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  • Market Update 12/26 New Highs - Energy Earnings And Their Impact.

    The Dow 30 , Dow Transports ,SPX, RUT all recorded new closing highs this past week, indicating strength and breadth across the board. Its more impressive when we factor in how the energy complex has been a drag on the indexes . Added to that we experienced a Blip in the biotech complex this week as well. Sector rotation has served the indexes well and confounded the naysayers who are quick to point out any weakness in any sector as THE Achilles heel of the market. That wrong footed approach continued throughout 2014 as many called 'THE" top no less than 5 times (as shown by the chart below) during the year. Anyone following that advice has been fooled repeatedly.

    One other very important factor - ALL of this is being accomplished without any bells, whistles or fanfare. Honestly from where I sit, all of this was met with a big yawn. Anyone participating in the equity market believing that there is rampant euphoria needs to step aside and rethink their entire strategy -- I have not wavered in my bullish stance on the equity market since the start of the secular bull market.

    Last week I cited the back to back 90% upside volumes days which are not only rare but powerful signals of future performance. Also of note from those days; on Wednesday (12/17) , advancing volume was 17 times greater than declining volume. This is a 'major accumulation day' (MAD) and indicates very strong buying interest. In the past two years, the only other MADs were at the SPX lows in January 2013 and October 2013. Both of these initiated long moves higher in SPX. I wouldn't dismiss this positive action as "year end window dressing", and would add this type of strength doesn't disappear overnight.

    Yet another Dow Theory Buy signal was recorded as the Dow Transports confirmed the Dow 30 high that was achieved earlier in the week.

    Now before anyone extrapolates this news as a reason to go all in here at record levels, I'll simply remind them of a few facts that have played out since this secular bull story began. Please, take note of the green arrows in the chart presented earlier. Its the same chart I have used this entire year and its clear that after new highs are recorded a period of consolidation and reversion to the "mean" takes place in each instance.. One reason I see no reason to chase", but rather be patient and wait for your "watch list" selections to come back to you with better entry points. This move could melt up to take us to the 2100 level , or more , who knows , but I also respect the fact that the relative strength are showing signs of being overbought .. All of this relates to the short term, IF you are a LT investor sit back and enjoy.

    The Dow Theory Buy signals simply forecasts an "all clear" if you will and reminds us at it has in the past that we have not seen THE top here.. Simply stated the equity market will be higher down the road than it is today. The multiple Dow Theory signals that have been given since the inception of this secular bull market have set the backdrop for investors. The long term trend is still intact and keeping that in mind as we go forward will help in making decisions when faced with any adversity in 2015. We surely may see plenty of volatility next year and moves to the downside will be part of that volatility.

    One of the most important "takeaways" in this recent show of strength and breadth is the rebound in the Russell 2000. I mentioned throughout the year that those forecasting the RUT would take the other averages and the entire market down were completely wrong. The Russell had a huge move in 2013 (over 30% gain) and it was just consolidating that move as it remained in a trading range until this week with a break to the upside. A very healthy situation in a bull market. Now the cry is "look how the Russell has underperformed". Those with an ill fated approach always seem to find new ways

    Now the cry is "look how the Russell has underperformed" in 2014 . I'm ever ceased to be amazed to watch those with an ill fated approach find new ways to detract from the market to make their case.

    Those bearish cries highlight how wrong the entire story bear story has been throughout this secular bull market. With this latest set of new highs the bears now want to throw "sentiment" around as being an issue that is a "boogeyman" ..

    I'll remind everyone of these other warnings that were going to take the market down. ----, "margin debt is at all time highs" "everyone is piling into equities , there is "no one left to buy just look at the bullish surveys", and on and on ..

    Yep that surely must be an issue ---- However, there is only one problem with those words. They were stated at the end of 2012 and ALL throughout 2013 and 2014. Maybe its time to find another theory .

    3rd Q GDP highest in 11 years

    A revised 3rd Q GDP report is suggesting an impressive run for growth, However I'll note there's no foregone conclusion it can be sustained, especially with tempered readings for a variety of leading indicators relative to their pace in Q2 and Q3. Two-thirds of that revision was due to stronger consumer spending. Taking a broader view, GDP growth in the last two quarters was eye-popping, but (combined with the -2.1% pace recorded for 1Q14) it averages to a 2.4% annual rate in the first three quarters of 2014.

    That said, momentum is clearly on the side of growth, and the consumer is leading as upward consumption revisions accounted for two-thirds of the total upward revision.

