My Broken Record Continues

Same ole story here folks. Stocks bottomed. Bears trapped. Investors disavow the rally. All-time highs in sight. Dow 20,000.

Talk has certainly turned from questioning me on how the market could possibly rally to when the rally might end to now finally embracing the rally. I love how the naysayers dismiss and disavow the move because there was some “external force” like the dovish talk from the ECB or China cutting rates. That’s what happens!

Another huge week from the bulls and yet another win for my bullish scenario. I feel a little slighted that the financial channels don’t want to let me do my victory lap and won’t follow up with the only person who got on board this move before it happened. Oh well…

Leadership continues to change and that can be a good and bad sign. Biotech and healthcare have been big laggards and given that we own them, I can’t say I am all that happy. However, semis, transports, banks and discretionary have all stepped up in a very positive way.

I couldn’t be more pleased with the action in the high yield (junk) space. I said this before, but there is a real possibility that a rally could run right into January.

Now, stocks have rallied really hard, really fast. A breather is more than okay at this stage. The bears’ line in the sand was just crushed on Thursday so some mild pause to refresh should be expected. One thing that concerns me in the back of my mind is that no one seems at all worried about the debt ceiling because every other time, it has worked out. It will this time too, but complacency seems especially high, where there is typically some worry out there.

Enjoy the weekend!

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Pain for the Bears

After two straight down days and four days of pause overall, the bulls roared back to life on Thursday as you would normally expect during a powerful move off a bottom. It’s that first mild pullback from a significant low where the bears get a little excited that it could be another leg down, but all of the Johnny Come Lately bulls realize it may be their last chance to get on board. More pain for the bears.

Recent sentiment data has not revealed a large shift from bearish to bullish sentiment. Investors remain skeptical about this rally. Stocks are still being shorted (play on lower prices). This is all further fuel for higher prices. Weakness should be bought, possibly right into the New Year.

Thursday was a very strong day internally for stocks as well as sector leadership. With options expiration on Friday, it’s unlikely that another strong day will follow. Looking at my four key sectors, semis and consumer discretionary are already above their September peaks. The transports have come back from the dead after being in their own bear market all year. Only the banks haven’t really stepped up yet, but I wouldn’t count them out.

At this point, I want to see high yield bonds really get in gear. As my favorite canary in the coal mine, their strength would further support my continued forecast for all-time highs in the major indices with Dow 20,000 on tap for 2016.

If you haven’t read my various pieces on post crash behavior and back to back negative August and Septembers, click on the blog icon up top. I have two more pieces I am about to publish and you won’t be surprised to learn that they, too, portend higher stock prices.

Have a great weekend!

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The Train has Left the Station

It’s been quite a week for the bulls and an almost straight up move from the nasty open last Friday on the weaker than expected employment data. Earlier this week, I posted a study that concluded a huge Q4 rally was underway. And that was on the heels of a series I have published on post crash behavior that was also strongly bullish.

The train has left the station.

Where are all the mouthpieces who were calling for a bear market? Where are all the people who kept arguing with me that my bullish forecast was nonsense? The naysayers have become eerily silent!

The move we are seeing from the lows has been nothing short of dynamic, as it usually is when the bottom is in. Relentless buying. Maybe a down day or two as a quick pause, but nothing more. Volume is high. Stock market internals are powerful. New sector leadership is trying to emerge.

The three key sectors, semis, transports and banks are behaving nicely. Consumer discretionary, left for dead over and over and over for six years, continues to lead. After several failed attempts, energy and materials have trapped the bears and are surging higher. Even high yield bonds, which have long concerned me, are showing signs of life.

Come on in. The water is nice!

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Down August AND September Equals HUGE Q4 Rally

Although I have been struggling to find enough stocks behaving constructively in the 9 major sectors to lead the next rally, I still do not see a meaningfully bearish scenario at this point for Q4. Besides the post crash trend, which can be viewed HERE, HERE and HERE, almost every sentiment indicator is showing excessive pessimism, which translates into positive returns going forward this quarter.

