market history


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The market call I am making could be life changing. The explosive Bull Market from 1995-2000 helped so many investors multiply their accounts many times over and we could be heading into a similar period now. The problem is most money managers are not prepared for it and the majority of investors are scared. If I am right about this call, you will need the ability to trade growth stocks and take advantage of a strong market. If you’re looking for someone with extensive experience in these areas, please contact me at: jfahmy@zorcapital.com

There is a constant theme in the financial media that this Bull Market is about to end any day now. I believe it still has a long way to go. It’s not going to continue straight up and we’ll experience plenty of corrections along the way. Ultimately, it will end with a “blow off” move to the upside where everyone just throws in the towel. I don’t know if this will happen three months or three years from now, but I am leaning towards the latter because it will take a long time for investors to change their mentality. I’m basing my thesis on technicals, fundamentals and investor sentiment. (I could write 10 pages on each of these topics but I will do my best to focus on the major points).

Technicals – Weekly volume is important to monitor because the big funds control the market. The major indexes continue to show that institutions are accumulating stock. For the most part, they are buying stock on the positive weeks and selling very little on the down weeks. This isn’t limited to the US markets. The global boom is being confirmed by new highs in many international markets. In the US, the leading growth index is the Nasdaq 100 and you can see in the chart below that it JUST broke out in July 2016 after going nowhere for almost 17 years!


Charts provided by MarketSmith

Fundamentals – The Bears’ biggest argument is that the market is overvalued. Stop with this nonsense! If you factor in the low interest rate environment, we’re trading at a reasonable valuation. If you take out Energy, the market is actually cheap! Also, the market is a discounting mechanism and trades on what will happen 6-9 months from now. Within the next two years, the economic stimulus from the new administration will help earnings grow and justify valuations. In addition, many Mega Cap companies have strong balance sheets with $20-$300 Billion in the bank. Not exactly a bubble, but I will get into this later.

Sentiment – Everyone hates this market! Even the Bulls I speak to are nervous and have one foot out the door. This constant fear is helping to drive the market higher, as many people are underestimating the power of psychology in fueling market rallies. For a while, I’ve been writing about this consistent psychological pattern in the market: An event (usually with a finite date) is over-hyped by the financial media. Since everyone is already nervous, there’s a huge rush into put hedging, shorting stocks, and buying toxic VIX products, etc. The event turns out to NOT be the end of the world and the market grinds higher, forcing many to cover their short positions and/or put cash to work.

Think of everything that’s been thrown at this market over the past few years: geopolitical concerns, dramatic elections, viruses, Brexit, terrorist attacks, etc. and guess what? The market has been INCREDIBLY resilient and literally brushes off any bad news. Now, imagine if the news over the next year or two actually turns positive. I realize the media hates Trump and will never say anything positive about him, but imagine if his team actually makes progress in tax reform, health care and the overall economy improves. This could move GDP growth from around 1% to 3% and S&P earnings can increase to $140-$150 over the next two years. Again, no one wants to consider anything positive but remember two things are almost always true: 1) The world keeps getting better and 2) The people always think it’s getting worse.

COMPARISON TO 1995

At the beginning of 1995, if someone said the Dow Jones would climb from 4,000 to almost 12,000 in the next 5 years, no one would believe it. Why? Because the crash of 1987 was still fresh in investor’s minds and the recovery was already 8 years long. Sound familiar? The correlation to today is that the Financial Crisis of 2008-09 is still fresh in people’s minds and the recovery has already lasted 8 years. Most people can’t even consider the possibility of the market going significantly higher from here because, according to the media, this 8 year recovery is “long in the tooth” and about to end. However, I have made the argument for ten months now that we resumed a NEW Bull Market in July 2016 (that really began in Jan 2013, NOT March 2009). Very few people want to talk about the Bear Market that recently happened from mid 2015 to mid 2016 where the average stock corrected over 20% and many of the leading sectors corrected between 25-50%. A similar thing happened from early 1994 to early 1995 BEFORE the market went on a strong run as shown below:

Here’s the catch: The move higher will not be easy. There will be corrections, shakeouts and pullbacks along the way. Many of them will be sharp and VERY convincing that the Bull Market is over. For example, even during the great bull market of 1995-2000, there were big corrections in 1997 and 1998 during the Asian economic and Russian debt crises. In fact, the correction in Sept/Oct 1999 had many people (including myself) thinking the bull market was over…right BEFORE it recovered and went on one of the most amazing six-month runs in market history! The biggest challenge for investors will be navigating through this. In other words, it will require a good balance of taking profits along the way up and having conviction during the corrections.

