From Lower Levels, a Bottom Coming

After last week, I am running out of adjectives to describe the stock market decline since December 3. Relentless seemed like the best word a week ago, but now it’s almost an understatement. Although I thought I had written my last long update before the Fed meeting, I had also thought that stocks would at least see a temporary low. I was wrong on both counts and am working on another update now.

Almost every day last week looked similar. Carnage across the board with almost no place to hide. I have said this before, but I think it still has merit to mention again. The decline has the “feel” (which I often say is not real) of needing a “clean up” day to force more selling and cleanse the market of any remaining sellers. Given the size of the decline so far, that could end up being a 1000+ point down day. Talk about unsettling investors over the holidays.

I would be really surprised if stocks just jump up at the open and rally sharply into the New Year. That would end up being a much worse scenario and need more downside before the initial low was in  place. This would be the same sentiment I shared for weeks after the October 11 low when I said that if stocks just rallied right back to new highs (they didn’t), I thought the bull market would end in Q1 2019. Significant, major or meaningful bottoms have very similar characteristics year in and year out, decade in and decade out.

A bottom is coming, but I believe it has to come from lower levels.

For those celebrating Christmas, I wish you and your families the happiest one of all, surrounded by loved ones. Some good food and cheer won’t hurt either!

 

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Relentless Selling Wave Continues

It seems like every time I sit down to start a new post over the past few weeks, I am looking at the same data, indicators and price behavior. Stocks closed the day before lower and look like they have a chance to bounce but end up closing lower yet again. I thought when I started writing about relentless selling, it would end sooner than later. And here we are again; stocks fell hard on Thursday with the glimmer of hope for a rally on Friday.

Today is also the final option expiration day of 2018. Every quarter is considered a quadruple expiration where futures also expire. And December is often the biggest one of the year as the masses square up their books for tax and performance reasons. You are all but guaranteed to see potentially record volume in the first 30-60 minutes. Lots of activity early on.

Thursday saw another very heavy trading day with even more signs of panic, especially right after lunch. There was a very powerful micro wave into 2pm that I would have ordinarily said was an easy call to be THE bottom. I did text two of my industry buddies at the time that in most other declines, you could close your eyes and load up right then and there. However, the selling wave since December 3 has been more severe than we have seen in a long while. Stocks should bounce from it, but I would like to see even a single day where stocks close higher than they open. In other words, on my charts, that’s a green candle. The more green, the better for the bulls.

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Ugliness for the Bulls Rolls On. May Need More Panic

Most of the past few weeks when I sat down to start a new post I thought, “well, yesterday wasn’t very nice for the bulls”. Today, as I sit on the train to New York, I am thinking that Friday and Monday were downright ugly for the bulls. The bad Friday, bad Monday combination, regardless of whether this remains a bull market or not is something typically seen near lows which is where I think the market is. Similar to hat I mentioned yesterday, the S&P 500 is now approaching its lows for 2018 while the S&P 400 and Russell 2000 have already breached those levels. The Dow and NASDAQ 100 remain above them, but with this nasty a selling wave, those two indices shouldn’t get comfortable.

I was disappointed to listen to the financial networks on the way to the train this morning with so much of the chatter focused around a stock market bounce, even from the bears. More than a few commented that Monday was the bottom. If in fact stocks do rally from here, I would feel very, very strongly that Monday’s low will be breached sooner than later. I had the same feelings after the first leg lower in October when stocks started to bounce.

There is definitely fear in the streets, but I don’t have the sense of true panic right here. I did see some panic readings on the way down, but they were not able to stabilize the market. Perhaps the most important takeaway from yesterday was that the previous leaders were taken out and shot. Those of us who have been hiding in the defensive sectors like utilities, staples, healthcare and REITs were finally punished. And although bonds have been rallying, they haven’t provided the same “safe haven” as they have in the past.

The Fed begins their final meeting of the year today with an announcement out on Wednesday at 2pm. Volatility isn’t going anywhere so soon.

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Is It a Bear Market???

In rare fashion, the bears are certainly in charge this quarter, but especially this month. Historically, it’s very difficult to see stocks under constant pressure during Q4, let alone December. The usual catalysts for decline are typically seasonally absent. While that doesn’t mean that stocks can’t decline this late in the year, a decline of the magnitude we are currently experiencing is very rare. 2002 saw a 6% decline in December and 1968 and 1957 had 4% declines, but that’s about it going back to 1950.
As I have mentioned on www.investfortomorrowblog.com stocks just cannot seem to get out of their own way since the last peak on December 3rd. I had a lot of confidence during that rally from the mid-November low to strongly forecast new highs were coming in early 2019. And even after stocks slid down again a week ago when I joined Yahoo Finance’s Midday Movers, I still felt strongly that a bottom was being hammered out.
Every little rally over the past week or so has been snuffed out immediately. Good news over the past month has only resulted in more selling which is a definite change in character for the stock market. In fact, without doing the research, I think this is only either the first or second time we have seen such poor behavior since the generational bottom in 2009. This is concerning to me.
The S&P 400 and Russell 2000 have now breached their respective 2018 lows.

