Making Stocks Great Again?!?

Fred Imbert and Eustance Huang of CNBC report, Dow rallies 1,000 points, logging its single biggest daily point gain ever:
Stocks rose sharply in volatile trading on Wednesday as surges in retail and energy shares helped Wall Street regain the steep losses suffered in the previous session.

The 30-stock Dow closed 1,086 points higher, or 4.98 percent. Wednesday’s gain also marked the biggest upside move on a percentage basis since March 23, 2009, when it rose 5.8 percentage points.

The S&P 500 also catapulted 4.96 percent — its best day since March 2009 — as the consumer discretionary, energy and tech sectors all climbed more than 6 percent. The Nasdaq Composite also had its best day since March 23, 2009, surging 5.84 percent.

Retailers were among the best performers on Wednesday, with the SPDR S&P Retail ETF (XRT) jumping 5.8 percent. Shares of Wayfair, Kohl’s and Dollar General all rose at more than 6 percent. Data released by Mastercard SpendingPulse showed retailers were having their best holiday season in six years. Amazon’s stock also jumped 9.5 percent after the company said it sold a record number of items this holiday season.

Energy stocks also jumped as U.S. crude oil prices catapulted more than 8 percent. Shares of Marathon Oil and Hess were the best performers within the energy sector, jumping 7.6 percent and 6.9 percent, respectively.

John Augustine, chief investment officer at Huntington Private Bank, said he welcomed Wednesday’s rally but added: “We still have a ways to go. We need to have three days of moving higher into the close to stem this wave of selling.”

A strong sell-off on Monday sent the major indexes down more than 2 percent and ended with the S&P 500 falling into a bear market. The S&P 500 was down 20.06 percent from an intraday record high set on Sept. 21 before Wednesday’s sharp rebound. U.S. exchanges were closed Tuesday for the Christmas holiday.

The recent decline in stocks “is a buyer’s strike due to lack of confidence in policymakers around the world,” said Augustine. “It’s going to take a long time to recover that confidence.”

The plunge in stocks on Monday came after Treasury Secretary Steven Mnuchin held calls with CEOs of major U.S. banks last weekend and issued a statement saying, “The banks all confirmed ample liquidity is available for lending to consumer and business markets.”

Monday’s move lower also came after President Donald Trump commented on the Federal Reserve once more, calling it “the only problem our economy has” in a tweet. Trump also said Tuesday the Fed was “raising interest rates too fast because they think the economy is so good. ” Trump has been critical of the Fed’s decisions regarding monetary policy this year. The central bank has hiked overnight rates four times this year.

“With the end of the quarter, we could get a bounce in the next few days,” said Peter Cardillo, chief market economist at Spartan Capital Securities. But “the problem is [President Donald] Trump continues to create a lot of uncertainty. We can’t focus on the fact there are a lot of good bargains out there.”

This is all taking place amid an ongoing government shutdown that started last week. The Trump administration and congressional leaders are at a stalemate over funding for a wall along the U.S.-Mexico border. The administration says the wall is important for national security while opponents of the barrier note it will not solve the U.S.′ immigration issues.

“Government shutdown starts with no end game strategy by either side,” L. Thomas Block, Washington policy strategist at Fundstrat Global Advisors, said in a note to clients. “The President ... remains convinced that fighting for HIS wall is worth a government shutdown and his base loves the confrontation.”
Bulls came out charging on Boxing Day to pick up a lot of post-Christmas bargains in stocks.

What occured on Wednesday was an unprecendented buying panic unlike anything I've ever seen before. It didn't happen right out of the gate, stocks were shaky at the start but when the markets turned around early this morning, KABOOM, stocks exploded up as did oil which gained nearly 10% today despite the strong US dollar (click on image):

So why did stocks melt up today? To understand this, you should begin by reading my last comment on the bad Santa selloff of 2018 which I posted on Friday. Read that comment very carefully to understand what was going on prior to this melt-up in stocks.

