***SPECIAL Fed Update – Fed’s Arrogance & Pomposity Leading to Recession Watch***

Stock Market Behavior Models for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Over the past few meetings, many of the strongest trends were muted.

As with most statement days, the model for the day calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM.

With stocks somewhat on the defensive lately, the next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 80%+, but it would have been stronger in magnitude had Tuesday’s early weakness not been overcome. Last meeting, this trend did not work as early strength on Fed day was sold in to and then piled on.

Rate Hike – One Down, Three to Go

The Fed is going to take no action today. At best, their commentary will be benign. At worst, Powell and company will upgrade their economic forecast which will also increase the likelihood for three or even four more rate hikes this year. June becomes the “live” meeting where rates should go up by another 1/4%. Then September and December. Back in January, I forecast 3.5 rate hikes this year with the risk to the upside. I am standing by that.

To reiterate what I have said for more than a year but a little more bluntly, the Fed is misguided, arrogant and in desperate need of help. NEVER before have they sold balance sheet holdings in the open market AND raised interest rates. In fact, I don’t think it’s ever been done in the world before. So why on earth do they believe they will so easily be successful? This grand experiment is going to end poorly and we are all going to suffer at the hands of the next recession which I stabbed in the dark as beginning between mid 2019 and mid 2020.

Yes, with banks holding $2.5 trillion on their balance sheets, the recession should be mild and look nothing like 2007-2009. And yes, this expansion will be more than 10 years old. And yes, there will be some external trigger like 9-11 or the S&L Crisis to push the economy over. But the Fed will have greased the skids sufficiently for the economy to recess.

Let’s remember that the Fed was asleep at the wheel before the 1987 crash. In fact, Alan Greenspan, one of the worst Fed chairs of all-time, actually raised interest rates just before that fateful day, stepping on the throat of liquidity and turning a routine bull market correction into a 30% bear market and crash. In 1998 before Russia defaulted on her debt and Long Term Capital almost took down the entire financial system, the Fed was raising rates again. Just after the Dotcom Bubble burst in March 2000, ole Alan started hiking rates in May 2000. And let’s not even go to 2007 where Ben Bernanke whom I view as one of the greats, proclaimed that there would be no contagion from the sub prime mortgage collapse.

Yes. The Fed needs to stop.

Velocity of Money Most Important

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money collapsed. It’s still too early to conclude, but it does look like it stopped going down in 2017 and might be just slightly starting to turn up. If 2017 does turn out to be the bottom, this could could eventually lead to the commodity boom I see for the 2020s, especially ex energy.

In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will not fully recover and function normally until money velocity rallies. This is one chart the Fed should be focused on all of the time.

It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one called the Fed out on this and certainly not Yellen at her quarterly press conferences. Hopefully, someone will question Chairman Powell on this next month.

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Crosscurrents Abound in May but Fraught with Risk

The month of May begins today. It’s supposed to be spring although you wouldn’t know it in New England on Monday as folks had on hats, gloves and down jackets. The weather is finally looking up in CT as the forecast calls for 70s and 80s this week. I think the bulls are hoping their forecast heats up this week as it’s been cold for stocks of late.

As you know from my blog posts since April 18 I have been much more concerned that the February and April lows could give way to a quick elevator shaft decline towards or below 23,000 on the Dow. It’s a scenario I am watching closely. I would feel a whole lot better for the bulls if we saw some confirmation in the form of a day or two where at least 80% of the volume (shares traded) was in stocks advancing. 90% would be even better. This kind of conviction has been sorely missing since the rally began.

Turning to May which was really the point of this update, like January, there are a number of trends that fire off, both short and intermediate-term. Let’s review them and give proper attribution.

1 – Today is May 1 which has become one of the most seasonally strong days of the year, more so in magnitude than winning percentage. The odds favor the upside 70% of the time. It’s been very rare to see even a .75% down day. (Hat tip Rob Hanna of Quantifiable Edges)

2 – Today is the first day of the month in an ongoing bull market. The previous month closed poorly. 80% of the time, today is an up day with limited downside when the trend doesn’t work.

