Stocks Tired But No Reason to Sell Just Yet

Stocks are now in one of the most seasonally strong times of year within one of the most seasonally strong times of year. The big question is whether the market has used up most of the available fuel and needs a break first. Certainly, the last few days have seen a mild pullback. It looks like the bears have a tiny bit of work left to do on the downside. However, those looking for any significant price damage during the these final two weeks will probably be sorely wrong.

I say this every year, but there are few reasons to sell over the final few weeks. It doesn’t mean it can’t happen; it just means that it’s less likely to happen. The Fed is done. Earnings season is still a few weeks away. Washington will quiet down. Since 1990, only 2002, 2005 and 2012 saw any real selling and it wasn’t all that significant. We have some tired indices and some exhausted sectors, but I wouldn’t be holding my breath for a collapse.

Leadership remains strong. High yield bonds are hanging in nicely. Intermediate-term participation is solid.

If you would like to be notified by email when a new post is made here, please sign up HERE

Fed to Hike Rates But All Not Well

Model for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Two meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, the upside edge is just outside a coin flip and certainly not worth playing based solely on this. While it’s also December option expiration week which has historically added a nice tailwind to stocks, that edge has also been a bit muted by the strength seen on Monday and Tuesday. On the bright side, there could be a strong and playable short-term trend to the downside starting by the end of the week, but we will have to see how the next few days play out.

1/4% Hike Against Mixed Economic Picture

Janey Yellen and her friends at the Fed have done an excellent job of preparing the markets for a rate hike today. I would say that it’s a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Whether you want to attribute it to the Fed making an independent decision based on the economic data at hand or that Donald Trump’s agenda is assumed to be very pro-growth or that Paul Ryan will be running tax policy or even that stocks have become a bit frothy, short-term rates are going up today and next year.

Looking at what the Fed is supposed to be basing their decision, the economy, we see a mixed bag. Over the past three months, we have created 156,000, 161,000 and 178,000 jobs in the U.S which seems pretty good on the surface. However, that’s 200,000 less jobs than 12 months earlier. The manipulated unemployment rate is down to 4.6% with the real or U6 rate at 9.7%. And while the consumer price index (CPI) has finally started to uptick after percolating for years, it’s hardly hot and worrisome. Our economic output, GDP, is improving and now stands at just over 3% which is also finally good news. I fully expect that to click between 3% and 4% in 2017.

Velocity of Money Still Collapsing

Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates

Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years. As I have written about, I truly believe that one of the main reasons Yellen and her inner circle don’t want to raise rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.

A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S. centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000, 25,000 and possibly 30,000.

What’s so bad about that?

Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

I understand why the Fed is going to raise rates. I truly do. However, given our current mixed economic picture and the weakness, deflation and accommodative stances of central banks elsewhere, I believe that Yellen and her minions are barking up the wrong tree.

If you would like to be notified by email when a new post is made here, please sign up HERE

Irrational Exuberance

This past weekend was the first official ski weekend for my youngest son and me. And boy was it cold in Vermont! But with mid-winter conditions, it was hard not to overdo it. I overdid it and now I am in a world of pain. Neck, back, quads, calves, fingers.

Anyway, as you can imagine, I am usually a chatty one on the lift. Since we typically ride the quad or 6 pack, we are usually with strangers. When people find out what I do for a living, they rarely ask questions except for the occasional “what’s the hottest stock right now”.

This weekend was very different.

Not only was I offered unsolicited advice on chairlift rides about investing, but I was also told that no one really needs a financial advisor. Everyone can do it themselves. I loved the guy who told me everyone should just use the robos to invest and call it a day. After all, they are super cheap and it’s all about cost. They didn’t like my analogy about driving a Yugo or finding the cheapest doctor or plumber.

If I could quantify the level of exuberance, I would say it was approaching irrational. Nothing like I experienced in late 1999 and early 2000, but that was once in a lifetime. The public is coming back to the stock market and higher highs await us. The problem is that the public tends to arrive late to the party and never leaves when they should. If someone told me 3, 4, 5, 6, 7 years ago that mom and pop wouldn’t start investing again on balance until Dow 19,000, I would have laughed in their face. But they are right.

This doesn’t mean much for the immediate future. The window I starting writing about for a decline exactly one month ago has essentially closed. Sure, we can and should see a 2-3% pullback. If everyone is looking for that, it won’t come right away. However, all of the warning signs I have written about for a larger decline have dissipated. Buying weakness is the strategy until proven otherwise.

