disavow and dismiss the rally, but their rationale has become even more absurd. I am even starting to see bearish analysts make personal attacks. I guess the pain is starting to hurt from having their throats’ stepped on.

It’s very interesting to note that sector leadership is very different so far this week than it’s been. Energy has been the big winner, finally stepping up to lead. Beaten down biotechs have also seen some love. This is important because it shows very strong underlying demand for stocks as certain sectors rest while others take their place. High yield bonds also continue to behave well and I am sticking with my forecast that this could be a run right into 2016.

In short, nothing has changed from four weeks ago in that any and all weakness should be bought. It’s just that after a 2000 point rally in the Dow, risk is higher than it was.

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Yet ANOTHER Bullish Q4 Study

After my research on post-crash behavior was complete, I turned to stock market performance. With both August and September closing lower, I wondered if there was any trend for Q4. Over the past 35 years, there were only 6 occurrences and all led to a positive Q4 by an average of +10.86%! You can view the study here. http://investfortomorrowblog.com/archives/1936

With the help of my friend and colleague Dana Lyons, http://jlfmi.tumblr.com, I analyzed stock market returns since 1950 when the S&P 500 dropped at least 10% in 6 days, like we saw in August. The average results are below.

3 months later +5.6%
68% of the time returns positive

6 months later +12.5%
81% of the time returns positive

12 months later +21.4%
81% of the time returns positive

24 months later +37.5%
90% of the time returns positive

Three independent studies all conclude the same thing over the intermediate-term. The bull market and this rally are far from over and my longstanding target of at least 20,000 is achievable in 2016.

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