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.

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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.

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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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February 11th, 2016

Subscribers Alerted to Imminent Market Sell-off

For those of you who aren’t subscribers, I’m sorry for you.  I’ve been warning my subscribers since last summer about the major correction we’re now suffering through.

You’re skeptical?  Here’s the post sent to members on Sunday, August 16, 2015.  The market closed at 2091.54 the previous Friday and within 7 trading days, on Tuesday, August 25, it closed at 1867.61, or 10.7% lower.

The question now is “Are we close to the bottom?” and “Is this a opportunity to pick up stocks at a discount?”  For my answers to whether the correction has bottomed and other questions, why don’t you join the other lucky investors who subscriber to Stock Chartist.

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Next Chapter In Saga About to Begin

The longest novel, according to Wikipedia, was something called “Artamène ou le Grand Cyrus” written by Georges and/or Madeleine de Scudéry in 1649–53.  It was in 10 volumes, had 13,095 pages and 1,954,300 words.  Reading any long book takes patience and perseverance, about the same patience and perseverance demanded by the flat market we’ve had to work with over the last six month’s.

Even though the market is up 1.59% YTD, almost half of which resulted from last week’s 0.57% increase, I believe it’s the prelude of a “market reversal” that will begin soon after the Labor Day break and after everyone has returned from their summer vacations.  We’re about to open the next chapter in this correction saga (click image to enlarge).

 

S&P 500 - 20150814

 

I know this is beginning to sound like a broken record but there’s clearly been an erosion of bullish momentum.   We’ve can’t predict but what we are seeing is that the market is losing its bouyancy:

  • the lower boundary of the grand channel since the 2009 Crash bottom was broken in May,
  • pivoting channels emerged as the slope (small dashed lines) switched from ascending to horizontal (and looks now to on the verge of pivoting again to fully descending),
  • the 50- and 100-dma’s reversed their direction and are now descending,
  • the 50-dma has reversed alignment crossing under the 100-dma (average of past 50 days is now less than average of past 100 days).
  • Finally, adding to the weight of evidence, the 50- and 100-dma’s last week appeared to be acting as resistance obstacles preventing the market from checking its downward trend.

It seems to be so obvious to the naked eye that the market is losing steam that I can’t imaging anyone not seeing it and acting.  I can’t believe that every day that the market bounces on recovery, the CNBC or CNN Talking Heads are trotted out to give their “stock up on discounted stocks” spiel.  As quoted in a recent CNN Money article, for example:

  • “The U.S. is exhibiting tremendous resiliency and a lot of independence from the rest of the world,” said Seth Masters, chief investment officer at AllianceBernstein, and
  • “It leaves the U.S. looking attractive in relative terms. There’s a valuation premium on U.S. equities but perhaps that valuation is justified,” said David Lebovitz, head of the global market insights strategy team at JPMorgan Funds, and
  • “There’s every reason to believe this bull market continues. Unless you think we’re going to have a bear market soon — which we think is highly improbable — almost by definition the next move is higher” said Troy Gayeski, senior portfolio manager at SkyBridge Capital

We all know that charts reading is subjective but it’s incredible how there can be two so diametrically different interpretations of the same chart.  On the one hand there’s the my view of the chart we’ve been looking at for the past several months shown above.  Then there’s the following comment and chart from StockCharts.com:

“an inverse head-and-shoulders pattern could be taking shape since late May [in the SPY etf whose value is 1/10th of the S&P 500 Index]. With an overall uptrend, the inverse head-and-shoulders represents a consolidation within an uptrend and a bullish continuation pattern. A break above neckline resistance would confirm the pattern and target further gains. Typically, the height of the pattern (213 – 204 = 9) is added to the breakout for an upside target (213 + 9 = 222) [translated into a target of 2220 for the S&P 500 Index]…. The right shoulder looks like a falling wedge, which is typical for corrections after sharp advances. SPY surged from 204.5 to 213 in mid-July and then pulled back with a falling wedge the last few weeks. ”

StockCharts.com Inverse Head and Shoulders

 

An “inverted head-and-shoulders consolidation”?  A wedge after a sharp advance from 204.5 to 213?  Give me a break!  Both interpretations (the short-term StockCharts.com or the longer-term Stock-Chartist.com) can’t be right; one is going to be wrong.  “But that’s what makes a market.”  Obviously, we’re hoping we’re right.

The world economic fundamentals continue to deteriorate.  Oil and other commodities are falling stocking renewed fears of deflation.  And the Fed apparently may be “out of bullets” to fight it.  The Chinese currency revaluation put a scare in many central banks, the most significant of which are their neighbors in the Asian emerging economies, causing new fears of a currency war.  There are also rumblings again about Greece and its negative impact on the Euro and European economies.  Rather than their being a possible silver lining in these clouds, the next shoe to drop will more likely be a negative surprise.

We believe to be fortunate in having embarked on a conservative plan, taking “risk off” by liquidating positions to add to cash reserves and, selectively as conditions confirm our longer-term view, adding to our index short position.  When the “Death Cross” finally arrives [50-dma crossing under 200-dma], we’ll probably have wiped the Portfolio clean and add to the speculative Index short positions.

Only a few more trading days to suffer through and then, when the page is turned to a new chapter, the story could get really exciting.  At least I hope so because this has been an awfully boring book that I’m just about ready to give up on.

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