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  • Weekly Update For The S&P 500: Is It Time To 'Buy The Dip' Or 'Sell The Rally'?  [View article]
    While my energies are focused upon football, I do want to thank you for publishing a terribly informative article that must have involved considerable time and effort. As things stand, I think we are poised to continue lower until we see a fundamental change in the internals of the market and resolution of the many market divergences identified by Pension Partners. "The biggest divergences are between stocks and inflation expectations, small-caps and large-caps, emerging markets and developed equities, and finally commodity levels and bond yields." Lastly, the longer term direction of the market will be heavily influenced by both the dollar and commodity prices, particularly oil.
    Jan 17, 2016. 02:28 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Can Earnings Season Provide A Floor For Stocks?  [View article]
    Happy New Year Jeff and thanks for the time and effort to produce another great installment of WTWA.

    In recent comments we have talked about the ominous macro global backdrop and deteriorating internals of US equities as measured by new highs, new lows, percent of stocks trading above their 50 and DMA and related measures. As expected, the market gave in and we are now in the midst of a substantial correction that is global in scope. In discussing today's conditions, I'm inclined to think too many focus upon the little issues, while ignoring the herd of elephants in the room. The debt super cycle has likely ended and we should not be surprised if the third leg of the global financial crisis surfaces in China. Among advanced economies, demographics are generally unfavorable and, when combined with flagging productivity, we should expect lower secular growth. With China pivoting away from an investment led economy, it will weigh upon emerging markets and commodities, prove deflationary and result in lower trade in international goods and services. We are already seeing it. While I note the distinctions in your study of high yield debt, credit spreads continue to widen and will weigh upon capex and profits as in previous cycles. Further, the US profit cycle has likely peaked at a time of excess valuations and at a time earnings and revenues are rolling over and while wage gains are outstripping productivity gains. Profit margin pressure, sagging revenues and tightening credit conditions are toxic for US corporate profitability. The Fate of equities, credit risk and term premia could easily hinge upon the trajectory of the dollar and commodity prices. In the meantime, I would not be shocked to see the $SPX to fall to the 1700 to 1740 area area if it breaks through the low of 1820 set in October of 2014. Remember, the VIX is only at 27 while this past summer we saw it hit 52, suggesting no screaming fear or panic, yet.
    Jan 17, 2016. 09:49 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Are The Best Year-End Investments?  [View article]
    Correction: futures made a low of 1998.50, about 2001 in SPX terms
    Nov 22, 2015. 10:30 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: What Are The Best Year-End Investments?  [View article]
    Thanks Jeff for another timely installment of the WTWA.

    The major indices are up since we last talked but the skewed participation of stocks included in the rally continues and remains a source of concern. $NDX and COMPQ$ continue to lead with the number of stocks above their 200 DMA about 1 standard deviation BELOW the median. New highs are sitting on their mean.

    Because of overbought conditions, last week I suggested the market would dip to the 1990 to 2000 area before ascending a wall of worry until it hit 2080 on the back of seasonality and strength seen in the week of OPEX. Late Sunday and early Monday morning in futures trading the index tagged 1989.50 or about 1993 in SPX terms, which could easily be foreseen. What I did not foresee was the subsequent strength of the rally to 2098, thinking it would stop at 2080 where there is fierce resistance which is now support.

    Looking forward, we have a complex mosaic of market seasonality, momentum, market structure and history to sort through to divine direction. After a weekly gain of more than 3%, we should expect the market to give some back early in the week and surge on the day before Thanksgiving based upon well established seasonal patterns developed by Sentiment Trader.

    December is likely to be volatile because in recent history we have seen a 2% to 4% loss in one of the weeks in December with little to suggest in which week the slaughter will occur. I'm inclined to think it will in be the period following Thanksgiving up to some time between the 7th and the 14th at which time Santa and OPEX front running will take place and drive the market towards it closing levels for 2015. This rally will likely be fun and likely take us through the 18th, the day of OPEX.

    With the market neutral and operating in a zone of congestion, I have few "tells" to suggest the likely inflection points or the band of trading volatility but history might suggest the upper bounds to be between 2000 and 2010 and the lower bounds to be the 200 DMA extending down to 2050 where there hard resistance/support.

    Happy Holidays
    Nov 22, 2015. 10:12 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices?  [View article]
    Thanks Dig Deep and sorry about the sloppy syntax. And its no coincidence that commodities are collapsing at the same time many emerging markets and their respective currencies are following suit. While there are a number of differences, in certain respects this is redux of previous taper tantrums.
    Nov 15, 2015. 01:15 PM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: What Is The Message From Falling Commodity Prices?  [View article]
    Thanks Jeff for another installment of WTWA.

