Bears Taking the Ball

Monday saw the not so unusual weakness we have seen lately. However, Tuesday did not see what has become the typical bounce back since the stock market last bottomed in Q1. While I don’t want to assign too much emphasis on one single trading day, especially when it’s in my best interest, perhaps the market’s character is beginning to change. I continue to look for a bull market pullback in the mid to upper single digits.

So far, price, the final arbiter, has done nothing wrong in most of the major indices although I would argue that the S&P 400 and Russell 2000 have started rolling over. While semis continue to move sideways, banks have broken down from their range and hard. On the flip side, high yield bonds have had an awakening and are now at all-time highs. That’s one of the reasons I don’t think the decline could become a full fledged 10% correction. Liquidity remains strong.

If you would like to be notified by email when a new post is made here, please sign up HERE

***Fed Update – Rates Going Up Today. More to Follow***

Stock Market Behavior Models for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Over the past few meetings, many of the strongest trends were muted and today looks a lot like the August 1 meeting day. I drew arrows below so you can see what the S&P 500 looked like heading into the Fed’s statement day which is today.

In both cases, stocks were just off of their highs. In August, stocks rallied and declined before beginning another leg higher. I wouldn’t be at all surprised if stocks saw a quick pullback this week followed by another rally attempt next week that ultimately fails.

As with most statement days, the model for the day calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range which seems very unlikely today, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM. There is a strong trend in play for stocks to rally on statement day and especially after 2 PM.

Powell & Co. Set to Hike

After raising interest rates by 0.25% 6 weeks ago, Jay Powell and company will be at it again today by hiking rates another 0.25%. Markets have fully priced this in and have begun to price in another 0.25% at the last meeting of the year in December. This continues to fit perfectly within our forecast for 3.5 rates hikes in 2018 with the risk to the upside. All eyes and ears will be waiting for the Fed’s forecast of rate hikes in 2019 which now stands at two. Investors will also be parsing the statement and listening to the Powell Q& A session on the economic impact of tariffs and tax reform.

While I doubt there will be much if any mention of the Fed’s sale of assets purchased during the Quantitative Easing programs, it should be noted that the pace of sales increases next month. That’s another potential drag on liquidity in the system that may take the markets some time to adjust to.

Economically, things remain firm right now on the back of tax reform, reduced regulation and massive repatriation of corporate cash.  We have strong Q2 GDP growth although Q3 will be much more challenging, record corporate profits, inflation back up in the zone and more jobs open than people to fill them. Consumer confidence and consumer sentiment are at or near record highs. Even wage growth is moving higher. Only the tariffs are holding back the economy and I think that may resolve itself favorably after the November elections.

In many ways, it doesn’t get much better than this. Reread that last sentence. That’s the one that concerns me a little bit, not so much for the next few quarters, but certainly as we get into the middle of 2019. If it can’t get much better than this, it only has one way to go although recessions do not begin with data like this. It takes time for bad behavior to permeate the system and confidence to become exuberance, but we are close!

They Just Don’t Get It

To reiterate what I have said for more than a year but a little more bluntly, the Fed is misguided, arrogant and in desperate need of help. NEVER before have they sold balance sheet holdings in the open market AND raised interest rates. In fact, I don’t think it’s ever been done in the world before. So why on earth do they believe they will so easily be successful? This grand experiment is going to end poorly and we are all going to suffer at the hands of the next recession which I stabbed in the dark as beginning between mid 2019 and mid 2020.

Yes, with banks holding $2.5 trillion on their balance sheets, the recession should be mild and look nothing like 2007-2009. And yes, this expansion will be more than 10 years old. And yes, there will be some external trigger like 9-11 or the S&L Crisis to push the economy over. This time, it could be tariffs or a European banking crisis. But the Fed will have greased the skids sufficiently for the economy to recess.

Let’s remember that the Fed was asleep at the wheel before the 1987 crash. In fact, Alan Greenspan, one of the worst Fed chairs of all-time, actually raised interest rates just before that fateful day, stepping on the throat of liquidity and turning a routine bull market correction into a 30% bear market and crash. In 1998 before Russia defaulted on her debt and Long Term Capital almost took down the entire financial system, the Fed was raising rates again. Just after the Dotcom Bubble burst in March 2000, ole Alan started hiking rates in May 2000. And let’s not even go to 2007 where Ben Bernanke whom I view as one of the greats, proclaimed that there would be no contagion from the sub prime mortgage collapse.

Yes. The Fed needs to stop.