After the month of August closed down, I shared two separate studies that indicated that September would be down as well. Although September closed with a bullish bang, the month still closed down more than 7%, which leads to another study. When August is down and September is down, October typically continues lower early on and forms a bottom from which a significant rally emerges. Hence, October sometimes being referred to as a bear killer for bottoms seen in 2014, 2011, 2002, 1999, 1998, 1997, 1990, 1989, 1987 and on.

Down Augusts followed by down Septembers are not a common occurrence. Over the past 35 years, there have been only 6 occurrences.  I think you will be surprised at the outcomes below.

6 out of 6 times, the S&P 500 rallied sharply in the fourth quarter, averaging a very impressive gain of 10.86%!

My view continues to be that after this bottoming pattern is complete, all-time highs are in store for the major stock market indices. I also believe that Dow 20,000 is a reasonable target before Q4 of 2016.

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More on the Post Crash Pattern… Both Paths are Bullish

The only thing missing from a “perfect” pattern is for the S&P 500 to breach the August lows for up to a few days. I hesitate to use the word “perfect” because it rarely plays out exactly as I expect, but it certainly did so in 2011. Additionally, in both 1987 and 1989 which I partially dismissed, the final lows did not breach the crash lows before the big rally began.

As you can see from the chart above, I have two colored scenarios to the right of where the current price action ends. The light blue is the more immediately short-term bullish scenario and has the final bottom as being in and the rally beginning last week. The orange line is less short-term bullish as it has one more decline into the final low over the coming few weeks before blasting off to the upside.

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Post-Crash Behavior Still Following My Scenario

Immediately after the August 24 mini crash, I opined that the bottoming process could begin as early as that very week, which it did. I also wrote extensively and did a fair amount of media discussions on the topic. So far, the major indices are nicely following that scenario which had stocks rallying off the crash low into a September peak and then revisiting that low by the middle of October.

Remember the comparisons I offered from 1987, 1989, 1994, 1997, 1998, 2010 and 2011? You can read the full article HERE. ($marts20150902.pdf) I was also excited to share my findings on CNBC’s Fast Money.

At this point, I am totally eliminating 1994, 1997 and 2010 as the correlation (how closely the patterns resemble the current one) has broken down. I am also partially eliminating 1987 and 1989 as the rally from the crash bottom to the ensuing peak was a mere two and five days long as you can see below.

We are now left with 1998 and 2011 as the most likely comparable periods to today. Not surprising, they are very similar as I review the price action, number of days in the rally period and days separating the mini crash low from the final low.

Below is 1998 where we see the late August crash, followed by a 17 day rally and 28 days between the lows before stocks embarked on a powerful rally to fresh all-time highs.

2011 is next and similar. 17 days of rally with 40 days between lows.

Finally, 2015 is below. First, you can see how the rally period allowed me to partially or mostly eliminate 1987 and 1989 although 1987 still looks similar to 1998, 2011 and 2015 if you look at the days between lows.

While the higher highs in the rally from the August mini crash looks more like 1998 than 2011, 1998 also rallied further than what we saw last month. I would offer that a synthesis of 1998 and 2011 is probably the best fit.

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Are We There Yet?

This feels like a family car trip with one of the kids constantly asking, “are we there yet?”

Much of what I have to say remains the same. Stocks have almost perfectly followed my post mini-crash scenario since August 24 and they are now in the zone for a possible successful retest of those lows between now and say, October 15. With the major indices opening sharply higher today, talk will once again focus on IF we have seen the bottom and this is day one of the rally.

Last Friday, we faced a similar set up, but I opined that the odds did not favor a low. Today, with the S&P 500 and S&P 400 retesting their closing lows from August and the Russell 2000 undercutting it, the odds now move to 50/50 that the final low has been seen. Even money is not an investing bet I would normally take as I typically like the odds to be in my favor. With that said, I think it’s better to pay a little higher prices than buy right here without an edge. In the end, I still think that another selling wave hits over the next few weeks.

