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.

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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.

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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.

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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.

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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…

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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.

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Yahoo Finance Today & Quick Update

I am excited to join the good folks at Yahoo Finance for their live show today at noon. To watch, go to finance.yahoo.com and you should see the show streaming.

While so many people fretted over the election in Italy, the global financial markets don’t really seem to care this morning with the bulls in charge. Although December is a very positive time for U.S. stocks, it’s backloaded, meaning that the second half of the month is much more powerful historically than the first half of the month. In fact, the first two weeks of December tend to see lower prices.

With the Fed meeting next week and likely to raise interest rates for the first time in a year, I am keenly watching instruments which have been decimated in anticipation of that hike. Those securities, like many bond sectors, could reverse and rally on the announcement of higher rates, as counterintuitive as that sounds.

One area of increasing concern is the technology sector which has already given back all of its post-election celebration. In particular, the mega cap leadership of Facebook, Amazon, Apple, Netflix and Google is looking very tired and weak. While Netflix and Apple could still steady themselves and score fresh highs in Q1, the others look like they have further to go on the downside. Add in Thursday’s shellacking of the semiconductors and there is good reason to pay closer attention now.

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1991 & 1992 Offering Good Clues Too

Yesterday, I wrote about the analog with 1980. If I change my research parameters from presidential elections to similar price behavior during any year, I come up with a very different analog. The current market is first below and you can see the BREXIT bottom in the middle, followed by the big summer rally and period of digestion before the current rally began on the right side.

In 1991, we saw a massive rally after the U.S. and its allies expelled Iraq from Kuwait in Operation Desert Storm or the Gulf War. Stocks were range bound until December of that year before exploding higher like we have seen this month.

The other similar period just happens to be right after the scenario I discussed above. I shifted the BREXIT bottom to December 1991 with the current rally beginning in April 1992 as you can see below. This scenario more closely resembles today when you look at the number of stocks participating in the rally.

The good news is that in both cases stocks resolved themselves to the upside without any meaningful correction for some time.

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1980 a Good Analog for 2016

Since the election the financial media and pundits have been fascinated with labeling the stock market’s strong run as The Trump Rally. I get it. And it’s really only a silly name anyway. However, the market isn’t rallying just because Donald Trump was elected. If the Senate went blue, I would argue that we would seen a muted response. Equally, if not more important, is the fact that the GOP now controls Congress and similar to how the government looked in 2009 & 2010 when the democrats were in the same position, the republicans have at least the next two years to pass their highest priority legislation and jump start the economy.

I went back 100 years to try and find similar stock market behavior post-election as well as during the year and the only remotely close parallel was 1980 when Ronald Reagan defeated Jimmy Carter as you can see below. In 1980, the Senate went to the GOP for the time since the mid-1950s, however the House remained blue.

I added a chart of 2016 so you can see how they line up. Take away the BREXIT decline at the end of June and they look interesting.


The important takeaway is found on the far right of the charts. In both cases, stocks rallied to new highs after the election, however the current rally is stronger and longer than the one in 1980. Perhaps that is because Congress is all red now, but was split in 1980. If this analog is to continue, stocks should be peaking shortly as they typically do during this time of year and pullback for a few weeks. I would only expect a mild bout of weakness in the 2-3% range.

If you would like to discuss how these possible scenarios could impact your own portfolio, please reply to this email or call the office directly at 203.389.3553.

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