3 – May 1 begins the “Sell in May and go away” (SIMGA) trend that lasts until November 1. In other words, it’s the weakest 6 months of the year, averaging a gain of 1.5% versus 7% for the other 6 months. However, since the bull market began, only 2011 saw any weakness greater than 1% so that trend has been somewhat muted.

4 – I tweaked SIMGA to look at just those in midterm election years which has historically been a weak year. That worked tremendously well through 2002 with some real doozies on the downside including double digit declines in 2002, 1990 and 1974. Overall, stocks rallied just 1% since 1950.

5 – I further tweaked SIMGA to only examine the first term of a president’s midterm election year which have yielded the weakest of the weak results. 1974 drops off but so do some gains. Overall, it didn’t yield much. Stocks averaged a paltry 0.73% since 1950.

6 – Finally, as I was starting to research what happened when stocks were down through April and SIMGA began, Jason Goepfert from Sentimentrader.com published the results so I will just copy his. I wish I could say “great minds think alike”, but I wouldn’t denigrate him by putting him in my category. When the year was down through April 30, SIMGA was also down by almost 3%.

Does all this even mean anything?

I draw two loose conclusions.

First, in the short-term, today is supposed to be up. If it’s not, regardless of what happens with the Fed tomorrow, I think stocks will continue lower and further open the scenario for a full breaks of the 2018 lows.

Second, there is enough of a seasonal tailwind through Halloween to suggest guarded optimism at best. In other words, when our models are not fully positive, it’s time to play defense and not be complacent. This is such a far cry from what I have written about 80% of the time since the bull market began 9 years ago.

Now is definitely not the time to be cavalier and and regard every decline as a buying opportunity with an easy recovery period. While I still absolutely do not believe the bull market is over and Dow 27,000 is coming, risk has increased dramatically this year and investors should be on guard.

As always, we will take it one day at a time and assess the evidence. If you have any questions or would like to schedule a meeting or call, please contact the office or click here for my calendar.

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Huge Week Ahead. May 1st VERY Bullish

Stocks begin the new week with the bulls on the optimistic side. Yes, the tariff deadline looms, but we also have the Fed on Wednesday, employment report on Friday and earnings scattered throughout the week. Lots going. Lots of ammunition for the bulls, or so they say.

I am not as encouraged for the same reasons I discussed last week and the week before. Lower before higher although I am sure I will feel squeezed if stocks break out to the upside with repairing any of the existing damage. Semis, junk bonds, lack of upside confirmation are all weighing on stocks not to mention the “ominous” 3% yield on the 10 year note which I don’t find to be so dangerous at all.

Today is the end of April and one of the strongest seasonal days of the year is tomorrow. 21 of the last 31 May 1’s have been higher. That’s pretty good. Another opportunity for the bulls to scream. I would become even more concerned if stocks opened higher today and then closed towards the bottom of the range followed by more selling on Tuesday. Let’s see what happens.

Lots going on this week.

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Don’t Let the Bulls Fool You; Bears are in Control

Turnaround Tuesday didn’t work out so well for the bulls,  but they did muster up some strength to rally on Wednesday and Thursday. Still, we don’t have a single day where 90% of the volume was in stocks going up. That’s sorely lacking to give the bulls some comfort. Lots of folks were crowing on Thursday about the NASDAQ 100’s regaining leadership with Microsoft, Facebook and Amazon blowing out earnings to the upside. However, let’s not forget that the market has not rewarded big earnings beats this quarter for more than a few hours.

I remain concerned.

Discretionary, healthcare and energy are the new leaders. That’s okay, but not what we typically see during the strongest markets. And don’t forget, energy is almost always a leader at the end of a bull market. High yield bonds are hanging in, but only by a thread and they certainly are not leading. The 10 year treasury note finally hit 3% as I wrote about in February. Now, just maybe it can peak.

I continue to see lower before higher, but new highs remain in my forecast above 27,000. I guess there is a chance that stocks run higher without doing all the things I want to see first. However, that would likely spell the end of the bull market later in 2018.

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Turnaround Tuesday, Semis & 3%

Just a quick comment regarding the short-term state of the market. With the current pullback lasting through Monday, there is a possibility for a rally beginning on Tuesday, also known as Turnaround Tuesday. This scenario is usually more important and prominent when stocks are in the throes of a more significant decline and momentum is strong. We do not have that now.

