Stocks Bounce After The Dalio Low

It was another wild week on Wall Street as A near term low was put in on Wednesday. The operative word is A, not THE, near term low. I’m calling last week’s low “The Dalio low” because legendary investor Ray Dalio went on TV last Wednesday (the exact low of the week) and said we might be headed for a depression. On Wednesday, the Dow turned higher after plunging 565 points intra-day and has been edging higher since. Interestingly, on September 29, 2015, Carl Icahn, released his doom and gloom video (I agree with his points) and that marked A near term low for stocks. Over the next five weeks, immediately after the video was released, the S&P 500 soared over 13%! That’s a huge move for the S&P 500. At this point, stocks are deeply oversold and way over due to bounce. Until Wednesday’s lows are breached we have to expect the market to bounce (or at the very least move sideways from here). Oil prices also placed A (not THE) new near term low last week which also helped sentiment. Central banks interfered again this week. China injected $50B to stimulate their market and the European Central Banks (ECB) hinted at more easy money in March. Central banks love interfering with markets and have distorted the playing field for years. Stepping back, any near term rallies (or more easy money aside), the market remains in lousy shape and we feel it is just a matter of time until the major indices fall 20% from their 2015 highs which officially defines a bear market. From our point of view, stocks topped out in 2015 and we are in the early innings of a new bear market (and a global recession). Several important areas of the market are already in a bear market (defined by a decline of 20% or more from a recent high) which means it is just a matter of time until the major indices play catch up to the downside. These are some of the important areas that are already in bear market territory: Commodities, The Small Cap Russell 2000 ($IWM), Transports ($IYT), Biotechs ($IBB), Retail ($XRT), Junk Bonds ($JNK), Materials ($XLB), just to name a few. Finally, if markets can’t bounce from here… Good Night Irene.   
Monday-Wednesday’s Action: Stocks Bounce After Dailo Low

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Stocks Mauled On Global Recession Fears

In our intra-week note we wrote, “Allow us to be clear, the major indices are in the process of topping out and barring some large unforeseen reversal to the upside – we are headed into a long overdue bear market for stocks (and possibly a global recession). A few of the major indices are now in correction territory (defined by a decline of 10% from a recent high) while several important sectors (transports, commodities, biotechs, just to name a few) are already in bear market territory. Thankfully, our defensive/cautious stance has been right on the money since last summer (for our newer members, we first turned cautious before the big crash in Aug 2015 and have been very selective since).” This was the weakest first week of a new year in Wall Street’s history. The popular indices were crushed this week with the small cap Russell 2000 breaking below last year’s low and it is now down 19% from its record high. Remember, the media defines a bear market as a decline of 20% or more from a recent high. Oil prices tumbled a whopping 10% last week and Chinese stocks continued to plunge which triggered fresh concerns about a slowing global economy. Meanwhile, several important sectors are already down over 20% from their highs such as the Transports (IYT), Biotechs (IBB), and Retail (XRT), just to name a few.
Monday-Wednesday’s Action: Sellers Shows Up With A Vengeance 
Stocks tanked on Monday after a new round of selling began in China. Overnight, Chinese stocks plunged a whopping 7% which triggered a worldwide sell-off. Stocks in China were halted after new circuit breakers were introduced. Monday was the first trading day for the month, quarter and year and the worst opening day for Wall Street since 1932! Stocks were relatively quiet on Tuesday as the market paused to digest Monday’s very sharp sell-off. Reuters reported that the People’s Bank of China (PBOC) injected nearly $20 billion into money markets to help calm markets. That was the largest cash injection since September 2015. This led people to be concerned that China’s central bank was interfering with markets again and using state banks to prop up the yuan at the same time. In the U.S., motor vehicle sales pointed toward a record year. Stocks tanked again on Wednesday as the selling continued to hit markets across the globe. Oil prices plunged over 5% and Gasoline futures plunged over 8% which illustrates how weak global demand is right now. On the economic front, the ADP said private employers in the U.S. added 257k new jobs in December, beating estimates for 190k. Factory orders slid by 0.2% in November matching Briefing.com’s consensus estimate. Finally, the ISM Service Index fell to 55.3 in December missing estimates for 56.4.