    While each commodity may have have its own story, each is affected by the stronger dollar which has been strengthening on the back of an expected rate hike. While the dollar had a so,so week, the trend is up.

    But I think the larger story is far more complex and includes volatility compression, deterioration in junk bonds, widening credit spreads, earnings disappointments, weaker than expected retail sales, renewed worry over the global economy and heavily skewed market participation.

    Prior to last wweek, the NDX had outperformed COMPQ; COMPQ had outperformed SPX; and SPX had outperformed SPXEW (equal weight SPX) while RUT lagged as did the S&P mid-caps. And within NDX, the larger of the large-caps were doing the heavy lifting with the top-five holdings all contributing heavily – AAPL , MS, GOOGL, AMZ and FB.

    In an unstable equilibrium with internals deteriorating, the broader market had to advance or the heavily tech weighted big caps had to correct. As the week unfolded, it was clear it was going to be the latter with COMPQ and NDX leading the way down along with energy and many cyclicals.

    The usual chorus of pundits assure us that this is simply a result of possibly divergent monetary policies and all will be well because of the health of the US economy.

    But this overlooks weakening trade, excessive inventory levels, earnings worries, valuations and credit spreads which have been distorted by excessively accomodative monetary policy, leaving spreads and too low and misppriced.
    Spreads, as with VIX, are likely suggesting a transitioning from a phase of complacency to a phase of cautiousness accompanied by higher volatility. Further there is a historical relationship between credit spreads and corporate earnings, reinforcing the concern over earnings.

    Under "Good Luck with That", how this plays out depends upon the fiendishly complex nexus of market forces but I'm inclined to believe there is room for further downside but expect an advance before seeing these lows, possibly the 50 DMA or lower. I'm thinking we will rally off 1990 to 2000 on the strength of seasonality and a possible announcement by the ECB of further QE, taking us to about 2080 where there is fierce resistance.
    Nov 15, 2015. 09:03 AM | 8 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will The Fed Put The Brakes On The Breakout?  [View article]
    I also wanted to share this piece which depicts a very messy relationship between the dollar and the federal funds rates:

    But this notwithstanding, I think a rate hike in the current environment of global easing would strengthen the dollar at the expense of exporters and emerging market currencies.

    But a hike would unlikely affect longer term US rates as they are increasingly correlated with bunds and other global debt instruments. And the massive savings glut in the world which, when intertwined with continued deleveraging and foreign purchases of treasuries, will keeps rates suppressed.
    Oct 25, 2015. 11:52 AM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Will The Fed Put The Brakes On The Breakout?  [View article]
    Thanks Jeff

    Odds of a rate increase appear very low at a time when the Atlanta Fed "Nowcast" for the third quarter is around 1%. Further many emerging markets remain fragile as a result of depressed commodity prices and any rate hike would simply place further strains on their currencies and increase the likelihood on default of piles of dollar denominated emergin market debt. Further, its not clear that the Fed has satisfied its dual mandate.

    While the Fed is always a story, I think the bigger story is earnings. In recent weeks, many expected the yoy decline in SPX earnings to be in the neighborhood of 5% but in the last week or so FactSet, as you note, has lowered its expected decline to 3.8% largely based on surprisingly higher than average earnings surprises (consumer staples) and exceptional earnings strength in the consumer discretionary and telecom services sectors.

    While revenues are coming in below expected levels, its clear as of this writing the "earnings malaise" is largely contained to energy, materials and, to a lesser extent, industrials. The latter is bearing the brunt of a stronger dollar, inventory shedding and reduced capital spending in the energy sector. Much of this can be seen in various Fed surveys and falling orders in the ISM survey but the inventory part of the mosaic should be self correcting and relieve one source of stress.

    With things where they are, many market analysts are pinning their hopes on consumer sectors to keep things going and its noteworthy that the market seems to agree. On Thursday the XLP put in a record closing high and on Friday and the XLY put in an intraday record, exceeding the last record by 10 cents.

    Under the "Good Luck with That", I think we face serious resistance from here on up in the S&P and would expect a pullback sometime next week (maybe tied to the Fed) that will take us below (possibly well below) the 200 DMA so the market can retest this level one more time as it is wont to do after spending more than 40 days below the 200 DMA which is a rare event. Along these lines, the paper Jeff cites studies the possible damage:

    Alternatively, a strong case can be made we are at or close to the top of a third wave and any correction ( wave 4) would provide the foundation for the last leg up which many, including the Elliot Wave Forecast, believe will take us to the 2120 area. Elevated put/call ratios, high holdings of cash among fund managers, reduced equity exposure as measured by NAAIM, underweight holdings of US equities as determined BOAML survey and seasonality could fuel the markets higher.

