Here are the very factors supporting stock prices:
1. We have likely seen a massive wipeout of margin long positions here. I need new data to confirm.
2. We have blown up psychology with massive psychology at hand. (This is very )
3. We have a weakening dollar (this is )
4. We have very low interest rates (this is )
5. We have very low input costs ( oil and labor, this is )
6. We have a massive melt-down in biotech happening (this is )
7. We have a 25% corrections in place in the Nikkei and the DAX (this is )
8. Massive sentiment by major brokerage firms for 2016. (Last year they were all looking for an up-year of 10% on average and they were all wrong)
9. Terrible technical conditions (breadth, divergences, etc) - These work in contrary ways. Everyone sees them as negative. They are negative when people are selling to raise cash (which is ).
10. Very high corporate profit margins (very ).
11. Plenty of corporate cash on hand for mergers and acquisitions ( )
So the foundation of the market is very very constructive from many perspectives.
The negatives are:
1. Rapidly rising default risk around the world as ZIRP and NIRP takes hold.
2. Falling PMI's signal softening economic activity
3. Corporate Buybacks can't continue forever, especially with rising default risk
4. Rising rates to corporate borrowers (Rising yields on HYG , falling HYG prices)
5. China: Weakening outlook. Drawdowns in reserves to support an overvalued currency. $99 billion drop announced today to the lowest levels since 2012.
6. Jobs numbers in the US have massive adjustments which are hiding the worst numbers we have had in many years.
7. Demographic challenges means that US Growth will stay low (and steady) for two more decades. Read Harry Dent's books.
8. China's demographics are where Japan's were in the late 1980's and very long term.
Those are the main points that I have in my head at the moment that will see-saw prices back and forth across the range for the remainder of the year.
The reason for the strong finish to the year? The election will be out of the way. The election is having profound impact on psychology and the year-end will be a strong quarter, I do feel.
The low 1868 is for the balance of the year from now, Sunday February 8, 2016 1880 last SPX500
1. Foreign currency trade unwinding from new regulations reducing leverage in currency trading forced traders to buy back their short-Yen positions and close out their corresponding trades that were financed with cheap and weakening Yen.
2. Crude oil - trying to find a bottom, and then bottoming/rebounding on short covering to the $40 level from $30-$26 at the low end.
3. Earnings forecasts dropping - led to a drop in valuations
4. Presidential elections - The extensive rhetoric the candidates throw around makes people nervous. As candidates drop out of the race, people are comforted. Overall, I believe America is very nervous about the current slate of candidates, which keeps a lid on the market this year overall.
5. M&A - China has already completed more M&A deals than all of last year, which was more than any other year. So, fears of China collapsing led to the decline and the rebound has been from people realizing the fears may be overblown.
6. Corporate buybacks - buyback are running stronger than at any time in the past. I did not foresee this in my previous comments. The fact that there are no projects or takeovers to complete tells me that valuations are "fair" for competitors and that there is ample credit available to corporations and there are no great investments to make in plant & equipment. This all speaks to a flat market for the year.
7. People who believe a weak January means a weak overall stock market may have sold out, but I sure hope very few people follow an investment strategy based on such ephemeral analysis.
8. Margin debt accounts may have waited until the New Year to sell positions to push capital gains into the following year, which is tactical. The level of Margin Debt is so closely correlated to the stock market index that it is truly a sign of investor confidence. However, it is not leading or lagging, but we get the data with a delay, so you have to be creative with this analysis.
9. The Fed: The December tightening forced investors to consider unloading shares and then by the time January-February came around, Japan went to Negative Interest Rate Policy (NIRP) to join Sweden's NIRP and the Fed said that negative rates could be considered a policy option in the future and all of the sudden we have an environment of Fed accommodation, which helped the market return to its previous price levels.
10. SO THERE you have it. I suggest you follow @LizAnnSonders at Twitter as she has the best fundamental data out there in beautiful graphs and common sense explanations. You'll really appreciate it if you check her out.
"Ready to update given the swift lift in sentiment to multi-year high readings... a top is near. It looks as if we hit 'euphoria' on the likely nomination of Clinton for the Democratic Party. Earnings were lackluster for the latest reporting period and the US Dollar has slightly helpful year-over-year rates of change. I'll suggest writing 6-9 month AT THE MONEY CALL OPTIONS against any market positions. With VIX elevated to 17 from a recent 13, this could be a decent return as I assume a sideways market for the balance of the year. 2096 last SPX."
I hope you all took notice.
So, what are we to do? Calmly, patiently watch the next 15 days as the companies report earnings and forecasts for the next quarter. Expect guidance down as things have softened in the past few weeks.
See you in the "Key Hidden Levels Chat Room".
Tim Nov 9, 2016 7:31AM EST
Here we are again: January of a new year. The election is behind us. And the recount is behind us too. So many bombs dropped over the last year, both real bombs and word-bombs by Presidential candidates. The word-bombs seem to get all of the attention with Trump winning the "best word bomber" last year by Time Magazine as the "most noteworthy" person in the world. Now with that out of the way, once again we have the same variables facing the market: plenty of headwinds and tailwinds. See 2016 list, to your left in blue.
