Are Major Stock Corrections Coming In 2017?

February 17, 2017

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Is Market Breadth Waving Bearish Flags?

February 13, 2017

All things being equal, during a healthy rally, we prefer to see a high number of stocks participate in the move (strong market breadth). In recent weeks, you may have come across something similar to the MarketWatch headline below:

Market breadth can be tracked in numerous ways. One of the most logical is to compare the health of narrow indexes, such as the Dow which contains only 30 stocks, to broader indexes, such as the NYSE Composite, which contains over 1,900 stocks.

Breadth Before 10% Plunge In Stocks

As described in this week’s video in detail, the S&P 500 experienced a waterfall decline of over 10% following the close on August 18, 2015. Notice in the chart below how vulnerable the trends were in the broad NYSE Composite Stock Index before the S&P 500’s big drop.

How Does The Same Chart Look Today?

The answer to the question above is “much better”. Instead of the moving averages making a series of lower highs and lower lows, the 2017 version of the same chart looks much healthier (see below). Recent gains have been much more broad-based than what transpired in the spring and summer of 2015.

Similarities And Differences: 2015 vs. 2017

This week’s stock market video covers some potentially troubling similarities in the area of sentiment between August 2015 and February 2017. The video answers the question…how concerning is this piece of evidence?

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Additional Measure Of Market Breadth

The 200-day moving average provides a guidepost for long-term trends. All things being equal, we prefer to see a stock or ETF above their 200-day moving average. Just prior to the 10% plunge in August 2015, only 41% of the 1,900 stocks in the NYSE Composite were above their 200-day moving average. Contrast the weak state of long-term trends in 2015 to the present day (1st chart vs. 2nd chart below).

How Likely Is A Plunge Similar To August 2015?

February 10, 2017

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Are The World’s Greatest Value Investors Bearish?

February 6, 2017

Actions Speak Louder Than Words

If you want to know what someone really thinks about the stock market, look at their recent portfolio transactions. What can we learn from recent moves made by two of the world’s most respected value investors?

Buffett Loaded Up After U.S. Election

With a focus on intrinsic value, based on future earnings potential, Warren Buffett has compiled one of the best track records in investing history. Buffett’s portfolio includes common stocks, such as Wells Fargo (WFC), Coca Cola (KO), International Business Machines (IBM), Apple (AAPL), and General Motors (GM). Therefore, if Buffett thought the stock market was currently significantly overvalued, we would expect him to be a net-seller in recent months. From Reuters:

Buffett revealed that he has bought $12 billion of stock for his company Berkshire Hathaway Inc. since the Republican Donald Trump beat Democrat Hillary Clinton in the Nov. 8 U.S. presidential election. In an interview with talk show host Charlie Rose that aired on Friday night, Buffett suggested that Berkshire’s post-election stock purchases overall were even higher, reflecting stocks that his deputies Todd Combs and Ted Weschler bought. “We’ve, net, bought $12 billion of common stocks since the election,” Buffett said. “The guys that work with me, the two fellows, they probably bought a little bit or sold a little bit too.” The speed with which Berkshire is buying stocks is unusual.

Do The Charts Agree With Warren Buffett?

This week’s stock market video asks three common sense questions about the long-term sustainability of the stock market rally. The answers are based on facts in hand, rather than opinions or forecasts.

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Is Bill Miller Concerned About Stocks?

Bill Miller’s fund beat the S&P 500 for 15 consecutive years from 1991 through 2005. Like Buffett, Miller unquestionably understands how to value common stocks. Has Miller been unloading shares in recent months? From a February 2 CNBC article:

“The stock market is not terribly expensive, and the market has a tailwind,” Miller said. “As long as the economy is growing and earnings are growing, the market is well underpinned.” Miller said he was fully invested in the stock market before the election and remains so.

How Helpful Are Valuations?

Reviewing PE ratios on the chart below in isolation, it would be easy to draw a conclusion that runs counter to the statements from Warren Buffett and Bill Miller above.

A detailed January 2017 analysis expands the sample size allowing us to examine PE ratios from a more balanced and broader perspective; the results may surprise you. It is important to note, Buffett and Miller have a long-term focus; their views tell us little about the market’s short-term outlook.

