Target Hit

On Friday, the Dow hit yet another one of our upside projections. This continues the longest stretch of successful upside targets since I started forecasting them 20 years ago. When the bear market ended in 2009 I remember being on CNBC with Larry Kudlow in early March thinking that stocks could bounce 1000 points before a possible retest of the lows could set up. People thought that was nuts. When stocks exceeded 8500 for five straight days, 10,500 became the next target and that was, of course, laughed at.

And here we are today. Dow 28,000. A target I offered on Fox Business, Yahoo and CNBC more times than I can count. Five straight closes above 28,000 will open 30,000 as the next target. I remember first discussing Dow 30,000 when stocks first breached 20,000 and people thought I was crazy. Interestingly, at this point, there isn’t another number above 30,000 to target. I am not sure what that means, but we will cross that bridge when we get there.

With Dow 28,000 I am seeing more people become bullish and a few cracks developing in the market with the number of stocks making new highs and new lows on the same day. Smart money is really increasing their level of quietly selling and dumb money is pouring into stocks. That’s usually not a recipe for good risk/reward and I am sticking with my neutral position in the very short-term. Simply put, that means I am not committing new money or raising risk until either stocks soften or the market internals improve. I am not calling for an end to this rally or the bull market or anything significant on the downside. Just your routine mild pullback or sideways action. I am, however, beginning to think about 2020, recession and how a bear market could develop.

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Lots of Opps But Market Not Ready For Another Leg Just Yet

Today is options expiration where moves used to be wide and volatile. However, these days expiration has actually become a fairly tame affair. As I wrote about the “haves” and “have nots” in the indices the other day, I think today will shape up to be fairly quiet with an obvious bias to the upside as the bears have been thwarted multiple times this week. Stocks should jump to fresh, new highs this morning but I do not expect an acceleration from there. The Dow, NASDAQ 100 and S&P 500 continue to lead while the S&P 400 and Russell 2000 are trying to play catch up and eventually take over leadership for the run past 28,000.

While I have been an unabashed bull for many quarters in semis, I think there is an opportunity in communication services, the newer S&P 500 sector. Banks and financial also look good to me for more upside. I am not sure today is the day to buy transports, but before long, they should be ready for an all out assault on all-time highs.

Some pundits have started to cry foul regarding the NYSE Advance/Decline Line’s inability to score new highs lately while stocks have marched higher. I am not worried about that just yet. However, I remain in the neutral camp over the very short-term for the same reasons I have spelled out lately. Stocks may only see a few percent lower or just go sideways for a few weeks before the next upside assault begins. Either way, I think there is time.

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Bulls Recharging. Bears Turning into Bulls

It’s good to be home after a great but quick trip to Dallas. Uncharacteristically, the markets were fairly quiet on Monday and Tuesday while I was away. Usually, my travels bring about all kinds of fireworks which force me to change plans and stress about being available and not missing an opportunity. I hope that doesn’t mean that the next trip will be worse than normal to make up for it!

Since I turned neutral on the very short-term, stocks have a done a beautiful job of doing, well, nothing. The “haves”, Dow, S&P 500 and NASDAQ 100 are doing a really nice job of going sideways which was one of my scenarios. The “have nots”, S&P 400 and Russell 2000 have done a nice job of mildly pulling back which was my other scenario. Nothing really has changed. The great growth/value debate rages on with growth bouncing slightly relative to value over the past week.

Semis look strong. Banks are readying themselves for another assault higher. Discretionary may have ceded leadership but it still behaves well. Transports are a little weaker than banks, but also look like they want to surge into year-end. Junk bonds do not behave like they have peaked. Industrials and materials have quiet caught fire as value has become back in Vogue. Healthcare and biotech are very strong. Energy remains in the doghouse.

All in all, I am seeing no signs that the rally has peaked or is about to end. My next upside target of Dow 28,000 should be seen by year-end with 30,000 possible shortly thereafter. I do find it hilarious that so many pundits have revised their bearish history by calling for Dow 30,000 or something similar when they have been neutral or negative for years. One negative I will leave with is just that. A lot of folks have turned positive after stocks eclipsed new highs recently. That’s cause for concern.

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The Neutral Theme Continues

Greetings from Dallas where I am attending NAAIM’s annual Outlook conference with the real thought leaders in the industry. Although I have been involved with NAAIM for almost 30 years, I still get excited and look forward to seeing old friends, meeting new ones and hearing from and participating with true cutting edge thinkers who aren’t beholden to Wall Street’s agenda.

