May 10th, 2017

The Watergate Template

Everybody seems to be talking about today. In the wake of Trump’s firing Jim Comey, head of the FBI, nearly every newscast is comparing the Tuesday Night Massacre with the Saturday Night Massacre of 1973 when Nixon fired independent special prosecutor Archibald Cox, which led to the resignations of Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus on October 20, 1973, during the Watergate scandal.

But Stock Chartist was ahead of the curve as subscribers got a “heads-up” about the stock market implications of the emerging White House turmoil in their April 2 issue of the Weekly Recap Report. You can today read what they got … 5 weeks ago.

The Watergate Template

Two weeks ago, in “Should We Sell Everything“, I offered up a view of the three previous corrections of any magnitude in the bull market we’ve had the benefit of enjoying since 2009 and concluded that since it takes several months for tops to form “all this talk about selling everything in anticipation of a correction that clearly is coming, at some time and at some point in the future is premature.”

Last week’s Recap Report entitled “Politics and the Stock Market” looked at stock market behavior in two previous Presidential Crises and concluded that “The big grey cloud on the horizon is the impact the charged political situation will have on Trump and his anticipated programs.” Today we drill down into the 1972-73 Nixon/Watergate market (click here for a chronology) in the chart below as template of what we might be able to expect should Trump’s Russia problems escalate to such a degree that it actually begins impacting the market (click image to enlarge):

Nixon Impeachment - 2

I know it’s blinding but let me walk you through it. The chart depicts the August 1972-December 1973 S&P 500 Index. This is important because the market advanced 6% between Nixon’s Election and January 11, 1973. The massive 48% crash (third steepest in history) began when the market peaked on January 11, a couple of days after the trial of the Watergate Seven burglars presided over by Judge Sirica began on January 8, 1973; it ended in October-December 1974.

  • At the top, the Market Momentum Meter’s values (e.g., 1234, 12936, 21605) and colors (green, yellow, red)
  • Some of the milestones in the Watergate saga
  • The S&P 500 Index and moving averages

The Watergate took weeks and months to unfold. It involved criminal prosecutions, Congressional inquiries and special prosecutors. It involved a cover-up that was discovered and disclosed, indictments and resignations and immunities granted. Calls for Nixon to resign began in January 1974 (click here for chronology), a House Judiciary Committee began impeachment proceedings on February 6, 1974 with demands for the tapes to be turned over. It continued until August 8 when Nixon announced his resignation.

Market upside momentum slowed dramatically as “breaking news” about the break-in continuously flooded the media so the moving averages began pivoting, first moving horizontally and then turning down. The Meter didn’t turned consistently Bearish Red until mid-April after the Index had already declined 6% below the peak to 110. Even with all the news, the market closed the 1973 with a -17.4% drop. But the meter was solidly Red with a Perfectly Bearish value of 21605. The market dropped another -36% before touching the low of 62.8 on October 3, 1974!

Why dredge up this sad chapter in Presidential history? Because it serves as a template for how investors might react and how the stock market might behave, should questions and inquiries about Trump and his staff’s Russian ties continue and evolve into indictable criminal activity. While the Nixon saga stretched over months, the Trump replay will be in fast-motion Internet time.

Just as athletes or first responders, for example, practice, run drills and watch game replays so as to be prepared for any contingency, stock market participants need to practice and be prepared. No one can predict where we’ll be a year from now. The indexes of confidence are hitting highs for over a decade, if not all time highs internationally and domestically in business, consumers and housing. And yet, like in 1973-74, politics overwhelm economic and market euphoria.

Being forearmed is being forewarned. This is not a prediction of a market crash but rather, using today’s popular jargon, it’s an “alternate narrative” of what did happen and could happen that we need to be ready for. We shouldn’t sell everything today because, if we and Trump are lucky, all this could blow over, the economy will continue plugging along, and the stock market will cross the mid-point trendline in the Reversion to the Mean channel and become support. I suggest, however, that you print the chart above, have it handy nearby, plot emerging events against what did happen and take action as needed depending on your tolerance for risk.

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April 2nd, 2017

Is a stock market correction coming?

The Trump Bump is approaching its 4-month birthday causing everyone to ask how long it will be before a correction? For a long time, we’ve envisioned a target of 2450 for the peak before the correction. On March 1, the S&P 500 touched 2400 on an intraday basis, or just 2% under the price target.

