Fear of the Unknown Driving the Stock Market

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

The other day, Wed., July 27, was the first real day where I saw some very heavy and indiscriminate selling in the markets. More than 10 stocks were down for every one that advanced. The same mass exodus was seen in the volume of stocks going down versus up.

Every single U.S. sector I follow closed in the red. All countries outside the U.S. with the exception of Mexico closed lower. People were heading for the exits.

But action like this has been seen over and over and over. So far, there has been nothing atypical about the three day decline in stocks.

And given the selloff, more red is certainly possible over the coming days or so. Since mid June, the Dow has risen from 11,900 to 12,800 and back to 12,300.

It would not be shocking, worst case, for stocks to revisit 11,900 again before regaining their footing and heading to new highs. That forecast remains unchanged. I remain of the belief that the stock market will resolve itself for at least one more run to new highs that will be based on what is becoming a record corporate earnings quarter with the exception of Bank of America. As such, until proven otherwise, I believe pullbacks are buying opportunities.

This whole deadline reminds me of how the media played up the first Persian Gulf War when Iraq invaded Kuwait in the summer of 1990. And if we didn't learn from that, the same thing happened in 2003 when we invaded Iraq. Markets typically sell the rumor and by the news.

I recall recuperating from surgery on my parents' couch in January 1991. At that time, just three years in the business, my plan was to buy after war broke out and the market collapsed. But as the first missiles began to fly on January 17 (?), 1991, stocks around the globe surged and launched a new bull market. While I do not believe the exact same scenario will play out here, I think most rational people believe that the looming "crisis" will be resolved sooner than later and the markets will shift their attention back to Europe and Q2 earnings.

Frustration, anger and name calling aside, I still think that those idiots in government (sorry, I couldn't help myself) will find a way to compromise and meet somewhere in the middle before any real carnage is done.

Regarding our investment strategies, and you are always welcome to disagree, our models do not take into account geopolitical news of the moment. I believe that is a losers game and I don't know anyone who successfully manages money based on today's headlines. Our models are not infallible, but I think they have done a pretty good job over the years. I continue to rely on them to navigate us through the stormy seas we occasionally hit. Keep in mind that the S&P 500 currently sits just 4.5% off its multi-year hit! Yes, I know, that's for now.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.


Until next time…

Paul Schatz

Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter @Paul_Schatz

Still Riding the Bullish Wave

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

I am going to spend my time this week staying with the theme from the past few weeks, my bullish forecast for the stock market. 

Although this phrase always applies, it’s certainly been an interesting few weeks, especially on the geopolitical front with the debt crisis deadline looming, Greece, Ireland, Spain and Italy along with the plethora of poor economic reports. 

Yet with all this being shoved down our throats 24/7 by the media, the major stock market indices are one or two strong days away from multi year highs. It’s been the epitome of resilient.

For the past month, I have leaned heavily on the bullish side of the argument for stocks. I won’t bore you with the facts, evidence and opinion, but my forecast flew in the face of conventional and generally accepted, just the place I am comfortable trafficking, in the minority. 

But to be fair, if I was going to be wrong, I laid the case out last week from a technical perspective.

The chart above from last week has been updated and remains an open possible scenario for the bears if the S&P 500 is able to close a few days below the neckline. Given the strength this week, it would be a long drop just to get to the line in the sand, let along pierce it. If and when the S&P 500 closes above the area labeled “right shoulder”, the head and shoulder pattern for the bears will be null and void, something I continue to believe will occur this quarter.

 

The other negative technical chart pattern can be seen below, the island top.  And like the head and shoulders chart, the island top is very close to breaching its own line in the sand, which would nullify the potential negativity of the pattern.

 

As I have already mentioned over the past few weeks, the Russell 2000 (small caps), S&P 400 (mid caps), high yield bonds and the Dow Jones Transports scored all time highs at the April market peak along with the Advance/Decline line, a cumulative measure of the number of stocks going up and down each day.

On the fundamental front, something I am certainly no expert in, S&P 500 earnings are growing faster than the S&P 500 index. That means the market is getting cheaper even though it is still rising.  We are actually seeing price/earnings multiple compression rather than the usual expansion. It is highly unusual for a bear market to begin with so many positives at a market peak.  