Stocks End 2015 Mixed to Mostly Lower

Stocks ended 2015 mixed to mostly lower. The S&P 500, Dow Jones Industrial Average, DJ Transports, Small Cap Russell 2000, Mid Cap S&P 400, NYSE Composite all closed in the red. Meanwhile, the Nasdaq composite and Nasdaq 100 ended 2015 higher. The move in the latter two indices was largely due to big moves in a very concentrated area of the market that continues to lead (for now). For the year, the big (deflationary) take-away was that the huge multi-year bear market continued for a slew of commodities. In fact, nearly every major commodity in the world except for Canola, Cocoa and Orange Juice futures ended the the red. That typically is not a healthy sign for other asset classes, like U.S stocks. Remember these are not one-off declines. Gold and silver have been falling since 2011, Oil is down for the second straight year. A slew of other commodities like: Soybeans, wheat, sugar etc are all down for several years and in steep bear markets. All this clearly shows you that demand is waning across the globe. Looking forward, the bullish argument for stocks is twofold: 1. Valuations remain fairly attractive: Bull markets rarely end when the P/E ratio for the S&P 500 is 19 (the last few bull markets ended when the P/E ratio was in the 20’s). 2. Easy Money continues from global central banks. So far, we have never seen a bull market end with the Fed keeping rates at 0.25% and other central banks printing billions of dollars everyday to “reflate” markets. That doesn’t mean the bull market can’t end now – just that we haven’t seen it happen before. On the other hand, the bears argue that the bull market is nearly 7 years old and the market is forming a large topping pattern as leadership dries up. Both factors are classic signs of late-stage toppy action. What does all this mean for you? A defensive stance is prudent until more cards come out of the deck. We remain flexible and will be prepared for either scenario to unfold. If the major indices breakout of their year-long trading ranges (S&P 500 2,134) then odds favor we head higher. Conversely, if we break down below Aug’s low (1867), odds favor we head lower. Until then, we have to expect this choppy action to continue.
Monday-Thursday’s Action: Final Week Of Year Is Quiet on Wall Street

Stocks Back To Break-Even For The Year

Stocks rallied sharply last week, led by beaten down areas (energy, materials, transports, etc) that bounced from deeply oversold levels. Not much changed last week as the same underlying conditions, we have outlined for you in recent months, continue to exist beneath the surface. The S&P 500 is back to breakeven for 2015 and the best trade of the year has been a counter-trend mean-reversion trade. Meaning, short the index when it is in positive territory and buy it when it dips into negative territory. This year has been an anomaly because most years we see the market trend (either up or down), rarely does it finish flat the year. The last time it was flat for the year was 2011 and that led to a strong rally 2013-2015. The big difference was that in 2011, the bull market was only two years old and it is turning 7 in March 2016. Clearly, we are very late in the game. That doesn’t mean the bull market has to end, just that odds favor we are getting closer to the inevitable end. The bullish argument is twofold: 1. Bull markets rarely end when the P/E ratio is 19 for the S&P 500 (the last few bull markets ended when the P/E ratio was in the 20’s) and 2. We have never seen a bull market end with the Fed keeping rates at 0.25%. That doesn’t mean the bull market can’t end now – just that we haven’t seen it happen before. On the other hand, the bears argue that the bull market is nearly 7 years old and the market is forming a large topping pattern as leadership dries up. Both factors are classic signs of late-stage toppy action. What does all this mean for us? We remain flexible and will be prepared for either scenario to unfold. If the major indices breakout of their year-long trading ranges (S&P 500 2,134) then odds favor we head higher. Conversely, if we break down below Aug’s low (1867), odds favor we head lower. Until then, we have to expect this choppy action to continue.
Monday-Thursday’s Action: Stocks Bounce From Deeply Oversold Levels