But things are in flux. The economy continues improving, business and homebuilder optimism is near record highs and the labor market is tightening generating wage increases for the first time in years.  The only fly in the ointment is the political backdrop and the risk that it poses for Trump’s economic agenda.

To not be caught off guard, subscribe here to receive the Stock Chartist newsletter every Sunday evening at 7:00 like the one below of March 19 and to be able to track the Stock Chartist Portfolio, including each buy and sell order as it happens.


Should We Sell Everything?

We’re hearing it more and more these days. “I think we should sell everything” and “The bull market is eight years old with only two pauses; it can’t go much higher” or “The Trump Bubble has to pop soon and I want to get out of the way.”  We can’t argue with these sentiments because they are logical and sound; but are they feelings to which we must respond and react? No doubt a correction is inevitable. It’s just that no once can predict with certainty when, from what level and how deep. A 5% correction from Friday’s 2378.25 close may come next week or a 30% correction could begin at S&P 2600 sometime this coming winter. Your guess is as good as the next guys.

What we can say with some certainty is that while the causes that bringing on the next correction will be different from previous ones, it will evolve pretty much the same as did those earlier ones. Everyone won’t jump off this speeding market train at the same time.  As a matter of fact, market sentiment may be in the process of changing from bullish to bearish even now. What we will be able to observe, however, is how slowly changing sentiment of the majority of investors reflects itself in the prices they are will to pay or forced to accept in their trades.

We have a couple of tools to help us deal with our collective xenophobia about the coming correction. For one, there’s our Market Momentum Meter which indicates the intensity of sentiment changes as measured by the rate and degree of price changes from historical trends. The second is that over a long stretch of history including 3 wars, 9 presidential administrations from both parties, many economic cycles including booms and busts …. through all that fundamental economic and political background noise, the market has inexorably rising at an average rate of 7.5% per year. During booms and bubbles it has contained by boundaries 45% above and below a trendline at the midpoint.

I’ve assembled a look back at the three prior corrections of this 8-year bull market. Granted, they all happened within the context of a soft economy back-stopped by the Fed’s Zero Interest, Quantitative Easing easy money policy so they could have been worse. But the next correction will happen within the context of an economy no on the mend, an administration, if they can get their act together, that promised tax, infrastructure, regulations reform programs and a Fed that continues finding ways to act constructively.

  • This is the 8-year Fed QE Bull Market that’s contained within the 7.5% Reversion to the Mean channel stretching back to 1939.  The purpose of including this is to show how long it took for each of the three previous corrections to evolve. S&P 500 - 2009-2017 Corrections
  • The 2010 correction:  Stocks got off to a good start in January but worries about European debt quickly deflated that early optimism. As the market got accustomed to these daily anxieties, and Greece managed to crawl out of its default hole, stocks started to crawl higher. On Aug. 27, Fed Chairman Ben Bernanke’s mere hint of another stimulus put stocks on an upward trajectory for the rest of the year. But let’s not forget May 6, when the “Flash Crash” shaved 10% of the Index in a matter of minutes only to have it recover by day’s end.
    S&P 500 - 2010 Correction
  • The 2011 correction:  From up 8% to down 12%, stocks finished 2011 with an annual change of 0.003%…about as flat as you can get. Investors are happy to put 2011 to bed.  From unrest in the Middle East due to the Arab Spring revolutions and Japan’s devastating earthquake to Europe’s worsening debt crisis to the ongoing bickering in Washington of the debt ceiling, stocks experienced some violent swings.
    S&P 500 - 2011 Correction
  • The 2015 correction: The year started with what we called the “Big Squeeze” as the market fluctuated in a narrow band and failing to breakout to new highs several times and instead plunged more than 10% in a week in late August on a wave of selling triggered by fears that China’s economic slowdown was turning out to be worse than feared.  Perhaps not coincidentally, the stall at the Big Squeeze was just below the intersection of two significant resistance trendline: the midpoint of the Reversion to the Mean channel and the top of the 2009 Fed bull market channel.A strong recovery after retesting the August lows failed again to penetrate the earlier ceiling as fears about China resurfaced causing markets to tumble again in January. We anticipated the big 30% corrections coming out of what appeared to be an emerging head-and-shoulders reversal top (with the Big Squeeze being the head) throughout the year. But the Fed again stepped in and prevented it from happening. The Meter returned to Bullish Green in April 2016.
    S&P 500 - 2015 Correction
  • Current: Which brings us up to date. The previous corrections took more than 4 months to emerge so, when the next correction comes it, too, should not begin with a sharp downdraft but a few months of fluctuations within a narrow trading range. The Meter has been unwaveringly Green since April 26,2016. It will take some time and sideways motion for the Meter to turn to yellow and red this time too. Our imaginary “ceiling” of the midpoint trendline is only 4% higher than Friday’s close.  But it’s only a benchmark and there’s no guarantee that it will stop the market euphoria that seems to be bubbling up.
    S&P 500 - 20170317

