Was That It?

At their worst levels on Thursday, the major stock indices were bludgeoned and downright ugly. The Dow was down to 16,000 and could have been cracked open like a coconut today had the bulls not mounted a very strong late day charge. The rally was somewhat impressive and leaves open the question of whether we just saw the revisiting of the August lows I have spoken about on CNBC’s Fast Money and written about here. With stocks looking up more than 1% at the open, it will be interesting to hear what gets circulated in the media.

My take is that the odds do not favor yesterday’s low as being the final chance to get on board the train to new highs. It was a nice reversal, but I don’t think price went deep enough nor shook out enough weak handed holders during the day. In short, the decline was too orderly. I think more work needs to be done on the downside.

Looking at the calendar, it’s not a usual time to see a final stock market bottom, but that doesn’t mean we can’t see a low now. Additionally, we typically see a little more time go by from the crash low (Aug 24). More than likely, after selling off in almost straight line fashion since the Fed decision last week, the stock market needs to bounce short-term before heading lower to what I believe will be the ultimate bottom. As I continue to write, I am keenly interested in which sectors lead and lag during the rallies.

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

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

Market Behaving as Expected. Bottom Shortly.

In my last update, I opined that the Fed should not raise rates and that whatever they did, the market would end whatever move it was having and reverse in the other direction. First, I am glad that Yellen & Co. did not raise rates. That time will come, but it wasn’t last week. Second, stocks rallied nicely into the Fed meeting and in the moments after the announcement. However, it was the perfect “buy the rumor, sell the news” as stocks reversed sharply shortly thereafter and closed near the lows for the day. I totally dismiss that the market was disappointed by the Fed’s lack of raising rates. That’s preposterous. Stocks rallied into the announcement in the classic ” buy the rumor” trend. Friday was an ugly day for the bulls and after the typical post-weekend, feeble bounce on Monday, the bears are out in full force today.

None of this action should come as a surprise as I wrote about post-crash behavior many times here and in Street$marts. From its intra-day low on August 24 to last week’s peak, the Dow jumped roughly 1500 points, retracing about 50% of what it lost since its last all-time high in May. Stocks are now in the throes of the secondary decline to revisit the levels seen in late August. I expect that visit to be successful within a few percent and eventually lead to all-time highs again.

The stock market doesn’t look pretty now and I don’t expect that to change until after the bottom is reached over the next two to four weeks. There will be all kinds of reasons not to buy when it’s time. “The market has lost confidence in the Fed.” “China is having a hard landing.” “Global economic growth is recessionary.” And on and on and on.

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

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

Don the Crash Helmets! It’s Bloody and Ugly Out There!!

By now, everyone knows that the Dow Jones Industrials fell by 1000 points last week, including a 531 point down day to close the week. More selling lies ahead in the short-term. It’s getting ugly. There’s blood in the streets. Sell what you can not what you want. Margin calls are coming. Maximum pain thresholds are being hit for the individual investor. Panic is here!

Before I opine on what it means, let’s put it all in perspective. 531 points is a 3% decline and 1000 points is just under 6%. Since the Dow peaked on May 19, the popular index has corrected 10% so far. In a worst case scenario, it could grow to 15-20% if China unravels beginning Sunday night.

For several months I have written many times about my concerns with the market. The most timely blog post was right at the most recent top on July 20.

Trouble Brewing Beneath the Surface

There were plenty of opportunities to take action, hedge, play some defense, sell, just do something proactive! I am sure that the vast majority of investors did absolutely nothing. In our portfolios, I am happy to report that we definitely took action several times by selling to raise cash as well as buying bonds which typically act as a flight to quality or “safe haven”.

I am not arrogant enough or naive enough to believe that during a full-fledged stock market correction that we won’t lose some money, but I am definitely pleased with our high levels of cash. This is a market time that separates the wheat from the chaff. The “pretenders” in the business get exposed. Investors don’t plan to fail. They fail to plan.

I often speak about the investing risk/reward ratio, referencing 18,500 on the upside and 16,900 on the downside. That negative skew caused us to take various defensive measures in many of our 12 strategies over the past few months. With the Dow finally closing below 17,000 with more downside to follow, the risk/reward is in the process of swinging firmly back to the positive side. It’s time to build a shopping list and prepare to deploy some of the beautiful cash that has built up.

