Bulls Ignoring Corona et al

Good Friday Morning!

Sorry I have been AWOL this week. Between the holiday on Monday and being in Boston on Wednesday, my schedule has been jam packed. Amazingly, with full on impeachment and the Coronovirus, stocks did not even hiccup this week. And that’s still with an historic level of greedy sentiment that just keeps on getting more extreme. One thing is for sure and that’s something I have said forever; price is the final arbiter. That means that nothing is more important than price in the end, no matter how poor sentiment is or fundamentals or anything else. In other words, it doesn’t matter until it matter and then it will matter in a big way.

The major stock market indices haven’t changed. Every index except for the Russell 2000 is making all-time highs. And said Russell isn’t that far away, so it’s not a huge concern. On the sector side, semis and discretionary are making fresh highs. Transports remain constructive and I  believe all-time highs are coming. Banks look similar but a touch weaker. I am not that worried here.

High yield bonds are still behaving very well and they are usually among the first areas of concern to develop. While they have pulled back a bit, they recently hit new highs, confirming the strength seen everywhere else.

A short-term pullback is long overdue and everyone is looking for one. However, remember one of the market adages. When it comes, investors will either  not buy the dip or it will  be the dip that they finally shouldn’t buy. Right now, I am betting on the former.

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Investor Behavior is now Very Dangerous

It seems like every single day stocks up higher, pullback and then rally into the close. It’s been one of those truly historic runs since December 3 where you would be hard-pressed to find any weakness. Those heavily invested are just sitting back, enjoying the gains and smiling. Those on the outside looking in are very frustrated and anxious to buy any discernible pullback at all.

While we mark all of our strategies on a daily basis, I rarely give any analysis until month-end. In these rare melt up markets, I find myself becoming a little giddy and looking at performance more. Although I know fully well that you can’t extrapolate a few weeks into a quarter or year, I find people often do and that usually comes right near a peak.

This kind of momentum is rare and typically keeps on going farther than people believe. Often without warning, they clean out the bulls in one, quick, fell swoop. Sometimes, that resets the bull while other times, it warns of a complete change in market character. Without doing any research at all, I remember late 2006 and early 2007 like this. Stocks just creeping higher and higher and higher. It went on for months, until it abruptly ended. The first pullback wiped out several months of gains. Volatility started in February 2007 and last more than two years.

I have already stated a number of times since mid-November that investors have become bullish, giddy and even greedy. This has been the most hated and disavowed bull market in history and I have often wondered if investors would even engage and accept it. And if so, what it would take.

So many people sold stocks and bought bonds or went to cash after the 2016 election. Their emotions and hatred for the incoming president got the best of them. They said they would not invest again under Trump was out of office. Whether or not that happens with the Senate’s impeachment trial remains to be seen, but over the past four weeks, I have heard from a handful of people who want back in. All of a sudden, they feel like stocks are going higher and don’t want to miss out. It’s that kind of behavior, “get me in at any price”, that causes me to worry and lose sleep.

13 months ago, the behavior was the exact opposite. Investors were screaming “get me out at any price”. 2019 was definitely a great year for the bulls and it seems that one by one, the bears are finally capitulating, throwing in the towel in disbelief. I am going to pick on high profile Morgan Stanley strategist, Mike Wilson although he is definitely not alone.

To his credit, Mike was negative on stocks during Q4 of 2018. He got that right to a big degree. However, after the initial bounce early in 2019, Wilson took his negativity a step further and pounded the table on a decline to 250 in the S&P 500. As stock moved steadily higher, 2500 became 2700. Interestingly, his TV appearances dwindled away, whether by the network or by Morgan Stanley. Finally, as 2019 was ending, Morgan Stanley put out a note from Wilson that now 3000 was the downside and things were no longer as bad as he feared. I haven’t seen Mike in any interviews for some time.

The great John Templeton once said that “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” Whether you mark the start of this bull run in March 2009 or December 2018, it’s very hard to argue that we are not seeing euphoric conditions right now. However, let’s remember that markets can stay irrational a whole lot longer than anyone can stay solvent as Keynes once said.

10,000 Dow points ago, I first called for Dow 30,000 before all was said and done. I wrote it here. I said in on CNBC, Fox Business and Yahoo Finance. Most people either laughed or nodded their head as they dismissed it as nonsense. In the throes of collapse 13 months, I pounded the table that new highs would be seen in 2019 and Dow 30K would closely follow. Most of my industry friends and colleagues were convinced a new bear market had started. Today, the masses are all talking 30,000.

