Crushing the Doubters

I know I must sound like a broken record, but boy, have the bulls been tough to fight. Just when the bears think a deeper pullback has started, the bulls step up again and power stocks higher. After an unexpected turnaround on Monday from the early weakness after the lack of OPEC production cuts, stocks are pausing once again. Earnings season is in full swing and we have heard time and time again how this is the worst earnings since the financial crisis.

What does the stock market say? SO WHAT!!!

Just today, Intel missed expectations and is now up almost 1%. That’s been the pattern. Crush the naysayers! The major indices are all at 2016 highs. Breadth remains powerful. The disavowing and hating crowd is still loud. As I have said since late February, buying the dips is the correct strategy until proven otherwise.

For a long while I just didn’t know what to make of the banks and I am not sure I do now. However, the sector has really stepped up over the past two weeks and is leading the market. That’s definitely not a negative. Industrials, materials and energy are all following suit while some of the defensive groups take a break. Biotech is probably the most interesting here and has the prospect of breaking out to the upside.

All the while, both high yield and treasury bonds are rallying with commodities. Unusual behavior and indicates lots of money looking for a home.

If you’re not having fun in this market, I don’t know when you will!

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All-Time Highs On the Way, But…

After a 24 hour trip to Houston, I am happily back home.Thanks to the Houston MTA for hosting me and inviting me to speak at their chapter meeting. I really enjoyed my time there. It was also good to see clients, colleagues and friends, all in 24 hours!

When I look back over my posts since the bottom, there has been one common theme. The bulls are in control. Higher prices to follow. Expect brief and mild pullbacks. Continue to buy. Almost without pause, the masses, especially in the media, have hated and disavowed this new leg in the bull market. I keep seeing calls for a new bear market and recession and global meltdown. Well my friends in the bear camp, the stock market doesn’t believe so and certainly isn’t listening.

Stocks have had a nice two days with an enormous amount of breakouts on an individual and sector basis. Breadth has been strong and the new highs/news lows ratio has been powerful. You can almost get giddy about sector leadership as the banks and diversified financials finally played some catch up. It’s very hard to poke holes as the more aggressive beta sectors are forging ahead with the defensive groups ceding their leadership role. Even junk bonds are listening and moving higher once again.

Over the next 6 and 12 months as I have said over and over, stocks should be higher than they are today. In the very short-term, stocks are overbought and could use a rest. I wouldn’t be surprised to see a pullback over the coming few days or so, but one that should be bought until proven otherwise.

At the same time stocks may pause from their highest levels of the year, gold has now seen a lower high with “smart money” on the sell side. That should lead to lower gold prices over the short-term. Bonds have not seen the normal decline as stocks rallied. Many have opined that the bond market senses recession or slowing growth. Stocks indicate the opposite. I think bonds are holding up so well because competition around the world is essentially non-existent.

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Give the Bears a Break

Last Friday, I wrote about stocks looking a little sleepy, but that higher prices would eventually prevail. For the 6th time since the rally began on February 11th, the stock market is pulling back. It’s normal, healthy and expected. No need to panic. The bears should be out in force shortly with calls of another correction or resumption of the bear market. But let’s give them a break; they have had so little to celebrate for almost two months.

The chart below isn’t a new one, but one I have shown various time with more data added as time has gone on. I first published right at the bottom in February amid calls that I was naive and pollyanna’ish. My oh my how price has a way of changing sentiment and behavior. Stocks already achieved the target I set for Q2 so a little rest is certainly warranted. Whatever weakness we see will be yet another buying opportunity for higher prices over the coming 6 and 12 months. Keep in mind that I am not calling for a straight up move into 2017, just that on balance, prices should continue to move higher. I wouldn’t be surprised for a more significant bout of weakness to hit later in Q3 or early in Q4.

dow

If I had to point to one or two things that concern me in the short-term, they would be high yield bonds and the banks. The former peaked before the major stock market indices along with crude oil while the latter has lagged the whole rally since February 11th. It would be a huge shot in the arm for the bulls if junk bonds can make new highs for 2016 sooner than later. The banks have been frustrating for both bulls and bears. I am still not sure what to make of them, only that if they get moving to the upside, we could see some real upside fireworks. Conversely, if they break down, that would create a more serious headwind for stocks.