    Let's note that two tailwinds for this report (health care services and federal spending) should recede somewhat. So, i do not expect 5% growth to continue. That said, consumers were out and spending long before the best of the tailwind from lower gas prices kicked in, and fixed investment is still a mixed picture. While oil and gas-related industries should slash capex, I have stated before and continue to believe we can expect some replacement as other industries see higher consumer demand. Further, housing is making no contribution, and any acceleration in demand for housing investment would be a further positive.

    The fly in the ointment ;

    (Yes we do need something for the wall of worry)

    The same concern I have mentioned in earlier blog posts and continue to be focused on -- the anticipated decline in Energy sector earnings. And their overall impact on The S & P..

    The recent reports on this topic should not be dismissed lightly and their impact on the S & P 500 as a whole will surely have to be reckoned with. Surely stabilizing crude oil prices will go a long way in calming any fears that this could snowball into something bigger , causing the market to pause, and well-- get ugly.

    So for me , one day and data point at a time..

    From the always reliable Thomson Reuters ;

    Energy Sector Earnings Estimates Took Another Hammering This Week

    Per Thomson Reuter's This Week in Earnings, the forward 4-quarter earnings estimate for the SP 500 fell $0.89 this week to $123.48, versus last week's $124.37.

    The p.e ratio on the forward estimate is 16.7(x).

    The PEG ratio is now 2.94(x).

    The earnings yield on the SP 500 is now below 6% for the first time since late 2004, early 2005, ending the week at 5.96%. The "earnings yield" is a obviously a function of the dollar earnings estimate on the SP 500 divided by the SP 500's price. Still the earnings yield is at an extreme we haven't seen in many years. I'll qualify the extreme measure by saying that the decline in the Energy sector's expected earnings is probably having an undue depressing impact on SP 500 earnings in general, but at the same I will note for readers that it will be important to watch the earnings yield when q4 '14 earnings start getting reported in January '15.

    For full-year 2015, as of Friday, December 19th, Energy sector growth is now expected at -20.4%, versus -13.7% as of December 12th, for an additional decline of 670 bp just this week alone.

    The other aspect to the earnings hammering within the Energy sector is that the out quarters are now seeing sharp downward estimates.

    In terms of easier Energy comp's, the q4 '15 expected Energy growth estimates and trends will tell us much as we roll through the first quarter of 2015's earnings.

    There is some good news on the earnings front as I also anticipated lower energy costs will help other sectors.

    Health Care expected earnings growth for q4 '14, rose between this week and last from 17.5% to 17.6%.

    Technology expected earnings growth for q4 '14 rose between this week and last from 8.7% to 8.9%.

    Utilities expected earnings growth for q4 '14 rose between this week and last from 9.9% to 11.2%.

    The crushing of the Energy sector's earnings growth is distorting the bigger picture within the SP 500. Take a look at the expected growth in the Financials, which has seen its full-year 2015 expected earnings growth increase this week from 17.5% to 17.6%. That increase doesn't add up to much but take a look at that 17% number as it far exceeds the earnings growth for the SP 500 as a whole of 8% - 10%.

    Stocks that I talked about during the past year , AAP, AAPL, CSCO, FFIV, GILD, INTC, FB, MU, MSFT, NXPI, NVDA, V, all posted 25% + gains this year..

    AND there were some major disappointments , especially in energy , however it should be noted that my three favorite E & P oil names CXO,PXD and CXO all garnered better than 40% gains before the rude crude oils shock hit those names. A lesson in discipline and managing risk, by taking some "off the table" or cashing out as they now sit well below those highs.

    From a recent blogpost ----

    as we have seen before the CHALLENGE will be to determine if the worries that are presented to investors are "real" or just another conjured up naysayer theory.

    Going forward it will be about earnings, price action and avoiding the "noise"

    It is what it is until it becomes what you make it !

    Best of Luck to all !!

    Disclosure: The author is long AAP, AAPL, CSCO, FFIV, GILD, INTC, FB, MU, MSFT, NXPI, NVDA, V.

    Additional disclosure: I am long numerous equity positions - all of which can be seen here on my SA Instablog. It is my intention to present an introduction to these securities and state my intent and position. It should be used as a 'Starting Point' to conduct your own Due Diligence before making any investment decision.

    Dec 27 5:11 PM | Link | Comment!
  • My Thoughts On The Outlook For 2015

    I see a few key "themes" when I start to look at what 2015 can bring.

    • What is going on in the rest of the world
    • The impact of what is "expected" to be a sustained decline in energy prices
    • The initial steps in the normalization of monetary policy
    • The political scene in Washington, D.C.