So, here we are. Although my intermediate and long-term bullish outlook remains unchanged and emboldened, I remain neutral over the very short-term as I first mentioned last week when I turned in real time, right here. Where do I think the major stock market indices can pull back to? As I discussed last week HERE, I am not looking for anything significant on the downside, maybe a few percent here or there. And perhaps the bulls can just limit the downside to some sideways activity within a few percent band for a period of time.

While I am still very positive on semiconductors, banks and transports, other sectors are percolating and starting to lead equally as good. Communication services being among them. Don’t underestimate the importance of this development for the continuation of the rally. On the flip side, I have been bullish on the defensive sectors like utilities , staples and REITs and they seem to have peaked for now. Reducing those positions into strength seems like the correct strategy for the time being.

I am going to cut it off here so I can hear Doug Ramsey from the Leuthold Group offer his long-term bearish case, something I don’t agree with, but I am certainly open to other opinions. If nothing else, it helps me to solidify my own position or find holes in it.

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Pause to Refresh or Mild Pullback Underway

Earlier this week, I turned neutral for the short-term in the stock market. That’s all it is. Neutral when I look out a few days to a few weeks. I am not calling for any decline of significance and we may not even see a noticeable pullback. Stocks could go sideways to work off what I see as investors becoming a little too giddy or they could mildly pull back. My work doesn’t support much more than that. Of course, as always, I could be dead wrong and stocks soar from here. I don’t see that happening just yet.

When looking for logical (when it the market ever logical?) areas for a pullback, I direct you to the horizontal blue lines on the Dow, S&P 500 and NASDAQ 100 below. If we get some mild weakness, I am just looking at what probably too many other people are looking at.

Finally for today, the Dow Transports are getting a lot of attention because after more than a year of not confirming the positive action in the Dow Industrials, they are both trying to score fresh, all-time highs. While yesterday’s assault attempt was thwarted by the bears, I think the transports are close to breaking out and soaring further into January. More on this next week.

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Dow Joins Party. Stocks a Bit Tired

Greetings from 36,000 feet on some bumpy air, which is the norm when I fly. On Monday, the Dow Industrials joined the S&P 500 and NASDAQ 100 in fresh, all-time high territory. That’s now three of the five major stock market indices which have accommodated my bullish forecast. The last two, S&P 400 and Russell 2000 still have a ways to go, but I am still very optimistic that they will join their cousins later this quarter or by early 2020. Both lagging indices are behaving constructively with solid foundations to launch higher. Here are the midcaps below.

With all that said and the endless patting myself on the back for being so bullish, I do not believe adding new money nor getting more aggressive is the right play here. I think there is a decent chance that stocks are peaking in the short-term and will either mildly pull back or move sideways for a spell. I continue to believe that any and all weakness is a buying opportunity until proven otherwise.

 

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More New Highs Coming. The Celebration Continues.

Right on cue, the NASDAQ 100 followed the S&P 500 into all-time high territory. And before you ask, I still believe the Dow, S&P 400 and Russell 2000 will be there shortly. Not a single note of my tune has changed. The bull market remains alive and well and higher prices are a comin’. Of course, you wouldn’t know this from listening to the chorus of bears who remain firm that Armageddon is just around the corner.

Taking a quick at some the things that really matter, we find my four key sectors are in good shape. Semis have fully broken out and are running strong. Banks are on the verge of their breakout and that should be happening this month. While discretionary has been quiet, I think they too will see new highs before Christmas. Finally, transports are behaving constructively and I expect higher prices into year-end.

High yield bonds have been very slowly plodding higher without much attention. Their behavior remains very supportive of a growing economy and continuation of the bull market, no matter how the bears want to spin it.

My theme is unchanged. Any and all weakness is a buying opportunity until proven otherwise. The masses have hated and disavowed this bull market each and every step of the way. Until we see the majority of very wrong bears turn positive, this market will continue to rise.

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Crickets and BUT BUT BUT from the Bears

Well, the Fed cut rates as expected. Powell said they are moving to neutral or pause mode, as expected. Stocks generally liked what they heard and closed near the highs for the day. Semis have struggled a bit over the past few days but I am not concerned in the least just yet. I think they have a chance to really soar into year-end.

This morning, the employment report came in better than expected as well as seeing upward revisions to prior months. Wage growth was a solid 3%. This report was Goldilocks and very hard to poke holes in. In a recent turn, good news is good news for stocks in the pre-market. That’s a nice shift and a rare kudos from me for the Fed.

The bearish crowd with the naysayers and gloom and doom’ers have been completely silenced this week. I hear crickets from most of them and “BUT BUT BUT” from a few of them. I laughed earlier this week when stocks were 1% and people emailed and tweeted to poke fun at me. 1%! HA!!