Three Questions About Rally’s Sustainability

February 3, 2017

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Stocks: The View From 30,000 Feet

January 30, 2017

Taking A Big Step Back

Uncertainties created by President Trump’s curbs on travel and immigration contributed to a selloff in stocks Monday. The monthly S&P 500 chart below allows us to filter out some of the day-to-day volatility. As of this writing, three positive developments remain in place: (1) the breakout above the multiple-year consolidation box (point A), (2) a retest of the breakout (point B), and (3) a bullish MACD crossover near point C.

A December 2 analysis provides some historical context (1993-2017) for the bullish monthly MACD cross shown above.

The View From 90,000 Feet

This week’s stock market video covers an extremely rare breakout attempt that is being made by the broad NYSE Composite Stock Index and puts the development into some long-term historical context (1965-2017)

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Trump Moves On Regulatory Reform

As outlined on November 11, reducing regulations could have a positive impact on earnings. Monday, President Trump moved on regulatory reform. From Reuters:

President Donald Trump signed an order on Monday that will seek to dramatically pare back federal regulations by requiring agencies to cut two existing regulations for every new rule introduced. “This will be the biggest such act that our country has ever seen. There will be regulation, there will be control, but it will be normalized control,” Trump said as he signed the order in the Oval Office, surrounded by a group of small business owners.

The Mother Of All Stock Market Signals

January 27, 2017

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Are Stocks Set Up For A 2011-Like Plunge?

January 23, 2017

2017 Momentum Has Been Waning

The S&P 500 has been treading water for six weeks, which means bullish momentum has been getting weaker and weaker. Given what we know as of January 23, what are the odds the S&P 500 plunges this week in a manner similar to the 2011 plunge shown below?

Yellow Flags Typically In Place

Markets can do anything at any time; an expression that applies to all markets, including the present day market. Having said that, waterfall plunges typically do not come without some type of observable deterioration already in place. The 15% plunge in 2011 occurred between the close on July 28 and the intraday low made on August 9.

How Did Stocks Look Before The 15% Plunge?

Prior to the 15% drop, the S&P 500 had been moving sideways for six months (orange line below), which speaks to indecisiveness and waning momentum. The market had also made two discernible lower highs (1 and 2 below) relative to the high made in early May 2011.

Compare and contrast the 2011 chart above to the 2017 chart below. Instead of a six-month period of indecisiveness, 2017 has seen six weeks of consolidation, meaning the loss of momentum was much greater before the market plunged in 2011. Instead of making two discernible lower highs, the 2017 market made a new high 17 calendar days ago (point A below). In 2011, the last new high was made 87 days before the 15% drop.

How Much Damage Was In Place Before The 2011 Plunge?

In the next set of comparisons, we will remove price from the equation and focus on trends. Moving averages help us monitor the never-ending tug of war between bullish conviction and bearish conviction. Remember, the plunge in 2011 occurred between the close on July 28 and the intraday low on August 9.

The chart below shows various daily moving averages for the S&P 500 on July 28, 2011; the moving averages range from the 40-day (dark blue) to the 150-day (lime green). Notice how the 40-day moving average peaked two months before the waterfall decline (point A). The fastest moving average had also moved from the top of the cluster to the bottom of the cluster, which spoke to the magnitude of the deterioration in bullish conviction relative to bearish conviction. Also notice how tight the cluster of moving averages were on July 28, and how the slopes had moved from positive to neutral or negative.

The 2017 chart below allows us to compare and contrast the exact same moving averages as of January 23. Instead of making a new high months earlier, the dark blue 40-day moving average is still making new highs. Unlike the tepid slopes in 2011, the slopes of all the moving averages in 2017 look much healthier from a bullish conviction relative to bearish conviction perspective. In 2011, the 40-day had migrated to the bottom of the moving average cluster; today, the 40-day remains firmly on the top.

Additional Historical Comparisons To January 2017

This week’s stock market video uses similar “facts in hand” charts to make comparisons to 1982, 1987, 1994, 2000, 2003, 2007 and 2009. The video helps us better understand the long-term bullish case relative to the long-term bearish case.

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How Can The Charts Help Us?

Charts cannot predict the future. Charts help us monitor the probability of good things happening relative to the probability of bad things happening. The probability of bad things happening was higher on July 28, 2011 than it is today. Regardless, the probability of bad things happening is never zero, something that remains true in 2017.

The charts above do not tell us much about the next few hours or next few days. However, given the information we have in hand today, which reflects relatively strong bullish conviction vs. bearish conviction on numerous timeframes, any pullback in stocks has a better than average chance of eventually being followed by new highs.