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Was That It?

At their worst levels on Thursday, the major stock indices were bludgeoned and downright ugly. The Dow was down to 16,000 and could have been cracked open like a coconut today had the bulls not mounted a very strong late day charge. The rally was somewhat impressive and leaves open the question of whether we just saw the revisiting of the August lows I have spoken about on CNBC’s Fast Money and written about here. With stocks looking up more than 1% at the open, it will be interesting to hear what gets circulated in the media.

My take is that the odds do not favor yesterday’s low as being the final chance to get on board the train to new highs. It was a nice reversal, but I don’t think price went deep enough nor shook out enough weak handed holders during the day. In short, the decline was too orderly. I think more work needs to be done on the downside.

Looking at the calendar, it’s not a usual time to see a final stock market bottom, but that doesn’t mean we can’t see a low now. Additionally, we typically see a little more time go by from the crash low (Aug 24). More than likely, after selling off in almost straight line fashion since the Fed decision last week, the stock market needs to bounce short-term before heading lower to what I believe will be the ultimate bottom. As I continue to write, I am keenly interested in which sectors lead and lag during the rallies.

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Market Behaving as Expected. Bottom Shortly.

In my last update, I opined that the Fed should not raise rates and that whatever they did, the market would end whatever move it was having and reverse in the other direction. First, I am glad that Yellen & Co. did not raise rates. That time will come, but it wasn’t last week. Second, stocks rallied nicely into the Fed meeting and in the moments after the announcement. However, it was the perfect “buy the rumor, sell the news” as stocks reversed sharply shortly thereafter and closed near the lows for the day. I totally dismiss that the market was disappointed by the Fed’s lack of raising rates. That’s preposterous. Stocks rallied into the announcement in the classic ” buy the rumor” trend. Friday was an ugly day for the bulls and after the typical post-weekend, feeble bounce on Monday, the bears are out in full force today.

None of this action should come as a surprise as I wrote about post-crash behavior many times here and in Street$marts. From its intra-day low on August 24 to last week’s peak, the Dow jumped roughly 1500 points, retracing about 50% of what it lost since its last all-time high in May. Stocks are now in the throes of the secondary decline to revisit the levels seen in late August. I expect that visit to be successful within a few percent and eventually lead to all-time highs again.

The stock market doesn’t look pretty now and I don’t expect that to change until after the bottom is reached over the next two to four weeks. There will be all kinds of reasons not to buy when it’s time. “The market has lost confidence in the Fed.” “China is having a hard landing.” “Global economic growth is recessionary.” And on and on and on.

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Market Reaction to Fed Announcement

The big lingering question regarding the Fed meeting after the decision is how to properly position portfolios. If you thought it was tough to get an edge on the rate decision, the markets’ reaction is even more so, which is why I would absolutely not advocate making wholesale changes ahead of the announcement. It’s one thing to flip a coin on the decision, but it’s a whole other thing to get the markets’ reaction correct as well.

The four possible scenarios are below.

Rate hike and rally
Rate hike and decline
No hike and rally
No hike and decline

Before pondering that, I saw a few Tweets that suggested Yellen could raise rates with dovish comments or leave rates alone and offer hawkish comments. And if the Fed doesn’t raise rates now, we will be having this same discussion before the December meeting. It’s enough to make you head spin!

Regarding stock market reaction, the very short-term sentiment indicators still have sufficient enough pessimism to support further upside. If I had to lean, that’s the direction the odds favor right now, but I certainly would not bet the farm on it. Good thing for me since I don’t own a farm!

The Fed trend also has a 70% upward bias for the day, but some of that fuel was likely used this week.

Should stocks spike higher on the news and follow through, I will view that as a selling opportunity rather than a momentum buying opportunity, which should be the minority opinion.

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