Insurance Sector Around Disasters

If any sub-sector should be impacted by disasters, you would think it would be the insurance group. Similar to what I did above, let’s look at how the Dow Jones Insurance Index behaved around the events.

Sandy is first and you can see that it was already pulling back when Sandy hit and continued to weaken for two more weeks before blasting off to the upside. This was basically in line with how the stock market did although a little earlier.

Reaction to Katrina was surprisingly strong as the sector did not have much downside immediately following although the S&P 500 was much stronger. And when the S&P 500 declined into October to new lows, the insurance group made a higher low, indicating possible future leadership which came to fruition through November.

Northridge is next and I had to use the stock of Allstate as my data on the insurance index did not go back far enough. While the S&P 500 rallied and then declined, Allstate was literally straight down for several months with barely an intervening rally.

With Andrew, I used the stock of Travelers since Allstate wasn’t public yet. Similar to the S&P 500, Travelers rallied a little and then declined although it wasn’t perfect.

Today, we see that the insurance group has been under pressure for a few weeks, oddly upticked on Friday and now is declining today where I have the arrow and “Harvey”. If history is any guide, we should see a good buying opportunity in this sector sometime in September.

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Stock Market Behavior Around Other Disasters

With Hurricane Harvey and the associated historic, catastrophic flooding the area is experiencing and the country is watching in real time, it got me thinking about how the stock market (S&P 500) and insurance stocks fared during previous disasters. I decided to leave energy out because there haven’t been many hurricanes that directly impacted oil and gas. I did not include the Deepwater Horizon disaster in the gulf.

Let’s start with the S&P 500 during Superstorm Sandy, Katrina, the Northridge Earthquake and Andrew. Then we can look at today for any clues at to what lies ahead. Although Ike was on an equal loss plain, I excluded it because it occurred in September 2008 during the height of the financial crisis. Price action from the crisis certainly overwhelmed any impact from Ike.

As you can see below Sandy hit when stocks were already pulling back. They rallied for a day before falling to their ultimate lows two weeks later. From there, it was straight up.


Katrina is next and it’s a different story as the hurricane had two landfalls, first in Florida which people forget and then in Louisiana. Katrina was also a category 5 storm in the gulf which somewhat led to the pullback into its second landfall. The media and weather experts were consumed with how a cat 5 landfall would devastate. Thankfully, we never found out!

Stocks opened lower on Katrina day and then rallied for two weeks before rolling over again to the final low in October. Then it was up, up and away.

With earthquakes, there isn’t a warning so this is a different type of catastrophe for the markets to deal with. As you can see below, the market barely skipped a beat and the impact was essentially nothing.

Finally, Andrew is below and like the other hurricanes, stocks had already been pulling back when this monster made landfall in 1992. Similar to Katrina, stocks rallied immediately for two weeks before rolling over to their ultimate lows in October before soaring again.

Finally, take a look at where we stand today. The stock market has been in pullback mode, which has been a theme of mine all month. It’s not really conforming to any of the previously mentioned disasters.

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Bounce to Continue. Yellen, Draghi & Harvey

We have several crosscurrents to end the week. Before I get to them, while I believe that stocks remain in pullback mode, I do not think that the bounce I wrote about on Tuesday is over just yet. There should be some more upside left. I am slightly encouraged by the very short-term strength in the Russell 2000 although it is about to test the underside of its long-term trend, also known as the 200 day moving average. That could cap the rally. Semis continue to hang in and refuse to tip their hand. On the other hand, transports broke down yet again this week and that’s a drag.

This is all within the context of the slowest activity of the year next week. “Slow” does not mean quiet nor lack of action. There have been many market events when participants have been on vacation. Russia’s debt default in 1998 is among the worst. It pays to stay vigilant.

The Fed’s annual retreat in Jackson Hole Wyoming is happening now. Chair Janet Yellen and ECB Chair Mario Draghi are both set to speak today. If any major policy moves lie ahead, I would expect a little hint in their speeches. Additionally, Yellen could/should offer some clues on the expected tapering of the Fed’s $4+ trillion balance sheet.