This analysis is based on the look of the charts as of January 23. If the charts deteriorate in the coming days and weeks, a new assessment would include a bump higher on the “probability of bad things happening” side of the bull-bear ledger. Only time will tell.

Long-Term Bullish Case vs. Long-Term Bearish Case

January 20, 2017

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How Was The Collective Mood As Stocks Started A 19-Year Secular Bull Run In 1982?

January 19, 2017

Stocks Must Overcome 2017 Gloom

Even with the backdrop of numerous positive technical developments, it may be difficult to envision the stock market moving higher given skepticism has been lingering for several years. The tone of reporting from this week’s World Economic Forum has had a decidedly pessimistic slant. From the International Business Times:

DAVOS, Switzerland — Despite the usual trappings of revelry here in the Swiss Alps at the World Economic Forum, an unfamiliar mood grips the proceedings: gloom. World leaders and people in charge of money are nursing angst over the potentially perilous state of the global economy. They confront an overwhelming array of crises all at once — China’s economic slowdown, the collapse of energy prices, plunging stock markets, confusion over monetary policy, conflict in the Middle East, an attendant surge of refugees into Europe, and the ever-present threat of terrorist attacks.

What Can We Learn From History?

In this article, we will examine one question and one question only:

Is it possible for stocks to successfully hold a breakout from a long-term consolidation pattern when the social mood and news of the day have a pessimistic slant?

How Was The Mood Back In 1982?

If you followed the news back in 1982, it would have been difficult to imagine the S&P 500 had already started what eventually became an 18-year secular rise. As you scan the bullet points below from the Wikipedia 1982 page, try to imagine the psychological impact of weekly headlines that included wars, bankruptcies, plane crashes, high unemployment, geopolitical strife, a debt crisis, and acts of terror:

  1. Unemployment in the United Kingdom increases by 129,918 to 3,070,621, a post-war record number.
  2. Mark Thatcher, son of British Prime Minister Margaret Thatcher, disappears in the Sahara during the Dakar Rally; he is rescued January 14.
  3. Shortly after takeoff, Air Florida Flight 90 crashes into Washington, D.C.’s 14th Street Bridge and falls into the Potomac River, killing 78. On the same day, a Washington Metro train derails to the north, killing 3 (the system’s first fatal accident).
  4. Four Northrop T-38 aircraft of the United States Air Force Thunderbirds Demonstration Squadron crash at Indian Springs Air Force Auxiliary Field, Nevada, killing all 4 pilots.
  5. The first computer virus, the Elk Cloner, written by 15-year old Rich Skrenta, is found. It infects Apple II computers via floppy disk.
  6. The Hama massacre begins in Syria.
  7. Syrian president Hafez al-Assad orders the army to purge the city of Harran of the Muslim Brotherhood.
  8. London-based Laker Airways collapses, leaving 6,000 stranded passengers and debts of $270 million.
  9. Japan Airlines Flight 350 crashes in Tokyo Bay due to thrust reversal on approach to Tokyo International Airport, killing 24 among the 174 people on board.
  10. The oil platform Ocean Ranger sinks during a storm off the coast of Newfoundland, killing all 84 rig workers aboard.
  11. The DeLorean Motor Company Car Factory in Belfast is put into receivership.
  12. Atlanta murders of 1979–81: Wayne Williams is convicted of murdering 2 adult men and is sentenced to two consecutive life terms.
  13. The United States places an embargo on Libyan oil imports, alleging Libyan support for terrorist groups.
  14. In Newport, Rhode Island, Claus von Bülow is found guilty of the attempted murder of his wife.
  15. The Falklands War begins: Argentina invades and occupies the Falkland Islands.
  16. A blizzard unprecedented in size for April dumps 1–2 feet of snow on the northeastern United States, closing schools and businesses, and snarling traffic.
  17. British troops retake South Georgia during Operation Paraquet.
  18. The nuclear submarine HMS Conqueror sinks the Argentine cruiser General Belgrano, killing 323 sailors. Operation Algeciras, an attempt to destroy a Royal Navy warship in Gibraltar, fails.
  19. HMS Sheffield is hit by an Exocet missile, and burns out of control; 20 sailors are killed. The ship sinks on May 10.
  20. A Unabomber bomb explodes in the computer science department at Vanderbilt University; secretary Janet Smith is injured.
  21. French-Canadian racing driver Gilles Villeneuve is killed during qualifying for the Belgian Grand Prix.
  22. Spanish priest Juan María Fernández y Krohn tries to stab Pope John Paul II with a bayonet during the latter’s pilgrimage to the shrine at Fátima.
  23. Braniff International Airways is declared bankrupt and ceases all flights.
  24. The British Special Air Service launches an operation to destroy three Argentinean Exocet missiles and five Super Étendard fighter-bombers in mainland Argentina. It fails when the Argentineans discover the plot.
  25. British landings spark the Battle of San Carlos.
  26. HMS Ardent is sunk by Argentine aircraft, killing 22 sailors.
  27. HMS Antelope is lost.
  28. Iranian troops retake Khorramshahr.
  29. KGB head Yuri Andropov is appointed to the Secretariat of the Communist Party of the Soviet Union.
  30. British ships HMS Coventry and SS Atlantic Conveyor are sunk during the Falklands War; Coventry by two A-4C Skyhawks and the latter sunk by an Exocet.
  31. The 1982 Lebanon War begins: Forces under Israeli Defense Minister Ariel Sharon invade southern Lebanon in their “Operation Peace for the Galilee,” eventually reaching as far north as the capital Beirut.
  32. The United Nations Security Council votes to demand that Israel withdraw its troops from Lebanon.
  33. British ship RFA Sir Galahad is destroyed during the Bluff Cove Air Attacks.
  34. VASP Flight 168, a Boeing 727 passenger jet, crashes into forest Fortaleza, killing 137.
  35. The Nuclear Disarmament Rally, an event against nuclear weapon proliferation, draws 750,000 to New York City’s Central Park.
  36. The body of “God’s Banker”, Roberto Calvi, chairman of Banco Ambrosiano, is found hanging beneath Blackfriars Bridge in London.
  37. British Airways Flight 9 suffers a temporary four-engine flameout and damage to the exterior of the plane, after flying through the otherwise undetected ash plume from Indonesia’s Mount Galunggung.
  38. ASLEF train drivers in the United Kingdom go on strike over hours of work.
  39. Four Iranian diplomats are kidnapped upon Israel’s invasion of Lebanon.
  40. Pan Am Flight 759 (Boeing 727) crashes in Kenner, Louisiana, killing all 146 on board and 8 on the ground.
  41. Intruder Michael Fagan breaches Buckingham Palace security as far as into the bedroom of Elizabeth II.
  42. Checker Motors Corporation ceases production of automobiles.
  43. Geoffrey Prime, a GCHQ civil servant, is remanded in custody on charges under the Official Secrets Act 1911.
  44. In New York City, the Reverend Sun Myung Moon is sentenced to 18 months in prison and fined $25,000 for tax fraud and conspiracy to obstruct justice.
  45. William Whitelaw, Home Secretary, announces that Michael Trestrail (the Queen’s bodyguard) has resigned from the Metropolitan Police Service over a relationship with a male prostitute.
  46. Hyde Park and Regent’s Park bombings: the Provisional IRA detonates 2 bombs in central London, killing 8 soldiers, wounding 47 people, and leading to the deaths of 7 horses.
  47. A coroner’s jury returns a verdict of suicide on Roberto Calvi, who was found hanging under Blackfriars Bridge.
  48. Torrential rain and mudslides in Nagasaki, Japan destroy bridges and kill 299.
  49. On a movie set, the Twilight Zone actor Vic Morrow and 2 child actors die in a helicopter stunt accident.
  50. In Beaune, France, 53 persons, 46 of them children, die in a highway accident (France’s worst).
  51. Attempted coup against government of Daniel Arap Moi in Kenya.
  52. The United Nations Security Council votes to censure Israel because its troops are still in Lebanon.
  53. Italian Prime Minister Giovanni Spadolini resigns.
  54. Mexico announces it is unable to pay its large foreign debt, triggering a debt crisis that quickly spreads throughout Latin America.
  55. Lebanese Civil War: A multinational force lands in Beirut to oversee the PLO withdrawal from Lebanon. French troops arrive August 21, U.S. Marines August 25.
  56. Italian general Carlo Alberto Dalla Chiesa is killed in a Mafia ambush.
  57. Iowa paperboy Johnny Gosch is kidnapped.
  58. Lebanese President-elect Bachir Gemayel is assassinated in Beirut.
  59. A Lebanese Christian militia (the Phalange) kill thousands of Palestinians in the Sabra and Shatila refugee camps in West Beirut, the massacre is a response to the assassination of president-elect, Bachir Gemayel four days earlier.
  60. The NFL Players Association calls a strike, the first in-season work stoppage in the National Football League’s 63-year history.
  61. The Wimpy Operation, first act of armed resistance against Israeli troops in Beirut.
  62. In Israel, 400,000 marchers demand the resignation of Prime Minister Menachem Begin.
  63. The Chicago Tylenol murders occur when 7 people in the Chicago area die after ingesting capsules laced with potassium cyanide.
  64. Helmut Kohl replaces Helmut Schmidt as Chancellor of Germany through a constructive vote of no confidence.
  65. John DeLorean is arrested for selling cocaine to undercover FBI agents.
  66. Luzhniki disaster: During the UEFA Cup match between FC Spartak Moscow and HFC Haarlem, 66 people are crushed to death.
  67. A gasoline or petrol tanker explodes in the Salang Tunnel in Afghanistan, killing at least 176 people.
  68. The Dow Jones Industrial Average surges 43.41 points, or 4.25%, to close at 1,065.49, its first all-time high in more than 9 years. It last hit a record on January 11, 1973, when the average closed at 1,051.70. The points gain is the biggest ever up to this point.
  69. In Lebanon, the first Tyre headquarters bombing kills between 89 and 102 people.
  70. The Minneapolis Thanksgiving Day fire destroys an entire city block of downtown Minneapolis, including the headquarters of Northwestern National Bank.
  71. The first U.S. execution by lethal injection is carried out in Texas.
  72. The December murders occur in Suriname.
  73. The 6.0 Ms North Yemen earthquake shakes southwestern Yemen with a maximum Mercalli intensity of VIII (Severe), killing 2,800.
  74. The United Freedom Front bombs an office of South African Airways in Elmont, NY and an IBM office in Harrison, NY.