The Dow Industrials and the NASDAQ 100 remain well above their respective lows with the S&P 500 falling somewhere in between.

It’s not a stretch to say that the stock market needs the latter two indices to fend off attack and remain above their Q1 levels.
When I turn to the stock market sectors, I look for which sectors are not making new lows for the correction as well as holding above their Q1 lows. There aren’t many. Software, telecom, healthcare, consumer staples, REITs and utilities are it. That means, semiconductors, banks, biotech, consumer discretionary, retail, builders, transports, materials, industrials and energy are all failing. This is also disconcerting.
Finally, our in-house indicator of stock market regime turned fully red for the first time since Q1 2016. Before that, you have to go back to Q3 2011 and then Q1 2008 for similar conditions. This indicator only warns and turns red after a decline of some significance has already been seen, but does a very good job of staying heightened until trouble has passed. In other words, it probably warns of continuing trouble 10 times for every three or four that actually pan out, but it never misses a protracted decline.
Between stocks falling on good news, lack of healthy sectors and the regime change, it certainly doesn’t feel very good right now to be a bull. Still, stocks are down low double digits, nothing cataclysmic, and have not made a new 18 month low, at least not yet. Negative sentiment is getting to an extreme and will support a snapback. If I fall flat on my face and I am absolutely, unequivocally wrong about the bull market living on, stocks should still find a low very shortly and rally before falling harder at some point in 2019.
If this is really a bear market, stocks will meaningfully break to new lows for 2018, rally short of Dow 26,000 and then fall much harder in 2019. I am just not ready yet to put a fork in the old and wrinkly bull market.

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Ugly & Ugly

On Monday, I wrote about the fireworks I saw coming at the open and not to get sucked into the media’s and pundits’ hysteria. Smart money would be selling not buying.Well, frankly, I wish I did some selling into that bull trap as Tuesday was downright ugly and this morning is looking even uglier to begin the day. I definitely did not see a decline of this magnitude coming. As I always say with outsized opens, where stocks close matters a whole lot more than where stocks open.

I am just now picking this blog back up as I left the office with an intense migraine and needed a little quiet time. The first 90 minutes were pretty awful but stocks have been trying to stabilize ever since. Today has the possibility to be a low, but the close is a few hours away and that will be very telling.

Before this latest decline began, the stock market looked decent. It was in the repair process from the October correction. At this point, I have to stick with this all being part of the bottoming process I have been discussing. In fact, it’s looking more and more like a compressed version of how stocks traded in 1994 when the bond market was more difficult than today. In 1994, stocks bottomed on December 8 with the news of Orange County California filing for bankruptcy.

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Fireworks at the Open

No one was surprised that positive news came out of Trump’s meeting with Jinping over the weekend. That’s been his m.o. all along. And stocks are set to react in a big way, at least at the open, with the Dow looking up 400-500 points. After last week’s huge surge this just continues the dominance by the bulls as I have been writing about.

For the Dow, the next big hurdle to clear is closing above 26,300 which was the highest price in November. The other major indices have their own levels. I don’t think closing above those key areas will be accomplished today and perhaps not this even this week, but let’s wait and see how stocks close today before jumping to any conclusions.

Now is when real leadership should begin to emerge. We really need to see either the banks or the semis step up. Without one of them, I fear that Dow 27,000 will be a selling opportunity. On the positive front I am encouraged that the transports have cleared their highest point in November although their decline and price damage was on the more severe side, relatively speaking.

Get ready for some fireworks at the open, but don’t get sucked in by the media and nonsense from the pundits who could not have been more wrong about the correction, bottom and this rally. If investors weren’t smart enough to buy before today, they could look like idiots once again for chasing prices higher. I am glad I am not in that boat.

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Whining & Crying Over Interest Rates

After Wednesday’s huge surge, stocks were quietly digesting on Thursday, somewhat as you would expect. With the initial blastoff from the bottom over which typically lifts all ships, especially those that were hit the hardest, it’s now time to start stalking emerging leadership. I am going to reserve judgement at this point since, frankly, I do not have strong conviction other than the transports are one sector acting very well. I want to see what the defensive groups do over the next week or so.

What I find really shocking right now is how the masses and media refuse to talk about long-term interest rates. All we heard all year was about how high rates were going and how bad it was for the economy and markets. Every stock market decline brought out whining and cries about rates.

Meanwhile. if you look below, the yield on the 10-Year Treasury Note now stands at a 10 week low. Long-term rates have been coming down, down and down. But you don’t hear that anywhere because it doesn’t fit the narrative. Wait. Just wait for it. Next week, the media and pundits will be back to worries about the flattening yield curve (short-term rates versus long-term rates) since long-term rates have fallen so much. Commence whining and crying!

