The Trump Rally In U.S. Stocks Is Over!

Since the intra-day low of 2,084.59 on November 3rd, 2016 the S&P 500 Index has rallied 8.39% to Friday's record closing high at 2,259.53. While U.S. stock futures are higher tonight (Sunday, December 11th), by tomorrow's NY close (Monday, December 12th) I believe the tide will have turned and a major stock market correction will be underway.

As can be seen on the daily, weekly, and monthly charts below, the S&P has now advanced to its 3-standard deviation upper Bollinger Band, where mean-reversion corrections are almost inevitable.

I see this so-called "Trump Rally" as a terminal advance that will ultimately be viewed as THE TOP in the current 93-month old bull market that began in March 2009.

All the usual variables that contribute to bear markets will soon be in force here as follows:

1. The Federal Reserve is raising interest rates and is now in tightening mode (at least for the short term - "Don't fight the Fed!").

2. The U.S. economy is probably already in recession, but official declines in GDP, as reported by the Commerce Department, won't probably be reported until the first quarter of 2017. Corporate earnings will deteriorate rapidly and P/E ratios will soon revert to more realistic values from current historical highs. Corporate buy-back programs will quickly disappear and central bank buying of stocks on a global basis will evaporate.

3. President-elect Trump and his potential Administration will raise domestic and international levels of uncertainty in the financial markets as his policies generate confusion and controversy at almost every level of Government.

4. The latest CIA report on Russian interference in U.S. elections has the potential to be a "Black Swan" of unprecedented proportions for investors as the validity and legitimacy of a Trump Presidency is called into question.

5. Crude Oil prices have more than doubled since their lows as posted in early 2016. This latest production agreement among OPEC and Non-OPEC countries, as reported today, may be a short term positive for energy-related companies, but higher energy prices are ultimately a huge negative for the global economies in general.

In the interest of full disclosure, I am short the S&P 500 Index using the double-short SDS ETF as my favored investment choice for this bearish action.

S&P 500 Index Daily Chart with 3-Standard Deviation Bollinger Bands

S&P 500 Index Weekly Chart with 3-Standard Deviation Bollinger Bands

S&P 500 Index Monthly Chart with 3-Standard Deviation Bollinger Bands

Damned If They Do; Damned If They Don't (Fed Rate Hike)

The U.S. Federal Reserve appears cornered in a "No Win" situation right now. In its FOMC meeting this coming week, the Fed will decide whether or not to raise interest rates. Several voting members have already voiced their hawkish views (translation: it's time to raise rates!), but there are also a few doves still on the Board who think the U.S. economy is just not strong enough for a rate hike here.

Fed Chair Janet Yellen appears ready to raise rates, but recent "data" tend to support waiting until at least the end of this year before pulling the trigger on a 1/4-point hike. And just maybe the Fed Chair has the November Presidential Election in her sub-conscious, and just maybe she's rooting for Hillary Clinton.

For most traders and investors, the prevailing view is that "no rate hike" is bullish for U.S. and global equity prices. While this group could be right, I think that if the Fed stands pat right here a message will be sent that the U.S. economy is weakening and that recession risks are heightened. Any scent of the next potential recession will send stocks lower.

And I think it's safe to say that most traders and investors believe that if the Fed raises interest rates this coming week, the U.S. equity prices will almost certainly retreat.

Damned of They do; Damned if They don't!

Unfortunately for U.S. equity investors, the script has already been written in stone if we look at the latest signals from my computer trading system. An official double sell signal has already been triggered in the weekly chart of the NY Composite Index, and a preliminary monthly chart sell signal is forming for the current month of September in the NY Composite Index. Official Weekly Chart sell signals have also been triggered in the Nasdaq Composite Index and the Russell 2000 Index. Please see all four charts below.

Nasdaq Composite Index Weekly Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Weekly Chart with Computer-generated Buy & Sell Signals

NY Composite Index Weekly Chart with Computer-generated Buy & Sell Signals

NY Composite Index Monthly Chart with Computer-generated Buy & Sell Signals

Market Timing Following the Much Anticipated Yellen Speech

Most major U.S. stock market averages gave up ground grudging last week from record highs posted the previous week. Friday, August 26th, was the most volatile day as traders and investors reacted to fresh comments from Fed Chair Janet Yellen. By most accounts, Chair Yellen's comments were mixed (neither too hawkish nor too dovish). 

According to Yellen:

The Federal Open Market Committee "continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives."

She added, "Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months." 

And if the economy falters, Yellen said the following:

"In addition to taking the federal funds rate back down to nearly zero, the FOMC could resume asset purchases and announce its intention to keep the federal funds rate at this level until conditions had improved markedly — although with long-term interest rates already quite low, the net stimulus that would result might be somewhat reduced."