Velocity of Money Most Important

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money collapsed. It’s still too early to conclude, but it does look like it stopped going down in 2017 and might be just slightly starting to turn up as you can see on the second chart of M2V since 2008. If 2017 does turn out to be the bottom, this would also coincide with the bottom of the commodity cycle which I have discussed and should lead to a massive commodity boom over the coming decade, especially in the non-energy products.

In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

These two charts definitely speak to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will not fully recover and function normally until money velocity rallies. This is one chart the Fed should be focused on all of the time.

It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one called the Fed out on this and certainly not Powell so far at his quarterly press conferences.

If you would like to be notified by email when a new post is made here, please sign up HERE

Can the Bears Make Any Move?

While the Dow declined almost 200 points on Monday the other indices were down much less with the NASDAQ 100 closing higher, a good sign for the bulls. Overall participation was poor and the defensive sectors were hit the hardest which was little bit of a head scratcher. As I mentioned yesterday, this week is the weakest week of the year on a seasonal basis. It is also another down Monday with an opportunity for an up Tuesday. I mention this because since the market’s Q1 bottom almost every down Monday has been followed by an up Tuesday. If the bears finally make a stand and repel what looks to be early morning strength, that would be a tiny clue that the market’s character is changing, I remain in the pullback camp for the next few weeks as the window of opportunity is now open for some short-term weakness.

There are many short-term opportunities right now in gold, bonds and the euro. And all with the Fed beginning a two day meeting. Rates are going up 1/4% tomorrow.

That’s it for today. I am on the train to NYC to join CNBC’s Squawk Box at 8am followed by a full hour with the good folks at Yahoo Finance on their Midday Movers show.

If you would like to be notified by email when a new post is made here, please sign up HERE

Junk Hanging In While Pullback Begins

This post is going to be short as I am planning on writing my special Fed piece as well as a full Street$marts before I head to New York City tomorrow. Nothing new to report. I remain negative for the next few weeks or so as the window of opportunity for a mid to upper single digit pullback has opened.

I have written about the split market and small warning from the NYSE A/D Line, however high yield bonds are hanging in nicely, at least for now, as you can see below. Sector leadership has been downgraded to neutral across the board.

Nothing new on the gold bottom. The metal saw its low in August while the stocks saw theirs this month. The longer gold doesn’t breach the August bottom, the more likely it holds.

If you would like to be notified by email when a new post is made here, please sign up HERE

And FINALLY, the Dow Rings the Bell

Well folks, with the Dow Industrials finally scoring fresh all-time highs, we have every major stock market index plus all four key sectors seeing new highs since the bottom of the Q1 correction. My forecast is now complete. I can’t count how many times people told me that a new bear market started or this time I was going to fall flat on my face. Don’t get me wrong. I fall on my face plenty times. I just keep getting up.

As the Dow has raced higher this week, the market’s foundation has continued to weaken. There’s nothing new on that front, only that the split market with so many stocks making new highs and new lows has worsened. It’s not healthy. That doesn’t mean the bull market is over because I don’t think that’s the case. I do think stocks are in for a pullback.

If we do see a pullback, the most telling thing may be how the defensive sectors behave. Right now, utilities, staples and REITs could go either way. High yield bonds have been quietly strong but no stronger than many floating rate or levered loan funds. The rest of the bond market has struggled. While the NYSE A/D Line has been powerful all year, it’s been lagging on a short-term basis all month.

Finally, and most importantly, price has yet to trigger any indication of impending weakness. That’s what I will be looking for over the coming week or so to take action.

If you would like to be notified by email when a new post is made here, please sign up HERE

Buy Yom Kippur But Participation is Waning

As the Jewish holiday of Yom Kippur is here, so ends the seasonal trend of selling Rosh Hashanah and buying Yom Kippur. It worked out very well this year, if you did the exact opposite! Rosh Hashanah was the most recent little low and stocks quietly rallied right through to Yom Kippur.

The Dow Industrials and the S&P 500 have reasserted themselves while the Russell 2000 and NASDAQ 100 have lagged, not exactly the healthiest backdrop. In sector land, banks continue to be weak and tiny bit concerning, especially when bond yields have rallied which is usually a tailwind.

High yield bonds have behaved reasonably well but the NYSE A/D Line has finally started to show some signs of deterioration and weakness. This condition can persist and not matter for three months or 23 months. It’s not a timely indicator, but it is very important.

Even though stocks have rallied of late, the internals have not kept pace, let alone lead. The short-term concern I have been writing about remains in place.

If you would like to be notified by email when a new post is made here, please sign up HERE

Hindenburg, Titanic, OH MY!