I like to start with an understanding of what "expectations are out there" and I do that with the Wall Street consensus for the Year-End S&P500. I added that with the RED BOX at the top which is around the 2300-2400 range. There are some above and below that range, but that gets 90% of the estimates.
The 2085 level was the launching point of this latest advance from before the election and that level was retested in the hours after the election results indicated Trump the winner. The market action up until that point, together with the lowest-ever-50-week readings of AAII Investor Sentiment Readings indicated to me that we had COMPLETED a bear market at this point in time. I view a bull market as 20%+ so a move to $2500 in the S&P would accomplish this technical feat. With plenty of skepticism, fears aplenty, high cash, massive retail selling of equities and mutual funds, high short positions, and "no bear market in prices" suggests very strongly that a 20% rally from 2085 is likely, and possible.
What I foresee happening in the first half of the year is the time window for Trump to get the most on the table for pro-growth, tax-cut, red-tape-cutting, Obama-care bashing, "Make America Great Again" pushes for change in the House and Senate. I hope we see Reagan-like Investment Tax Credits, Cuts in capital gains tax rates for young and small investors to get investment capital moving and to get banks lending again.
The second half of the year, especially towards the end of the year, I foresee a correction in prices back to the start of the year on signs that there is friction in the Republican Party and fears to make bold and broad changes to the tax laws and concerns about the credit rating and borrowing capacity of the US. The Democrats will be stalling with threats to shut down the Gov't and doing everything in their power to stop the changes Trump is pushing through.
I am playing the entire market through options instead of playing with full equity positions which limits my risk, while maintaining a small short position. But, I am a small investor with majority in cash and real estate which I am enjoying more and driving deeper into the real estate since 2008-09. Yet, at the end of the day, I think investing in India and China are the future, and hence Value Cost Averaging into those markets with the belief that regardless of Hillary or Trump or the next president, our time is being the Super-Power is almost over (see the 250 year cycle analysis on the net), and therefore, what British Empire faced a few decades ago, is going to repeat itself with the power status changing. So, when I hand the portfolio to my kids, I am not told 'what was I thinking about putting all my eggs in the US basket'!!!!!
I think our economy is going to flourish with Trump just cause he knows how to keep things afloat, but at the same time, his in-experience is going to show up and as a result we will have mis-interpretations for a day / week / month and hence we will have sharp moves (up and down) and hence playing the VIX might make a bit of sense. But, then playing options against the positions also will work great.
If and when a stock sells off violently due to Trump comment, Sell Naked Puts. If a stock takes off due to his comment, Sell Naked Calls. Of course, have the account size to tolerate the downside of both situations, and do it for stocks that one wants to own or play.
Who knows? The future is SO UNKNOWN that any interpretation whether it is GANN or FIB or Funda or Eco based is going to have such as systemic risk that it is going to break down. Even the most expensive Astro Guy that I know (no names) said we will take off with Hillary and she is going to win, and we will go down 50% if Trump wins. And, history right now shows that it has not happened (no Hillary win, and no Trump bashed market)!
I am hoping that the Margin Ratio at NYSE comes down a bit, the PE ratios are within good range after Jan numbers, the PB and PS ratios behave within range, and we get more Dividend increases in 2017 due to buy backs and organic increases taking the P/D ratio into favorable range.
Love to see your 2017 forecast, and hoping that you are going to be "range" based.
The economy - agree there.
The market - agree there too.
The pundits who said Hillary would win and the market would rally - or fall if Trump won... We always have to deal with that noise.
The fundamentals: Margin debt is high, and so is short interest. The PE is fine, given low rates and low inflation. The P/B and P/S depend on what industry, debt, growth and margins look like, so I'm not an "overall market P/S or P/B" analyst because the stocks in the index now are so different from the stocks 20 years ago. They just aren't the same. Dividend increases oddly enough correlate with market tops historically, but I get what you mean that you want to see more there to support valuation.
Psychologically, I see Trump having a 6 month honeymoon phase before people begin to really push back and become sand in his gears of progress. I think a mid-year update will be needed this year as we see what is able to be cleared through Congress and the Senate and become law. We will really see who is a believer in capitalism and who is a bureaucrat by what laws get through. I'm hoping for plenty of "investment friendly" tax laws that give tax credits for new investment, hiring and long term commitments to development.
So, I see the upside being more logical in the first half and a correction in the second half, tending toward the back-end or the last quarter.
Happy New Year.
Tim 8:51AM 1/10/2017
About the bull case - well, i like the sentiment analysis, but is there that more ground upholding the higher highs case? Dollar is also rising currently and we are already on all time highs, if i play the bull card it will be of course with more caution - im still waiting for a correction to happen cause everything feels overpriced