Something for everyone, bulls and bears alike!

My computer trading system may offer some clues right here to the next major move in stock prices. While the preliminary "rare" monthly chart sell signal in the S&P 500 Index that was triggered in the week ending June 24th was aborted by a spectacular rally the following week, we now have a confirmed weekly chart sell signal in the NY Composite Index for the week ending August 26th (see chart below). While weekly chart sell signals have not been triggered in any other major index, the sell signal in the NY Composite Index is noteworthy.

In 1987, the year of the great October crash, the high for the year in most major stock indexes was posted on August 25th. Seasonals are mostly negative over the next 8 weeks (late August through mid-October), which tends to support the bearish case here.

NY Composite Index Weekly Chart with Computer-generated Buy & Sell Signals

NY Composite Index Monthly Chart with Computer-generated Buy & Sell Signals

Rare Monthly Chart Sell Signal Triggered in the S&P 500 Index

At Friday's close, June 24th, 2016, a rare monthly chart sell signal was triggered in my computer trading system. While this key signal will not become official until the close of trading on June 30th, unless we get a significant rally this coming week, the inevitable conclusion must be that the 7-year bull market in U.S. stock prices is over and that a major bear market is now underway. 

If a new bear market has in fact begun, then the Brexit vote last Thursday will clearly be seen as the "black swan" catalyst, but there's plenty of bear meat to go around right now. 

Traders and investors looking for a reasonable downside target in the S&P 500 Index can now look to the October 2007 high at 1,576. This translates into a 22% correction from Friday's close at 2,037 and a 25% correction from this month's recent high at 2,120.

S&P 500 Index Monthly Chart with Computer-generated Buy & Sell Signals

Daily Chart Buy Signals in Major U.S. Stock Indexes; Sell Signals in Gold

Daily chart buy signals were triggered by my computer trading system in the following major U.S. stock indexes at today's NY close: Nasdaq Composite, NDX, OEX, NY Composite, HGX,  DIA, and QQQ.

Daily chart buy signals were triggered in scores of individual stocks like AAPL, AMGN, FDX, GM, GS, IP, JPM, LLY, ORCL, SBX, TWX, USB, UTX, and WY.

Daily chart sell signals were triggered in almost every precious metals related investment including GLD, SLV, GDX, GDXJ, SIL, and SILJ and at least a dozen individual precious metals mining stocks.

My computer trading system is pointing the way higher for U.S. stocks and lower for Gold and precious metals related investments. In the U.S. equities market, my own view is that an important short term trading low was posted intra-day today and that a major short squeeze is about to unfold that will take most major U.S. stock market averages well into record high territory.

Nasdaq Composite Index Daily Chart with Computer-generated Buy & Sell Signals

Gold ETF Daily Chart (symbol GLD) with Computer-generated Buy & Sell Signals

The Invisible Hand (from Central Banks, NOT Adam Smith)

The "invisible hand" is a term first used by Adam Smith (he wrote The Wealth of Nations in 1776)  to describe the unintended social benefits of individual actions. The phrase was employed by Smith with respect to income distribution (in 1759) and production (in 1776). This exact phrase from Smith has come to capture his notion that individuals' efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society.

Smith assumed that individuals try to maximize their own good (and become wealthier), and by doing so, through trade and entrepreneurship, society as a whole is better off. Furthermore, according to Smith, any government intervention in the economy isn't needed because the invisible hand is the best guide for the economy. Thus, the invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources.

However, despite the common sense wisdom of the great Adam Smith, it is well reported now that in addition to government intervention into the global bond markets with massive purchases, central banks worldwide are now buying equities. While proof has yet to be presented that the U.S. Central Bank is participating, I strongly suspect covert operations by the Fed to this effect. Purchases of equities by the Bank of Japan and the Swiss National Bank are well documented in the public record now. While the European Central Bank has just now acknowledged that it is purchasing European corporate bonds in addition to massive ongoing purchases of sovereign debt, I also believe that the ECB has been covertly buying equities. 

While corporate share buy-back programs have been substantial here in the U.S. for many years now, I don't believe these very public efforts to support share prices have been enough lately to sustain the very high level of major market indices at or very near record highs where they are now. 

Some of the greatest traders and investors of all time are now sounding alarm bells with respect to the U.S. and global stock markets. Stan Drunkenmiller, perhaps the greatest of all time, is now short stocks and long gold. Carl Icahn is bearish on U.S. stocks in almost every interview now. And George Soros has now come out and said that he is shorting stocks and buying gold. Paul Singer, another legendary billionaire investor, told Institutional Investor in an interview this past weekend that "at the moment we’re either in a stage of stagnation or rollover, possibly in the early stages of a global recession". Singer added that "it’s a very dangerous time in the financial markets".