Then on Sunday, Treasury Secretary Steven Mnuchin had the bright idea of calling the CEOs of all the major banks to check up on their liquidity and put the "Plunge Protection Team" on standby, and he made all this public in a tweet, leading many on Wall Street to rightly question his judgment:

I truly believe if Mnuchin didn't create undue panic, we would have seen a massive Santa Claus rally on Monday. His timing was terrible and again made me wonder if perhaps he and Trump are in cahoots with hedge funds looking to create panic.

On Wednesday morning, the Wall Street Journal published a lead article blaming computerized trading for the herdlike behavior and market swoon.

No doubt, algorithmic trading is exacerbating the violent market swings but there is something else that really bugs me, the fact that the exchanges still refuse to reinstate the uptick rule for shorting stocks, one of many factors making markets go haywire.

Why are exchanges refusing to reinstate the uptick rule? Because they thrive on volume, it doesn't matter whether stocks are going up or down as long as volume is there, exchanges are making a mint. It's the same reason why they embraced computerized trading, it's all about volume and profits.

Anyway, what led to the massive melt-up in stocks today? Below, I list some factors in order of importance:
  1. Major rebalancing going on in markets. Zero Hedge discusses a massive $64 billion buy order coming from US corporate DB plans that sold bonds to buy beaten down stocks. I think the real figure is over a trillion dollars when you factor in US public pensions, global pensions and sovereign wealth funds (like CPPIB and bigger players like Norway's pension and Japan's GPIF), mutual funds and hedge funds and other large institutional investors. I read a figure from the Investment Company Institute that on the week ending December 19th, mutual fund outflows topped $55 billion (while inflows into ETFs were around $25 billion). Add to this hedge funds raising cash to meet redemptions and tax loss selling from retail investors and robo-advisors doing tax loss harvesting, and you see signs of capitulation. Trillions were obliterated in markets during the last quarter going into today, so even if one trillion of rebalancing sounds like a lot, it's not as much as was lost in Q4.
  2. Massive short-covering: As I stated on Friday, smart short-sellers don't stand in front of a rebalancing freight train, they cover knowing full well a buying panic will ensue and wait for a better time to short stocks again. And don't kid yourself, they will be back with a vengeance but massive short covering today only exacerbated the natural buying frenzy.
  3. Fed on hold for 2019: I am of the opinion the Fed is done raising rates and there will be a potential halt to the balance sheet reduction next year depending on how bad markets and the economy get. US economic data is softening fast, inflation pressures are non-existent, unemployment will start rising and the Fed will be hard-pressed to justify any more rate hikes or even to leave the balance sheet reduction on auto-pilot. In fact, if stocks didn't melt up today 1000 points and instead melted down 1000 points, I guarantee you the Fed would have called and emergency meeting this week, cut rates and stopped the balance sheet reduction (I'm dead serious about this). Also, there have been numerous press stories questioning whether President Trump can fire Fed Chair Powell and opinions stating this will cause a major disruption in markets. I'm of a different opinion. I believe President Trump made a HUGE mistake appointing Jerome Powell to be the next Fed Chair and this decision might cost him the next election. Had he appointed a dove like Neel Kashkari, someone who understands markets and the threat of global deflation, he might have stood a chance, especially if he dropped these silly tariff wars with everyone. I also think if he does fire Powell and replaces him with a dove, markets will initially tank and then rally like crazy.
  4. Technicals and fear gauges: Most stocks are way oversold. I saw a chart showing rolling new lows from Bespoke Investments earlier which showed we reached extreme levels not seen since 2008, 2011 and 2016. It doesn't guarantee anything but at the very least, we are due for a major relief rally. The same goes for fear gauges which showed extreme levels of pessimism, they too suggested the selloff was way overdone and we were due for a big bounce. There were other signals on Monday which suggested we were nearing our first major bear market bottom. Lastly, the fact that CTAs are now short every major market reassures me from a contrarian perspective (I'm short CTAs!).
  5. Valuations are now compelling: Going into today, the stock market was pricing in no earnings growth whatsoever for next year. None, zero, zilch. So from a valuations perspective, a lot of stocks were compelling, especially those with dividends that yielded much higher than T-bills after the latest rout. In fact, I remember a call with HOOPP's CEO Jim Keohane in early November where we discussed the value of a good pension. That call took place right after the October selloff, the worst October since 2008. Jim was telling me then that stocks moved from 5% overvalued at the beginning of the year to 5% under-valued, so I can just imagine where his valuation indicators were going into today's market. 
  6. President Trump, David Tepper on buying the dip: During his Christmas address, President Trump suggested the stock market swoon is a buying opportunity. He also blamed the Fed for all that ails the market and US economy (but he appointed Powell!!). And hedge fund guru David Tepper stated on Monday the stock market tumbled too sharply and he was ‘nibbling’. Nibbling, my foot, he was buying like a little boy in a candy store on a sugar high! And this was the same guy who came out last week to say he's done with stocks and raising cash. That's why I keep warning you to ignore the hedge fund gurus and their recommendations, pay close attention to what they're buying and selling every quarter (and I guarantee you, Tepper and other elite hedge fund managers were buying beaten-down tech stocks going into this massive rally and even today).
By far, the most important factor driving stocks up right now is major rebalancing and that trillion dollar figure wasn't pulled out of my nose, it's based on a tweet Howard Silverblatt, S&P Dow Jones senior index analyst posted:

Anyway, I covered the factors behind the massive melt-up in order of importance. I've repeatedly warned you, nothing goes down or up in a straight line, after such a massive selloff, we were due for a massive melt-up, one that might last well into January (but obviously not as violent as today's action).

What else? There were signs on Monday that something big was in the offing. Stocks tumbled on Monday, it was a short day (market closed early at 1 p.m.) but I was on it like a hawk and noticed a few things:
  • Even though the Dow tumbled 600+ points on Monday, US long bonds (TLT) posted a mediocre gain, signalling to me investors were taking profits on bonds to buy stocks.
  • More interesting, safe sectors like utilities (XLU) were down 4%, flushing on Monday. And this on a day bonds rallied even if it was a weak rally, suggesting to me investors were rebalancing away from safe sectors to higher risk sectors.
  • My eyes were fixated on Amazon on Monday. It touched its 100-week moving average in the morning, was down 5% and then BOOM, they ran it up 5% before it closed marginally down. That there told me a lot about where the action would be on Wednesday. 
  • Another risk gauge I tracked closely on Monday was biotech stocks (XBI). They were up all day and then puked at the close, down 2%. That also reassured me during a bad market day going into Christmas.
By the way, in case you think I'm lying about all this, I invite you to track me on StockTwits where I regularly post my market thoughts, trying to make sense of these crazy schizoid markets.

For me, the market provides the most important signals, you just have to know how to intepret them. And I'm not just talking about stocks, I track bonds, corporate bonds, currencies and commodities. Macro, macro, macro is what guides my risk-taking behavior and looking at what top funds are doing gives me micro clues into which stocks are worth tracking.

For example, I still like healthcare stocks (XLV) but going into today, I knew some of the generic drug makers were way, way, WAY oversold, especially Teva Pharmaceuticals (TEVA) and Perrigo (PRGO), both of which shot up today, outperforming other generic drug makers (click on image):

Now, don't get excited, I'm swing trading these markets and take risks most of you definitely shouldn't be taking but I'm just showing you there are plenty of opportunities in the stock market and a lot of these stocks remain very oversold on a weekly basis, even after this massive rally.

In terms of major US sectors and industries, all of them performed well today but no surprise, cyclicals outperformed defensives and the tech sector led the charge as FAANG stocks, biotechs (XBI) and semiconductor shares (SMH) all posted huge gains (click on image):

Again, don't extrapolate too much from a massive one-day rally. I still believe defensive stocks (healthcare, utilities, telecoms) are going to outperform cyclical shares (banks, energy, industrials, homebuilders) next year, especially if the US economy slows and we get a synchronized global downturn, but given the violent selloff in high beta stocks (SPHB)  which severely underperformed low volatility (SPLV) in 2018, I'm not surprised to see a big reversal going on now (click on image):

Still, I caution you, we are likely entering a bear market when the next major selloff occurs, and you need to understand that we will see many countertrend rallies -- some more explosive than others -- but that's all they are countertrend rallies that eventually peter out as stocks head lower.

I need to warn everyone reading this because it's easy to get caught up in the excitement or fear that grips markets during these big rallies and selloffs.