The stock market usually builds towards a peak. There are almost almost warning signs, sometimes for months on end and in the case of the Dotcom Bubble, it took well over a year of warnings. Over the coming few weeks, I will publish a fresh Canaries in the Coal Mine which has rarely missed a major peak in stocks.

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That Was Quick

On Monday I wrote about a low risk opportunity for the bears with very well defined risk. Market sentiment had reached an historic extreme as investors had become beyond bullish and giddy. They are downright greedy. Market greed isn’t corrected quickly nor painlessly. It normally takes a sharp decline in stocks to create some fear and panic that things have changed. The problem with playing this is that markets can stay irrational longer than you can stay solvent.

With that said, we wait for something in price to indicate that the bears have an opportunity. Last Friday, stocks opened at their highs for the day and closed near the lows. That represented a one day pattern called a “key reversal”. While one day patterns do not possess significant strength, they do give a very close point where you know you are wrong. In this case, closing above Friday’s high was that point.

It didn’t take long, but the trade was wrong immediately, meaning on the close one day later. Cut your losses, lick your little wound and move on. The historic level of greed hasn’t changed. Risk remains. That could go one for days, weeks or even months. We sit tight and wait for another set up or perhaps stocks decline without a good risk/reward opportunity. In any case, it’s hard to throw more money into stocks right here or increase risk.

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An Opportunity for the Bears

Since mid-November, I have often discussed sentiment in the stock market. Plainly put, investors have been very confident to the point of being greedy and giddy to an historic extreme. We last saw that behavior in January 2018 which led to a 13% stock market decline to resolve the condition. Of course, there were other factors that led to that decline, like some cracks in the market’s foundation, something I am not seeing today.

When I have a little more time, I will post some charts to show the various indicators that scare me regarding sentiment. It’s really bullish out there. Besides comparing today to January 2018, we also sentiment like this in May 2011. Ultimately, we saw a 20% decline in Q3 that year, however, there were some pretty dark macro events like Greece, the U.S. debt downgrade and possibly U.S. default. Q1 2000, aka the Dotcom Bubble, was another time where sentiment was off the rails. However, the market’s foundation had completely crumbled by the time 2000 began. Today looks nothing like that.

Friday saw what is commonly known as a “key reversal” in the major stock market indices, many sectors and hundreds of stocks. You can see that on a chart as the market gapped open to a fresh all-time high and then closed near the lows for the day. One day set ups do not usually have all that power, but as I have already mentioned, we do have some extreme sentiment.

This makes the “trade” fairly easy to execute. For now, until and unless the various indices, sectors and stocks close above last Friday’s high, the short-term is neutral at best, negative at worst. Below, I grabbed one index and one sector for you to see.

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Early January Indicator Calls for More Upside While Oil & Gold Hit Peaks

With the much ballyhooed Santa Claus Rally out of the way which I really reduced to meaningless in the grand scheme of things, the media has turned its attention to the Early January Indicator (EJI). As Yale Hirsch of Stock Trader’s Almanac fame discovered, as goes the first five days of January, so goes the rest of the year. Since 1990 when the EJI is positive, stocks end the year higher 78% of the time versus 74% for any random year since 1990. That’s not exactly the layup it seems on the surface. If we look at more recent data since 2000, the percentages don’t change very much. As we have seen with a number a catchy seasonal stats and studies which look great on the surface, they often don’t give you the edge when compared to random.

Turning to the Iranian situation and its impact on oil and gold, as I mentioned in media segments this week, when commodities rally into an event like we saw, we usually see some type of peak as missiles begin to fly. The opposite is true when they fall into an event. All week I spoke about watching for a peak in crude oil which had rallied hard since early October.

On Monday, Tuesday and Wednesday, crude closed lower than where it opened all three days. Wednesday’s emotional session was truly one for the records books. Early on crude oil scored a 9 month high and a 17 day low on the very same day. That’s some wildly volatile action that isn’t seen very often. I feel confident in saying that the peak is in for a while and the risk is to the downside. I also wouldn’t be surprised to see crude trade in a range bound by the high and slightly lower than the low to calm things down.

Gold, which was also on a tear of late, also saw some truly historic, emotional action on Wednesday, but not quite the range of crude. On the far right of the chart, just like crude, you can see what was a huge early rally to $1610 before the bears came to work and pushed gold all the way down to $1560. I think gold also looks to have put in a top for a while.

