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┬árate 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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Bears Left in the Dust

While I did not see the magnitude of the January decline, I did call the January bottom in real time as the internal or momentum low. From there, I saw a reflex rally for a few weeks that would be followed by another decline to revisit or retest the same levels seen in January before a much better, stronger and more long-lasting could begin. While the bears screamed about further collapse and bought more bottled water and canned goods, I explained that the evidence did not support such a claim.

At both the January and February lows, various sentiment indicators were at a negative extreme seen mostly at significant bottoms, meaning that people had become so bearish, a rally was about to begin. After the rally began in January we saw a truly historic thrust off the bottom in the volume in the number of stocks advancing and declining, however, recent results were not as strong as older ones. You can read the post here. http://investfortomorrowblog.com/archives/2123

At the February bottom, I offered some upside price targets and lines in the sand based on some fairly simple technical measures. I also said that solid confirmation of the bottom call I made at February lows would come on a close above 1947 on the S&P 500. http://investfortomorrowblog.com/archives/2136

With everything coming together rather nicely, let’s take a look at the S&P 500, Dow Industrials and S&P 400 below. With all three indices closing above their bullish lines in the sand, the rally has been confirmed which has been talked about a lot in the media as the time to buy. For our strategies, I much prefer to buy closer to the bottom where the risk/reward ratio is more positively skewed, knowing full well that volatility would be high.

So far so good as all of the major indices are in gear to the upside and have rallied significantly from the February bottom on the way to my initial price target next quarter. For the time being, I will remain positive unless price closes back below the bullish line in the sand.


Price action over the past few weeks has seen the bulls press and press and press the upside. Three times, stocks have become short-term overbought, including right now, only to see a two day pullback at most before the bulls went back to work. Historically, that indicates strong buying pressure which isn’t exhausted so quickly. Strength begets strength.

This rally isn’t about the Fed or China or Iran or even the election. As has been the case since last year, oil prices have been the primary driver and they are up almost 40% since the low. Lately, it’s beginning to look like stocks are dragging oil up rather than vice versa and that’s a healthy sign longer-term if it holds.

Additionally, many of my previous concerns have been put to rest. All four of my key sectors are now in gear to the upside as the banks have caught fire this week to join the semis, discretionary and transports. Industrials, materials, REITs and even energy have also kicked it into high gear. Previous leaders, staples, utilities and telecom have all held their own.

Even the decimated high yield bond sector has joined the party in a big way of late and I am really pleased that our High Yield Plus strategy got on board early in the game. Emerging markets, left for dead with junk bonds and energy, have suddenly caught fire. This is yet another rally that has trapped the masses off guard and unprepared. And it’s not over just yet although a quick pullback would not be a bad thing.

If your portfolio is not performing as you expected or you would like a fresh set of eyes to analyze it, please contact me directly by calling the office at 203.389.3553.

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2008 Price Analog Put to Bed

In the past few issues, I discussed a widely followed price analog to 2008. Countless times, I have pounded the table that 2016 is ABSOLUTELY NOT 2008. Price was just following that path, but I expected the analog to break down much sooner than later. Over the past few weeks, it certainly has as you can see below. The January decline in 2016 mirrored that of 2008, almost to the day, as did the rally out of the January low. That’s where it ended. The S&P 500 saw new marginal new lows in 2016 only a few weeks after the the first low, but now is seeing its highest level since early January.


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Market Stretched in Short-Term But Intermediate-Term Remains Bright

During strong initiations off a bottom, price just powers higher seemingly day after day without much pause. The most beaten down stocks rally the most and the bears claim it’s all “short covering” and doomed to fail. But it doesn’t. Slowly,one by one, the bears stop disavowing the rally and become silent. Each short-term overbought condition hears some renewed calls for more downside, but typically there’s nothing more than a few day pullback of 1-3%. Since the current rally began on February 11, there have been three such instances and each time, stocks paused for two days. The market is once again at a similar juncture.

On Friday, the government released a good employment report regarding job creation. However, that was tempered by wages falling. A huge gap up would have been a nice place to book some gains. Rather, stocks saw some very mild weakness followed by a small intra-day rally before losing steam into the close. My review of hundreds of stocks and ETFs over the weekend shows a market that’s a little tired. No significant warning signs or indications the rally has ended, just the need for the fourth pause to refresh or mild pullback.

At the same time, treasury bonds should see at least a small bounce. Gold was the most interesting story on Friday as it saw a fairly large scale reversal. That turns the short-term trend neutral. I wouldn’t be surprised to see gold try to rally in the morning today before the bears try again. Until gold closes above Friday’s high, the bulls are no longer in total control.

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GOP Ganging Up on Trump… AGAIN

One of the great things about flying JetBlue is that every seat has a TV so I was able to watch the GOP debate on one channel and the UCONN men’s game on another as I flew to Reno. Boy was that debate painful! Did anyone learn anything new? It is clear to me that the Rubio and Cruz camps got together and agreed to a moratorium on attacking each other so they could collectively attack Donald Trump. They must have also been in concert with former presidential candidate Mitt Romney and his head shaking, jaw dropping assault on Donald Trump just hours earlier.

In all my years alive as well as my studies as a political science major, I cannot ever recall a party so steadfastly against their front runner with a such a commanding lead before. The GOP is breaking out every weapon they have and nothing seems to be working. Paul Ryan, John McCain, Judd Gregg, Mitt Romney. The list goes on and grows.

Rumors have circulated that leadership has met with Rubio, Cruz and Kasich to implore two to drop out of the race and back the other for the good of the party and the demise of Donald Trump. While Kasich doesn’t ever really enter the fray, he looks to be close to calling it a day and he has already said there is “zero chance” he will be anyone’s running mate.

If Trump continues his dominance, it won’t be long before rumors pop up that a faction of republicans will begin to outwardly support Hillary Clinton. They will argue that she’s the lesser of two evils and disparage Trump for all the obvious reasons. However, I think we all know that the Washington establishment, lobbyists and donors really fear Trump because not only can’t he be bought, but he could jeopardize their future hold on politics as we know it.

If you thought it has been crazy so far, it’s going to get even more interesting if and when Trump becomes the nominee. So many people keep asking me if I would support him and it’s something I think about everyday since my candidate is no longer in the race.