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History Says Higher, but Stocks a Little Sleepy

Stocks ended the quarter just shy of fresh highs and booked a huge 6%+ return for March. Historically, that portends more upside over the first week of April. Speaking of April, it is one of the strongest months of the year. Most of the long-term studies I have done and read indicate higher prices 6 and 12 months out.

On the flip side, stocks have looked a little sleepy over the past two days and today is the monthly release of the employment data. I don’t expect anything unusually strong nor weak for this report and I don’t think it’s a market mover. Perhaps, we are looking at a few days of pause to digest.

The U.S. dollar has been particularly weak of late, thanks to Janet Yellen’s throwing of cold water on an April interest rate hike. The greenback is stretched enough on the downside to warrant at least a quick bounce here. Should that happen, you can expect the euro, loonie and pound to pullback. I am not convinced the yen will follow suit since bonds are bouncing and the yen usually moves with bonds.

Lots of short-term crosscurrents, but nothing significant of note for now.

Have a great weekend! Men’s and women’s Final Four. I will take North Carolina and Oklahoma in the finals on Monday on the men’s side. On the women’s side, here we go Huskies!! Going for our 4th straight national championship to cap a career for the greatest female college basketball player of all-time!

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Bye Bye March & Q1

Last day of the month. Last day of the quarter. What a ride it’s been although if you fell asleep on New Year’s Eve and woke up today, you might conclude it was a quiet three months with the Dow up a few hundred and points and the S&P up 1%. As we all know, it was anything but dull. March is on pace to return more than 6% after an historically weak start to the year. This kind of strength usually spills over early in the next month.

Yesterday, I left off with a look at the sectors. Two of the four key ones, semis and consumer discretionary, continue to march higher constructively. After a huge rally off the January bottom, the transports are looking a little tired and unable to score a fresh high this week. Banks continue to be a head scratcher, spending the month going sideways. They REALLY need to step up and breakout!

Consumer staples and utilities on the defensive side are at or very close to all-time highs. Telecom and REITs are making 6 month highs. These four groups are proxies for a low interest rate, slow growth environment. The rest of the sectors look “fine”, but not incredibly healthy.

Finally, one of my favorite canaries in the coal mine, high yield bonds, have been dynamite since mid-February, which certainly helped lead to that huge stock market rally in March. High yield has taken a little breather of late and they absolutely must see fresh highs in April to keep the stock market rally going.

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And the 5th Pullback since The Bottom Ends

On March 21, I penned a piece calling for the 5th pullback since the rally began. I used words like “brief” and “mild” to describe what I thought was coming before the next rally began. As with the previous four pullbacks, all we saw was essentially two days of slight weakness before the bulls roared back.

And roar back they did.

Right before Janet Yellen released her speech on Tuesday, I did an interview with CNBC India regarding the Fed raising rates as well as the market’s short-term prospects. I want to thank Chair Yellen for listening to me and the market when offering such dovish (benign) comments regarding the need to raise interest rates right now.

The stock market certainly loved what Yellen had to say as the fifth pullback abruptly ended in a hurry. By the time the closing bell rang, the Dow Industrials, S&P 500 & S&P 400 all were back to the levels seen before the 2016 began. Only the Russell 2000 and NASDAQ 100 are left to regain lost ground, which should happen sooner than later.

I keep referring back to the “dark days” of 2016 when I was essentially the only bull left out there. I remember at both the January and February lows how CNBC and Fox Business couldn’t find but a few people to offer even neutral views, let alone bullish ones. My Twitter feed was overwhelmed with calls for a new bear market and a crisis worst than 2008. I am just wondering what happened to those folks. I have seen a few people who disavowed the rally and recommended selling the whole way up suddenly say that they successfully bought the bottom, in hindsight of course.