Wow! As a short-seller myself, with a 20% short allocation in the S&P 500, shouldn't I be comfortable in my position with all these legends on the same side of my bearish trade? I should be, but I am NOT !

I read this morning that according to the latest polls, the Brexit vote actually favors "LEAVE" now (the vote is on June 23rd), which is incredible to me. While I am a bit skeptical of this latest poll, market volatility (and downside air pockets) will almost certainly increase. Again, this sort of news should be great news to short-sellers like me (and the legends of the game).

Am I more comfortable given this latest Brexit news? NO! Why not? Because I strongly believe that the "invisible hand" of Central Banks will continue to support equity prices through this potentially volatile period and beyond. In fact, I now believe there could be an extraordinary short squeeze! While I probably won't lose sleep tonight with my 20% short position in tow, I will in fact be covering early this week in favor of a 100% sideline cash position. Not even gold appeals to me right now, although all the great ones who were quoted earlier in this column have apparently loaded up the truck with precious metals related investments. I won't be joining them, but I completely understand their views.

Is There A Market Message In The Breakdown of GOOG & MSFT?

Google (Alphabet, symbol GOOG) and Microsoft (symbol MSFT) both fell sharply this past Friday on earnings disappointments. Microsoft ended the week 8.8% below its best weekly intra-day high set on Tuesday, April 19th, while Google ended the week down 6.6% from its intra-week high (also set on Tuesday).

Incredibly, despite extraordinary losses in these two market bellwethers, the Nasdaq Composite lost only 0.80% on Friday, while the Dow Jones Industrial Average, Russell 2000, and the S&P 500 Index actually posted modest gains on the day!

Should stock market investors be concerned about the breakdown in Google and Microsoft? Or is this just another example of a market that is immune to bad news and will continue to "climb a wall of [earnings] worries" to new all time highs?

No one knows the answer, of course, but I remained convinced that the U.S. stock market is still extremely vulnerable to a major correction right now and that investors need to be short or out! Not even the ultra hot precious metals mining shares hold appeal to me right now. Daily chart "red dot" sell signals were triggered by my computer trading system in most of the miners this past week, and I expect a significant retracement of recent gains in this volatile group over the next several weeks.

Google Weekly Chart with Computer-generated Buy & Sell Signals

Microsoft Weekly Chart with Computer-generated Buy & Sell Signals

Philadelphia Gold/Silver Miners Index (XAU) Daily Chart with Computer-generated Buy & Sell Signals

Is The Puppeteer Ready To Pull The Strings Again?

Bloomberg News reported today that Federal Reserve Bank of Boston President Eric Rosengren may be less dovish than Wall Street investors currently believe. In a speech delivered in New Britain, Connecticut today, Mr. Rosengren said “The very shallow path of rate increases implied by financial futures-market pricing would likely result in an overheating that necessitates the Fed eventually raising interest rates more quickly than is desirable, which could endanger the ongoing recovery and continued growth.” It is noteworthy that Rosengren is currently a voting member of the Federal Open Market Committee, which meets again 8 days from now to plot the path of interest rates and monetary policy over the coming months.

While an interest rate hike at the April FOMC meeting would come as a complete shock to the marketplace, it can't be ruled out. At a minimum, traders and investors should probably begin to adjust their thinking regarding the Fed's current dovish stance on short-term interest rates.

One of the FANGs was crushed after the closing bell today. After reporting weak subscriber growth, Netflix (NFLX) fell about 8% in extended trade this afternoon. Analyst downgrades (after the fact) can be anticipated here, and even lower prices for NFLX stock can be expected over the next few weeks.

In the interest of full disclosure, my allocation to the U.S. stock market right now is 60% short total assets under management. My short position is entirely held in the S&P 500 "Double Short" ETF (symbol SDS).

Could this be another year that U.S. stock investors will be best served by listening to the old adage "sell in May and go away"?

Red Dot Daily Chart Sell Signals in FB, NFLX, KO, & XOM Among Others

Just a quick note this evening, March 31st, the end of the first quarter.

Daily chart sell signals have been triggered by my computer trading system over the last two days in four key stocks (among others): NetFlix (NFLX), Facebook (FB) , Coca Cola (KO), and Exxon Mobil (XOM). Please see that attached charts.

While meaningful sell signals have yet to be triggered in any major stock indexes, my strong belief right now is that the extraordinary "counter trend" rally that began on February 11, 2016 is now over. Among the major averages, only the Russell 2000 Index was able to post an intra-day reaction high today, above yesterday's intra-day reaction highs.

In the weeks and months ahead, when all major U.S. stock market averages are sharply lower from today's closing levels, the financial press will refer to the stock market high this week as the "Yellen Top". Dovish monetary comments from Federal Reserve Chair Janet Yellen on Tuesday, March 29th, served as the catalyst for one last stretch higher this past week. But the music has stopped now and all the chairs are all taken! 