Taking a longer-term perspective, something I am not usually known for doing, the NASDAQ 100 continues to give off some very positive vibes. This index is made up of the 100 largest non-financial stocks on the NASDAQ and is dominated by tech giants Apple, Intel, Google, Microsoft , Oracle and Cisco. As you can see below, the index is quietly and without fanfare bumping up against fresh 10 year highs! 

 

Looking out even further gives you a sense of how much upside room there is before all-time highs can be seen. In case you forgot, the Dotcom bubble high from 2000 is another 100% from here. I remember quipping on Bloomberg TV that whatever high the NASDAQ was putting in wouldn’t be seen again in my lifetime. I certainly hope I live a very long life and will be able to see that peak eclipsed sometime in the 2020s or 2030s.

Last week I closed with:

'Given all the positives listed earlier against the negatives from the charts, the easiest thing to do would be to move to a neutral stance.  And maybe that means we are in for some sideways activity.  "Play it safe", if you will, with all the negative news from the debt ceiling debacle to Italy and Ireland and Greece.  But I have never been to one to seek the easy way out.  I continue to believe that the major stock market indices are going to resolve themselves to the upside and score new high closes this quarter.  And that's the way I plan to invest until proven otherwise.' 

And I still feel the same way now. The stock market has had a nice run this week and while it certainly deserves a rest, I think any pullback is a buying opportunity until proven otherwise. The first thing that would concern me is if the major indices closed below the low we saw on Monday morning July 18.

I hope you stay cool in all this heat.  Relief is on the way!

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz

Heritage Capital LLC

http://www.InvestForTomorrow.com

http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter  @Paul_Schatz

Regulators expand disclosure requierments when credit is denied or revoked

The Board of Governors of the Federal Reserve System is expanding the mandates of the Equal Credit Opportunity Act, which requires a creditor to notify an applicant when an extension of credit is denied, based in whole or in part on information in a consumer report.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, consumers who are denied credit or whose existing credit arrangement becomes less favorable - or even worse - gets revoked, based on a credit score will be able to get free access to that score and other related information.

The creditor will have to provide a statement giving the reasons for taking an adverse action against the consumer and also a notice that discloses the applicant's right to a statement of reasons, right to a free credit report and right to dispute the accuracy or completeness of information in the consumer report used by the creditor to make a lending decision.

Under the Fair Credit Reporting Act, consumers also are entitled to know the numerical credit score used in making the credit decision; the range of possible scores under the model used to generate the score; up to four key factors that adversely affected the consumer's credit score; the date on which the score was generated; and the name of the person or entity that provided the score.

The changes take effect July 21.

The Equal Credit Opportunity Act makes it unlawful for creditors to discriminate on the basis of sex, race, color, religion, national origin, marital status, age or because all or part of an applicant's income derives from public assistance.

Up? Down? Sideways?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

In the past two Street$marts as well as on this blog, I have pounded the table that the odds heavily favored a market rally. I thought that we were just seeing the fourth 4-8% pullback since the major low on July 1, 2010 and the bulls were about to pounce. When so many people emailed, called and interviewed with the opposite forecast, I felt even stronger that higher prices were in order. And the market did not disappoint!

Longer-term, the Russell 2000 (small caps), S&P 400 (mid caps), high yield bonds and the Dow Jones Transports scored all-time highs at the April market peak along with the Advance/Decline line, a cumulative measure of the number of stocks going up and down each day. On the fundamental front, something I am certainly no expert in, S&P 500 earnings are growing faster than the S&P 500 index. That means the market is getting cheaper even though it is still rising. We are actually seeing price/earnings multiple compression rather than the usual expansion. It is highly unusual for a bear market to begin with so many positives at a market peak. In April 2010, we saw the same thing, but had to endure a 17% correction before more new highs were seen.

One possible scenario that worried me during the rally was that the market was going to make it difficult and stop short of new highs and begin to rollover. People who trade and invest by using charts would call that formation a Head and Shoulders Top. Only when the index breached the blue neckline and closed below it, would the pattern be confirmed and much lower prices would ensue.

Additionally, as you can see below, chartists are also screaming about another negative pattern called an Island Top where there is a "lonely" day of trading isolated above the day before and after.