Bottom line, all this talk about selling everything in anticipation of a correction that clearly is coming, at some time and at some point in the future is premature. We can be cautious, worry and even be anxious but we don’t yet need to act.

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February 10th, 2017

Subscribers Alerted to the New Bull Market

I’m sorry for those of you who aren’t subscribers.  On August 7, 2016…..before the elections, and way before the “Trump bump” was launched……my subscribers were alerted to the fact that the market appeared to be building a head of steam and getting ready to melt up.

On the previous Friday, August 5, the S&P 500 closed at 2182.87. Since then, the market has advanced above 2300, or 5.9% higher. Furthermore, as explained in that report, we envisioned an interim target of 2450, or an advance of 12.2%, for some time in 2017. We began assembling a balanced portfolio of over 50 stocks since then that, almost unanimously, have performed as well or better than the average S&P 500 stock.

But  the only thing you can be sure of is that circumstances continually change. To not be caught off guard, subscribe to the Stock Chartist newsletter.


Heating Up On the Way To A Bubble Melt-up?

Because I’ve been looking down for so long that it feels uncomfortable to lift my head and start looking up.  The market isn’t yet shouting but has begun whispering that something has changed, something both fundamental and technical, action that’s been confirmed by a Perfectly Bullish alignment in the Momentum Meter’s moving averages.  Rather than being rebuffed at the 2175 level, a favorable jobs report Friday morning helped push the average to a new all-time high close of 2182.87.  The change could be as simple as investors no longer viewing “good news as bad” (since it gives the Fed room to raise rates) but instead “good news as good” (since it means strength in the economy and possibility of resumed sales and earnings growth).

S&P 500 - 20160805 ST

Rather than looking backwards for the correction that has yet to materialize, it may be possible that the market is warming up and heading towards the long-awaited melt-up.  What sort of technical obstacles or resistance levels might there as the market advances further into uncharted, all-time new highs territory?  About the only clues are in the “reversion to the mean” trendlines:

S&P 500 - 20160805 LT

The orange trendlines (solid for outer boundary and dotted for the mid-point) in the above chart ascend at approximately 7.5% and have contained all the market’s movement since 1939 through two Secular Bear Markets (1970′s and 2000′s), four wars (WWII, Korean, Viet Name and Middle-East Wars) and countless political and economic upheavals, domestic and international.  So they are “reliable precedent” indicating the possibility that the market’s next move could actually be an assault on the mid-point trendline at around 2450 in the S&P 500 Index, or 12% above Friday’s close?

Without getting carried away and turning euphoric, there are many rationales about why a move of this magnitude is possible, the primary of which is that the world is awash in cash looking for a place to be invested.  Before there’s general inflation of hard assets and wages there could well be an acceleration in financial asset inflation:

    • According to Moody’s, five companies, ( Apple, Microsoft, Google, Cisco and Oracle) were sitting on $504 billion, or 30%, of the $1.7 trillion in cash and cash equivalents held by U.S. non-financial companies in 2015, most of which was overseas to avoid taxes.  Both political campaigns may propose tax incentives for repatriating and investing the cash.

Corporate Cash Holdings

  • Institutional investors have been sidestepping equities and investing in fixed income instead.  With interest rates on the verge of moving higher and equities continuing to advance, they will begin rebalancing in favor of equities.
  • Foreigners continue to look at US equities as a safe haven.
  • Mergers, corporate buybacks and a dearth of IPOs have all contributed to a stock shortage just when demand is beginning to increase.

So rather than fighting it, we have to face “reality” and embrace it:

Reversion to Mean - lt

The market could be heading up the mid-point trendline and, if a bubble melt-up in equities does materialize, head all the way up to the upper boundary above 3500 in the next year or so.

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