On the weather front, Hurricane Harvey is set to hit the Texas coast shortly. The worst forecasts have it making landfall and then pulling back offshore for another assault on land. Weather events are very short-term and quickly reversed market events. The energy sector is where we typically see the highest impact. I wrote about energy yesterday and I still feel the same way, storm or not. Thoughts and prayers are with all those in harm’s way! Stay safe!!

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Oil and Energy Diverging

It seems like the energy sector debacle has received very little attention among the mainstream media this year. Even the financial media don’t really care. I am guessing that’s because crude oil has somewhat bucked the bearish trend the stocks have been on as you can see below. Oil has been very volatile and mildly lower. The stocks have been downright ugly. This has been an unusually long period of behavior like this.

In the past, the stocks have usually been on the correct side, but the relationship currently seems to be broken. Of course, people are going to speculate nonsense about OPEC and shale and manipulation. Don’t buy it! If I had to put a trade on right now, it would be to own the energy stocks and short crude oil. If I had to choose, I would look for a final bout of capitulation where investors throw in the towel all at once and then look to buy energy stocks. That’s what has been missing all along.

Investors just keep holding on to the likes of Exxon and Chevron and the like, hoping they will bottom. That’s the kind of behavior we saw during the Dotcom Bubble bursting 17 years ago although I do not believe energy is even remotely like that.

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Bounce Coming But Pullback Still Secure

While the short-term pullback continues, stocks are seesawing back and forth and are “supposed” to bounce here. For the past two trading days, the bears were unable to follow through from Thursday’s decline and fought the bulls to a draw. Unless we are looking at something bigger on the downside than I expect, we should see the bulls step up in a small way. It will be interesting and perhaps telling to see which of the major indices lead and lag the bounce. Both the S&P 400 and Russell 2000 are still in the doghouse.

On the sector front, it’s an uglier story with only the semis remotely hanging in. Banks and transports are already breaking down and discretionary isn’t too far behind. Only utilities look strong here and that’s not what should be leading if the rally were on solid ground. Should the semis lose it, I would think the overall stock market decline to quickly resume to its next downside level, roughly 3% lower.

Looking at my favorite canary in the coal mine, high yield bonds are trying to make a higher high, however I do not believe it’s going to hold. Momentum on down days just overwhelms up days and the intermediate-term pattern isn’t inspiring confidence.

There are more than a few cracks in the pavement which need to be repaired before the next rally begins. I would use little bounces to reposition portfolios. I would not chase stocks higher.

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As Expected, Pullback Continues

All month I have been writing about a short-term pullback for stocks. Nothing huge. Just your garden variety 3-5% bout of weakness which could overshoot. This coming from someone who has been bullish all year on stocks. I won’t reanalyze what I have already written several times, but here are a few reasons. The Dow Industrials were off on their own island of strength while the mid and small caps were in decline. Dow Transports were even weaker. Sentiment surveys and option data had become too greedy, too complacent and too positive. The list of stocks making new 52 week lows expanded and then surpassed those making 52 week highs, all while the major indices were so close to all-time highs. Key sector leadership fell off.

The stock market was just looking for a catalyst or an excuse to pull back.

First it was North Korea and then it was Charlottesville and now it’s Barcelona and Gary Cohn. The common thread in each case is President Trump. Since the post-election rally, dubbed the “Trump Rally”, “Trump Jump” and “Trump Bump”, I have remained firm that while the president always gets credit and blame, the rally was really based on the GOP’s election sweep and perceived ability to govern and pass legislation as they saw fit. That agenda is now being questioned and you will likely start hearing the media and pundits refer to the pullback as the “Trump Slump” or “Trump Dump”.

