Draghi & ECB Deliver

It’s a very busy week for the markets and economy coming off the ECB’s long anticipated announcement of Euro QE last week. On the one hand I thought it was smart to leak the $50B euros per month plan so that markets could digest it ahead of the official statement. It was also a great move to then exceed the number that was leaked by $10B euros.

On the other hand, I am not in favor of this piecemeal approach when everyone already knows that $60B euros per month won’t be enough. If Mario Draghi was truly committed to QE and saving the euro “at any cost”, they would have pulled all stops and done the shock and awe of AT LEAST $100B euros per month right away. It would caught everyone off guard in a positive way except for those who are positioned against QE, exactly the folks the ECB is trying to combat. It would have sent such a powerful message to the markets.

Yes, I know. The Germans are ardently opposed to QE. Blah, blah, blah, blah, blah. That may be their public stance with Merkel pounding the table in opposition, but in reality with their export economy on the verge of recession, a weaker euro is precisely what the doctor ordered. As I have long discussed, this is just another currency battle in what some have termed, “a race to the bottom”, meaning that countries are devaluing their way to prosperity. (Insert incredulous look, head scratch and head shake)

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7 Years Ago

As I drove home from Vermont today on Martin Luther King Day, I thought about past MLK Days, which is something I would normally do to pass the time away. My two boys were in the back seat napping and listening to music and I had Sirius on in the background. I vividly recall MLK Day 1994 as it was the single coldest day I have ever skied at Mount Snow, -25F with 20 mph winds that made it feel like -50F. I lasted all of two runs with an intervening break in the lodge on top. It was also the earliest I ever hit the bar and stayed there all day.

Market-wise, MLK 2008 is indelibly inked in my memory. Coming off a huge 2007 for our strategies in a difficult market environment, we began 2008 with a positive view of the stock market. At year-end, the market was finishing up its 2nd 10% decline in 5 months and I thought we would be a solid bounce to sell into in January. That didn’t happen.

Instead, stocks saw an orderly decline that appeared to end on the 9th. After a few days of pause, the selling floodgates started to open on Thursday and Friday before MLK Day. Over the weekend, the first major piece of financial crisis news hit. Previously, we had seen bits and pieces like sub prime loads beginning to default and two Bear Stearns hedge funds blowing up. But each time, the market digested the news and headed higher. MLK weekend 2008 it all changed.

When Japan opened Sunday night, I knew it was going to be bad. In fact, markets all over Asia were bleeding red to the tune of 5-8%. Our futures immediately signaled at least a 500 point decline when trading resumed on Tuesday from a Dow at 12,000. When I woke up Monday morning and saw Europe in collapse and our futures “limit down” which is the maximum point decline allowed pre-market, I knew our clients would be very concerned, especially if they didn’t hear from me with some kind of reassuring explanation. So I spent my MLK Day 2008 on the phone calling each and every client letting them know that I expected to see a 500-1,000 point decline in the Dow on Tuesday morning. I also explained that while there would be some short-term pain, I believed it was absolutely the worst time to sell. In fact, if anything, it looked like the final “flush” in the decline that began late on 2007 and a bottom should be at hand shortly. Investing is a marathon not a sprint and not only did I remind clients of that, I reminded myself as well!

Thankfully, every single client but one listened to my advice and some even bit the bullet and added money to their accounts early in the week. Stocks closed that post MLK Day Tuesday well off their lows and all seemed like it would be okay from there. Then Apple had a really bad earnings miss that afternoon and once again, overnight trading indicated another disastrous open. But a funny thing happened on the way to a crash as was being predicted. After another ugly open, buyers came storming in throughout the day and the Dow actually closed sharply higher, regaining all of the lost ground from Tuesday and the previous Friday.

Tuesday’s and Wednesday’s action post MLK was stage one in the stock market’s first quarter bottom that led to the May peak above 13,000 and the last good opportunity to sell before the crisis really unfolded.

