What Would Ray Dalio Say Now?

All I heard Friday was how “surprised” everyone was with the magnitude of the rally. If people were paying attention, it was anything but a shock. I spoke about the internal or momentum low being hammered in the very day it happened and regardless of what it would lead to, stocks had to rally first. And rally they have!

Friday’s activity saw the second 90% up day in volume over a one week span. Historically, that has been very bullish, even during bear markets. Bears should not discount that buying thrust just yet. All I heard as stocks were bottoming was that everyone should “sell the rally”. Well, my bearish friends; you got that opportunity but you have been noticeably quiet of late.

The bulls put in one heck of a show late last week in the face of weaker than expected economic news. Heading in to the new week, the bears really need to step up early and make some noise. The longer the bulls can hang on and keep the major indices from giving back Friday’s gain, the more likely we will see another strong move higher. Pausing to digest is fine and expected, but not much more, 1900 ish on the S&P 500.

After a low, the most beaten down tend to rally the hardest before real leadership emerges. From a chart and trend point of view, staples and utilities appear to be the healthiest and that’s not exactly the type of leaders we want to see. That reminds me of 2000. But it’s still early.

Treasury bonds also partied with stocks, something we haven’t seen in a while coming out of a bottom. Famed hedge fund investor, Ray Dalio from Bridgewater, who is often dour, commented that with stocks and bonds both declining, that looks depressionary. I wonder if that means explosive expansion with stocks and bonds both rallying lately?!?!

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Internal Bottom Confirmed but Volatility FAR from Over

Last week I wrote about the internal or momentum low being put in on Wednesday. Thursday’s action was essentially a stand off between the bulls and bears although the bulls had to be pleased that stocks stopped going down. Friday was the big point gainer for the bulls, but there wasn’t much upside after the big gap opening.

Assuming I remain correct in my assessment of the bottom, stocks usually see a day or two of red before exceeding Friday’s high this week. From there, we are supposed to see more upside lasting at least a few weeks or more into a trading peak in February before another decline sets in. The beginnings of these rallies are littered with the most beaten down names running the hardest as short covering initially causes the move. Real leadership takes some time to develop so don’t prematurely hop on the former losers as new leaders.

Stocks are going to stay volatile for another 4-6 weeks. Buying weakness and selling strength is the strategy I most want to follow until the markets settle down. Stay nimble and don’t be stubborn. I am not loving the action in the financials, industrials and materials, while healthcare,  biotech, staples and  REITs behave better. The next few weeks are also going to be an important period for high yield (junk) bonds to make a stand. I continue to believe that this key canary in the coal mine sees a major bottom in 2016.

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Internal or Momentum Bottom Being Hammered In

Stocks continue to be very volatile, one of the primary casualties of higher interest rates, but certainly from the dislocations in the energy market, which has seen an epic and historic collapse. I imagine that the large oil-based sovereign wealth funds in Norway, Saudi Arabia, Kuwait and Qatar have been massive sellers of global equities this month to continue to fund their social programs in the face of imploding energy prices.

The relentless and indiscriminate selling has all the hallmarks of push button forced selling and not the selling with keeping market impact small. Since the mid 2000s, I have often heard that when the Middle East funds want out, it’s immediate and not over time.

The crash in energy prices has also wreaked havoc on many inter-market relationships, causing all sorts of market-related issues this month. It has been a very ugly few weeks for the bulls.

For the past two weeks, I have pounded the table that this is absolutely not a repeat of 2008. I won’t rehash the comments, but you can view here if you like along with a valid price comparison from 2008.


What totally astonishes me is how the masses have completely abandoned stocks to the likes of which have only been seen a handful of times in history and mostly at either major bottoms or significant intermediate-term lows. I am used to seeing the “buy the dip” crowd out in force on CNBC and Fox Business during market corrections. But not this time. It seems like everyone is advising to sell the rally now.

In my 26 years in the business, I have survived two 50%+ multi-year bear markets and a whole of 20%+ declines. Never before have I had so many calls, emails and request for meetings from clients who have been shaken to the core by the headlines. That is shocking to me. Stocks are down a little more than 10%, but investors have emotions like they did in the middle of the financial crisis.