Keep an eye on buying the most battered into the Fed meeting on Wednesday.

If you would like to be notified by email when a new post is made here, please sign up HERE

Bulls Continue to Trample Ahead

On Wednesday, I gave a higher level overview of how the stock market is behaving along with the leadership and some key indicators. Nothing has really changed. Almost everything is severely overbought, but they can still become even more overbought. Pullbacks through year-end should be shallow and no more than 2-3%, lasting just a few days.

Another piece of good news for the longevity of the bull market came this week. The NYSE Advance/Decline Line scored an all-time high. That effectively insulates the bull market from ending for at least several months if not longer. Broad participation is there and weakness has to be bought until proven otherwise.

nyad

Additionally, high yield (junk) bonds are a whisker away from new highs as well. As you know, they are one of my favorite canaries in the coal mine. Bull markets typically don’t end with junk trading so well. That adds further insulation for the bull to live on well into 2017 if not longer.

jnk

Without any pullback, those looking for investment should find laggards, instruments that haven’t kept pace with the advance. Healthcare, biotech, staples, REITs, utilities and preferred stocks are a few to research.

Have a great weekend! My nose smells snow in Vermont and it’s time to makes some turns…

If you would like to be notified by email when a new post is made here, please sign up HERE

Window for Decline Almost Closed

For the past three weeks, our models have been defensive regarding the stock market after the first week’s post-election surge. I often say that when certain conditions are present, a “window of opportunity” opens for a stock market decline. The longer time passes without a decline, the more likely the window will close. Today, the window is starting to close and I imagine that by two weeks from today, it will be fully closed, modest decline or not.

The  Dow, S&P 500, S&P 400 and Russell 2000 are all in gear to the upside and look strong, although definitely overbought. The NASDAQ 100, on the other hand, has given back all of its post-election hoopla and just doesn’t behave well. While that bellwether index is dominated by Apple, Amazon, Facebook, Microsoft and Google, which have been under strong downside pressure, it would be careless to dismiss this as just a few bad apples (no pun intended). It remains a red flag for now.

Looking at my four key sectors, banks, discretionary and transports are all acting very well and indicating good things for the bull market. Only semiconductors are questionable, however, they really haven’t done anything terribly wrong except see an outsized down day last Thursday. Further supporting excellent leadership is the performance of the materials, industrials and energy. With the defensive staples, utilities and REITs continuing to lag the rally, that adds further credence to the longevity of the bull market. I do think, however, that a short-term trading opportunity may exist as the Fed raises rates next  Wednesday and the most beaten down sectors begin to rally on that news.

High yield bonds are finally starting to kick it into high gear after breaking out to the upside on Tuesday. Even the NYSE Advance/Decline Line is ever so slowly inching back toward an all-time high. Unless something dramatically changes over the coming week, weakness is a must buy into January.

If you would like to be notified by email when a new post is made here, please sign up HERE

Stock Market Yawning at Recount

After a small gain on Wednesday, the seasonality bulls got their work done on Friday as the strong trend held to form. Without any weakness leading into that trend, it made it too tough for me to play it. However, I did tweet on Friday that taking a small short position at the close for seasonal weakness on Monday seemed like a better risk/reward play.

Heading into the new week, we have to be on the lookout for the typical post-Thanksgiving hangover early in the week and then the jobs report on Friday which is the final major data point before the Fed raises rates on the 14th. Stocks remain extended and overbought as I mentioned last week, but it doesn’t mean they have to go down right now. They can become even more overbought and extended or they can simply pause and go sideways.

As everyone has been quoting everywhere, the Russell 2000 has been up for 15 straight days, a feat I would never, ever have predicted at any time. At some point, the streak will end. At some point the index will close below the previous day’s low. I am way too chicken to buy that without a meaningful pause or pullback.

The rally continues to look fine and my window for a decline is quickly approaching. Leadership is strong and the internals have improved. High yield bonds are stepping up as well. The stock market doesn’t seem to care about the recount about to take place in several states. Should that Hail Mary gain any steam and possibly reverse the election, that would make the Bush/Gore fight look like a walk in the park compared to a full-fledged constitutional crisis unfolding. Stocks would crater. That scenario is not something I think will happen. It is interesting, however, that Jill Stein has raised more than $5 million that she doesn’t have to give back if it’s unspent or more than needed.