Before I dive into the details of the stock market, I am going to start with my conclusion. While the evidence is certainly not as strong as it was a few months ago, I do not believe that the 6+ year bull market has ended; read, all-time highs lay ahead. The weakness looks like the first full-fledged correction since October 2011. The behavior we are currently seeing looks similar to what we actually saw in 2011, as you can see from the two charts below.

dia16 dia11

As I write this over the weekend and have not seen any stimulative action yet around the world, the preponderance of the evidence suggests that stocks are about to the enter the bottoming process, as soon as this week. While that doesn’t mean an immediate return to Dow 18,300, it does suggest that the repair process starts sooner than later, although high volatility won’t end soon.

From time to time as my great friend and colleague, Sam Jones, likes to say; Calling All Cars. It’s time add cash to your accounts. Blood is in the streets. Panic is setting in. It’s time to take on a little more risk or open a new strategy that’s more aggressive. That will likely be my theme for the next few weeks. On a personal level, I will be making my entire 2015 retirement plan contribution over the next few weeks so you truly know I how view the current situation.

If you have any questions about the market’s correction or your portfolio, please don’t hesitate to contact me directly by replying to this email or calling the office.

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

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

My Oh My… The Music Has Stopped

If you listen to the media or have an active Twitter feed about the markets, you would think stocks have literally collapsed into the depths of a bear market. We MUST be down at least 10-15%! Yet as I type this, the S&P 500 has pulled back all of 6%. It’s a little more than half way to the 10% correction level.The Dow hit my initial downside target of sub 17,000 and the S&P 500 is on its way to 1970 – 2000.

Sentiment has swung dramatically from ebullient in June and July to pessimistic now on its way to possibly despondency shortly. Options traders are positioning for Armageddon. Volume in popular stock market ETFs SPY and QQQ is exploding higher as investors seek the refuge of liquid broad indices over individual stocks.

Technicians are talking about a new bear market and things like Dow Theory Sell Signals and the “dreaded death cross”. (I have written several blogs about Dow Theory and it’s probably time for another.) Market leaders in biotech, healthcare, consumer discretionary are finally getting hit. Market generals, Amazon, Regeneron, Google, Netflix, Facebook, Disney, etc. are being bludgeoned as the music “suddenly” stopped in the game of market musical chairs.

Markets typically don’t bottom on Fridays. I have to find my notes, but I recall Friday being the least likely day for a low although I do remember the post 9-11 bottom being on a Friday. Stocks are currently in the middle of the recognition wave where investors no longer believe it is a mild pullback to stay the course. The masses now believe there is further downside to go. Very light panic has set in. “Sell what you can, no what you want” is often heard. We should be seeing the bears on the popular financial channels any day doing the “I told you so” tour. Cue perennially wrong perma-bears Marc Faber, Jim Chanos, Peter Schiff, Porter Stansberry, etc. They are waiting in the wings!

From my seat as someone who has not been bullish for a while and raised significant cash over the summer, this looks like the beginning of the bottoming process. Unlike the routine and regular bull market pullbacks that just bottom out of nowhere 3-5% off the highs, this one has some more depth and teeth. While the zone to find a low has begun, it may be days or longer. Tops take a long time to develop, sometimes months or quarters, but bottoms are usually not a single day in time. They are quicker yet still require the necessary pieces to be complete.

The markets are a lot closer to a low than they were yesterday and last week and last month. It’s just going to take some more time and patience.

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

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

Rolling Out the Red Carpet for the Bears

It’s been a rough week for the bulls with Apple taking it on the chin and the Dow Industrials down every day in addition to the last two days of the previous week. Early indications have the bears heading into the weekend with another victory. I want to go back to what now seems like a very prescient post on July 20 titled Trouble Brewing Beneath the Surface. On that day, all of the major indices were at rally highs and the NASDAQ saw an all-time high. It was also a period where I continued to raise cash in portfolios.

I started out by saying, “the more I analyze, the more I don’t like.” I was very concerned about the lack of participation by the majority of stocks in the rally. I am still concerned, but at least it hasn’t gotten worse. Sector leadership, however, has started to wane as consumer discretionary, biotech and healthcare have all experienced sharp pullbacks. It’s not unusual to see the strongest stocks hold up until the very end and then fall in an elevator shaft style decline. Next week will be key for those sectors.

At the same time, the treasury bond market has put in a nice bottom and has been seeing a meaningful rally, which should continue. The dollar has been quiet for five months, but much higher prices should be in the offing. After collapsing to my sub $1100 Q3 target, gold is trying to hammer out a low. There should be a strong rally beginning there in the not too distant future.