Bottom Line: A major downturn in U.S. stock prices appears imminent. Dovish comments from Fed officials not with standing, the perfect storm of bearish pressures is about to unfold: (1) Weak fundamentals in the form of lower corporate earnings and growing recessionary forces, (2) renewed downward pressure on commodity prices as global deflationary factors reassert themselves, and (3) the threat of Britain's exit from the EU turns into reality (Brexit!). Is that a Black Swan circling overhead?

Russell 2000 Index Daily Chart with 200-Day Moving Average Line

GAAP vs Non-GAAP Earnings? Should Investors Care?

The S&P 500 Index has rebounded 13.2% since the February 11th intra-day low of 1,810.10. Friday's close at 2,049.58 was the first day in positive territory for the new year 2016 (+0.28%) when compared to the final closing price for 2015. A recovery in commodity prices generally and in energy specifically has contributed to the better tone for equity prices in the U.S. and globally over the last 5 weeks. Added stimulus from central banks around the world, including the U.S. Federal Reserve, has also provided a boost for stocks.

Is the "great correction" of early 2016 now over and past? The S&P 500 and the Dow Jones Industrial Average are now "plus" on the year! If "Don't Fight the Fed!" is your rallying cry, then YES, the correction is over and you should be comfortable with an "overweight" position in U.S. stocks. However, if you are old and ugly like me, then you are probably sensing that something is not quite right and that maybe share prices are about to retreat again!

In the interest of full disclosure, I am now 50% short the S&P 500 in my managed accounts. My entire short position was established on Friday, March 18 and is in one single security, the SDS "double short" ETF. For those unfamiliar with this security, when the S&P 500 falls 1%, the SDS actually rises 2%, and if the S&P 500 advances 1%, then the SDS declines 2%.

If the quality of earnings matters anymore, here are some interesting charts and tidbits about GAAP vs Non-GAAP earnings per share for companies in the S&P 500 through 2015:

According to Factset, U.S. non-GAAP "pro forma" corporate earnings for S&P 500 companies are expected to decline -8.0%  for Q1 2016. If this estimate turns into reality, then it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009. It will also mark the largest year-over-year decline in earnings since Q3 2009 (-15.7%). 

According to the chart above, at year-end 2015 the S&P 500 Index was trading at 21.2 times GAAP earnings for the trailing twelve months (TTM). If GAAP earnings are down 8% in 2016, which is a likely scenario in my view, then the S&P 500 is really trading now at 23.0 times forward full-year 2016 expected earnings (NOT the widely held view of a much more favorable 15 x forward earnings). If the S&P 500 Index should be trading at 15x forward earnings, does that mean this closely watched index is 53% overvalued? Interesting questions, for sure!

And the outlook for investors may actually be even worse immediately ahead because U.S. regulators are finally looking at this GAAP vs Non-GAAP reporting issue, and they may even take some "unfriendly" action here. Wouldn't that be something!

From a Wall Street Journal report on Wednesday, March 16, 2016 and reprinted on www.marketwatch.com:

U.S. securities regulators are looking at whether it is time to restrict companies’ use of financial metrics that deviate from official accounting standards, Securities and Exchange Commission Chairwoman Mary Jo White said Wednesday. New rules may be needed to “rein in” firms’ use of bookkeeping that doesn’t comply with the generally accepted accounting standards known as GAAP, White told an industry conference in Washington. “Your investor relations folks, your CFO, they love the non-GAAP measures because they tell a better story,” White told the conference sponsored by the U.S. Chamber of Commerce. “We have urged for some time that companies take a very hard look at what you are doing with your non-GAAP measures. “We have a lot of concern in that space,” she said. The use of non-GAAP measures is legal under U.S. securities rules, but companies can’t give those figures greater prominence than official accounting results. 

Bottom Line: U.S. stocks look vulnerable to another major correction on the very near term horizon!

NY Composite Index Daily Chart with 200-Day Moving Average Line

Buyer Of Last Resort - When Will The Fed Tighten Next?

The Federal Reserve's Open Market Committee meets this coming Tuesday and Wednesday, March 15th and March 16th. Almost everyone on Wall Street expects a "quiet" Fed in terms of monetary policy. In this case, "quiet" means no rate hike for now and unchanged rhetoric from the Fed suggesting several 1/4-point rate hikes before year-end 2016. Of course, no one believed the Fed in January when it said there would be several more rate hikes between now and year-end, and no one believes them now. The Street expects only one or two 1/4-point rate hikes between now and year-end 2016. Most expect only one, and some pundits actually think there will be NONE!