January 2008 was the worst month I delivered to clients since launching my firm and the most difficult of my career at that point. There were a lot of “strange” messages being sent from our market models that didn’t make a whole lot of sense to me then. I just kept scratching my head wondering if our models were broken. In hindsight, they were dead on in warning of major systemic issues down the road that I had never seen before. After doing countless hours of research in spring 2008, the only comparison I could find was the period from 1929 to 1932 where the Dow lost 89% of its value. I am certainly glad I continued listening to our models in 2008!

While 2008 ended up being the year no one ever wants to repeat, MLK Day 2008 will always stick out in my mind as the day I chose fight over flight by calling all of our clients proactively. It was also a time where I knew I could handle whatever the market threw at me, good, bad or otherwise.

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Early Warning System & January Barometer

With the first five days of January officially in the books, the Early Warning System (EWS) pioneered by Yale Hirsch is flashing a positive sign for the rest of January as well as 2015. The theory says that as go the first five trading days of the new year, so goes January. And as goes January, so goes the year.

With help from my friend Carter Worth of Stern Agee (Carter did the heavy lifting and I peppered him with questions), he examined both the first five days as well as January since 1927. If the EWS was positive, there is a 76% chance that the whole year will be positive. If the EWS was negative, then the year was a 50/50 toss up.  Any random year has a 67% chance of being up. So right now, history says there is a 76% chance of 2015 being an up year.

Those stats alone seem valuable, but they left a big question unanswered for me. If the EWS was positive and then January was positive, how much did January’s return borrow or steal from the full year? Remember, we really don’t know the full results until January 31 and by that time, the stock market could already be substantially higher and potentially cannibalize the full year results.

After continuing to annoy my old friend Carter, we learned that when January is negative, the rest of the year is actually positive by an average of a paltry 1.6%. However, when January is positive, the rest of the year is also positive by an impressive 8.6%.

Although stocks began the year on a sour note, the bulls rose to life over the third, fourth and fifth days of the year to close the first five days marginally higher. As I type this, January is currently down less than 1%. The next three weeks are obviously key for this historical study in determining the outcome of 2015. After watching the Dow reach my longstanding 18,000 target, I am now patiently waiting for five consecutive closes above 18,000 to set the stage for a run to at least 20,000.

My own 2015 Fearless Forecast is being edited now and one thing is for sure, I do not see a repeat of 2014 in any asset class!

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Another “V” for the Bulls… Must Run from Here

As I have written before, since mid 2012 the stock market has seen more “V” bottoms than in all previous years combined. “V” bottoms went from being very rare to becoming the norm. With each successive low, investors are changing their buying behavior to accept the “new” behavior as the norm. In my view, this is setting up the masses for yet another 2000-2002 or 2008 style wealth decimation.

So now that we have yet another confirmed “V” bottom, which for full disclosure, I continue to use as trading opportunities, where are the markets headed? Two days ago, I wrote about the markets lacking the warm an fuzzy feeling. While I remain fully invested, I am dancing closer to the door than I have in a while. The bulls must take the major indices to new highs right here, meaning this month. Any failure to see new highs and subsequent rollover to the downside should result in a full fledged 10%+ correction. And even if we do see new highs, there needs to be higher conviction. Market internals are not positioned strongly and need to improve dramatically. By that, I mean the number of stocks advancing and declining as well as the volume in those stocks. We also need to see the number of stocks hitting new highs expand on any new high in the major indices.

For now, the ball is in the bulls’ court and they must run hard. The monthly employment number hits before Friday’s open and I am looking for a “much ado about nothing” reaction. After increased volatility over the past week, it would be a good sign to see a few quiet days in the markets.

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Waiting for Warm & Fuzzy

The “traditional” Santa Claus Rally ended in the red for the stock market and that’s not a warm and fuzzy sign heading into 2015. Through the first 3+ days into 2015, small cap stocks are not leading their large cap brethren and that’s not a warm and fuzzy sign. Stocks sold off hard to begin the year and that hasn’t been a warm and fuzzy sign.