S&P 500 is at new highs. NASDAQ 100 will be at new highs today. The Dow isn’t far behind. The S&P 400 and Russell 2000 will take a little longer but they’ll get there sooner than later. Don’t rule out a sharp move higher by year-end for the stock market.

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Fed to Cut Rates, Indicate Pause & Move to Neutral

What to Expect Today

The Federal Open Market Committee (FOMC) is going to cut interest rates by another 1/4% at 2:00pm on Wednesday. The market is expecting it and the cut has already been priced in. Any other action would be a shocker. With stocks essentially at to all-time highs, this continues to be reminiscent of 1995 when the Fed came from an overly restrictive monetary policy in 1994 to realizing they screwed up and quickly played catch up. Stocks had long understood and priced this in with 1995 being one of the all-time great investing years in modern history.

Right after the Fed announces their decision, all eyes will be on the statement for clues of future interest rate cuts or signs that the Fed may be close to being done. Given the data and stock market behavior over the past 6 weeks, I do think Jay Powell and company will offer some hawkish comments or indications that a pause in the rate cutting cycle may be in order into 2020.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. I fully expect that to be the case today. Besides that, there is also a strong long-term trend for stocks to close the day higher, although that is not as strong as it used to be. Additionally, with stocks at all-time highs and significant upside progress over the past month, the bulls have even less dry powder than normal, not to mention how poorly stocks have done under Jay Powell on Fed day. In his short tenure as Fed chair, Powell already has the weakest stock market performance of any Fed chair in history on Fed day.

Countdown to a Trump Tweet

It’s certainly no secret that the President isn’t the biggest fan of Jay Powell, even though Donald Trump appointed Powell as Fed chief. Trump has been as misguided as Powell when it comes to interest rates. The President has been publicly trying to shame the Fed into copying the failing and disastrous European model for negative interest rates, something I hope and pray never, ever happens in the U.S. Low or negative interest rates are certainly not an economic panacea.

On the other hand, whether intentional or by accident, President Trump has been ingenious in creating a natural scapegoat for any potential economic weakness before the election. If the economy strengthens over the coming quarters, Trump will certainly take credit for it, in spite of his perception that the Fed had been working against him. If the economy weakens from here, the President will obviously blame Powell & Company as Trump has been publicly campaigning for more aggressive action by the Fed. In either case, Trump likely wins in the court of public opinion.

Jay Powell’s Arrogance & Ignorance

As I already mentioned, everyone knows what the Fed is going to do at 2:00 pm today. That’s not in debate. And right now, the market is pricing in at least another rate cut. Long time readers know that I have been very critical of the Fed, more with Yellen and Powell than Bernanke although Big Ben did make perhaps the single greatest imbecilic comment in 2007 when he said the sub prime mortgage crisis was “contained” and there would be “no contagion”. It would be impossible to have been any more wrong than that and on an epic scale.

Anyway, I think the Jay Powell led Fed is among the worst groups since 1988 when I entered the business. Greenspan may have been the worst Fed chair since Arthur Burns in the 1970s but Powell is certainly working on his legacy and it’s not an enviable one.

For 6 years I have pounded the table that raising interest rates AND selling assets which is now being referred to as quantitative tightening is the mistake of all mistakes. Selling assets is akin to also hiking rates as it reduces liquidity and tightens financial conditions. Janet Yellen should have chosen one or the other. Pick your poison. Instead, she forged ahead with both.

Jay Powell continued on that path except he, in a grand stroke of additional arrogance, decided that rates should go up at a quicker pace. Arrogance and ignorance are among the two worst character traits and I think Powell has them both. We all saw what happened last December when the Fed added that one additional rate hike and did not temper the asset sales. The global financial markets collapsed like hadn’t been seen since the Great Depression.

The Fed – Savior of the Financial Markets

Now, you can argue that it’s not the Fed’s job to appease the financial markets and you would technically be correct. The Fed has a dual mandate from Congress. Price stability (inflation) and maximum employment. However, the Fed, for the most part, usually follows what the markets want and have priced in. I say “usually” because there have been a few times when the Fed has gone off book.

Remember, the Fed doesn’t want to upset the financial markets. These markets are absolutely vital the U.S. and global economies. And despite what you may hear from Lizzie Warren and Bernie Sanders, a healthy and vibrant Wall Street community is an absolute necessity to a growing economy, even though that same group is prone to bouts of greed and bad behavior which can have a periodic and significant detrimental impact on the economy (see chapter on how the financial crisis began in 2007 and 1929).