This remains a time to keep some powder dry. A good buying opportunity may not be too far off in the stock market and likely by the end of September.

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

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

China Again

A few weeks ago, I published a piece about the Shanghai having further to fall. Chinese Market Collapse Not Over

Last night, Chinese stocks saw their largest decline since February 27, 2007, a day I vividly remember as I was running money for a hedge fund in Boston and about to leave for a week’s ski vacation in Utah to celebrate a belated 40th birthday with a bunch of friends. At that time, the prevailing sentiment was that the Asian Flu was cause a 15-20% stock market correction was taking hold in the U.S. I vehemently disagreed and argued for fresh all-time highs over the summer as major corrections typically don’t begin with such volatility and fanfare.

Today, we have another huge rout in China. Our market looks weaker than it did in February 2007, but I still don’t believe the bull market has ended just yet. It is, however, living on borrowed time and the next new high will have to be scrutinized very, very closely.

U.S. stocks are getting short-term oversold and a counter trend rally shouldn’t be far off. This should be a rally to sell into rather than buy, but we’ll analyze that if and when some strength develops. For now, keep an eye on the sector leaders in healthcare, biotech, housing, financials and consumer discretionary. If the major indices see accelerated selling, I would expect the leaders to have a quick and very sharp bout of strong selling that should result in another buying opportunity. On the other hand, it would be concerning if these sectors began to underperform.

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

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

Bears Having Their Day

Not even half a day of weakness and talk of the big C is out. The dreaded correction! It’s amazing that after a 73 month secular bull market, it’s still the most hated and disavowed bull ever. Yes, it’s now been 42 months since the last 10% correction, but markets don’t fall just because of age. Corrections occur to repair breaks and right now, there aren’t enough things broken to warrant a full fledged correction.

The most glaring concern is that the Dow Industrials continue to divergence from the Dow Transports and the Dow Utilities are even weaker. Coupled with sentiment, it makes the short-term murky as I have written about lately. Before you jump on the bears’ bandwagon, we have seen this picture before and it doesn’t end well for the bears. Weakness to the lower end of the trading range continues to be a buying opportunity until proven otherwise.

Don’t ignore the recent strength in banks, consumer discretionary and my very contrarian play in energy going forward. That’s not the kind of leadership you typically see if the stock market was in real trouble.

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

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

Is it Crash Helmet Time???

For the past three weeks, my message has been one of a little short-term concern against the backdrop of much higher prices to follow. That remains unchanged. Market sentiment had become frothy, meaning that too many people had become too confident in the stock market. We saw that in both the individual investor and newsletter writer sentiment surveys. Options traders were betting overwhelmingly on higher prices over the short-term. Corporate insiders were selling much more than they were buying. Traders using the Rydex mutual funds had become heavily invested on the “risk on” side. The short-term trading or ARMS index showed excessive buying pressure.

Combined together, we had stock market sentiment at potentially bull market killing levels. However, excessively bullish sentiment has never single handedly killed a bull market. There needs to be a poor monetary and/or valuation landscape as well, which we do not have today. So let’s not even begin the discussion about the bull market being over. I know I am beginning to play with fire as I have said that during every single pullback since 2012 began, but I continue to feel the same way today.

Anyway, the pullback is here. It looks and feels nasty. The bears are coming out of the woodwork calling for a bear market, a 20% decline, even the 10% correction. As always, I could be wrong, but I view this bout of weakness as yet another single digit pullback that can be bought and will lead to fresh all-time highs next quarter.

Yes, sentiment was really bad, but go back and reread my two pieces on Canaries in the Coal Mine. The big picture did not look unhealthy a few weeks ago and certainly does not today. The market was due for some cleansing and the job is getting done now. Stocks should begin to probe for a low shortly between current levels and 4% lower. Technical damage has been relatively mild so far and it’s time to make our shopping list.

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

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

Two Market Scenarios for the Quarter

In the last issue of Street$marts, I wrote about stocks being in a “murky” period for the next few weeks. I am going to pat myself on the back and say it has certainly looked “murky” since early October although I wish I had been more aggressive in taking action. The dark clouds have recently dissipated and the sun is starting to pop out. Once the decline began, it looked like the second half of October would see a low and that’s been confirmed.

I recently shared research that indicated a 15% chance of a 8-11% decline during the Q4. This was based on the S&P 500 seeing a fresh high in September or October which usually insulates the market from much more than a 10% decline. So far, on a closing basis the Dow and S&P 500 have dropped almost 7% and 7.5% respectively, and 8.6% and 9.4% on an intra-day basis. The other major indices have seen more significant weakness.

