Textbook Consolidation Ends

Late last month, I wrote a piece concluding that stocks looked a bit tired at all time highs. Nothing terribly damaging, but they were in need of some rest. Routine, normal and healthy pullbacks can come in different forms. The easiest way for stocks to digest is to decline 2-5% fairly quickly, while another way is to see sideways movement with a slightly downward tilt for a period of weeks.

The Dow Jones, S&P 500 and Nasdaq 100 all saw the latter from September 3 through the 15th. The S&P 400 and Russell 2000 saw the former with modest declines of 2.65% and 3.70% respectively. With the Dow, S&P and Nasdaq 100 all hitting fresh highs, it’s very hard to argue that the recent pullback is not over. Action in the S&P 400 and Russell 2000 are definitely cause for concern with the Russell living on bull market life support now.

There have been a number of recent headwinds that will dissipate one by one through month end. Markets interpreted Janet Yellen’s announcement and press conference dovish and hawking depending on who you listen to. Yields on the five year note are up 22% over the past month while the 10 year has risen by 14%, certainly not a dovish anticipation or response. Stocks, however, are up 3%, certainly not hawkish and not only responded positively after 2pm on Fed statement day,  but also followed through the day after. With many more headwinds to overcome by month end, it will be a very bullish sign if stocks can hang in within a few percent of new highs.

With the Fed gone for now, markets are squarely focused on Alibaba’s much ballyhooed IPO set for September 19. It certainly looks like institutional investors have raised the necessary cash to fund the $20+ billion offering by selling tech stocks into the Fed meeting. Additionally, Scots head to the polls to vote on leaving the UK, a move that I believe would catastrophic for their economy.

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Headwinds Abound This Week

Almost all markets finished on a sour note last week and that spilled over to begin the new week. While I have written about stocks needing a short-term breather, I was surprised that treasury bonds could not get a lift as stocks weakened. In fact, both stocks and bonds peaked the same week, but bonds sold off more significantly, something that is unusual.

The major stock market indices certainly look like they want at least a little rally, but the bigger question is will that occur right here or perhaps after the Fed concludes their two day meeting on Wednesday at 2pm. So far, the bulls are trying to mount an attack. Investors are concerned that Yellen & Co. might strike the words “considerable period” from the statement, which would be interpreted as the Fed hiking rates sooner than the 6 months initially described by Ms. Yellen’s at her first foot in mouth chat, also known as her press conference.

Besides tomorrow’s FOMC announcement, the market has also been facing three distinct headwinds this week. First, on a calendar basis, this is a particularly weak time of year through the end of the month. Second, market sentiment into last week had become very bullish, which can signal that investors have much of their money already in the market. Historically though, sentiment impact beyond a few weeks usually requires a catalyst to get the snowball moving downhill.

Finally, the largest initial public offering of all time, Alibaba, comes to market this week. With current pricing indications, it looks like the company will raise roughly $22-24 billion. That money has to come from somewhere and it stands to reason that it’s likely coming from funds using some spare cash and selling current tech holdings.

The rest of the week is going to be action packed, but the bull market remains alive, albeit, a little wounded.

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More Airstrikes Announced… Markets Don’t Care

Last night, President Obama announced an expansion of the campaign against ISIS with targeted airstrikes in Syria. And as we have seen so many times over the past 10 years, the financial markets responded with a big yawn as if to say that, financially, nobody really cares.

Are investors being complacent or realistic?

My theory on geopolitical news is twofold. First, reaction depends on how solid a footing the markets are on. Cherry picking with the benefit of hindsight, in July 2006, for example, Israel and Lebanon were involved in armed conflict. Stocks peaked in early May and sold off roughly 10% to their momentum low in mid June before the fighting ever began. After a feeble market bounce, the news out of the Middle East took a turn for the worse in mid July and stocks sold off again with the strong tailwind of poor market underpinnings. Today, we have many of the major stock market indices close to all time highs on solid but not great footing, very different from a market that is already in decline.

The second way I form an opinion on market impact from geopolitical news is to take a worst case scenario and see what economic impact it might have. If Russia fully invaded Ukraine and then began to march into Belarus or elsewhere, the worst case scenario would be a return to a Soviet Union style dictatorship from a very large and resource rich economy as well as a modern day Cold War with the West. That would likely cause global markets to become unglued for a long period of time.

The worst case in Syria and/or Iraq with airstrikes and even limited group troops does not move the needle for our economy, let alone the global economy. Similar to when Assad used chemical weapons on his own people, certainly a horrific worst case scenario, global markets did not respond negatively for more than a few hours as there was not going to be any impact on the global economy.

From my seat, investors responded appropriately and realistically to the president’s speech last night. Complacency is already in our stock market judging from the extreme level of bullishness in the various sentiment surveys, but sentiment alone does not usually have a direct impact on stocks. There is usually a catalyst first.

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Don’t Fall Asleep

Over the past few weeks I have written that stocks seem “tired” or “in need of a pullback or consolidation.” Remember, stock market digestion can occur two different ways; one by price declining 2-5% or price simply moves sideways for an extended period. Right now, it looks like we are getting the latter as the S&P 500 has essentially gone nowhere for more than two weeks.

While all this boredom was occurring, we had a weak employment report, Russia/Ukraine cease fire signed and broken and QE Europe announced by the ECB, certainly lots of news to get stocks moving in some direction if they were ready. Eventually, the market will begin to move again with some significance and I would not be at all surprised if the first move fakes out the masses.

On the sector front much has changed over the past month when I had lots of trouble finding sectors that looked appealing. Now and maybe even more so in another week, most sectors look attractive in one form or another. While banks and energy are lagging and struggling, almost all other sectors look like they want to resolve higher.