Don't get excited, don't be petrified either, just try to take advantage of major selloffs buying good stocks which are way oversold but be ready to sweep the table if they bounce back big.

As far as international stocks, I noticed emerging markets shares (EEM) were up 2% today, far less than US stocks but they remain above their 200-week moving average, for now (click on image):

You really need to pay attention to emerging markets, if they go into a deep bear market, it will only intensify global deflationary headwinds.

What else? High yield bonds (HYG) were up 1.7%, which is good, but we're still not out of trouble yet until it crosses back above its 50-week moving average (click on image):

I wish I could cover a lot more but it's the holidays and I need to recharge my batteries a bit. Tracking, trading these markets and then writing about it is exhausting and quite frankly, I'd rather post some market thoughts on StockTwits for rest of week and finish up my year-end review.

Hope you enjoyed my market comments over this tumultuous holiday season. Please remember to kindly donate/ subscribe to this blog on the right-hand side under my picture using the PayPal options. I thank everyone who takes the time to contribute, it's greatly appreciated.

Below, the Dow surged 1000 points after the worst Christmas Eve ever, posting its best one day gain in history. CNBC's Mike Santoli discusses the current state of the markets with Barbara Doran of BD8 Capital Partners.

Earlier this morning, CNBC's Bob Pisani looked at the day's market action and said the market was discounting a very bad 2019.

And on Monday, chart analyst Katie Stockton said she saw a weeks-long relief rally in stocks that could offer a better selling opportunity.

Lastly, speaking with CNBC on Wednesday, Todd Horwitz, chief strategist at investment advisor Bubba Trading, predicted that next year is going to be “very rough,” dropping another 10, 15 or 20 percent. He may turn out to be right but it's too early for these gloom & doom forecasts.

Update: Michael Sheets of CNBC reports, JP Morgan sees a ‘window of opportunity’ for stocks in the first months of 2019:
The first three months of next year will likely see stocks rally, J.P. Morgan says, so long as the Federal Reserve “skips” its March meeting and does not hike interest rates again.

“Signs of capitulation by institutional investors are creating a window of opportunity for equity markets into Q1 assuming the Fed reacts to market stress,” J.P. Morgan analyst Nikolaos Panigirtzoglou said in a note to investors on Friday.

Last week the central bank raised rates for a fourth time in 2018.

Stocks initially rose after the December meeting, as the Fed lowered its forecast of rate hikes next year to two from three. But equities fell sharply during Fed Chairman Jerome Powell’s post-meeting press conference. Powell was not as “dovish,” or leaning against more rate hikes, as some investors may have wanted, but Panigirtzoglou thinks whether the Fed gets even more dovish next year will be the key factor in determining whether stocks get a boost in the beginning of 2019.

“If such dovish shift does not materialize and the yield curve inversion fails to improve, any equity rally in Q1 would most likely be short lived,” Panigirtzoglou said.

J.P. Morgan also sees an “important headwind” for stocks as “now significantly reduced,” Panigirtzoglou said. The firm said “non-bank investors” around the world, also known as “real money investors,” are no longer bullish on stocks. The S&P 500 briefly entered a bear market on Christmas Eve, a move which Wall Street defines as a 20 percent decline or more from recent highs.

“The equity market declines over the past few months have erased real money investors’ previous equity overweights, reducing the need by these investors to actively sell equities from here,” Panigirtzoglou said.
On Thursday, the Dow closed more than 250 points higher in wild session, erasing a 600-point drop. If the market stabilizes here and continues going up in the new year, it will help build investors' confidence. In the short-run, this is a positive development, it means the market has found a bottom, for now.

Of course, some futures traders I talk to think the S&P is going back to where it was when Trump was elected on November 8th, 2016 ("it needs to retest that mark of 2150").

Also, Carter Worth of Cornerstone Macro joined the 'Fast Money' team on Thursday to discuss why despite the big reversal, markets aren't in the clear just yet and why he sees more trouble ahead for banks.

My technical reading is as long as Financials (XLF) and emerging markets (EEM) ETFs stay above their 200-week moving average, markets are fine but if they fall below, we're headed lower.