Either by skill or luck, I am always happy to nail a low as it occurs, especially now, when so many others were calling for much more serious damage. With the world fixated on Ebola, Europe’s economy, earnings and ISIS, fear was prevalent last week, the likes of which we haven’t seen since mid June and in some cases, 2011.

So far, all we know for sure is that “A” bottom was achieved. Whether it was “THE” bottom remains to be determined. If prevailing sentiment becomes “sell the rally”, the upside is likely to continue. However, if the masses believe that we just saw the final bottom of 2014 on the way to new highs, a more difficult path will be in store as I discuss below.

I continue to watch two scenarios as the most likely paths over the coming months. The green line in the chart below is obviously the more bullish of the two. It has last week’s low as “THE” low from which the year-end rally has already launched and all time highs are to be seen within a few months. The orange line forecasts a lot more volatility with the currently rally petering out shortly and marginal new lows seen within a few weeks. From there, the real rally begins, similar to 2011, with higher prices down the road.

 What is obviously missing from the scenarios above is a truly bearish one that has the bull market already over and this current rally representing a good selling opportunity leading to sharply lower prices right into the New Year and beyond. At this point, I just don’t see it. We simply do not have enough dead canaries to warrant such a negative outcome. And speaking of dead canaries, I will update the Canaries in the Coal Mine next week.

For now, the takeaway is to watch for signs that the rally is hitting stumbling blocks. High yield (junk) bonds had a truly epic day on Friday, recovering five days worth of declines in one day. That nascent advance must live on. Good sector leadership needs to emerge and not from consumer staples, utilities and REITs. Although the banks are a bellwether sector, the bull market can live without them for a while longer, but that will likely lead to the eventual demise.

Before I finish this article, there are things that concern me. It’s not all roses out there! After 67 months, the bull market is showing its age. Traditional Dow Theory just gave its first negative trend change in some time as both the industrials and transports closed below their August secondary lows. That’s long-term problematic unless both make fresh all time highs in the coming months. What would bother me even more is if one index scores a new high, but the other one does not. Anyway, we have time to explore this further next week.

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

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

So Far So Good!

Just two ago, I wrote about the stock market “groping” for a bottom and laid out a scenario for that to begin on Wednesday. The beaten down Russell 2000 was the key as it very quietly had been outperforming the market for three days. That behavior is not what you typically see if a crash was unfolding. Our indicators and systems backed up my own thoughts and our equity strategies went to maximum exposure at the close on Wednesday.

When I woke up Thursday morning and saw the global stock markets in collapse, I thought it was going to be a truly interesting day. With so many things looking good a few hours earlier, I was either very wrong, which has happened before and will happen again, or this sharply lower open was an absolute gift to the bulls. At this point I am very glad I stayed the course and even took what I would classify as personal gambles at the open by buying oil and shorting the VIX.

After the lower open, stocks staged a very impressive comeback and the internals looked much better along with sector leadership. Our own flagship sector strategy has had a very tough month coming in to this week, but as with the Russell 2000, it bucked the market downtrend and closed higher on Tuesday, Wednesday and Thursday. For the past week or so, I have strongly suggested that clients add money right away as this correction was nearing an end. And I followed my own advice by making my kids’ college fund additions as well as my 2014 retirement plan contribution into the market weakness.

Time will tell if we just saw “THE” bottom or “A” bottom, but even if stocks don’t go right back to all time highs, the preponderance of evidence suggested a good rally was close at hand. There are two scenarios I am watching now and I will spell those out in the Street$marts edition I am currently writing.

Remember, the largest one day stock market rallies usually occur after a decline. In 2008, we saw 4-8% one day moves many times. The larger the decline, typically, the larger the snapback. If you hated certain stocks, ETFs or funds on the way down, use the strength to rebalance your portfolio the way you want.

I am keenly watching how the plain vanilla high yield (junk) bonds funds act now. They are very stretched to the downside and are supposed to rally smartly. It’s put up or shut up time for the short-term, intermediate-term and perhaps even long-term.

Finally, I mentioned watching Apple and Netflix for signs of leadership. Apple hung in really well and should see new highs this quarter. Netflix announced bad earnings and was bludgeoned. IF this is the final rally of the bull market, IF, I would expect the rally to leave many key stocks behind. In other words, it would be narrow. The rising tide would not lift all ships. Again, IF.

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

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