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Bulls Drive Ahead But More Stocks Down

The bulls did a nice job on Monday and Tuesday after laying an egg during Thanksgiving week. I don’t think Wednesday will be quite as easy during the afternoon. While the major stock market indices scored gains on Tuesday, there were almost 700 more stocks going down than up. That’s not exactly the pillar of strength which leads to immediate gains. Frankly, it’s a little disappointing.

The vast majority of our work turned positive at the end of last week so my scenarios will continue to have a bullish outcome. As I mentioned the other day and will continue to state, the worst case downside looks to be just under Dow 24,000 while the upside should be around 27,000. I will take that risk/reward ratio every single day.

Since the bottom last week, the lagging and pummeled NASDAQ 100 has been the index leader which is what normally happens in the embryonic stages of a rally. Sooner than later, the real leadership will emerge which very well may be the NASDAQ 100, however it’s too soon to tell. I am also not reading too much into sector leadership just yet nor the fact that high yield bonds look downright stinky.

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The Makings of the Bottom

Coming back from being out of the office for over a week is never easy although I received a few emails doubting I was actually away since I sent so many updates last week. It’s not that hard when your kids like to sleep in and you don’t. I got a lot done before any of them, including my wife, starting stirring in the morning.

Stocks came back from the Thanksgiving feast with the bulls firmly in charge early on. This is very unusual behavior as we would normally see strength last week and some give back today. When I ran my numbers and models over the weekend, I saw almost across the board strength and improvement in the face of lower prices last week. That may seem a bit counterintuitive. The stock market went down but my research became more positive. That’s exactly what happened. Prices went lower, but the internals of the market actually improved.

Look at the Dow with the Volatility Index (VIX) beneath it. The VIX spiked to its highest level in early October but has made a series of lower spikes, showing less downside momentum and ripe for a turn in the Dow.

Those conclusions don’t say anything about the next day or possibly week, but it does further confirm that the next significant move should higher as I have been stating for a few weeks. I think the risk/reward is strongly skewed to the upside by a factor of at least 3:1. Looking at the Dow, sure, prices could tick just below 24,000 or 2% lower, worst case. On the upside nothing has changed. Dow 27,000 should be seen in Q1 of 2019. That’s a 5:1 spread. Not bad if I am right.

Volatility is going to remain. Lots of repair work still needs to be done. The incredibly strong seasonals that everyone was quoting last month have fallen flat on their face. Investors have become fairly  negative. The news flow isn’t good. Between the Fed, Europe and tariffs, there much to worry about. All the ingredients for a stock market bottom are here.

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What Happened to the “Easy” Week?!?!

I hope you had a meaningful and terrific Thanksgiving! I cannot believe the amount of food I consumed although without the traditional bottles of wine, I guess there was a lot more room. Having been out of town since last Thursday, I am looking forward to getting home today, seeing my pets and sleeping in my own bed.

This week was supposed to see a mild drift higher, especially after Monday. You know, it was one of those “easy” weeks where you sit back, do nothing and watch your portfolio rise. Stocks “always” rise during Thanksgiving week. It’s those strong seasonal tailwinds. Well, someone forgot to inform the bears who have been out in force selling the entire week with the exception of Wednesday morning. I know I didn’t expect to see this kind of damage this week. I thought the bears would stay at bay and allow a little holiday rally before the possible resumption and completion of the correction next week or the week after. I hate being caught off guard.

Today is one of those half days for the stock market. We sometimes get them around July 4th and Christmas. The industry wants to be closed but the powers that be on the exchanges don’t want to lose coveted business to Europe. Hence the half day. It’s also a day where liquidity is very light, making it much easier to push stocks around. The day after Thanksgiving is also typically one of those “easy” days where stocks “always” rise. That doesn’t appear to be the case today, at least at the open, as the market looks to open down roughly 3/4%. With so many investors taking the day off, I wouldn’t be shocked if the bears exhaust themselves early in the day and the bulls can move stocks from there.

China was bludgeoned yet again last night over the ongoing tariff war. This is one giant game of chicken between Trump and Jinping with both countries losing, but China more so than the U.S., so far. There is no way the Chinese are going to stand idly by and watch their stock market fall 50% without taking action, either by coming to an agreement or retaliating in the currency market and/or geopolitical arena.

Don’t forget the chart below which I keep posting. Yes. I am still looking for Dow 27,000 sooner than later. The pink line is the only scenario I am considering right now, which I know can be a dangerous assumption. I am sure I will be able to add another over the coming weeks unless stocks just collapse from here which would render my scenario as embarrassingly wrong.

One closing comment of interest which I will expand on next week when I am back in the office. For all the blame and publicity, long-term interest rates are now making 9 week lows. CLEARLY, that’s not what’s bothering stocks.

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