One more thing to add. Both crude and gold have seen historic levels of positive sentiment over the past few months to the point of real and tangible greed, much like we are seeing in stocks right now. While stocks haven’t seen their peak yet, I do think the giddiness of traders in gold and crude coupled with the emotional downside reversals have put a temporary ceiling on the two to let things settle down and hopefully wring out some of the weak handed holders and Johnny Come Latelies before the next meaningful rally can begin which I do see happening in the first half of 2020.

I will have more on the historic sentiment readings in stocks shortly, but remember that extreme sentiment readings alone won’t cause a change in trend. There is always a catalyst. As you know, I have been arguably the most bullish person out there for many years, first calling for Dow 30,000 when the Dow was barely at 20,000. Now, it seems like every pundit is revising history to get on board the freight train. While this is not 2000 again, it does have the look of early 2018 and mid 2011.

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Santa Called. Bulls Excited on Wall. Could There be a Fall?

Although it wasn’t much for the bulls to celebrate, Santa Claus did call to Broad & Wall. The last five days of 2019 plus the first two days of 2020 finished slightly in the green for the &P 500 by 0.34%. The media would have you believe that this 7 day trading period now holds untold fortunes for stock investors versus any old random year. That’s simply not the case, even when giving the bulls the benefit of the doubt by including the first two days of the year in the calculations when it would be impossible to invest until the Santa Claus Rally (SCR) ended.

Let’s take a deeper dive.

First, I have daily stock market data back to 1926 and while I could go all the way almost 100 years, I chose not to. I have always said that markets morph and evolve. What happened that far back when stocks traded on Saturdays and were closed for war has absolutely no bearing on today. Lots of folks use data since 1950. I do as well for some studies and when I am not lazy. My favorite periods to use are since 1990 and since 2000. I think a whole lot changed after the crash of 1987 and then again in 2001 and 2007.

Here is what I learned. Since 1990 77% of the calendar years have been up using the total return for the S&P 500. After a positive SCR, 81% of the years have been up. In other words, the difference is one single year, deeming it statistically irrelevant.

That disappointed me. So I went a step further.

I looked at all years where Q4 was positive, the calendar year was positive and the SCR was positive. There were 14 since 1990. Of those 14 years, the next calendar year finished higher 12 times or 85%. If you are curious, the failed years were the first and last in my study, 1990 and 2018.

Furthermore, 1990 and 2018 were also the only years in the 14 where there was a 10%+ stock market decline during the first quarter of the year.

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A Little Taste for the Bears – Santa Still in Play

Stocks roared out of the gate to begin 2020 and it certainly felt like the masses were buying hand over fist. However, let’s remember that this is a holiday-shortened week and I don’t think everyone is back to their normal schedules. With stocks closing at their highs for the day, it’s very unlikely that any peak of importance was seen.

Several times last week I mentioned my last 5 and Santa Claus Rally research. The last 5 was reduced to a coin flip in my work and well, the S&P 500 was basically flat. Today ends the SCR and the bulls want to see 3224 closed above for Santa to have officially called Broad and Wall as Yale Hirsch’s adage goes. Despite what looks to be a nasty open based on the U.S. taking out a top Iranian terrorist and tensions flaring in the Middle East, I think Santa is safe this year. I would be surprised to see a bad opening followed by afternoon selling below 3224.

With sentiment at historic extremes, greed is running very hot and only market weakness can cure that. I still find it hard to believe that any real pullback will start from news like this. Perhaps we will see a mild pullback right here and then another rally to new highs where a real pullback begins.

Finally, I left off on Monday with a tease about another seasonal trade about to unfold. One that has a very strong track record. Unfortunately, given the narrow difference in performance between the major indices to close the year, the trade is a bit muted through its period ending on January 8. That trade says to own the Russell 2000. We’ll see how it plays out.

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3224 the Key Number for Santa

Friday’s action in the stock market wasn’t the victory the bulls were claiming. After another higher opening, the bears made a tiny stand and managed to fend off higher prices for a few hours. That’s about all you can say besides there were more stocks declining than advancing. I know; I am grasping at straws into year-end. However, make no mistake about the historic sentiment readings we are currently seeing now. This is the polar opposite of what we saw one year ago when the masses were screaming about a 2008 redux. Caution will be warranted in Q1 of 2020.