My view here is that the Federal Reserve will not shock the financial markets with a 1/4-point rate hike this week (although the probability is NOT zero), but instead the Fed will change the tone of its post-meeting communique to suggest aggressively that a 1/4-point rate hike will come much sooner than Wall Street currently anticipates, perhaps as early as April 27th following the next FOMC meeting in late April.

This week's "unfriendly" rhetoric from the Fed and also in upcoming speeches from Federal Reserve officials WILL SHOCK the financial markets.

In the chart below, the NY Composite Index has rebounded an incredible 13.0% since February 11, 2016, but it is still down 10.2% from its all-time record high as posted on May 21, 2015. The current rebound is likely to find formidable resistance at its 50% retracement point (right here at Friday's closing price), a 10-month downtrend line, and its 162-day moving average line.

The price of Gold is now 5 trading days off its recent rally high, which suggests there may be short-term top in this closely watched asset that is sometimes very sensitive to market liquidity. As mentioned in my last column, I sense the early stages of a "liquidity squeeze" which will soon send U.S. stocks tumbling.

NY Composite Index Daily Chart with Trend Lines and 162-Day Moving Average Line

Great Storm Rising: The Next Major Liquidity Squeeze!

Since the intra-day lows of February 11th, with the exception of T-bond prices, almost everything else is up sharply! You name it: Gold, silver, copper, crude oil, and stock prices are all higher over the last 16 trading days. 

Mining stocks have been the star performers this year so far, with many individual mining shares posting gains of 100% or more since January 19th. The S&P 500 Index is up 10.5% since February 11th, while the Russell 2000 Index and the Nasdaq Composite are up 13.0% and 12.0% respectively.

The "tone change" from February 11th is nothing short of incredible. Many Wall Street pundits are already declaring an end to the "great correction" that chopped 15% off the S&P 500 Index from the intra-day high on November 3, 2015 to the intra-day low on February 11th, 2016. And maybe this newfound bullishness is justified? Who am I to argue with the herd?

However, an interesting sell signal was triggered by my computer trading system in most of the precious metals stocks at Friday's close, March 4th. Please see the Philadelphia Gold/Silver Mining Index (symbol XAU) daily chart below. Few would argue that this entire group has been on fire lately with most stocks doubling in a few short weeks, and maybe these hot stocks deserve a much needed rest to consolidate recent gains. Unfortunately for bulls, I suspect that there is more here than meets the eye. I think the Federal Reserve is about to make a huge mistake. While most market watchers now believe the Fed won't raise interest rates more than once over the rest of 2016, and that the next rate hike is unlikely until at least June (if then), I believe that rhetoric from Federal Reserve officials is about to become very unfriendly and that a 1/4-point rate hike could come as early as the upcoming March FOMC meeting. Wow, wouldn't that be a shocker!

Philadelphia Gold/Silver Stock Index (XAU)  Daily Chart with Computer-generated Buy & Sell Signals

Second Thoughts: Sustained Advance? or Counter Trend Rally?

In my last column on February 11th entitled "Green Monday", I speculated that a tradable bottom was already in place or very close at hand for U.S. stock prices. As it turned out, the intra-day low in the S&P 500 Index at 1810 on February 11th was the turning point to a fairly strong rebound. The S&P 500 Index has advanced 7.5% since then and many on Wall Street are already predicting an end to the "great correction of early 2016" and the resumption of the 7-year bull market.

Are they right? Are we in a sustained advance that could eventually post new all-time highs? Or is this just a counter trend rally within a vicious bear market that will soon overwhelm even the most fervent bull?

Quite frankly, I just don't want to hang around with any significant positions to be apart of the outcome here!

For traders and investors looking for an excuse to exit this market, the S&P 500 Index has rebounded to its 50-day moving average line, which could very well be significant overhead resistance.

Another interesting excuse for exiting this market might be the price action today in Honeywell (HON). Yes, there's been lots of talk about a potential merger with United Technologies (UTX), but the Honeywell chart looks more than a bit scary to me, and this 2016 favorite equity could very well have topped out here today.

Of course, there are a score of other reasons to head for the sidelines in addition to these two interesting excuses, including the potential "Brexit" (UK) threat or  maybe even a "Frexit" (France) threat, two fascinating market moving topics that will corner the headlines for at least the next several months! I am on record in several of my columns over the last couple of years with the view that the European Union (as we know it today) will not exist by 2018, if not sooner. A comparison to the Soviet Union in 1989 ("tear down those walls") is not so far fetched here. The European Union may not exist in ANY form in two or three years time!

I wish I could offer a viable investment alternative to "Cash" right now. I don't even think the precious metals stocks offer any reasonable investment-worthy risk/reward opportunity here. 

Bottom line: Cash is king!