BULL MARKET SUPER CYCLE

For the past 100 years, the market’s pattern has been approximately 15-20 years of an economic boom followed by 10-15 years of a downturn or consolidation. This current cycle looks to have started with the new highs created in 2013 and could last for many years. These cyclical uptrends are usually led by new inventions that revolutionize our lives, enhance productivity, and completely change the way we do things. The new ingredient that could really add fuel to this rally is the global economy. Many companies continue to expand internationally and are seeing explosive growth overseas. We are no longer just a domestic economy as we were in the past. One sector I am specifically focusing on is the Semiconductor group. Chips are no longer just going into computers. They are found in smart phones, cars, watches, memory, sensors, machine learning, artificial intelligence, etc. The “Internet of things” is the inter-networking of all these devices and experts estimate that we will see over 50 billion connected objects by 2020.

THE FANG STOCKS

If you study the biggest stock winners throughout history, the majority of their moves end with “blow off” or climax tops. This usually involves a period of days or weeks where the stock gets extremely extended in price, sees several technical gaps, and ends with its largest point move of the entire advance. As I mentioned before, many of the Mega Cap growth leaders such as Apple, Amazon, Facebook, Home Depot, Google, Netflix, Salesforce and Priceline have a tremendous amount of cash in the bank. In addition, you rarely see companies with $50-$700B market caps growing at such amazing rates. Combine that with the Large Cap Financial stocks that have strong balance sheets and you have a potential recipe for higher prices. At some point in the next few years, I wouldn’t be surprised to see “blow off” type moves in many of today’s growth leaders.

Another factor to consider is there are fewer stocks to buy. The number of publicly traded stocks has dropped from approximately 7500 in the late 1990’s to under 3800 today. This is the result of more M&A, less IPO’s due to stricter regulations, and a more liquid private market. As money flows into the market, fund managers have fewer stocks to chose from and lower floats to work with because of all the corporate stock buybacks. In other words, less supply and more demand.

There are two final points I would like to make: 1) I am not a blind bull. If I am wrong about this call, I will simply cut losses because capital preservation is ALWAYS the number one priority for my clients. One of my biggest strengths is the ability to make decisions and change my mind when market conditions call for it. 2) If I am right about this call, this could be life changing! You will need someone who can capitalize on this move, especially if your financial advisor is bearish and doesn’t have you positioned properly. If you are looking for a money manager or would like to set up a FREE consultation, please email me. My skills at finding growth stocks and my 20 years of trading experience will allow me to take advantage of this rare, generational investing opportunity.

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Raymond James’s’s’s Andrew Adams is out with a reminder about the bear market you may have already forgotten about – it took place in 2015 in a very stealth way and effected all but the ten largest stocks in the S&P 500. The indices weren’t nearly as effected as their underlying components were, so it doesn’t show up in your favorite index ETF’s price chart, but, my friends, it was grueling.

Here’s Mr. Adams:

I’ve used this stat before, but it still astounds me that during 2015 if you had put all your capital into the largest ten companies in the U.S. stock market, you would have ended up making about 20% on the year, yet if you had held the other 490 companies in the S&P 500 instead, you would have actually been down about 3%. Talk about a strangely narrow market! Of course, that period culminated in the stealth tactical bear market in early 2016 when, at the February 11 low, the S&P 500 stocks were down an average of 26.7% from their 52-week highs and stocks in the Russell 3000 were down an astonishing 37.3%, on average. We still contend that was probably the “bear market” that many are still predicting even now, but it does not qualify in the eyes of some purists since the S&P 500 itself was “only” down about 15% from its previous all-time high instead of the requisite 20%.