    As we close out the year, geopolitical tensions are still there, simmering on the back burner - and could surely boil over in 2015. Perhaps a bigger concern to anyone investing in U.S equities are the economies of Europe and China, which at the moment remain weak.

    Where are we now: Europe's crisis has entered a new phase. The euro area is facing a threat of deflation and an extended period of stagnation.

    The European Central Bank is expected to fight that with more aggressive policies. China's economy is still dependent on exports, so European weakness isn't going to help. China has yet to develop sustainable domestic demand.

    Looking ahead to 2015, one of the "key " uncertainties is how and where crude oil will trade. After a sharp drop in the final months of 2014, most expect a new equilibrium in the months ahead - but where exactly? The answer matters a lot. The impact of lower oil prices on the consumer depends on how far prices decline and how long they stay low. The drop is a function of increased supply and decreased demand. However, lower prices will discourage new supply and encourage consumption, a combination which should eventually lead prices back up. The path of oil prices will have a significant impact on the economic outlook in 2015. I do believe that Crude Oil will stabilize, but stay under the $70- $75 level during the entire new year. This will create a positive environment for consumer discretionary stocks.

    Oil and gas exploration and production has been a rapidly growing area of the economy in recent years. As we saw with Texas in the 1980s, a sustained decline in oil prices will likely have a devastating impact on some parts of the country. However, the energy sector is a small portion of the overall economy. Capital spending in the industry is currently about 7% of business fixed investment or 0.9% of GDP. Employment in the industry is a mere 0.15% of total nonfarm payrolls (roughly the number of jobs added per month in 2014). I can envision lower energy costs boosting other sectors to gains to offset the expected loss from energy components in the U.S. and therefore sustain a decent level of GDP.

    The drop in gasoline prices will boost consumer purchasing power and reduce business costs. The impact on consumer spending depends on how low gasoline prices go, how long they stay low, and usually arrives with a lag of two or three months. I believe this positive is being minimized by those that are highlighting the negative picture on crude oil prices. And they are seemingly totally dismissing the positive impact on the bottom line of U S corporations as if it doesn't exist.

    As we now know the Fed gradually completed its Large-Scale Asset Purchase program (QE3) in 2014. The key question is when policymakers will start raising short-term interest rates. There is no clear consensus view at the Fed on when that will begin. There are plenty of observations and predictions regarding the Fed. What I do know is that being Fed obsessed will get you nowhere and that the Fed officials all agree on one thing - the decision to begin tightening policy will be data-dependent. In my view they have never wavered on that and it is not in question at all.

    The Fed is focused primarily on the U.S., but it also has to pay attention to what's going on in the rest of the world. That means anticipating the impact of overseas developments on the U.S. economy and financial markets. At this point, global growth is expected to be a bit soft in 2015, but the risks have been weighted to the downside. Yet, the amount of leverage in the global system is nowhere near where it was at the start of the financial crisis. That suggests that the downside risk to the financial system may be limited. In my view that includes the energy "contagion" risk that many are warning about. From what I have seen the financial risks associated with any issues involving energy company "debt"entirely manageable. Although we shouldn't be surprised to see a negative market reaction if there are defaults from 'marginal', over leveraged energy companies.

    Investors need not fear the Fed. While there are always dangers that policymakers will move too early or too late, the first rate hike should be seen as a natural consequence of an improving economy. I have maintained all along, and continue to say that the Fed is expected to tighten policy gradually once they start.

    Cheap oil is a huge tailwind for China, India and Europe. China was supposed to crash in the past few years. Guess what? It did. The Shanghai Composite is essentially flat for the past 5 years, while the Chinese economy grew at 7-8% annually. The Chinese GDP has almost doubled for the past 5 years, while their stock market has been a dud. Things started to stir up in late 2014 and we will probably see The Shanghai Composite catching up and continuing to outperform in 2015.

    Biotechs will continue to be in the spotlight. IBB has been overdue for a big pullback for quite some time, but it could easily go a lot higher. The biotech ETF IBB is up more than 200% for the past 3 years. The last time a major sector tripled in such period of time was in the mid to late 90s with technology. Do you know what happened after that? The Nasdaq Composite doubled again before it crashed. Maybe, we will see something similar in biotechs. We will probably see a substantial pullback right before tax deadline in April as people sell their big biotech winners to pay uncle Sam. If that develops use that as an opportunity to research names in the sector and initiate positions.