Anyway, stocks are seeing some very nice upside breakouts, but for me, I don’t think this is the greatest time to add risk to a portfolio. If you weren’t smart enough to add at lower prices, I wouldn’t compound your mistake with potentially another. There will be another short-term pullback sooner than later when people with cash will have that opportunity. The problem will be that they won’t take action at that point because they’ll look for a much deeper decline. If you absolutely must invest, I would look at the laggards here and have a solid exit plan before buying.

That’s it for now as I am heading to NYC for the day. Tomorrow, I will look at the sectors, commodities and currencies as there are some really nice short-term opportunities now.

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The 5th Pullback Since The Bottom is Here

Repeating what I said on Friday, stocks now have a mild headwind post the Fed announcement which last through this week. Couple that with the fifth short-term overbought market since the rally began on February 11 and you have the ingredients for a small pullback or pause to refresh. The rally isn’t over.

Three of the four key sectors (except banks) are dominating and can still be bought on weakness. While all of the major indices remain strong, I am most focused on the NASDAQ 100 right here as it should play catch up, either by rallying more over the coming weeks or pulling back less.

I wish I knew what to make of the healthcare sector, but I just don’t have any opinion. More than anything else, it looks like a proxy for Hillary Clinton’s winning presidency. The weaker this sector, the more likely it is that she will win.

As with stocks, crude oil and high yield bonds are also very overbought in the short-term. Both should see some weakness sooner than later before heading higher again. While gold has also rallied dramatically this year, there may be more at play than just a quick pullback. Intra-day volatility has expanded and it’s starting to trade on the sloppy side. A more meaningful bout of weakness would not a shock.

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Still Laughing at the Bears

Yet ANOTHER solid week by the bulls! Chatting with my peers who also pounded the table to buy at the Jan and Feb lows, we all find it amazing how revisionist history is playing out and suddenly those who were the most bearish at the bottom and during the rally are now supposedly fully invested. Incredible how price movement along can change investor sentiment! I feel for those who have largely ignored scoffer at this historic rally. One thing about this business is that you can’t hide from performance.

Anyway, the positive trend for this week based on today’s expiration of options is just about over. At the same time, there is a 5 day trend after the Fed meeting that triggered which calls for lower prices next week. Additionally, stocks, once again, look a little tired in the short-term, just like they have four other times since February 11th. A brief and mild pullback next week is the most likely scenario.

I remember wondering in mid February where leadership would come from. Most of the sectors looked weak. My oh my have things changed. From a technical perspective, telecom, industrials, materials, energy, staples, utilities and transports all saw significantly higher lows on Feb 11 than when the stock market saw its previous low on January 21st. I said at the time that these were not the kind of leaders that could bring us back to the old highs. They did a great a job of stabilizing the market until the more aggressive and important sectors, like semis, were ready to take over.

This 7 year plus bull market continues to amaze and confound the masses. Betting against it has been quite hazardous to portfolio values, yet those who disavow stay their course. At some point, they will be right, but best of luck until that day comes…

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***SPECIAL Fed Meeting Alert… A March Surprise?***

Whether you like Dolly Parton’s, “Here You Come Again”, Kenny Loggins’, “This is It”, or Europe’s, “The Final Countdown”, it’s Federal Open Market Committee (FOMC) statement day again. Boy did those 6 weeks fly by. And the markets have basically done a 180 since January 27 with the Dow going from vertically down to up and advancing from 15,940 to 17,250.

Yellen’s Cover for Standing Pat is Gone

After raising rates in December, the Fed prepared the markets for four more rate hikes in 2016. Almost to the day of that announcement, global markets began to sink on fears that the worldwide economy was slipping into recession. With that, the Fed quickly backed off the rhetoric and so went any discussion of a rate hike in January.

Yellen cited China, Europe and even lower than expected economic output in the U.S. along with collapsing oil prices are reasons for keeping interest rates unchanged.

My oh my have things changed.

  • Our stock market not only stabilized, but rallied sharply
  • Oil prices are up 50% from the bottom
  • Q4 GDP came in stronger than expected although up just 1%
  • February employment report printed a reasonably strong and better than expected increase of 242,000
  • China’s stock market calmed down and began to rally
  • European markets gained
  • ECB chief, Mario Draghi, announced an increase in bond buying and more stimulus

What will Janet Yellen say now?

