Big Correction Coming?

Stocks continue to trade very heavy, but we should be on guard for a strong bounce at any time here. I think the top is in for a while so bounces are now selling opps and a better buy point should be seen after Labor Day. To reiterate what I have said for a while, this pullback should not be the beginning of a new bear market, just another healthy cleanse in an aging bull market.

Here is the segment I did on CNBC’s Squawk on the Street the other day sharing my thoughts.

http://video.cnbc.com/gallery/?video=3000191113&play=1

Short-term comment:

It’s been amazing how fast the NYSE Advance/Decline line has plummeted from its recent all time highs. Coupled with the spike in new 52 week lows, you can really see some widespread selling, especially in the interest rate sensitive issues. Even if rates rise for the next 30 years, it won’t be a straight line and there will be some powerful countertrend rallies. Bonds could be the story for the last four months of 2013, but not in the manner everyone thinks!

Correction Coming?

Every month or so, I write an update on the market’s canaries in the coal mine to get a sense where the bull market stands. Nothing has changed on that front in that we having an aging bull market, but one that should live on through the next correction and probably into 2014.

As the market builds towards the next meaningful pullback, here are a few things to watch as I briefly discussed on Fox Business.

http://video.foxbusiness.com/v/2565939221001/correction-coming/

Comparisons to 1987 Mount

For the past six months when asked about my outlook for 2013 I replied that I thought it would be a front loaded year with all or close to all of the gains during the first half of the year.  I have and continue to compare it to 1987 without a one day stock market crash. Others have predicted that 2013 will look more like 1995, the single greatest investing year of the modern era. Now that would make me (and you) really happy! This will be interesting and fun to follow over the coming months.   

Let’s take a walk down memory lane and examine the years before 1987 and 1995 and the present. We will start with 1986, 1994 and 2012. As you can see below, 1986 blasted off right out of the gate, went into a trading range during the middle and then closed near the peak for the year. 

  

1994 is next and this was a very different year with Alan Greenspan and the Fed surprising the markets by raising interest rates in February. That led to a 10% correction, the first one since 1990. The stock market saw three more declines in June, November and December, culminating in Orange County’s municipal bond default after Thanksgiving. Although the major indices only lost a few percent that year, it was an horrific year in the bond market with investor sentiment as negative as you typically see after a bear market. 

   

2012 is below with strength right out of the box followed by a correction in May that led to a melt up in stocks before pre-election jitters took the wind out of the sails into Election Day. The usual year-end rallied ensued. Overall, 2012 was a good year for stocks returning 13%, but ending the year with anxiety over the Fiscal Cliff.  

  

While 2012 was not nearly as strong as 1986, it had similar investor sentiment points and nowhere near the negativity associated with 1994. On the surface, it looks like 2012 fell right between 1994 and 1986. 

Below you can see the first nine months of 1987 and 1995. In both cases stocks took off as the year began, paused, and then took off again.  

  

  

 Here is 2013 year-to-date, which looks like the average of both years so far. 

   

Now is where 1987 and 1995 begin to diverge. Again, I absolutely do not believe we are going to see a stock market crash like we did in ’87, but the pieces are beginning to line up for the largest correction since 2011. The next two charts put it all together best. You can see three distinct almost vertical rallies in 1986-1987 culminating with an August peak and disaster thereafter. In 1994-1995 we see the year long challenging period and the relentless bull run. 

   

     

 Today (below), we are somewhere in the middle so far price wise. Alan Greenspan and the Fed were one of the main driving forces behind the collapse in 1987 along with computerized trading and Washington put its foot in it mouth. Is today that much different if Bernanke & Co. start the unwinding process at one of their next two meetings? In my view the only question for the stock market is if it is peaking right now or will there be a 4-8% pullback first followed by a final run to all time highs. 

 

If you are concerned about portfolio or the scenarios I laid out and want to have a more detailed discussion, please contact me directly at 203.389.3553.

Nightly Business Report TONIGHT

I am going to be on The Nightly Business Report tonight (Monday July 1st). In my neck of the woods, it’s at 6:30pm on public television, CPTV or channel 13. You can find it on your dial here, http://nbr.com/

In all likelihood we will be discussing what I see down the road as we begin the new quarter and second half of the year with earnings season beginning next week.

Stocks are beginning the quarter with the bulls in charge. Will it last?

Bonds saw enormous outflows from mutual funds last quarter as prices were hit hard. Is it time to buy?

Gold was decimated again. Is the decline over?

What will Bernanke and the Fed do?

Who Turned the Lights Out?

After a nice opening by the bulls on Wednesday, the bears came out en mass to print a fairly ugly day across the board except for gold and the stocks. It looks like stocks are heading back to revisit the lows from last week which should happen in the next few days.

The stock market is now as oversold as it has been at any time since the November bottom. Failure to respond positively over the coming week would be the first real change in character for this market since last year and probably turn the trend from up to neutral at best.

Market internals have gone from overwhelmingly solid to pathetic and that usually means the next rally is one to be sold in to. Emerging markets have been obliterated with the sector now down double digits on the year which we have certainly felt in our own emerging markets strategy.

Volatility is back and the next few sessions are going to be mighty interesting!

I will be working on Street$marts shortly with the comparison to 1987 I have spoken about before.

Stocks Surge Higher With Authority

All of the major stock market indices saw more all time highs but this time it looked like a serious bull rush with the market opening flatish and pushing higher and higher all day. Some of the “old” defensive leaders came back to life like healthcare, consumer staples and utilities. This market is beginning to feel like a melt up which usually sees even more vertical gains, but which also ends in ruins. In my 2013 forecast, I called for a front loaded year with the gains early and I am not wavering from that. 1987 has been stuck in my mind since late last year and this is how it felt back then.