    2014 gave us 5 pullbacks in the S & P, all seemed to be gut wrenching to the average investor as many forget what a good correction is all about. The retail investor hasn't seen a 20% decline since 2011. Each one of those pullbacks brought more bearish rhetoric that the bull market was at an end, the "TOP has been put in " cries were everywhere. Remember how the AliBABA IPO signaled THE top. OR, how Ebola was going to destroy global growth. We have seen plenty of these "folly scenarios" like that since this bull market run, all creating opportunity. Honestly, sometimes the sheer "noise" that is thrown around makes one wonder how some of these naysayers have the ability to balance their checkbooks. I surely wouldn't let any of them near mine.

    I believe 2015 will truly be a year where investors will have to be nimble. To that end, my strategy going forward ---

    • Other than my core holdings, and anything I may add to them, I won't "marry" a position for any length of time unless there are extraordinary circumstances.
    • I expect to utilize my call writing strategy (which to date has outpaced any and all market averages in the last 2 yrs.) quite a bit more.
    • Keep my cash allocation higher than I have in the past, as I look to take advantage of quick volatile corrections in both the market in general or an individual name.

    Instead, I will take my "shots" by adding intermediate term positions in the names I continue to mention here. Attempt to harvest gains and then move on. In summary -- "take what the market gives me"

    My view on the first part of the year is rather simple-- if the market strength carries the S & P and other averages to highs until the end of the year, the market will once again be extremely overbought. Given that set-up, I expect to see the first Q as challenging given the possibility of an overbought market, meeting up with any one of the numerous worries that are out there. In addition, as stated here and elsewhere on SA, I too have a concern of what may ensue once the money managers stop "chasing" here in December.

    But 2015 won't be different from the past, as we have seen before the CHALLENGE will be to determine if the worries that are presented to investors are "real" or just another conjured up naysayer theory.

    I'll remind everyone that we had a very weak and sloppy first Q last year when many pundits were telling anyone who would listen that the bull run was in fact over!! I'll also suggest that all go back to some of the commentary in February to see how those panic scenarios didn't materialize.

    For me, it will be about watching to see what develops and just like we have witnessed since the inception of this secular bull market, I will attempt to weed out the "spin", "rhetoric" and the "panic du jour" moments and concentrate on what the price action of the market and corporate earnings are saying. Now on that note, a cautionary statement -- watch the effect of the Energy sector earnings on the overall S & P 500.

    IMO, investors should be watching what impact energy sector earnings will have on the S & P total earnings picture. As that could bring about a reset of expectations on earnings growth and re-price the S & P in '15.

    In keeping with what I see as more volatility both up and down, I note that the absolute best time to put on long-term positions is after the market averages are down >10% and select stocks start to break out to new 52-week highs from proper bases.

    I'll be putting together a list of stocks I am watching as possible investments for 2015. At present I am watching the "technicals" waiting to decide on entry prices.

    In the meantime the "Dogs of the Dow: and the "January Effect" lists are what I am interested in at the moment. I believe they offer a great place to research names to take positions for the New Year.

    While it is nice to take a stab at defining what 2015 may be like for the markets , the bottom line is the 2015 economic outlook will evolve over time as the key issues, oil prices, the job market, and the global economy, become clearer.

    I'll close with Words of Wisdom form Josh Brown, CEO Ritholtz Wealth Management

    What investment success looks like to me is not being happy with a portfolio every day, but being happy with the long-range outcomes that truly matter - the accomplishment of life and financial goals.

    Best Wishes to all for a Prosperous New Year!

    Dec 21 1:18 PM | Link | 4 Comments
  • Market Update 12/22 - From Overbought To Oversold And Now......

    Talk about volatility..... Last week I was speaking to the overbought situation in the S & P that I felt was in need of being resolved.. as I presented this chart

    and wrote the following

    However, its simple, the S & P was and is overbought as stated here the last 2 weeks, so it should not come as any surprise that the market now has experienced weakness. So I believe this initial drop is well within the "normal" pattern we have seen before and suggest it may have more time to play out.

    Now just how far this weakness goes could depend on the unrelenting "fear" that is out there concerning the oil market "contagion".

    My commentary on Dec 17th

    The oversold condition I mentioned yesterday in the S & P when the rel. str. sat at lows last seen on Oct 15th , seems to be in the process of reverting to the mean.. Same with the VIX after spiking @ 25 yesterday it too seems ready to put its tail between its legs and head back down to the lower teens..
    This pattern has played out for quite some time and I would be surprised if it did not play out again.. crude oil "may" be a "key" here If this pattern doesn't act as it has in the past that could be a clear sign of trouble ahead.

    We'll see, but I'm guessing that it will indeed play out ---S & P up/ VIX down ..