Why 1982?

From Yahoo Finance:

In the last 81 years, there have been only two “outside years” before 2016: 1935 and 1982. Both of these years were followed by the S&P enjoying double-digit gains — +28% in 1936, and +17% in 1983 — which potentially sets the table for a monster rally into 2017.

There are several technical occurrences in the present day that are similar to the early 1980s. For example, the S&P 500 broke out of a consolidation box in 1982 by exceeding the high that was made nine years earlier in 1973. In 2013, the S&P 500 exceeded the highs from both 2000 and 2007, which represents a significant long-term breakout for equities. 2016 also represented a very rare “outside year”, an event that last occurred in 1982. The concept of an outside year was covered in detail on December 30.

More Recent History Also Features Consolidation

The concept of consolidation followed by a breakout or breakdown applies to all timeframes. The chart above shows a consolidation box that was in play between 1997 and 2013. A more recent view of the S&P 500 also features a consolidation box that dates back to 2014 on a monthly chart. Stocks are currently holding onto a bullish breakout from the 2014-2016 consolidation box.

How Vulnerable Is The 2017 Market?

This week’s stock market video looks at the longer-term health of the current rally in stocks. Are longer-term cracks starting to appear?

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The Broad Market Has Been Consolidating For 19 Years

Similar to the multiple-year consolidation that preceded the 1982 breakout in stocks, the present day market also features a consolidation box that started forming back in 1997. As of this writing, the NYSE Composite Stock Index is holding above the orange consolidation box shown below.

The View From 30,000 Feet

If we double back to the first chart in this article, it is easier to see how the concept of consolidation and breakouts may apply to 2017 and beyond. There were plenty of reasons to be pessimistic in 1982, and yet stocks were able to advance after breaking out.

2017 Is Significantly Different From 1982

Our purpose is not to say 2017 is 1982. In fact, 2017 is a unique year that will be different from every other year in human history. The same can be said for every year; they all follow a different fundamental and technical script.

History reminds us that the recent bullish breakouts from long-term stock market consolidation patterns do not necessarily need to be coupled with widespread optimism for stocks to advance over the next several years. Almost no one was expecting an 18-year secular bull run in stocks given the news of the day in 1982, and yet, that is exactly what happened.

Before a lot of energy is wasted on the differences between 1982 and 2017, keep in mind our purpose was to examine one question and one question only:

Is it possible for stocks to successfully hold a breakout from a long-term consolidation pattern when the social mood and news of the day have a pessimistic slant?

Notice the term “possible” is used above, meaning all bearish scenarios also remain in the realm of possibility. This exercise helps us remain open to all outcomes, not just the pessimistic outcomes often covered in the media. Time will tell.