In my view, not only is this absolutely not the time to withdraw money from stocks, I believe we are approaching an opportune time to add money and perhaps take on a little more risk. It’s very hard to understand why folks are so focused on taking losses and standing aside. Stocks were down more last August, a lot more in 2011 and more in 2010. Each time led to a robust recovery.

What has the masses so spooked this time?

During these types of periods, I often suggest that if the volatility becomes too much, then lowering portfolio risk over time is a better strategy. Investing is a marathon not a sprint, but the desire to accept the ups and downs changes over time. I never like to move my own portfolio around during periods of outsized returns on the upside or downside. Rather, I like to wait until the environment is calmer and I can proactive not reactive.

Wednesday has the potential to be a key day for the stock market. There is a decent likelihood that an internal or momentum low was just seen as the relentless selling wave hit extreme panic and capitulatory levels. Internal lows are when the majority of stocks have seen their maximum damage. It’s when selling is the harshest. The maximum pain threshold for investors.

We will know more definitively in a few days.

If I am right, it doesn’t mean stocks are out of the woods and new highs will following next month. Rather, the markets should bounce and decline a few times, but the downside should be limited as a foundation is built for a stronger rally later this quarter and into April.

And if I am wrong?

I still do not believe now is the time to sell. That’s crazy in my opinion. At some point sooner than later, stocks will bounce and for those who just cannot stand the pain anymore, there will be a better opportunity to exit.

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Tuesday’s Binary Outcome

On Friday, we finally had the “puke” opening. There was some panic, desperation and despondency. In the “fight or flight” debate, there were more than a few investors taking to the skies! Given the very heightened volatility, Tuesday’s trading should not be quiet. Rather, the stock market should see another large move. Scenario A has the bulls putting up a real stand right from the opening, perhaps an old fashioned “gap and go” snap back rally. On the other end of the spectrum, Scenario B would look similar to August 24 where stocks see a mini-crash. I don’t see much in between which is why I used the word “binary” in the title.

Why way will stocks go?

It’s not exactly a coin flip, but the evidence is not overwhelming either. There were a few lights at the end of the tunnel on Friday for the bulls. The most beaten down indices, Russell 2000 and S&P 400, closed down much less than  the Dow, S&P and NASDAQ, a clear break from the meat of the decline. Additionally, both laggard indices closed Friday significantly higher than where they opened, another possible sign of at least a short-term trend change. Biotech, energy, utilities and healthcare sectors all did not make news lows on Friday, a definite change in the relentless, indiscriminate selling of the past two weeks.

Tuesday is yet another one of those “key” days for the bulls. Let’s see if they can stem the tide and mount a little offensive of their own.

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Puke Opening is Here

As the relentless selling pressure in stocks continues, my last few pieces talked about getting closer to at least a trading low, but not quite there yet. Even as stocks bounced back on Thursday, the tune was the same. I was waiting for that really ugly, panic driven opening where stocks saw there largest point decline of the correction. As I type this, the Dow looks to be down 400 points and this certainly qualifies as a “puke” opening.

While I hate to invoke 2008 because I absolutely do not think 2016 is like 2008, this kind of price action was also seen right into the MLK weekend with the first low coming immediately after. I think it’s possible the market will behave similarly.


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Stocks Bouncing But No Bottom Yet

I won’t rehash what’s been plastered all over the media. Selling in stocks has been relentless and the worst start to any year ever. It “feels” like the market is collapsing and harkens back to 2008. As I like to repeat from time to time, feel is not real. Yes, the major indices are down upper single digits in 2016, but I would argue that if this decline occurred any other time of the year, it would not be getting the press it is now because it’s the beginning of January.

Blame has been laid on China and North Korea and energy. The way I see it, energy has been the real culprit, but we will know for sure if stocks rally with energy still falling or stocks don’t rally when energy does. The latter will be very disconcerting!

In the short-term, stock are rallying today, but it’s not very convincing and I do not think it will last. The NYSE A/D line is just 2:1 positive for a Dow up more than 250 point as I type this. That’s disheartening for the bulls. Financials are up but lagging and consumer discretionary looks sad. The bulls need a much better effort to mount a real rally.

This bounce looks temporary and should lead to new lows when it peters out. A real bottom should have some panic associated with it during the morning with gradual firming towards the close. So far, those levels have not been seen.

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