Batnick and I were talking about this just now. We were screaming about this stealth bear as it was happening. Nobody cared much at the time in the financial media, because the index Bigs were holding up appearances.

But the enlightened investor takes note of this sort of thing and keeps it handy for the next time a doomer calls the present state of affairs “euphoric” or “irrationally exuberant”.

It wasn’t very long ago that the indices corrected through time, while their components corrected through price, beneath the surface.

Source:

Investment Strategy: “Charts of the Week”
Raymond James – April 19th 2017

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I’m not sure if you can actually read the individual events, but very interesting if you can. Again just looking at the 1960 – 1980 period, a period of volatility and little capital appreciation. This rather compares to the current period of 2000 – 2016.

The message from the chart, is hang on long. If you are not in the market, then despite all the evidence to the contrary, the current pullback may be an entry point.

 

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Totally ignoring all of the media stories, fundamentals, anything other than the 3 charts, the charts would suggest that for a long while since 2000, the market has gone essentially nowhere until the current breakout.

The charts would suggest that the breakout has a long way to run yet. In fact, it is just getting started.

I’ve blogged about the eventual breakout previously and recommended hanging on, which I still would advocate, purely on a chart basis.

The important thing is that the ‘news’ around the breakout, as it was historically, is usually bad. There are all manner of problems. Hang on, somehow.

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The Dow Jones Index has broken 20,000. Pretty impressive. Historic. Will it hold? Typically there is a bit of a pull-back and then the market moves forward.

 

 

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The whole problem with the world is that fools and fanatics are always so sure of themselves, and wiser people are full of doubts”

–Bertrand Russell

I always have admired the writings of British philosopher Bertrand Russell, who died in 1970, 14 years before the Russell 2000 Index was created and compiled.

The Russell Index, his “namesake,” now may be priced to perfection.

Nothing moves in a straight line, especially in the markets.

Fade the Trump small-cap rally, as hope seems to be triumphing over experience.

In “Donald Trump, You Are No Ronald Reagan (Part One)” and “Yell and Roar … and Sell Some More,” I struck a cautionary tone about economic and market cycles, political partisanship leading to delays or more modest tax reductions, and the leadership skills and avowed policies of President-elect Trump compared to those of President Reagan. I also compared the current market advance with the honeymoon the markets delivered 35 years ago. (I will be expanding on my thesis and concerns this week).

This morning, in “How Long Will We Ignore the Negatives of This New Presidency, ” Jim “El Capitan” Cramer voices and adds to many of my concerns.

While respecting the strength of the last month’s stunning and almost parabolic move (see Bertrand Russell’s quote above) and recognizing that the only certainty is the lack of certainty, the markets to this observer are overvalued on almost every basis and the reward versus risk is substantially tilted toward the downside.

My pal David Rosenberg, chief economist and strategist with Gluskin Sheff, shares my view that the market is being over optimistic:

“If you were to do a fair-value estimate of the multiple against where it is today, you could actually then back out what the implicit earnings forecast is. And right now, it’s 30%. That is the implicit earnings increase that is priced in. So if you’re buying the equity market today, just know that you’re buying an asset class writ large that is expecting a V-shaped +30% bounce in earnings growth over the course of the coming year. Trouble is, that it is a 1-in-20 event — and normally that 1 in 20 happens early in the cycle, not late in the cycle …. Actually, six quarters of negative comparisons. I mean, if the earnings recession is behind us and if there are Trump tax cuts ahead of us — even if I allow for the full brunt of corporate tax cuts — and if I allow for whatever nominal GDP growth is going to be, I still can’t get earnings growth much above 10%. 15% is a stretch, but you might still get there. But even that doesn’t get you to a 30% earnings expectation.”

–Welling on Wall Street: An Interview with David Rosenberg

So, what is the best short? Perhaps it’s the Russell Index.

“When all the forecasters and experts agree, something else is going to happen.”