As I did my usual weekend research and overview I am even more convinced that there is valid reason to have some short-term concern. By short-term, I am looking at the next three to five weeks and nothing more than a single digit pullback, worst case. Lots of little things have ans continue to pop up to go along with the negative seasonal headwind this time of year. However, the real and nasty bearishness of September has been muted by the bull market as I wrote here.

While price action in the major indices continues to be strong and price is the final arbiter, there are a number of secondary things that warrant attention. You have heard or read about the “dreaded” Hindenburg Omen or Titanic Syndrome. Those are two stupid names for a market condition that’s not as deadly as the name suggests. In essence, they are triggered when there is a split market, meaning lots of stocks making new highs and new lows along with a few other rules. Analysts look for clusters of these signals to signal weakness in stocks. While their track record is a little above average people love to cherry pick and highlight triggers at the bull market peaks of 2000 and 2007.

Given what I wrote, I still remain very confident that the bull market remains alive and reasonable healthy. More all-time highs should be in order next quarter and into 2019.

If you would like to be notified by email when a new post is made here, please sign up HERE

Gold a Bit Perplexing. Stocks Due for Pullback

Let’s start with gold. A few weeks ago, I wrote a longer article in Street$marts about a major low in gold forming. It’s USUALLY not that difficult to spot. However, this time, gold and the gold stocks have been diverging with the metal holding the bottom while the stocks made new lows. See the charts below.

I can tell you that it’s  been a bit perplexing, but not unprecedented. And although I have been long-term bullish on the dollar since Q1 2008, I now find myself in one of those moments where the next month or two doesn’t look so hot for the greenback. If that comes to fruition, gold should rally.

Turning to stocks, I still have the same concern I voiced the other day. Price acts great, but I am not in love with what’s going on beneath the surface. There is no clear cut leader from the major indices. Discretionary and transports are leading powerfully. Semis are neutral at best. Banks are no better. Junk bonds have been quietly very good. The NYSE A/D Line has stalled out.

What would make me feel better?

The Dow joining the other indices and scoring an all-time high. The NYSE A/D Line joining the Dow. Banks stepping up or at least outperforming the S&P 500.

I am not overly negative or worried about a big decline, but I also don’t think stocks are rocketing higher from here. A pullback sooner than later seems in order.

If you would like to be notified by email when a new post is made here, please sign up HERE

Becoming a Little Concerned

Sell Rosh Hashanah, buy Yom Kippur. The age old stock market adage for this time of year. I can tell you that no one was discussing that at synagogue over the past two days. As you can imagine, it was AAT, all about Trump, the good, the bad, the ugly and the otherwise. Normally, as you know, I would insert myself right into the conversation. However, given the holiday and toxic nature of politics right now, why bother. Everyone has their opinion and no debate is likely to change that.

Stocks saw reversals on Monday and again on Tuesday, first to the downside and then to the upside. Net, net, we saw a small rally. Leadership is faltering. Semis and banks are breaking down. Dow Jones Transports scored an all-time high while the Dow Industrials did not. The horribly named Hindenburg Omen and Titanic Syndrome have been flashing repeatedly this month, signaling a narrowing of participation.

I am becoming a little more than mildly concerned.

And gold is certainly frustrating bulls and bears.

If you would like to be notified by email when a new post is made here, please sign up HERE

Role Reversal

The NASDAQ 100 and by default, the technology sector has led the markets all year. That’s certainly no secret. Value stocks have lagged not only this year, but every year since the bull market began. In fact, they are about as cheap relative to growth as they have ever been. This week, there has been somewhat of a reversal of fortunes as the tech-laden NASDAQ 100 has come under strong selling pressure while value stocks have held their own.

Does that sound familiar?

That’ s what started to happen as the Dotcom Bubble began to burst in March 2000. No, I am not predicting anything like 2000-2002, just making an observation. The market’s foundation remains very solid today while it was crumbling in early 2000.

Although semis are selling off with tech, the other three key sectors remain in leadership. Junk bonds are fine and the NYSE A/D Line recently scored yet another all-time high. Definitely not the behavior typically seen at the end of a bull market.

It’s interesting that as the bears beat their chests on every bit of geopolitical news that comes out, especially when concerning Donald Trump, stocks don’t even miss a beat. As I have said since Trump was elected, the market simply does not care about his tweets, attacks, behavior or anything else that’s not related to the economy. It’s reality over rhetoric or policy over personality. That has to be so tough for the bears to accept when all they have done is rationalize why stocks should be going down for the past 9 years.

Finally, while the gold stocks have made new lows this week, the metal has not, creating an interesting divergence…

If you would like to be notified by email when a new post is made here, please sign up HERE