Lines in the Sand

The bulls are back to pressing against the upper end of the short-term trading range and should attempt to close above those lines in the sand. On the Dow, the level is 17975 on a closing basis while it’s 2073 on the S&P 500. Both are just a one day rally away. The S&P 400 already saw all time highs last week while the Russell 2000, long left for dead by the market, has a line in the sand at 1215 which is one good morning away. Finally, the Nasdaq 100, dominated by Apple and few other mega tech stocks, is breaking out of its multi-month period of digestion and is poised to see fresh highs shortly.

Unless the major indices fail to exceed their lines in the sand this month and rollover to new 2015 lows, the ball is firmly in the hands of the bulls and they will need to run with it.

On the key sector front, while the banks and transports continue their slumber, the semiconductors are starting to wake up. Fresh bullish leadership is emerging from the consumer discretionary sector and homebuilders while the defensive leaders like utilities and REITs are lagging. If this new trend continues, it would have very bullish implications over the coming months.

On the flip side, long-term treasuries have quietly taken it harshly on the chin with the exchange traded fund TLT down more than 5% from the highs. The are supposed to step right here…

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

Bulls Trying to Step on Bears’ Throats

Earlier this week, I spelled out three possible scenarios for stocks with one very bullish, one mildly bullish and one bearish. I gave most weight to the mildly bullish one and least weight to the bearish one. Right now, stocks are marching more towards the very bullish scenario although the Dow breached the lows I had discussed in the mildly bullish scenario.

Looking at the five major indices, the Dow needs to close above 17,850 to set up a run to new highs and break the backs of the bears. The S&P 500’s number is 2065 while the S&P 400 is hitting fresh all-time highs as I type this. The Russell 2000 is already above its line in the sand and just needs to close well to stomp on the bears. Finally, the Nasdaq 100’s number is 4295, still more than 1% away and playing catch up.

Unless the major indices immediately reverse, and there is the employment report on Friday, the bulls should have enough juice to push higher with most indices scoring all-time highs this month.

Anything to worry about? With the bull market being 71 months old and more than 3 years without a full fledged correction, risk is there. The three key sectors, semis, banks and transports are not leading and don’t look powerfully constructive. Defense remains in charge, not exactly a ringing endorsement.

However, if the Dow sees 5 straight closes above 18,000, that will set up 20,000 as the next target in 2015.

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

Bears Pulling a Pete Carroll?

The bears began Monday’s trading with the ball, seemingly just needing to breach the lows to force a wave of technical selling. It shouldn’t have been that difficult. After multiple intra-day reversals by the bulls stocks ended sharply higher on decent internals. While that all looks very nice and neat on a chart, I would have still preferred to see a clear breach of all recent key lows by at least the majority of the major indices. All we saw on Monday were the Dow’s bottoms being cleaned out.  Interestingly or curiously, the S&P 500 essentially saw the exact same level as in December while the S&P 400, Russell 2000 and Nasdaq 100 weren’t even close.

All this together, the bulls have a little advantage here but must use it right away. If and when Monday’s lows are breached on a closing basis, that would likely set off a sharp “whoosh” lower of several percent across the board as I mentioned in Monday’s three scenario piece. For now, keep an eye which sectors are leading and lagging for signs of change. Eventually, the short-term “all clear” signal comes when the S&P 500 closes above 2064.

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

Bears Trying to Run It In

Congratulations to the New England Patriots! I didn’t root for you, but a win is a win, even in the face of the single worst offensive play called in the history of  big game sports.

Stocks begin the week with the bears in mild control even following Thursday’s reversal. Early this week should be very key to see which way the short-term winds blow. On the S&P 500 and its weaker cousin, the Dow, price has declined to the same general area for the fourth time since early December. While not impossible, it’s unlikely that a “quadruple” bottom will hold.

The scenarios end up being:

Most bullish – stocks hold the lows from last week and the bulls take over control right away and begin and advance to new highs

Modestly bullish – stocks see further selling of 2-3% before bottoming and beginning a solid rally to the end of the quarter towards the old highs

Bearish – stocks knife right through the lows of the past two months and plummet straight to the levels seen at the October “Ebola Bottom”

At this point, I think scenario number two is the most likely  with number three as the least likely.