You don’t read this blog to hear my social views so I am not going to a rant about what’s going on in the country today. Suffice it to say that for as long as I can remember back to my childhood, I have always fought and stood against racism, bigotry, intolerance, discrimination, hatred and evil. They have no place in this country or on earth. There are no exceptions to this. At the same time, free speech is one of those inalienable rights which we often take for granted. However, it’s not really 100% free speech as you can’t scream “fire” in a crowded theater. There are limitations. Those a lot smarter than me will likely be struggling with this over the coming years if the 9-year escalation of racism, bigotry, hatred, white supremacy & neo-nazism continues.

That was more than I wanted to write, but it wasn’t quite a rant. Anyway, back to the markets and what’s at hand. The pullback is continuing as planned with Thursday being the first across the board rout where basically everything went down. For those looking for a silver lining, the defensive groups like staples, utilities and REITs were hit along with the others. That typically confirms the decline and indicates more downside before a low, but it’s getting there. It’s a necessary piece towards an eventual market bottom.

On the positive side, while high yield bonds have declined, their weakness has been small although I sense more downside is coming. The semis which I wrote negatively about here have been the quiet winners during the pullback and are the lone holdout from making new lows. It will be very interesting and telling to see if they can hold up.

With all of the major indices in gear to the downside, it’s unlikely that the current action is just a re-test of the North Korea decline from last year. Momentum is making a fresh low now so we are likely to see at least a low, a rally and a new low before the whole decline wraps up. I had written about a rocky period into mid-September and I am not ready to change that opinion just yet. Let’s see what shakes here. Don’t forget that the Fed has their annual retreat next week in Jackson Hole WY. With Janet Yellen and Mario Draghi (ECB) both in attendance, we should expect to hear more about their respective balance sheets.

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Market Like 1987 Again?

With Thursday being a downside rout that closed near the low for the day, stocks normally see two way action during the next morning before the opportunity for a stronger move comes after lunch. When markets are in the throes of a decline and I would hesitate to call this a decline of significance at this point, many of us turn to history for price analogs. The crash of 1987 really began to unravel the week before which was options expiration week.

Downside momentum kept building from Wednesday’s open and Friday was a disaster. Stocks crashed on Monday as a confluence of events unfolded not limited to newly appointed Fed Chair,Alan Greenspan, raising rates too quickly, Treasury Secretary James Baker announcing that the U.S. would not defend the dollar and this new, cutting edge institutional risk management program called portfolio insurance which essentially sold more S&P 500 futures the lower stock prices went. And the lower stock prices went, the more contracts that were sold. It was a snowball or pile on effect, much like the Flash Crashes of 2010 and 2015. Anyway, I bring this up not because I think stocks are going to crash 20% on Monday. I don’t. It’s just an interesting tidbit which you may hear about in the media, especially from the gloom and doom crowd.

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Energy Collapse. An Opportunity?

Stocks continue to bounce after the tensions with North Korea have quieted for now. As I have written about before, I think the stock market used North Korea as its catalyst or excuse to pullback. The underpinnings were a little weak and a little decline was coming regardless. My thoughts remain the same that the pullback is not over and the major indices will need to step it up sooner than later to revisit the old highs.

Every now and then I have mentioned the energy sector this year as it has been under what seems to be constant pressure all year. A few times, I saw short-term opportunities that never transformed into anything more. With this latest bout of selling the sector is once again approaching a window of opportunity. I say “approaching” as the opportunity is not here. I think we need to see the baby thrown out with the bathwater so to speak. It would be great for that to coincide with a piece of particularly bad news for the sector. You know. The things that bottoms are made of.

For now, let’s just watch the XLE ETF day to day and see if the opportunity sets up in a way where risk can be defined. It’s unlikely that it will quietly find a low with this kind of carnage.

Tomorrow, we will look at how crude oil is trading vis a vis the the energy stocks.

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Big Day for the Bulls But No All Clear Yet

Stocks bounced very strongly on Monday led by banks, semis and transports which just happen to be three out of four of my key sectors. That’s one for the bulls. The beaten down Russell 2000 index of small caps led the major indices higher and that’s another good sign for the bulls as the Dow Industrials definitely lagged the rally. While participation was decent, the number of stocks hitting new highs and new lows was not encouraging as they were almost equal. That’s one for the bears.