Today, the bull are trying to make a stand after seeing yet another 5% pullback in stocks that is being gobbled up. Could we have just seen a successful revisiting of the December lows that leads to new highs this month? It’s certainly a plausible scenario and one I am positioned for. However, I am not yet convinced that the decline is over.

The market looks too sloppy. Two of the three key sectors, semiconductors and banks, are in need of more repair. And the transports are no prize either yet. High yield bonds saw more weakness than they should have, causing some pain in our strategy, and they too, look like they need to stabilize before trying to rally.

It’s not my strategy to try and protect against 5% or less declines. I tend to ride them out which is why I may sound a little cavalier right now. That is, until the market proves me wrong and forces my hand. At this point, it looks like any new high seen quickly will lead to a larger than 5% decline and one I will take against. Further weakness from here should complete the decline and set the stage for a better rally.

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First “Key” Day of 2015

It’s only the second trading day of 2015, but I am going to get a little dramatic and say for the short-term, it’s somewhat of a key day. The second trading day of the year is seasonally a very strong one. Given the 1%+ down day to end 2014, there is a trend to see significant strength during the first week of the New Year to counter that unusual down day. Today is also the end of what many refer to as the Santa Claus Rally.

Overnight, the futures point to a red opening which is something I like to see when I am looking for a rally. Let stocks open mildly lower and give the bulls a chance to gather steam throughout the afternoon. Sector leadership and rotation are typically all over the map this week so it’s definitely worth paying close attention here.

If the bulls don’t get their act together shortly, stocks are probably looking at what they saw last year, a 5-9% pullback from where a better low can be formed. But that’s getting ahead of ourselves.

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Don’t Count the Bulls Out to Begin 2015

Welcome to 2015! Wishing you and your family a very Happy, Healthy, Safe and Peaceful New Year!

Stocks finished 2014 with a whimper rather than a bang as the lack of liquidity allowed sellers to move prices sharply lower on Wednesday. The last two days of December have become somewhat of a headwind lately, but that weakness is supposed to be reversed next week. As bullish as I was over the past few weeks on the small cap Russell 2000, the trend is now to own the S&P 500 and Nasdaq 100 to begin the year. It’s also the time when the cheap, beaten down stocks from 2014 are supposed to get a bid and see higher prices over the coming 1-2 weeks.

I am sure the bears will come in to 2015 all fired up having won the battle on Wednesday, but I suggest caution in getting too negative too quickly. The time for that should come multiple times this year and possibly as soon as the next  few weeks, just not right now. The first week of so of the New Year usually sees some crosscurrents not limited to the previous year’s leaders being laggards and vice versa. I am focused squarely on the energy sector for signs that trend is taking shape. Crude oil looks like it can bounce to begin 2015, but it doesn’t yet exhibit signs of THE bottom just yet.

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Homestretch

This is it. Three more trading days and 2014 will be in the books as they say. Just 8 trading days ago, the bears were beating their chests yet again about how the bull market ended or the stock market was in 10%+ correction or a whole host of other nonsense. I wrote it right at the October bottom and I did the same thing 8 days ago; the bull market is old yet alive and weakness should be bought right away. Don’t count out Ole Saint Nick! If you followed that advice you were instantly gratified.

Dow Industrials – All time highs

S&P 500 – All time highs

S&P 400 – All time highs

Russell 2000 – All time highs

Reread that last one. Russell 2000 all time highs. The index that was left for dead by all the bears. Where are all those naysayers now? Awfully silent!

The only major index still waiting to celebrate the New Year at a fresh high is the Nasdaq 100. The odds do favor this laggard stepping up over the coming weeks to join its cousins.

Year after year, I have written about the many crosscurrents this time of year to go along with some very powerful trends. Are they perfect? Not even close. Do they win 9 out of 10 years? Nope. But they do provide a much better than average result when followed properly.