Honeywell (HON) Weekly Chart with Computer-generated Buy & Sell Signals

Green Monday

Green Monday was a novel written by Michael Thomas and published in June 1980. I remember reading it as a young trader at the CBOE in Chicago. While I don't think it was ever a NY Times bestseller, Green Monday was still entertaining and even thought provoking. This fictional story was mostly about oil and manipulation in the financial markets. OPEC was at the height of its power at that time (1980), financial markets were reeling under the strain of sharply higher energy prices, near record interest rates, out of control inflation, and restrictive monetary policies. The global economies were mostly in recession and there was almost no light at the end of the tunnel. As I recall, Green Monday is about a few key oil sheiks conspiring to actually LOWER oil prices to ward off the potential threat of military action against the OPEC countries by western energy consuming nations. The plot thickens when these same sheiks attempt to personally profit from this action by accumulating massive amounts of U.S. equities ahead of the actual announcement that crude oil prices will be dramatically lowered. They quietly accumulate huge stock positions in almost every liquid exchange listed company and then make billions when on Green Monday the announcement of lower oil prices is made.When the actual announcement is made, energy-related share prices went down at first in the book, but then joined in a record bull run with most other companies.

While the novel Green Monday doesn't sound like much of a page-turner, I think the story line may actually be relevant to the current economic environment, where sharply lower oil prices are creating havoc (and opportunity) in the financial markets. 

Almost every headline was ugly today in the financial media. European banks are collapsing, demand for credit default swaps is soaring, gold and silver are safe havens again, the once almighty and invincible U.S. Dollar is under significant pressure in foreign exchange dealings, and global stock prices are in full retreat.

So why are buy signals suddenly being triggered by my computer trading software in major U.S. stock market averages? Maybe we shouldn't ask why! Maybe we should just BUY!!

However, if we do ask "why", then maybe the answer is that sharply lower energy prices will soon lead to a dramatic and unprecedented wealth transfer from energy producing nations to energy consuming nations. And maybe, just maybe, real economic growth and prosperity will finally be generated on a global basis!

Bottom line: I think it's time to buy U.S. stocks again! The next big swing in equity prices is probably to the upside. The end of the great correction of the last few months is probably close at hand. I even think that today's intra-day price lows could represent a tradable bottom, and they might even represent THE BOTTOM!

S&P 500 Index Weekly Chart with Computer-generated Buy & Sell Signals

A Portolio Manager's Greatest Fear

Answer: The overnight, out-of-the-blue, outrageous, and shocking Corporate Announcement in your largest stock position!

In the 38 years that I have been trading, investing, and managing money, I've seen my fair share of shocking corporate announcements. And I have been on the wrong side of a few of them, but I fortunately have managed to dodge most of them. When I was younger I employed the less-than-optimal trading strategy of "placing all your eggs in one basket, and then watch the basket very carefully". Lessons of time and money have prevailed and I now "diversify" a little more, although "overweight" situations are probably still more common than they should be in my current investment approach (i.e. gold stocks).

On Thursday morning, February 4th, I woke up early as I usually do and reviewed all my positions for potential overnight activity. I remember feeling great with my massively "overweight" allocation in precious metals mining shares, as everyone one of them had posted 25% to 50% gains since I bought them in mid-January 2016. In my head I was thinking "Master of the Universe" after what looked like a brilliant call on the U.S. Dollar (down) and Gold (up) earlier this year (in this column and with my portfolios). To capitalize on my bullish view on gold and silver stocks, I could have taken the easy and safe route with purchases of the most popular ETFs (GDX, GDXJ, and SIL), but I reached deep into my "master of the universe" stock picking talent and bought 6 of my favorite names in this hated sector. Those 6 names were AG, CDE, EXK, IAG, SSRI. and PPP. Yes, PPP !?

After the close late Wednesday, February 3rd, Primero Mining Corp. (symbol PPP) announced that its Mexican subsidiary, Primero Empresa Minerva had received a legal claim from the Mexican tax authorities (better know as SAT) seeking to nullify the Advance Pricing Agreement (better know as the APA) issued by the SAT to Primero Mining Corp in 2012. This APA confirmed Primero's basis for paying taxes on realized silver prices for the years 2010 to 2014. Mexico's SAT did not identify any different basis for Primero to pay its taxes, but Primero's management and its legal counsel indicated to investors that they strongly believe this latest "legal claim" by Mexico is "without merit" (and they will fight it "vigorously").