I bring up Turnaround Tuesday not so much because I think stocks are at important bottom, but because of the potential for more downside if some kind of rally does not materialize. And taking that one step further, if the major stock market indices close below Monday’s lowest levels, that should lead to an acceleration lower.

As I wrote about on Monday, semiconductors continue to be a concern along with junk bonds. Semis have now exceeded the April lows and appear to be headed to say hello to their average price of the last 200 days. After that, the group is headed to the February lows. Along with high yield bonds, semis need to be watched closely here.

Finally, don’t forget about the 10 year treasury note yield. The “all-important” 3% ceiling should be kissed this week. Stocks shouldn’t like that. However, I think the first run through 3% will likely be rejected sooner than later. That COULD lead to a stock market low.

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Bears in Charge as Bond Yields Rise Again

The bears certainly won the day on Friday to end the week. While stocks did close off the lows with the typical late day buying into the bell, stocks fell back into the equilibrium level we have seen of late. The bears have the upper hand to a small degree. While the transports, banks and discretionary are hanging in nicely for now, semis continue to be under severe pressure. They are now at risk of breaking the April, testing their average price of the last 200 days and possibly heading down to the February lows. This group is vital to market leadership and one we must watch closely.

The other area of concern is high yield bonds, an investment I often write about.They are just not acting well. While that doesn’t have significant impact in the short-term, it does keep me on my toes given how old the bull market is as well as how strong a warning junk usually gives.

In late February, I wrote about bond yields, something I watch all of the time, but rarely write about. At that time, I said bond yields were not peaking. Two months later, we have bond yields rallying once again. Look for the media to have BREAKING NEWS once the yield on the 10 year treasury note hits 3%. Once that happens, yields should be close to topping out as the masses realize they are rising.

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Short-Term Remains Murky But Dow 27,000 on Tap for Summer

Almost like clockwork when I wrote about the bears giving up which caused me to be concerned, stocks declined. However, given the elevated level of volatility a few day pullback isn’t going to raise many eyebrows. With stocks closing off of the lows on Thursday after yet another nonsensical piece of information leaked regarding the Mueller investigation and Trump, the bulls should an opportunity on Friday. If the major indices close at their highs for the week, we will likely see more upside next week. If stocks close below Thursday’s low, we should see downside follow through next week. While lack of overall volume doesn’t concern me at all, it does bother me that the stock market can’t even generate a single 80% day where 80% of the volume is in stocks going up. After a string of 90% down days, we should have seen at least an 80% day or two on the upside to confirm that the rally is sustainable.

Looking at sector leadership, semis were bludgeoned on Thursday and now threaten to breach the recent lows. Although banks were higher during Thursday’s carnage, they re one bad day away from new lows. On the flip side, discretionary and transports have rallied smartly with the latter probably being a little more important. It is “funny” that with crude oil at new highs and approaching $70, I don’t hear any of the pundits spewing about about how these two groups always move in opposite directions because the transportation companies have such a high reliance on energy. Just another myth not supported by fact.

Turning to one of my favorite long-term indicators, the New York Stock Exchange Advance/Decline is one of the best ways to determine overall participation in rallies. When stocks made their peak in January, this indicator was at an all-time high, leading me to continue to conclude that more new highs should follow after the correction. And just this week, the NYSE AD Line made a fresh new high by a whisker, reconfirming that the bull market remains alive.

As I email, meet and speak with clients this year, people are uniformly surprised that my thoughts, writing, opinion and forecast have included some fairly negatives scenarios. While I obviously don’t know what will come to fruition, for the first time in years and years, I now have economic doubts that aren’t just somewhere way out on the horizon. We are getting closer and closer to clear and present danger. As I have started to mention, a mild recession is a very real possibility between mid 2019 and mid 2020. And if that’s the case, a bear market in stocks will accompany that. For now, let’s focus on the short and intermediate-term and see if stocks can accommodate my forecast for Dow 27,000 over the summer.

Have a great weekend. After a quick trip to MD and NC this past Tuesday I am now heading to the east coast of Florida and then Orlando to visit with clients and attend the annual NAAIM Uncommon Knowledge conference. I know. I know. With the amazing spring weather in New England, how will I adjust to temps in the 80s with sun. I will do my best.