    Longer term, I think we have more than fair reason to be concerned about the global economy, waning corporate revenues and contracting profit margins. Although Laslo Byrini would be quick to remind us that "the correlation between earnings and price is less than acute. In the 1982-87 experience, the S&P 500’s earnings rose a paltry 6.26 per cent, or just 1 per cent a year, while the index gained 228 per cent."

    And that is precisely why Jeff frequently says " Good Luck with That".
    Oct 25, 2015. 09:35 AM | 2 Likes Like |Link to Comment
  • Weighing The Week Ahead: Earnings Recession? Will It Matter?  [View article]
    Jeff mentions McClellan in his discussion of the ZBTI and I believe they offer the best accounting of the record of the Zweig Breadth Thrust indicator:
    Oct 11, 2015. 11:10 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Earnings Recession? Will It Matter?  [View article]
    I thought earnings might underlie another great edition of WTWA. After all, its mother's milk and now being served.

    While overbought by several measures, the SPX could easily advance to the 2033 area where it will meet a confluence of resistance including structural resistance, the 61.8% Fibonacci retracement from the lows of August and the 150 and 200 DMA. I expect a pullback.

    How much it pulls back will largely be technical but the extent of the subsequent rebound is likely to be determined by both technical and fundamental considerations, including the macro global economic backdrop, inter-market relationships, earnings and valuations. The hypothesized rebound could play out over months before there is a resolution.

    With respect to the macro global economy, its notable that the IMF, the Brookings Institute and Fulcrum have all recently lowered their estimates for global growth for 2015. Trendline growth is seen at 3.2% and Fulcrum lowered their estimate to 2.6% from 3.0% largely because of below trend growth in emerging markets stemming from the commodity "shock" brought on by fundamental changes in China.

    Longer term, demographics, excess capacity, excess savings and continued fallout from the global debt super cycle could weigh upon global growth and depress inflation.

    In the US the Atlanta Fed Nowcast sees growth of 1.1% in the third quarter largely as a result of needed inventory shedding and sluggish exports. I believe recent weakness in manufacturing is a reflection of both of these developments and inventories should be self correcting but exports could be constrained for some time as their fate is tied to both dollar strength and global growth.

    As to earnings, third quarter earnings are already being released and as you note FactSet is looking for a 5.5% yoy decline but cautions companies could beat analyst estimates. "And revenues are expected decline for Q3 2015 by -3.3%. If this is the final revenue decline for the quarter, it will mark the first time the index has seen three consecutive quarters of year-over-year revenue declines since Q1 2009 through Q3 2009."

    Obviously, the market is aware of these prospective developments and is likely awaiting further insight as to whether damage from the stronger dollar and slowing global growth will extend beyond materials, industrials and energy. These sectors account for close to 20% of the market capitalization of the S&P 500 and wider deterioration outside of these sectors would not be constructive and lead to renewed selling.

    Separately, spreads in investment-grade corporate bonds are on track to increase for the second year in a row, according to Barclay's data. That would be the first time since the financial crisis in 2007 and 2008 that spreads widened in two consecutive years. The previous times were in 1997 and 1998, as a financial crisis roiled Asian countries, and a few years before the dot-com bubble burst in the U.S.

    I think it's fair to say the rosy expectations of earlier this year that underpinned the outlook for the US stock market — solid economic growth supporting the start of interest rate rises have not panned out. Instead, pessimism over the global economy, emerging markets and how a stronger dollar has tightened US financial conditions and hit foreign sales of S&P 500 companies.

    Lastly, Mohamad El Erian believes "markets and the global economy are moving closer to an inflection point: Either the growing global economic malaise, accentuated by a structural increase in financial market volatility, will be a wake-up call to policy makers, or the global economy will slip deeper into a self-reinforcing malaise, making it very hard for the central bank to contain financial volatility."
    Oct 11, 2015. 10:21 AM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Global Weakness Drag Down The U.S. Economy?  [View article]
    Thanks Jeff for offering valuable insight in a very challenging environment.

    Because everyone now foresees a retest of recent lows, I'm less inclined to believe there will be one though it cannot be ruled out.

    If it happens, though, it is likely to take place next week or the following week owing to seasonality factors and take us to around 1840. The last two corrections were resolved in the first half of October.

    Once we work our way out of this correction brought on by sudden moves in China, exaggerated fears of a hard land landing and the collapse of emerging market currencies, then what?

    With global growth slowing, the US economy confined to 1.5 to 2.5% growth and a strengthening dollar, corporate profits are likely continue to be challenged. Weakness in sales, margins and earnings will likely persist notwithstanding ebullient forecasts up by analysts for next year.