When politicians from both sides talk about how Wall Street “wrecked” the economy, they always forget how many direct and indirect jobs were created from Wall Street’s work. The problem is that we (the U.S.) always seems to reward bad behavior and don’t punish it. And so many politicians continue to pat themselves on the back for the Dodd-Frank piece of legislation which did good by increasing capital standards but failed miserably by declaring victory that the days of Wall Street bailouts were over. Not a chance.

When push comes to shove, the political will is never there to let a Morgan Stanley or a Goldman potentially take down the economy. In real time in 2008, my thesis was that AIG should not have been saved which would have sent Goldman down with it. I thought letting more institutions be punished would have caused more short-term pain, but the free market would picked up the slack and the economy would have seen a much, much better recovery than it did. A topic for a different day.

Dual Mandate

As I already mentioned above, the fed has a dual mandate from Congress. Regardless of what President Trump believes or wants, the Fed’s instructions are from Congress. When we look at the Fed’s dual mandate, Congress essentially directs the Fed to keep inflation manageable and seek to have the country fully employed.

Right now, unemployment is at or near record lows with minority unemployment also at or near the lowest levels since records began. That is maximum employment, a point where the Fed would normally worry about a labor shortage and a spike in wages. While wages are finally rising, we are not seeing a squeeze and nothing like McDonalds paying signing bonuses like we saw years ago. With half of the Fed’s mandate pointing towards a rate hike, it’s makes me wonder.

Looking at price stability (inflation), we see the same trend that has been in place for more than a decade; inflation cannot seem to get going. While many people are familiar with the Consumer Price Index, the chart below is a much better gauge and you can Google if you want more info about it. The blue line excludes food and energy and this CENTURY you can’t find a single year of 3%. The very random Fed target of 2% has barely been met since the financial crisis.

So, the second half of the dual mandate is certainly amenable to a rate cut although the most recent data was just a tad “hotter” than the market was expecting. You have the dual mandate at odds. In my world, that would mean a neutral stance by the Fed. Leave rates unchanged and stop selling assets, which they did announce at the July meeting.

Jay Powell & Company at Odds

Jay Powell and the majority of the voting members of the Fed want to cut interest rates by 1/4%. There is a minority faction that wants to leave rates alone. Powell has spoken about an “insurance” rate cut which in my mind means a single cut. Today, we are look at cut number three. He discussed weakening economies in Europe and Asia that eventually could impact the U.S. He is worried about the trade war with China. I just want to know where in the dual mandate it says that the Fed should worry about China and Europe. The rest of the world is now loosening financial conditions so now Powell wants to follow them.

ECB chief Mario Draghi is on his way out of Dodge, leaving Europe in worse shape than when he began 8 years ago. With more than $15 trillion in negatively yielding bonds and a whole new round of bond buying starting, Europe is that fly in search of the windshield. That story ain’t gonna end well. However, the powers that be refuse to accept their fate. The Euro experiment is a failure, plain and simple. It should be dismantled, but I digress.

What I Would Do

My own economic forecast remains unchanged since I first offered it in late 2017. I think the U.S. will experience a very mild recession beginning before the 2020 election. Although there are so many doom and gloomers who forecast something much more ominous, it’s almost impossible with the banks in such great shape, literally sitting on more than two trillion dollars in cash. And if you want to know what I would do instead of cutting rates, I would stop paying the banks to keep their excess reserves at the Fed. This would force them put some money to work in the economy.

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All-Time Highs Are Here. WHO KNEW?!?!

The S&P 500 is poised to open at fresh, all-time highs this morning. Absolutely none of my readers should be the least bit surprised. I have written about it every single week this entire year. And the stock market isn’t done. I have made fun of and called out the bears every step of the way to outcries of “BUT, BUT, BUT” whenever presented with facts. They hate. They disavow. They call for the end of the world. They have been flat out wrong.

Stocks haven’t seen new highs since July and maybe this is one of those times where the masses get really excited and throw money at the market and then stocks see a short-term peak. I do not get that feeling, but I don’t have high conviction either. Rather, I could see stocks seeing some very nice strength this morning, leveling out and then not doing much until Wednesday afternoon after the Fed concludes their meeting.

My long-time favorite sector, semiconductors, scored all-time highs on Friday and looks to add on to that this morning. This has the potential to be one serious breakout and run if the stars line up. We’ll see.

I am a bit disappointed that REITs, which were in a similar position to semis, saw a classic breakout and then immediate failure as you can see below. It happens. Watch utilities and staples and read a lot into it!

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