Interestingly and uncharacteristically, we don’t really have a standout leader index since the December bottom. All of the major indices have basically seen returns in the same range, something I do not expect to continue. I am sure you are now wondering if I think everything is hunky dory and we should just mortgage the house and go all in to stocks. Absolutely not. The time to do that was in October or last January or many other short-term bouts of weakness since 2012.

As I wrote about over and over and over during the fourth quarter, it is beyond unusual to see a major peak late in the year, especially during an uptrend. There is little impetus to sell. And let’s not forget about the pension and mutual fund managers trailing their benchmark and in dire need to pay performance catch up.

But the calendar is turning this week and I do see some minor market cracks that need to be fixed. I don’t like that over the past three days stocks lost momentum during the afternoon and closed in the lower end of the daily range. I also want to see the high yield bond market regain its footing in the face of volatile energy prices.

This won’t be the last time I write this next comment. 2014 was hard to lose a lot of money and it was a tough year to make a lot of money. I don’t think we have the same landscape in 2015. Things are about to get really interesting…

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Santa Ain’t Messin’ Around

The stock market bottom this week wasn’t as pessimism laden as the one in October,  but it was certainly fun nonetheless! And just like I did in October, I gave readers a few days notice to prepare for the low. Frankly, this was easy.

While it was a slightly soft seasonal time, the market sold off a few percent more than it should have which is part of the reason the rebound has been so robust. December is a haven for strong trends and several collided this week with a focus on Wednesday, Fed day. It was Santa’s turn to propel the market and boy did he deliver with the S&P 500 just a whisker away from all time highs to close the week. Yes, you read that right, ALL TIME HIGHS.

It was only a few days ago when friends, colleagues and pundits were all telling me that the quant models were wrong; bull market was over and stocks were not going to rally like they usually do this time of year. I don’t know; the bears are the ones who look to be the wounded party.

In any case, it was a great three days for the bulls, but now comes the time where I really want to see the Dow, S&P 400, Russell 2000 and Nasdaq 100 step up and grab new highs. If we fast forward to January and these indices are still lagging, I will certainly become concerned.

It was also good to see the high yield (junk) bond sector turn on a dime and take off. This group is vital to the long-term success of the bull market.

On the sector front, the news is less robust with plenty of sectors still not leading like I would like to see. As with the major stock market indices, let’s give them into January to get themselves healthier. Earlier this month, I sold our position in the transportation sector when it stopped rallying as crude oil collapsed. That sector needs to repair itself. Today, I sold half of our long-term position in semiconductors as they went from strong leader to laggard.

Have a good weekend and be safe!

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Santa Claus is Starting to Call… Right on Time

Over the past few weeks as stocks declined I remained firm in my forecast that Santa Claus would pay the markets a visit as he typically does in bull markets. One by one, I heard from people why this year was different, why stocks are already in a bear market, why oil would consume the market. I targeted this week and early next for the low as history suggests and for the rally to begin. Yesterday was also a very strong trend based on the Fed meeting for stocks to rally. Given Wednesday’s very impressive showing, stocks should have seen the bottom.

How will I know if I am wrong? That’s the question I always want to answer before committing client capital which I did this week. In the short-term, stocks should not fall back over the coming few sessions below yesterday’s low. Stocks are supposed to follow through to the upside almost immediately, which I believe they will.

Tax loss selling should have ended and the energy stocks are the best group to confirm this. They look like they are beginning a good bounce into the New Year. Was it THE bottom or just a trading low? It’s too early to tell, but I favor the latter right now.

As I mentioned before, more than 80% of portfolio managers are trailing their benchmarks this year which is why I did not believe the market could experience a large decline into year-end. Managers would use any pullback to commit cash and try and play the catch up game. The recent pullback gave them plenty of opportunities although I doubt they went all in, at least  not yet. Continuation of yesterday’s rally will likely force their hands at higher prices and further fuel the market higher.

We’ll see what today and tomorrow brings for stocks, but stocks are off to a good start thanks to Janet Yellen and the Fed.

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