    Fast forward to the chart below and we surely did see more fear. In just one short week the S & P not only corrected that overbought situation , but landed in oversold territory as all of my relative strength indicators fell to levels we experienced on Oct 15th.. Coincidentally that was a short term bottom that led to a very strong rally. And the result this time was more of the same.

    Now this recent weeks action brings me to another point I last made back in January 2013 when we last had Back to back 90% upside days. And January 13th was in fact the last time this occurred until this past Wednesday and Thursday.

    Recall that 90% Upside Days are when 90% of total points traded, as well as total volume traded, come in at better than 90% on the upside. These back-to-back 90% upside volume days are pretty rare events.

    From Sentiment Trader -- 'The performance of the stock market following that about one month later is higher 83% of the time, and three months later has been higher 100% of the time'."

    These strong moves volatile moves are indicative of the underlying currents of the market, and shouldn't be dismissed as technical jargon.

    Why the change in sentiment in one short week? Perhaps the market is now looking at some of the positives instead of following the "contagion" script that led to the weakness.

    The stimulus from a nearly $50 plunge in oil should give the global economy a boost in 2015.

    • Lower oil and gasoline clearly are lifting consumers' spirits.

    This morning's initial read of December sentiment surged far above expectations to its highest level since January 2007 (!).

    • The elves are out shopping --November retail sales rose much more than expected at both the headline and core levels, and October was revised up as well. Beyond gasoline, which fell on plunging prices, the gains were broad-based and suggest the pass-through from lower gasoline prices is well underway. Cornerstone Macro puts Q4 real retail sales on track to increase at a 4.8% annualized rate, with a bias for an upside surprise. This is very bullish.
    • It also is buying the Fed more time, if it so chooses, by assuring already low global inflation likely will continue to surprise to the downside.
    • Small business optimism breaks out Driven by a 4-year high in the percentage of firms expecting the economy to improve, the monthly gauge hit a post-recession high in November, bringing it in line with its historic average. Following December's stronger-than-expected increase in payrolls, Manpower's strongest quarterly outlook for jobs in seven years and a monthly JOLTS report that was indicative of diminishing labor-market slack, the NFIB survey suggests continuing job gains heading into the New Year. Pay may be better too, as an increasing number of small businesses said they are raising compensation, a missing ingredient during much of this recovery.

    Meanwhile, as we approach the end of 2014, corporate profitability has moved ever higher and earnings are on pace to grow a little over 10%, explaining nearly all of the change in the S&P this year as multiples are essentially flat versus the end of 2013. Stronger growth, a stronger consumer, continued low inflation and interest rates, and P/E multiples in the mid-range of historical averages. Those aren't the signs of a looming recession that the naysayers are warning of.

    I have one caveat to those positive comments in that last paragraph, and that is quantifying just now much the energy sector will hurt S & P 500 earnings as we enter 2015. That is something that needs to be reckoned with.

    For sure another factor in this quick reversal of sentiment is what I have mentioned before. Money managers trailing the "averages" saw this as a huge chance to give their portfolios a lift and position themselves for the start of 2015. The S & P just went thru what I believe was the final dip as we approach year-end due to continued oil weakness. Many were mesmerized by the crude oil contagion talk. That theme was quickly extrapolated to somebody, somewhere, going belly-up and possibly provoking a mini-financial crisis of some kind. Of course there will be fallout from this quick steep drop in oil, BUT

    Given all the balance-sheet rebuilding and regulatory scrutiny of the past six years, I don't foresee such a crisis to be systemic or long term in nature, but it could give the markets one last leg down, sometime down the road before heading higher. Investors with a Longer term horizon should consider adding during periods of lower prices, using whatever further correction may occur to complete their buying programs.

    Long term investors need to stay the course as the Long term trend is still decidedly up. Many of the indicators I use are flashing "neutral", indicating to me that there may be enough energy left in this latest "up" move to take the major averages to new record highs.. We'll see how that plays out in the next two weeks.

    A quick peek ahead into next year and I am of the opinion that 2015 will truly be a year where investors will have to be nimble.. The "call writing" strategy that I use will be employed more than in the past. Other than my core holdings, and anything I may add to them, I do not expect to "marry" a position for any length of time unless there are extraordinary circumstances.

    Instead, take my shots with some of the names I continue to mention here. I still have a strong feeling that many of the energy names that have been discussed can make an investors year in short order. It will surely be interesting to look back next December to see if that was the case..

    For starters, I like the names on my "Dogs of the Dow" list , and stocks on the "January Effect" list look very appealing to take positions in for intermediate (2- 6 months) holdings into next year.

    Happy Holiday season to all -- Best of luck !!

    Dec 20 11:01 AM | Link | 4 Comments
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