Given all the positives listed earlier against the negatives from the charts, the easiest thing to do would be to move to a neutral stance. And maybe that means we are in for some sideways activity. "Play it safe", if you will, with all the negative news from the debt ceiling debacle to Italy and Ireland and Greece. But I have never been to one to seek the easy way out. I continue to believe that the major stock market indices are going to resolve themselves to the upside and score new high closes this quarter. And that's the way I plan to invest until proven otherwise.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.


Until next time…


Paul Schatz

Heritage Capital LLC

http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter @Paul_Schatz

No "Buts" Here...That Was Some Rally

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

The second quarter of 2011 was characterized by weakening economic data and the reemergence of the sovereign debt problems in Europe, especially Greece.

For much of June in my weekly Street$marts newsletter and last week on this blog, I wrote about how bad the headlines have been with Greece, Europe, awful employment numbers, Case-Shiller home price index at fresh 9 year lows and the Fed's Quantitative Easing II was coming to an end on June 30. It certainly felt like the stock market should be down 10-15%, if not more. Yet when you look at the chart below, the market completed its fourth 4-8% normal and healthy pullback since the major low on July 1, 2010.

You can also see from the chart that the S&P 500 touched the dark blue line, which represents the average price of the last 200 days. It is not uncommon for the market to visit this long-term trend gauge during periods of weakness.  Interestingly, the 1250 area in pink on the chart was not breached during the decline. That's one thing that did surprise me. Typically, when the masses become so focused on a certain level, the market has a funny way of running through that number for a day or two, causing investors to take action and then reversing in the opposite direction leaving many people holding the bag. This is called a trap.

  

As I wrote about last month, the impending (and current) rally would be fueled by sentiment shifting from exuberant to despondent after only an 8% decline.  Newsletter writers, often wrong at turning points, had become almost uniform in calling for a market correction after we had already seen a 6% pullback. Option players, especially smaller ones (usually mom and pop) were positioning for a correction, seeking the protection of put options after stocks were down 6%.  That group is usually wrong when there is a strong consensus. 

  

Technical measures, like the advance/decline line, up/down volume and their derivatives had become as oversold as at any point since the bull market began.  Intra-day gauges we created and use in-house were showing some mass selling right near the bottom.

  

On the flip side, buying by corporate insiders began to pick up after only a 5% decline. This group may be wrong in the short-term, but they usually get it right the longer out you look. At the April stock market high, we saw junk bonds, the advance/decline line, Dow Transports, Russell 2000 and S&P 400 all score all-time highs with the Dow, S&P 500 and NASDAQ at multi year highs.  Although that doesn't insulate the markets from a decline or correction, historically, bear markets do not begin with so many positives at a peak.

So as I write this, we have now seen 8 straight days and 11 out of the last 13 where the bulls won the battle. That is unusually powerful momentum. During bull markets after a decline, that is confirmation of new leg higher beginning.  During bear markets, a move like we have seen is best sold in to. Contrary to the emails I have received and arguments from my peers, we are still in a bull market folks. And with the Dow Transports scoring an all-time high today, we have further confirmation.

From here, we need to keep an eye on which sectors are leading and make sure all of the major indices also make new highs, including high yield (junk) bonds. Friday at 8:30 a.m. is the release of the monthly employment report. With stocks coming so far, so fast, I would expect a strong opening to be viewed as a good very short-term selling opportunity for the market to gather itself, a pause to refresh if you will.

 

FYI, I will be on CNBC’s Worldwide Exchange on July 13 at 5:35am.

 

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

 

Until next time…

 

Paul Schatz

Heritage Capital LLC

http://www.InvestForTomorrow.com

http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter @Paul_Schatz

People's United completes acquisition of Danvers Bancorp

People’s United Financial, Inc. announced today the completion of its acquisition of Danvers Bancorp, Inc, a $2.9 billion bank holding company based in Danvers, Massachusetts.

Danvers Bancorp’s sole subsidiary, Danversbank, has 28 branches in the Greater Boston area. The total consideration paid by People’s United will be comprised of approximately 18.5 million shares of common stock and $214.5 million in cash.

“We are pleased to welcome our new customers and employees to People’s United Bank as we expand and deepen relationships in the greater Boston market, the nation’s 10th largest MSA,” said Jack Barnes, president and chief executive officer of People’s United. “As the largest bank headquartered in New England, we look forward to offering increased lending resources and additional products and services to our new customers in New England’s largest market."