She basically lost the cover to keep rates unchanged although markets expect no action from the Fed today with 90% certainty. However, they do expect a more hawkish statement and press conference. The likely path forward is that Yellen & Co. lay the groundwork for a June rate hike and let the markets digest and prepare for that.

“What If?” – Focus on the Banks

If Yellen pulled a March surprise, stocks, bonds and commodities should fall precipitously with staples, REITs, telecom and utilities being the hardest hit.

Of all the sectors, the banks look like they want to move most and here are four scenarios to watch for.

Fed stands pat & banks rally – Actionable trade for a few weeks to a few months

Fed stands pat & banks continue in line or worse with the S&P 500 – Ignore banks

Fed raises rates & banks rally – Actionable trades for the rest of the year

Leave Rates Alone

I won’t rehash my trail of comments since 2008, and you are probably tired of hearing and reading them anyway, but ever since Q4 of that year, I am on record as saying that the Fed should NOT raise short-term interest rates until the other side of the next recession. The U.S. survived the Great Recession, but our economy is far from thriving.

As I have also pounded the table for the past 7 years, we are living through a very typical post-financial crisis recovery which is very uneven and frustrating. It sometimes teases and tantalizes on the upside, but occasionally terrorizes on the downside. Think Japan since 1990. In the end, few are pleased with it and blame is easily fanned around.

The Fed has tried mightily to spark some “healthy” 2-3% inflation, but has not been successful overall. And I don’t believe they will see success until we get through the next recession which I forecast to occur early on in the next president’s watch. It should be very mild as corporations are sitting on roughly $3.5 trillion in cash with more than $2 trillion on bank balance sheets. It’s almost impossible to experience a significant recession with the banks having such a dramatic cushion of cash.

After that, inflation should begin a secular bull market along with interest rates going higher for decades. Our economy will finally get back to trend or average GDP growth of at least 3% which has not been seen since pre-2008. This could also coincide with Europe getting its fiscal act together after another sovereign debt crisis.

Did Yellen REALLY Want to Set Precedents
The December rate hike sets all kinds of precedents.

  • First rate hike ever with inflation under 1%.
  • First rate hike ever with the annual social security COLA at 0%.
  • First rate hike ever with wage growth needing to jump 100% to hit the Fed’s target.
  • First rate hike ever with industrial production on the verge of recessionary levels.
  • First rate hike ever with GDP barely 2%.
  • First rate hike ever with inflation expectations close to 0%.
  • First rate hike ever with retail sales closer to recession than escape velocity.
  • First rate hike ever with non-farm payroll job growth continuing to decelerate.

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FOMC & Options Expiration the Themes for the Week

The Dow, S&P 500 and S&P 400 enter the new week at their highest levels of 2016. That surprised me when I did my weekend review. I would bet that most people think stocks are much lower than they actually are. Last week was another big victory for the bulls, much to my delight. Day in and day out since February 11, investors have disavowed and laughed at this rally. However, all we have seen in historic participation and strength since the rally began.

Four times since February 11th, stocks have become short-term overbought and all four times, the best the bears could muster was a two day, mild pullback. That in itself continues to be a sign of underlying power that typically doesn’t dissipate so quickly. The Dow and the S&P 500 are quickly approaching the opening gap created on January 4th when stocks fell sharply to begin the New Year. That’s 17,425 on the Dow and 2044 on the S&P 500. Those levels should create the landscape for another short-term pullback.

This week, we have options expiration and the Fed meeting to deal with. Historically, March expiration week has been nicely positive for stocks. That trend should continue into the Fed announcement on Wednesday. With stocks rallying so sharply into the Fed, the trend says they continue early this week and then pullback modestly on the other side of the meeting.

Three of my four key sectors are acting great with only the banks in question. Tomorrow, I will spell out three scenarios for the banks based on the Fed’s decision that should have some legs into next quarter.

High yield bonds continue to power higher and that behavior should not be underestimated. If junk bonds hold on to these gains, it will be very difficult for the stock market bears to make any meaningful headway.

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