Sector leadership remains defensive and we really need to see that change before talk of Dow 20,000 begins again. High yield bonds are showing a very bullish short-term pattern and they should be watch closely, especially if energy continues to bounce from the last week.

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

Heading into the Weekend

Some of the pop in volatility this week is starting to be wrung out as the markets close the week. On Thursday we saw a nice reversal across the board, however the internal numbers were nothing to write home about. Additionally, I would have much preferred to see the lows from at 2015, if not December 2014 breached before the reversal took hold. That would have given a good flush to weak handed holders.

For now, the major indices remain in the two month trading range without a huge edge either way. Sector leadership is also unwavering and favoring the defensive areas like healthcare, biotech, utilities and REITs. Homebuilding is the outlier leader on a short-term basis.

Unless something changes dramatically by 4pm, the stock market will close down for the second straight month with the “all important” month of January being negative…

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

Fed Day Model and Trend

The FOMC concludes their two day meeting today, surviving the “epic” and “historic” blizzard. The model for the trading day is to see stocks in a plus or minus range of 0.50%, but generally we see mildly rising prices until 2pm and then increased volatility with an upward bias to the close.

The Fed trend is to be long the stock market from yesterday’s close to today’s close based on a variety of historical factors. That trend has an accuracy rate of 77%. Should the market end higher today, it would set up another trend for stocks to be lower tomorrow although not as strong as today’s trend.

Expectations are for the Fed to do absolutely nothing at today’s meeting, but everyone will be parsing the statement for clues that the FOMC will forestall raising rates until late this year or even into 2016. You already know that I vehemently disagree with any rate hike anytime soon and believe that QE should not have ended. I have said this for years, but I will say it again. Our economy and to some degree, our markets, are not strong enough to stand on their own two feet.

We can argue whether we should have QE’ed $5 trillion at all, but once the program began, it has to be seen to its rightful end. I don’t believe the Fed did that.

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

Bears to Pounce at the Open

Stocks look to open sharply lower this morning on a variety of news events, although none that are singularly that bad. Greece is in the headlines yet again and frankly, if they are going to exit, let’s just get it over with. Their economy and market is not even a rounding error in the grand scheme of things, but a Grexit will open the door to the southern European countries saber rattling about an exit if they are not bailed out.

The open should put the major indices close to saying “hello” to last Thursday’s low, which is the line in the sand on a closing basis for the bulls over the short-term. On a day like this, I always look closely at which sectors lead and lag. I am most interested to see if the previous leaders are still leading or the previous laggards are still lagging.

I would fully expect to see treasury bonds and corporates rally today along with gold, REITs and maybe utilities. Tech should be under strong pressure given Microsoft’s big earnings miss. Most important, today’s close will be very telling.

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

Lots of News This Week

While last week was certainly news filled, this week will be even busier as the northeast plans for another snowmageddon. At the bus stop this morning, our new neighbors who are from Dublin talked about the more than 10 cases of water they bought. When I stopped laughing, I asked them what they planned to do with all that water. And while they were at it, I asked them if they also bought canned goods and ammo! That conversation gave me a good chuckle to start my day.

After the blizzard prep, we will be hearing about the actual “epic” and “historic” storm until the clean up takes over. Although I would rather head to Vermont like I did when the 40 inch “epic” and “historic” storm hit two years ago, I promised my wife that I would stay home since they are forecasting high winds and possible power outages. What kind of father and husband would I be if I celebrated a powder day while my family was stuck home freezing?!?!

Anyway, besides the storm, Apple and Google are set to report earnings this week and both are potential market movers. We also have the Fed meeting on Tuesday and Wednesday with a 2 pm announcement on the 28th.

Looking at the stock market, the short-term line in the sand is remaining above last Thursday’s low on a closing basis. Should the bears muster enough energy to take stocks beyond that, the market is probably going to new 2015 lows and below the December bottom. But let’s cross that bridge if and when. For now, defensive sectors are leading and that is telling potentially two very different stories.

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

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)

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

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.

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