People's United reports approximately $28 billion in assets, provides consumer and commercial banking and wealth management services through a network of 370 branches in Connecticut, Vermont, New Hampshire, Massachusetts, Maine and New York.

The Rally is Here, but...

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)


The Rally Is Here, But…

Last week, I spend some time with the folks at Yahoo! in New York taping two segments for their Yahoo! Finance show Breakout. What a great time! The first segment pretty much spells out my view of the stock market: Bull Market or Bust.

If that segment wasn't controversial enough, the second segment, Bye Bye Euro, is about my long-term view that the Euro currency will cease to exist in the next 10 to 20 years. As I have mentioned before, it's all about the "haves and the have nots". While North Carolina may want to help save South Dakota, it's very difficult for the country of Germany to want to bailout Ireland or Spain or Portugal. And the countries in need want help on their terms, not austerity rammed down their throats.

The stock market certainly has done its best to confound the masses, as it usually does. The decline from the April peak pushed the envelope of what I call the normal, routine and healthy 4-8% pullback, but so far, that's exactly what it has been, 8% from high to low. I certainly did not think it would get to 8% and perhaps I have been a bit too complacent about it. But as I have done my whole career, I follow our models and the evidence at hand.

Over the past few weeks, stocks haven't done much, but the headlines continue to make it feel like the economy and markets are falling off the cliff. I think it is all part of a more complex bottoming process, which is usually required the deeper a decline goes. Between Greece and jobs and the debt ceiling and housing and QEII ending, it's tough to read the news. I would argue that if things are really as bad as the news suggests, stocks should be down a whole lot more than 8%. Judging from the action this week, that process appears to have ended with a rally beginning.

As most of you know, we use technical and quantitative inputs in our work as opposed to fundamental inputs. At the lows of the past few weeks, the stock market is now more oversold than it has been since the bull market began in 2009, even more so than during last spring's 17% correction.

Some of you may argue that we are no longer in a bull market and that's why the oversold readings don't matter as much. Given that the number of stocks advancing and declining (A/D line) hit an all time high in April along with junk bonds, that would be highly unusual. Even if that's the case, which I am not willing to concede on June 30, there is still supposed to be at least a failing rally.

My premise has been that from this decline, we will learn what kind of market lies ahead for the second half of 2011 based on the quality of the next rally. Which indices and sectors are leading and lagging. Is there broad participation? How do junk bonds and small caps, barometers of liquidity, behave?

Over the past few weeks, we have a whole host of indicators pointing to a bottom. The number of stocks advancing and declining on a daily basis is very washed out, too much selling too quickly. Most of the derivative indicators, like the McClellan Oscillator, are saying the same thing.

Volatility has increased dramatically from very low levels. Usually, it pauses or reverses after such a rise. According to AMG, investors have drained incredibly large amounts of money from equity mutual funds recently. At the same time, option traders on a variety of exchanges are becoming very defensive. Small option traders, usually mom & pop traders, have gone from exuberant to despondent in just a few weeks.

On an intra-day basis, we are seeing rolling large blocks of liquidation hitting extreme levels where rallies often begin. On the flip side, buying by corporate insiders has increased substantially and they are usually not wrong for very long. Add it all together and you get the recipe for a good stock market rally.

After a 6% or 8% pullback with the slew of indicators pointing to a low, we should be seeing constructive price action with at least some upside follow through. Until last Thursday, that was sorely missing. We now have a number of positive behavioral days with some follow through confirmation as you can see below.

SO much attention has been paid to the level of 1250 on the S&P 500 (the March tsunami low), I was hoping for a quick plunge through that level to shake out the final bulls.  Twice, price came closer, but no cigar.  In a perfect world, price dives through 1250 for a day or so and causes more selling that makes headlines, only to see the bulls step up to reverse the trend and start a powerful that rally to trap the bears as the I tried to depict in the next chart.

On the surface, I believe a break of 1250 is more constructive for a longer and more meaningful rally than if the rally has already begun. A rally from here will leave unanswered questions and keep a scenario open for a decline below 1250 sometime during the third quarter.

FYI, I will be on CNBC’s Squawk on the Street on July 5 at 9:35 a.m.

Have a very safe and enjoyable holiday weekend!

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.


Until next time…

Paul Schatz
Heritage Capital LLC

http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter @Paul_Schatz