Of course, even though I held 6 different names in my precious metals portfolio, Primero was my largest allocation. Given that Gold and Silver prices were up sharply again Thursday morning (in a strong uptrend), I remember thinking early Thursday morning that PPP may actually open unchanged or just slightly lower, but the market would then quickly shrug off this negative corporate "tidbit", especially given that the Mexican government was looking at increased taxes on Primero's silver sales, and PPP is mostly focused on Gold mining. Primero traded as high as $2.73/share intra-day on Wednesday, February 3rd, but closed suspiciously weak that day at $2.63/share. After the overnight negative news, PPP opened at $2.10/share and promptly went south to close out the week at $1.62/share which was down 41% from Wednesday's intra-day high. I consider myself fortunate to sell my billion shares of PPP at $2.04/share. And when I was selling my entire stake in PPP, paranoia began to take hold and I started to think that Mexico would soon go after every mining company to nullify ALL its ATA agreements in a semi-Nationalist attempt to secure (steal) much-needed additional revenue for this impoverished State. Of course, all my mining stocks have Mexican properties, so by Thursday's close I had blasted out of every mining stock I own. Most gold/silver mining stock portfolios posted gains of at least 5% on Thursday, February 4th, but my 6-stock portfolio actually lost 3% that day. We can all think of worse war stories (i.e. October 1987, May 2010), but it still hurt none-the-less. "Master of the Universe"? Perhaps not yet!

Bottom Line: 

1. While I don't have any horses in the race right now, I still think Gold/Silver mining shares will be among the big winners of 2016 (assuming they aren't nationalized).

2. My computer trading system has triggered some interesting buy signals in the U.S. stock market (see charts below). I am not sure right now if I will attempt to participate on the long side, but there is no chance that I will be shorting the S&P 500, the Russell 2000, or the Nasdaq Composite anytime soon.

3. While central banks across the globe look like they are no longer omnipotent, I strongly suspect that they have a few more tricks up their sleeves to boost financial assets prices in attempt stimulate economic growth.

Primero Mining (PPP) Daily Chart with 200-Day Moving Average Line

Phildelphia Gold/Silver Mining Stock Index (XAU) Monthly Chart

Russell 2000 Weekly Chart with Computer-generated Buy & Sell Signals and 200-week MA

S&P 500 Stock Index Weekly Chart with Computer-generated Buy & Sell Signals

NY Composite Index Weekly Chart with Computer-generated Buy & Sell Signals

Negative Interest Rates & Their Impact On Financial Asset Prices

In an unexpected move very early this past Friday morning (Jan 29th), the Bank of Japan announced that it will cut the rate on current accounts that commercial banks hold with the BoJ to minus 0.1%, adding that it will push this rate even lower if necessary. With this move to a negative interest rate policy (NIRP), the Bank of Japan now joins a half dozen central banks in major countries across Europe with interest rates also below zero. 

When I was a fresh young student at the University of Chicago Graduate School of Business 40 years ago, interest rates below zero were thought to be theoretically impossible. However, here we are in the real world and clearly the impossible is now becoming commonplace. In recent Q&A's following scripted speeches, Federal Reserve Chairman Yellen and influential NY Federal Reserve President William Dudley both said that a negative interest rate policy here in the United States was possible if financial conditions deteriorate enough to warrant such action.

San Francisco Federal Reserve Bank President John Williams told reporters this past Friday that he now sees slightly slower growth, slightly higher unemployment, and about a tenth of a percent lower inflation this year than he had expected in December, when the Fed raised rates for the first time in nearly a decade. The Federal Reserve probably needs to keep U.S. interest rates lower for longer given headwinds from weak global economic growth, a stronger dollar and an unexpectedly sustained drop in oil prices, according to Williams."Standard monetary policy strategy says a little less inflation, maybe a little less growth ... argue for just a smidgen slower process of normalizing rates," Williams said. "We got a little stronger dollar, some mixed data on the economy, some weakness in (fourth-quarter U.S. GDP growth), all of those coming together kind of tell me that we probably need a little bit more monetary accommodation this year than I was thinking in the middle of December." 

All the "ducks" are starting to quack now! The hawkish views that were so "unanimous" following the Fed's interest rate hike in December have quickly receded to the point where almost no one expects more than a single interest rate hike from the Fed for the remainder of 2016, and voices can already be heard around the water coolers on Wall Street that the Fed might actually have to cut rates before year-end. And a 4th round of QE may also be a possibility now!

What does this mean for investors?

For U.S. equity prices, probably flat to higher over the rest of this year. Corporate earnings disappointments coincident with an economy on the verge of (or already in) recession will negatively impact share prices which will tend to offset any potential easing of monetary policy by the Federal Reserve.

For U.S. bond prices, Treasuries will probably represent a reasonable flight-to-safety option, and Treasuries will have scarcity value if talk of another round of QE escalates. Corporate bonds will be plagued by the stigma of  potential bankruptcies in the energy sector, but overall the better credits should do well.