Given that all five of the major indices closed above last Thursday’s high, the rally should continue today, at least until lunch. High yield bonds did not have a stellar day on Monday and they are supposed to step up today. “Supposed” to is the operative word.

I do expect the bears to put up a fight before new highs are seen. That little battle will certainly go a long way into concluding whether my call for the pullback to continue is right or wrong. I also believe that tensions with North Korea are on simmer and will reignite over the coming month.

I tweeted about the Dow Transports on Monday which you can see below. This is not a new chart. I have been discussing it for the past few weeks as potentially a leading indicator for stocks. This sector was the first to exhibit weakness and then test the blue line which is its long-term trend, aka the 200 moving average. At the end of last week, the transports once again revisited its long-term trend and tried to reverse. On Monday, the group powered higher and confirmed a bottom of potential significance is in place. The upside target for this move is 9600.

The interesting “tell” will be if the rally fails in the transports and closes below the Q3 lows. At that point, we will watch to see if any other indices follow suit.

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Stocks to Bounce But Pullback Not Over

In part II of the piece I started last Friday, I turn to the market evidence supporting the 3-5% pullback I have been discussing all month. While tensions with North Korea have quieted down over the weekend and global stocks are sharply higher, I do not believe the pullback is over. Now, if the five major indices scream right back to new highs and sector leadership is strong, I will clearly be wrong in this call, but I am willing to give it some time. Let’s see if the bulls can first retrace what they lost last Thursday.

One of the many reasons I started looking for a pullback can be seen in the charts below. Just take a cursory glance and you will see that the Dow Industrials are leading the parade with the S&P 500 just behind. The S&P 400 and Russell 2000 are lagging significantly. The NASDAQ 100 is just a tad better.

Leadership by the Dow does not equate to healthy and strong leadership. It’s exact opposite. Investors are looking to hide in the “safer” and more liquid areas. If this was one of my regular Canaries in the Coal Mine update, I would offer that none have died or are close to dying, but a few are coughing.

Stock market sentiment began to get a little too happy, complacent, greedy or whatever other adjective you want to use. We saw it in the surveys, the options data as well as the Rydex fund flows. While sentiment ebbs and flows at a good pace, weakness is likely needed to restore at least a small wall of worry.

The semiconductors are one of my favorite sector canaries and concern over the past few weeks has been that with the NASDAQ 100, software and internet sectors all scoring fresh new highs, the semis have been unable to. If they started to rollover, they would likely bring down the rest of the tech sector with them.

The Dow Transports are another sector which had been under pressure long before North Korea became a recent issue. You can see below its decline was more than just a few day event and warrants attention.

Until earlier this week, I was holding out hope for the bulls by the continued strength in the high yield bond sector, my favorite canary in the coal mine. However, the past three days have seen relentless selling in this sector. Something has changed in the character of the market.

I could add to my list of short-term concerns including the infamous Hinderburg warning which really just says the market is very split with an equal number of stocks doing well as poorly. The number of stocks making new highs and new lows has shifted significantly to the negative over the past week adding credence to the Hinderburg.

HOWEVER (isn’t there always), the New York Stock Exchange Advance/Decline Line, which measures market participation just hit an all-time high earlier this month. Historically, that pretty much insulates stocks from a serious decline or bear market as it shows good health and lots of liquidity.

Finally, the much talked about VIX which is a broken measure of anticipated volatility spiked by almost 50% this week and almost 100% from its recent low. That has been a strong indication of future gains several months out.

In short, the next few weeks to month or so could be rocky, but not cataclysmic. Besides North Korea, we have the single biggest geopolitical since 9/11 on September 24th with the German election. Stocks are wounded and need some time to heal, but more new highs are in store later this year and into 2018. If you are nimble enough, selling short-term strength is the right strategy until proven otherwise.

As hard as it may be, investors would be best served by not being glued to the news channels 24/7. Focus on the long-term. The economy’s growth is accelerating. More jobs are being created. Record earnings. Heed my theme of 2017. Reality over rhetoric!

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