If you would like to be notified by email when a new post is made here, please sign up HERE

Seasonals Favor Bulls into Weekend

Today and Friday are well known and widely followed seasonally strong days for stocks. That doesn’t mean we should just blindly buy and hope things work out. Stocks have been almost straight up since the election so you can certainly argue that a lot of fuel has been used up, including the last two days. As I mentioned on Monday, if the stock market was down on Tuesday I would have wanted to be long on Wednesday and Friday. That’s not the case.

Stocks are super overbought, but they can still get even more overbought. The signs of a tired market price-wise aren’t showing up just yet although that doesn’t mean there can’t be a pullback. There’s just no solid edge here. Almost every non-defensive sector except healthcare and biotech is breaking out. Leadership is very strong.

High yield bonds are finally stepping up, but more work needs to be done. The NYSE A/D Line is making new post-election highs, but it’s still not close to the all-time highs it needs.

ad

IF the window for a decline closes over the coming few weeks, I would expect the aforementioned high yield bonds and NYSE A/D Line to score all-time highs by mid-January. That would give the bull market another strong indications of staying power.

Wishing you a happy, healthy and meaningful Thanksgiving surrounded by those important in your life!

If you would like to be notified by email when a new post is made here, please sign up HERE

Bulls Not Done

The bulls came back from the weekend in a good mood as stocks are rallying into lunch on Monday. While banks are taking a little breather, commodity-related sectors are leading with energy, metals & mining and materials all doing well along with some of the beaten down Hillary sectors, utilities, staples and telecom. High yield bonds are finally showing some oomph and emerging market countries are bouncing. The NYSE A/D Line is showing decent participation.

I won’t rehash all the studies out there about Thanksgiving week, but this a seasonally positive week with Wednesday and Friday showing the best returns. If Tuesday is a down day, I would be interested in being long for the last two days of the week, making sure to sell or lighten up ahead of the weekend.

While I am not abandoning my recent concerns about stocks, I am recognizing that the window for a decline will start closing within a few weeks. If one the scenarios I offered last Friday is to play out, we should see weakness begin to manifest itself by the end of next week.

If you would like to be notified by email when a new post is made here, please sign up HERE

Three Scenarios to Year-End

On the surface, you would think that the past nine days were nine easy days for the bulls. After all, the Dow was up more than 5%. What could be bad? Beneath the surface, there was much wrong with the post-election rally that began the day before the election. To begin with, the Dow was a leading index, followed by the Russell 2000. The S&P 500 and S&P 400 were nothing special. The NASDAQ 100 was actually down over the two post-election days and is lagging very badly. Reread that last sentence. With the Dow up 5% over two post-election days, the usually leading NASDAQ 100 lost ground over those two days. That is not a healthy market.

Internally, it looks even shakier with the average stock on the New York Stock Exchange closing lower post-election. Now the bulls will argue that it’s because the bond market has been hit so hard and there are a large number of bond-related issues trading on the NYSE. They are correct. The bears, however, will state that these very bond-related issues are the ones which have powered the NYSE Advance/Decline line to new high after new high and their fall from grace is definitely a strong warning sign. The bears are correct as well.

Below, I am going to depict this quandary in two different but similar ways. First, you can see the old tried and true NYSE A/D Line which is just a cumulative total of each day’s number of stocks going up and down. It peaked in late September but so far, has been unable to regain that level and confirm the market’s huge surge.

nyad

Next, you can see the S&P 500 with the 21 day moving average of the number of stocks going up and down on the NYSE. This is a shorter, but also valuable indicator of participation and health in the stock market.

spx21ad

This indicator peaked back in July and has been almost steadily in decline except for its recent uptick post-election. It, too, is not confirming the strength seen in stocks since the election.

Finally, below is the PIMCO High Yield Fund which is a good proxy for the high yield (junk) bond market. As you know, high yield bonds are perhaps my favorite canary in the coal mine. This sector peaked in October and has been very weak ever since, including post-election.

Something just isn’t right…

phydxOn the sector leadership front,banks, semis and transports, all key sectors, have celebrated the Trump victory in a huge way all soaring to new highs. Discretionary has been the lone key sector hold out, but that group is trying to get its act together as a late comer to the party. This strength in leadership somewhat mitigates the dire picture painted above.

When our research indicates a weak market while stocks are at new highs, I often refer to a “window of opportunity” for a decline. While that window is open, like now, a decline has a higher probability of occurring. Once that window closes, it becomes less likely. I was emailing with one of our adviser clients the other day and Mike asked what were the most likely scenarios I saw unfolding through year-end.

1 – Stocks peak now and decline 4-8% over the next month and rally strongly into year-end.