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Bears Starting to Throw In the Towel

Over the past week or so, I have written about some price levels I wanted to see exceeded to turn the picture a little more bullish. Since then, all five major stock market indices have closed above those levels. After that I wrote about the “key” reversal last Friday that had some analysts calling for the end of the bull market. The market immediately rejected that rejection. Then the bears hung their hopes on the “magical” 50 day moving average. On Tuesday, every major index closed firmly above their average price of the last 50 days. The bears cried about the lack of volume. Stock market volume just surged.

I think the bears have started to throw in the towel. And that now makes me a tad nervous.

During Tuesday’s rally, banks closed lower and are reacting negatively to good earnings. High yield (junk) bonds, while rallying nicely, closed near their lows of the day on Tuesday. Stock market participation in the rally is decent, but from resounding and we still do not have a single day where 90% of the volume has been in advancing stocks. That’s not the type of action that leads to a strong and sustainable move higher. It’s what you sometimes see before a rally ends.

I guess what I am trying to say is that after not worrying too much about the short-term for a while, I am now growing more concerned. Before the emails come in, I still believe the bull market is intact and Dow 27,000 remains on tap. I am just not sure that stocks are going straight to new highs from here. Let’s see what the coming few days bring…

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“KEY” Reversal and the 50 Day Moving Average Boogeyman

On Friday, the major stock market indices saw yet another “dramatic” reversal as strong early gains were not only given back but also turned into losses during the afternoon before closing off the lows. People who look at charts usually forecast further weakness ahead with some even using the one day pattern to call for the end of the bull market. I think you have to take these kinds of days in context. One day doesn’t end a bull market or cause a selling stampede. And if/when the reversal day is closed above, it becomes moot anyway.

Besides the reversal day which you can see on the right side of the S&P 500 chart above, you can also see the light blue lines which have defined the range stocks have been in since late January. In other words volatility has gone from extreme to more moderate as the lines continue tighten and will eventually converge over the summer.

Additionally, there seems to be a fascination now with the dark blue line which is the average price of the last 50 days, also known as the 50 day moving average. Pundits are saying that stocks are struggling to regain this line, especially since the line is descending. IF all of the major indices were in the same position, the conclusion may have merit. However, with the S&P 400 and Russell 2000 above their own 50 day averages, I dismiss the conclusion as nonsense. In fact, I wouldn’t be at all surprised if all five major indices closed above their 50 day averages and then we saw another pullback in stocks to trap those people.

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Bulls Looking Up. The Absurdity of Exact Price Levels.

Yesterday, I wrote about some “key” price levels to watch. I put quotes around it and chuckle because there is some level of absurdity with getting too cute about a given exact price. That’s one of the many flaws of analysis. S&P 500 2675 is “vital” but not 2674 or 2676? Technicians get way too caught up in exact numbers rather than small ranges which makes a whole lot more sense. And remember, the market will always do its best to confound the masses, especially when everyone is focused on a certain price.

The most important thing about this week and Thursday was that the NASDAQ 100 and Russell 2000 are now leading. Many would call that “risk on” which is what you want to see during a rally, especially off of a bottom. That needs to and really should persist for a while.

Semiconductors have done very well, not only holding well above the February lows during the last decline, but they are also leading. That’s a very good sign for the intermediate-term. Banks on the other hand are not leading but are also not breaking down. I do think this group will lead again and likely see new highs sooner than later. Almost the same thing can be said about consumer discretionary although they are a drop weaker than banks. While I am at it, let’s put transports in the same category as discretionary.

The weaker looking sectors are mostly defensive, utilities, staples, REITs and telecom. That’s exactly what I wanted to see coming out of the bottom. Materials, healthcare and biotech are all on the weaker side which does not concern me at all.

After being left for dead so many times, energy is FINALLY showing some real leadership and outperformance which goes along with my commodity theme for 2018. Energy is typically a late stage bull market leadership group and this fits in nicely with theme of the bull market being in final inning or two.

Things continue to look up for stocks although I don’t think the full all-clear has been sounded. I continue to favor buying weakness and adding risk into weakness. I also want to ignore the laggards and not anticipate when they start to lead. There should be plenty of time.

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