–Bob Farrell’s Rule #9

In keeping with my negative market outlook for 2017, I am making Direxion Daily Small-Cap Bear 3x ETF (TZA) , at $18.78, my Trade of the Week. Here’s why:

* Over the last year the Russell Index has materially outperformed the broader indices: Since mid-December 2015, the Russell Index has doubled the performance of the S&P Index (up 24% compared to 12%). As Bertrand Russell noted, “extreme hopes are born from extreme misery” — at least if you have been short iShares Russell 2000 ETFIWM! (Note: In its history, the Russell Index never has been as extended relative to the Bollinger Bands.)

* The recent widening in relative performance (Russell vs. S&P) may be a function of the president-elect’s policies toward protectionism and against globalization; the timeliness and extent of impact might be overestimated.

* The Russell Index is more richly valued than the broader indices. The 2016 price/earnings multiple for the Russell Index is 32x and 25x 2017 estimates (before any new effective tax rate) on non-GAAP earnings. The S&P Index is trading at 19x 2016 non-GAAP and 17.5x 2017 estimates. However, the S&P multiple of GAAP is 26x — there is no currently available GAAP multiple of the Russell.

* As interest rates gap higher, the cost of capital is rising for small and medium-size companies: This is occurring at a speed far faster than many previously thought. Large, multinational companies have better and cheaper access to capital through the markets and/or on their cash-rich balance sheets. (Note: This morning’s move in the 10-year U.S. note yield to more than 2.50% may be a tipping point).

* The rate of growth in the cost of commodities and services is starting to accelerate. This hurts smaller domestic companies that are less diversified compared to the larger companies. Remember, mono-line smaller companies often have less pricing power than their larger brethren. (Note: This morning’s $2.35 rise in the price of crude oil to nearly $54 also may be a tipping point).

* Smaller capitalized, domestically based companies are not beneficiaries of possible repatriation of overseas capital. As Russell wrote, “Sin is geographical!”

* The president-elect’s infrastructure plans likely will be slow to advance. There will be some opposition from both parties, members of which will be looking for a revenue-neutral and not “budget-busting” fiscal jump-start. At best, this is a 2018-2019 event. Moreover, the build-out could benefit some of our larger companies (e.g., Caterpillar(CAT) and United Rentals (URI) ) over smaller companies. In the broadest sense, however, infrastructure build-outs rarely contribute to sustained prosperity; just look at the sophisticated and state-of-the-art infrastructure in Japan.
That build-out has failed to bring sustainable economic growth to that country. The same can be said for Canada, which is mired in a 1% Real GDP growth backdrop despite Prime Minister Trudeau’s large infrastructure spending of years ago.

* The president-elect’s immigration policy — building a wall, limiting in-migration and exporting those who are in our country illegally — are not pro-domestic growth and could hurt small to medium-size companies.

* The president-elect’s China policy and broader protectionism policy could end up hurting the sourcing (impacting availability and cost) of many smaller companies, potentially squeezing profits by lowering margins and reducing sales.

Bottom Line

“All movements go too far.”

–Bertrand Russell

My view is that the Russell may soon stop crowing and I am moving toward a more aggressive short of that Index.

 

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I’ve highlighted that the 2 bond Kings are less than impressed with the move in stocks. The majority of articles however are very bullish for stocks moving forward. They are also bullish on the economy generally.

I haven’t really had time to sit down and really think my way through the issues, so I’m just reading the articles at the moment.

From a purely historical/technical perspective, this current market resembles somewhat the market of the 1970’s into the early 1980’s. The obvious difference however is that the interest rate environment is inverted.

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Ignoring the headlines, as headlines are headlines, the prolonged ‘nowhere’ finally broke out into a massive bull market. This coincided with a fall [for 30 years] of interest rates.

We have the massive ‘nowhere’ pattern. We don’t have an interest rate environment that can fall any lower. The only new direction is up, or a continuance of low interest rates.

‘Low’ would be anything up to 7%. As long as interest rates gradually move up to, and do not exceed that sort of number, we could have another bull market leg.

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