I shared my research on the last five trading days as well as the Santa Claus Rally (SCR) and the bulls need the S&P 500 to close above 3224 on January 3rd for Santa to officially call. As my work showed, it won’t be surprising to see the S&P 500 close below 3224 on December 31st. This is what usually happens when stocks are up strongly during the year as well as Q4. There will be another seasonal trade coming up on Tuesday’s close through the first five trading days of 2020. I will share it as soon as I know what it is!

With month, quarter and year-end just about here, I am about to enter the busiest time of my year. Add in my report to clients and Fearless Forecast, there will be a lot going on over the next month. And I am still rehabbing my ankle and shoulder 6 days a week. I mention this as posting here may be a bit erratic, but I will do my best as always.

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All Looks Terrific But Be Careful

I hope everyone had a great Christmas, Hanukah, Kwanzaa and Boxing Day!

As I wrote about the other day, the Santa Claus Rally and last five days of the year are not the absolute layup the pundits keep predicting. In strong years, the last five days trade is not even a coin flip, however, Santa still comes calling about 70% of the time. That puts added bullish weight on the first two days of 2020 if the last five of 2019 are down.

It is amazing that even the bears are conceding how bullish the stock market is right now. Almost every measure of sentiment I look is showing extreme greed. My Twitter feed has been full of the CNN Fear/Greed needle which is pinned on extremely greedy. However, the masses aren’t doing their homework because that indicator has done a poor job at market peaks. The other measures, like put/call ratios, sentiment surveys and money flows are all looking very similar to January 2018, late 1999 and other extremes.

While I don’t think the conclusion is to sell everything here, risk has certainly increased dramatically and it pays to dance very close to the door. That will likely be a theme of mine when I release my 2020 Fearless Forecast in a week or so.

Index leadership has been very strong from the NASDAQ 100, but the S&P 400 and Russell 2000 has been disappointing although they both met my forecasts by achieving new highs.

While the stock market has pressed higher and higher, it’s worth noting that semis, banks and transports, three of my four key sectors, are not making new highs for the rally. Tuck that under your cap but don’t forget about it. Discretionary on the other hand is a sector I offered as a solid trading opportunity on December 16. At that time, it looked coiled up and ready to bust higher. Today, we can see it below and it has been a nice little run.

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Stocks CREEP Higher – Waiting on Santa

Let’s start this article with the big picture. The bull market is alive and reasonably well and will live on into 2020. Next year will likely present some challenges, but we will cross that bridge when I start to work on my 2020 Fearless Forecast. One thing is for absolute sure in my opinion; there will be fireworks in 2020!

For roughly a month, mostly on the blog, I had been discussing a stock market that was a little ahead of itself and then a little tired in the very short-term. In my lexicon, that meant I would hold the positions I had, but not add any new money nor increase risk. I did a pretty good of sticking to this although I did put some new money to work last week.

Over the past month, it certainly “felt” like stocks surged higher as they crept higher and higher almost every day. Before checking, I would have guessed that the S&P 500 was up by 5% since Thanksgiving. However, the real number is 2%, certainly nothing to sneeze at, but also not the melt up so many pundits have been forecasting.

Markets that creep higher and higher feel like larger magnitude moves as they occur because the pullbacks are so brief and shallow. Creeper markets also tend to give back so much of the gains in one fell swoop down the road. I will not be surprised to see that happen sometime in Q1 2020.

Anyway, since the little post-Thanksgiving low on December 3rd, the stock market rally has occurred almost entirely at the open. That’s not a bad thing. That’s not a good thing. Below you can see an hourly chart of the S&P 500.

Look at all of the areas where there is no red or green candles. Those are the gap up openings. Each one is followed by the market going sideways for a period of time before gapping higher again. One thing we should look for is a change in character where stocks gap higher, but instead of going sideways and then higher, they just sell off and don’t immediately recover.

Now, my valued readers, before you stop reading and start thinking that the most bullish person out there has turned negative, think again. I am only talking about short-term noise, at least for now. Under 5% moves. There are many concerns about the frothiness of investor sentiment (and it’s really greedy out there now), but I am going to wait and cover that another time.

Historically, the market is in the midst of one of the most favorable times of the year from now through early January. And the traditional Santa Claus Rally (SCR) is scheduled to begin on Christmas Eve. That’s five trading days before year-end. Remember the old adage made popular by Yale Hirsch from the Stock Trader’s Almanac? “If Santa Claus should fail to call, bears may come to Broad and Wall.” While Yale posited that a bear market would ensue, the truth of the matter is that a decline usually follows during the first half of the new year with Q1 being the most likely time.

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