2 – All of the weakness I described above is absorbed by the market. Stocks pause for a week or so and then roar back to life right into January.

3 – Stocks meander around for another month and then rally modestly into January where they peak and see a 10% correction in Q1.

At this point, I am hesitant to score the scenarios, but the action over the next week or so should allow me to remove at least one scenario. The window of opportunity for a stock market decline has opened and it’s time to play defense. We will see what shakes out. This is not the time to be complacent.

If you would like to be notified by email when a new post is made here, please sign up HERE

The Path to 270 & Stock Market Reaction

Don’t forget to vote!

Thanks to NBC, ABC and FOX in Connecticut for having me on regarding the election. Each segment was very different and offered new information. The first two interviews are below and I will post the FOX one as soon as I have it.

Statistical Model Provides Hints at Presidential Outcome

Financial expert says election could have impact on stock market

It’s been a long two years since the midterm election and I think I can confidently state that the entire country has election fatigue. I would guess that the only ones sad about the election being over are the cable networks and social media platforms as they have seen enormous surges in viewership and usage.

Whether you like it or not, we are going to elect a new president today and the markets will react. If you are on Twitter, I will post comments as states are called and the Asian markets react along with the S&P 500 futures.

Trump’s Path to 270

Looking at my own electoral map, Trump needs to almost run the table in the statistical dead heat states to get close or over 270. Florida is the absolute must, live or die state for Trump while Clinton can lose it and still win handily. Trump then needs North Carolina, Arizona and Ohio to just get him to 259. From there, he probably needs two more blue leaning states, assuming that Michigan and Pennsylvania stay blue as I think they will. The only ones realistically left would be New Hampshire, Colorado and Wisconsin. That’s an almost insurmountable challenge.

If Trump has any chance to become #45, it would likely come as a result of neither candidate achieving 270 electoral votes and the contest would then turn to the House of Representatives where the GOP and Paul Ryan have control. Should this very unlikely scenario unfold, it would be ironic that Donald Trump would need help from the republican he has most battled with and attacked since becoming the candidate to become leader of the free world.

Split Congress Likely

Turning to Congress which matters for the markets, the GOP has a 90% chance of retaining control of the House and thwarting Clinton’s agenda, should she win. The Senate, on the other hand, is essentially a toss up and the nod goes to the democrats, assuming Hillary Clinton is victorious. My count has it 51-49. If that’s the case, it will be extremely interesting to see how President Clinton, a quiet staunch ally of Wall Street, and new Senate Majority leader Schumer, also a Wall Street supporter, deal with Liz Warren and Bernie Sanders regarding the mighty Senate Banking Committee.

How Will Stocks React

Below you can see the possible scenarios and how I believe the stock market will react. They appear as president, Senate and House.

  • Clinton, democrat Senate, republican House (most likely scenario)

Stocks continue to rally for another day or so and then peak this week and gently pullback towards Thanksgiving before attacking 19,000 in December or January.

  • Clinton, republican, republican (2nd most likely)

Almost the exact same scenario as above although the rally will be a bit more muted.

  • Trump, republican, republican (3rd)

Stocks immediately pullback 4-6% to a bottom by Thanksgiving before gaining their footing for a strong rally into the New Year. All-time highs are seen.

  • Clinton, democrat, democrat

The most unlikely outcome causes the biggest problems over the intermediate and long-term as the left agenda goes unchecked with major tax increases on higher income earners, significant increase in regulation and huge expansion of social programs. Stocks become very volatile over the next few weeks before rallying into the New Year. Bear market begins by Q3 2017 and stocks fall by 30-40% by the 2018 midterm elections.

Watch the Reaction Not the News

As I have always said, as an investment manager, I am much more concerned about market reaction to the news than what the actual news is. As such, I will be keenly watching which sectors lead and lag the rest of the week and during any weakness next week. Additionally, healthcare and biotech were decimated over the past few months into last Friday on the prospects of Hillary winning. While they are snapping back sharply this week, it will be interesting to see if their rally has legs or if it’s just a dead rat bounce. Banks have become a vital leader since the BREXIT low in June. Interestingly, it doesn’t seem like this sector is concerned about Liz Warren or Bernie Sanders attacking them or regulating them so quickly.

I will have more this evening on Twitter (@paul_schatz) and tomorrow right here.

Don’t forget to vote!

Regardless of the outcome, the greatest country on earth will still be here tomorrow…

If you would like to be notified by email when a new post is made here, please sign up HERE.