    There is simply no foundation for this optimism in light of the discussion above and persistent deflation which will further weigh upon profits. Additionally, the credit markets continue to flash caution.

    In response to all of the above, the market may enjoy a brief bounce once the current correction is resolved but then adjust to the reality that the cyclical, if not secular, outlook for profits has changed.

    It is at this point valuations, earnings and growth prospects will be re calibrated and during this process we could see deeper lows (possibly) followed by historically modest gains and/or a frustrating trading range.

    Lastly, I found it interesting that Harvard is ditching its traditional approach of assessing the likely risk and return of each separate asset class and instead focusing on five key factors: the outlook for global equities, US Treasuries, currencies, inflation and high-yield credit.

    They are clearly looking at the big picture and also looking for managers who are nimble and know how to short the market.
    Sep 27, 2015. 02:53 PM | 4 Likes Like |Link to Comment
  • Weighing The Week Ahead: Has The Fed Assumed A Third Mandate?  [View article]
    I would politely disagree and point you to a brief article by Larry Summers who sees the data quite clearly:

    "Data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressures. Employment growth appears to have slowed down, commodity prices have fallen further, and the general data flow has been on the soft side. Comprehensive measures of data surprises, such as the Bloomberg Economic Surprise Index, bear out this impression and the Atlanta Fed’s GDP Now model is currently predicting only 1.5% growth in Q3."
    Sep 20, 2015. 04:49 PM | 1 Like Like |Link to Comment
  • Weighing The Week Ahead: Has The Fed Assumed A Third Mandate?  [View article]
    Thank Jeff for another great installment of WTWA.

    Yellen's decision to pass on a rate hike is an admission there are potentially serious macro global headwinds stemming from the slowdown in China and inter linkages with emerging markets. They hold $3 trillion or so in dollar denominated debt which becomes increasingly difficult to service with EM currencies in a free fall.

    Because of this and the strengthening dollar, close to 13% (gross exports) of our economy is exposed to contraction contagion although some of this should be offset by lower oil prices. And the Fed statement tied international weakness into US economic performance when they noted exports were “soft.

    Yellen also mentioned improving manufacturing utilization but did not mention we remain below the highs of 79% of last November.

    In addition to the above and reduced rail loadings, the ratio of inventory to sales has crept up to 1.36 against the backdrop of uncertain retail sales. Should this continue to increase, a classic inventory correction could destabilize the economy.

    If QE was to stimulate demand through increasing the value of financial assets, then recent stock-market corrections could easily reduce demand and amount to financial tightening at a time when consumer confidence seems to be peaking in a narrow channel.

    And if you dig deeper into the unemployment figures there's a bit more slack than the headline rate suggests. Around 9 million workers have left the labor market since October of 2009, making it easier to realize declines in the unemployment rate. Manufacturing employment fell.

    And when you look at the ratio of coincident to lagging indicators it raises serious questions.

    Lastly, we have possibly entered a period of secular stagnation heavily impacted by lingering debt overhangs, persistent demographic shifts in savings preferences, global wage arbitrage, falling productivity and stagnating capital spending, which are powerful and long lasting, and likely to color our economic outlook for many years to come.
    Sep 20, 2015. 10:07 AM | 6 Likes Like |Link to Comment
  • Weighing The Week Ahead: To Hike, Or Not To Hike?  [View article]
    Jeff, you and Felix made a great call last week. I saw it early in the AM of the 7th while futures were trading.

    The internals of the market have improved, the VIX term structure is no longer inverted and there are many indications of the market remaining oversold. More strength than weakness.

    Most see the S&P trading in a converging triangle and the narrow trading range last week clearly suggests the market is waiting for the Fed decision and further insight into earnings.

    Though the macro global economic backdrop is weak, I would like to see a small rate hike to confirm strength rather than demurring and prolonging uncertainty. Such a policy move, though, would rattle emerging markets currencies and heighten the risk attending dollar denominated risk. To avoid this, the Fed is likely to stay the course.

    As to earnings, analysts expect CY 2015 to beat the prior year by 1 to 2% and then surge 17% in CY 2016. I do not see this nor does David Tepper, suggesting this correction could last longer than most expect. The folks at McClellan see the correction process continuing through September 2016.

    I still expect a lower low and increasingly the correction is taking on the personality and structure of the 1998 correction which was resolved through a lower low (13 pts) after tagging the 200 DMA.

    But who really knows?
    Sep 13, 2015. 01:19 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Revise The Year-End Market Targets?  [View article]
    Jeff, the S&P was officially launched in in 1957 but it is my understanding Standard and Poors used available data to reconstruct its starting date as 1950.
    Sep 7, 2015. 11:07 AM | Likes Like |Link to Comment