I have spoken a lot about my bullish take on long-term treasuries for most of 2014 given the continued sub par economic growth conditions. Recently, however, bonds have had their issues and may need more weakness before the next rally can take hold.

I am keenly watching gold for signs of reversal and I think the shiny metal is getting closer, but as with bonds, it needs some work on the downside before a big rally begins.

Finally, there is this little company in Cupertino CA with the same name as a popular fruit that is unveiling its 6th iPhone any minute. Will the market care?

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Beware the Ominous September… or not

Each year at this time, we hear the pundits roll out the ominous stats regarding the stock market’s performance for September. “It’s the worst month of the year.” “Be careful.” “Do some selling.”

Those sound an awful lot like “Sell in May and Go Away.”

The thing about compiling market stats is that over decades and decades the averages tend to really smooth out. Additionally, much depends on when you begin and end your study. Further, if you add enough qualifiers to the study, you can make the results give almost any message you want.

Historically, on average over the past 100 years, September has been a weak month with stocks peaking during the first week and selling off to a low in mid October. That’s fact.

Ari Wald of Oppenheimer added a twist to this data. He found that when the S&P 500 was above its 200 day moving average (long-term trend) to begin the month, stocks closed higher by roughly 0.40% versus a loss of 2.70% when price was below its 200 day moving average. For what it’s worth, the S&P 500 closed August well above its long-term trend.

What’s my take as we head into the final month of the third quarter?

As I wrote here last week, stocks look a bit tired and in need of some rest. That rest could come in the form of price declining 2-4% or enter a small trading to refresh.

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Happy Labor Day!

As we say goodbye to the unofficial end of summer, this Labor Day remember those who helped build our great country and celebrate the achievements of the American workforce.
Wishing you a safe and enjoyable Labor Day filled with family, friends and cookouts!
Heritage Capital LLC

Stocks Looking a Little Tired

The bull market remains alive and reasonably healthy. I am still long-term bullish. I am still fairly bullish over the intermediate-term.

With that out of the way, stocks are looking a little weary at all time highs, which should not be totally unexpected. The market has powered higher all month and started to struggle a bit of late. At least for now, I think risk equals reward or perhaps even slightly outweighs reward.

To refresh the rally, stocks can either decline over the coming few weeks or enter a sideways trading range for a few weeks to a month. Should the market continue higher here without participation remaining strong, I would have more intermediate-term concerns. For now, a mild, orderly and routine 2-5% pullback would be very welcome.

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Treasuries Sneak Quietly into Favor

As you know, I have been a treasury bond bull almost all year, putting me squarely in the severe minority camp. 2014 began with the masses all forecasting much higher interest rates across the spectrum. Astute investors know that the masses are usually wrong, especially at major turning points.

Jeff Benjamin from Investment News continues to listen to my usually contrarian side of investing and wrote a great article which you can click on below. Keep in mind that this market has rallied tremendously and is certainly due for a pause or outright decline at some point sooner than later. The easiest money has already been made.

Treasuries Sneak Quietly into Favor

In a few minutes Janet Yellen speaks at the Fed’s annual summit from Jackson Hole Wyoming which happens to be one of the greatest ski resorts on earth. People say they go for the winter, but stay for the summer. Anyway, unlike her predecessor who used Jackson Hole to lay the ground for further QE, Yellen is likely to say absolutely nothing meaningfully new.

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The Fed has It Wrong with the Taper

This is certainly not new news for my readers, but I continue to be in the very lonely camp that the Fed is misguided in tapering the $85 billion in monthly bond purchases and they should totally hold off raising interest rates until our economy gets to the other side of the next recession.

As you know, we have been in the slow growth and no inflation camp for years, a theme we still have a high degree of confidence in, hence our very large position in long-term treasuries this year in our Global Asset Allocation program.

Yields on the 10 year note have hit our downside target of 2.5% and even stretched to almost 2.3% before reversing. In the short-term, yields will probably rise and then at least revisit the 2.3% area next month or later.

Below is the most controversial of the three segments I did with the good folks at Yahoo Finance last week. Enjoy!

Fed Has It WRONG

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Rumors of the US Dollar’s Demise Have Been Much Exaggerated

The second segment I did on Yahoo Finance last Thursday was not a new one for long time readers. As many of you know, I turned very positive on the US Dollar right about the time Bear Sterns needed a bailout in March 2008. That was long before any QE (money printing) began.

Historically, the dollar spent most of its life oscillating between 80 and 120 on the US Dollar Index, an index containing a basket of currencies with the majority of the weighting against the Euro and Yen.

When the economy is strong and interest rates are typically in an uptrend, the index rises and vice versa. Usually, the US Dollar Index in anticipation of a weaker economy and lower rates and bottoms in anticipation of higher rates and a better economy. Remember, this is all relative against the rest of the world, but primarily against Europe and Japan. Additionally, in times of international crisis, the dollar is typically viewed as a safe haven.

For the past 6 years, the greenback has and continues to be one of the most hated investments, especially by the general public. They very wrongly assume that printing $5 trillion would devastate the dollar as the doomday’ers would have you believe. I can’t tell you how many times I have heard pundits talk about the “plunging dollar” or how Ben Bernanke’s money printing continues to punish it. The truth is, the US Dollar Index has never been lower than it was in March 2008.

Anyway, I didn’t mean for this post to be this long and go on and on. The segment I did last week on Yahoo Finance is below.

Why the Dollar Bears Have Been Wrong for the Past 5 Years

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