For foreign exchange traders, the U.S. Dollar has been "king of the hill" for almost five years now. After bottoming out in May 2011, the U.S. Dollar Index is up 37% since then. When the BoJ "shocked" the financial markets this past Friday with a negative interest rate policy, the U.S. Dollar Index jumped about 1%. My own feeling is that Fed governors and other Fed presidents like Williams this past Friday will join in a united chorus of dovish speeches over the very near term which will knock down the U.S. Dollar in foreign exchange dealings over the next several quarters. And if QE4 is actually announced by the Fed, then the U.S. Dollar could plunge! 

What's left?

Oh yes, GOLD, precious metals, and related mining shares. I believe that the 4 1/2-year bear market in gold, silver, and related investments is over! Gold prices are already up 5.48% in 2016 (despite a stronger U.S. Dollar!), which far eclipses almost every other investment in terms of performance. The S&P 500 Index is down 5.07% so far this year, and most other major U.S. stock indexes are down even more. Among sector indexes, the NYSE Biotech Index is actually down 24.00% and the KBW Bank Index is down 12.62% year-to-date so far in 2016!

In the interest of full disclosure, my current allocation to precious metals mining shares is approximately 40% in the accounts I manage. This relatively high sector allocation is up from zero % to start the year.

If a picture is worth a 1,000 words, please take a look at the latest monthly chart of the Philadelphia Gold/Silver Stock Index (symbol XAU) which shows a monthly chart buy signal just triggered by my computer trading system for the first time in 18 years (since January 1998). A monthly chart buy signal was also triggered in the Major Gold Miners ETF (symbol GDX) this month (among other buy signals in gold and silver related mining shares).

Philadelphia Gold/Silver Stock Index (XAU) Monthly Chart with Computer-generated Buy & Sell Signals

Major Gold Miners ETF (symbol GDX) Monthly Chart with Computer-generated Buy & Sell Signals

Will The Federal Reserve "Blink" At Its Next FOMC Meeting?

At its December 2015 FOMC meeting, the U.S. Federal Reserve raised interest rates for the first time in almost a decade. While this first hike was only 25 basis points, post-meeting comments from FOMC voting members suggested that eight more 1/4-point hikes would be forthcoming over the next two years.

The U.S. stock market, as measured by the S&P 500 Index, fell sharply in the first three weeks of this new year. If we start with the closing year-end 2015 level of 2043.29 and then compare it to the January 20th intra-day low of 1812.29, the decline was 11.3%. And if we measure the January 20th intra-day low against the May 21st, 2015 all-time high in the S&P 500, then the decline was 15.1%. I don't think it's a stretch to conclude that at least some of investor concerns this year so far have been related to the actual and apparent expected tightening of monetary policy by the Federal Reserve. Don't fight the Fed? Isn't that the best investor advice ever written in the shortest possible words?!! Of course, maybe the collapse in crude oil prices had something to do with the collapse in U.S. stock prices, or lower economic growth in China, or the warm December weather, or the cold January weather. Pick your poison? Maybe it's Donald Trump's fault? You're fired!

I don't think it really matters why U.S. stock prices caved from January 4th through the morning of Wednesday,  January 20th. What matters is where do we go from here? My computer trading system indicates that U.S. stock prices are going higher from here. The rebound from Wednesday's intra-day lows has been meaningful, and I don't think this rebound is a "dead cat bounce". However, right now my own long positions only include energy, commodities, steel, and precious metals stocks. I recently read that over the last six years the best strategy has been to buy the general market (SPX) one week before each FOMC meeting and sell one week after each FOMC meeting. I was stunned by the results in this report. The "buy & hold" portfolio earned about 12% annually while the FOMC "two week" holding period strategy yielded more than double the buy & hold result. I think it's interesting that the U.S. stock market bottomed on Wednesday, January 20th, one week prior to the FOMC meeting this coming week. My best forecast here is that U.S. stock prices will be higher at least through the end of this month and maybe even for a couple of days in early February (consistent with the FOMC trading strategy of buying one week before each meeting and selling one week after each meeting)..

In my last blog dated Sunday, January 17th, I predicted that crude oil prices would bottom out early this past week and that prices would not stay below $30 a barrel for very long. For now, this looks like a pretty decent call. Of course, when prices were collapsing early Wednesday, my energy positions were testing my patience to the limit. However, the rebound in energy prices late Wednesday, Thursday, and Friday was nothing short of spectacular! One of my energy stocks, SM Energy (SM), actually rebounded 60% from Wednesday's intra-day low to Friday's intra-day high! My simple view here is that WTI Crude Oil prices will probably not trade significantly below $30/barrel for the remainder of 2016. $40/ barrel is a reasonable forecast for the current rebound over the near term (120 days), but I suspect prices will overshoot on the upside at one point in 2016. 

While Gold and Silver are among the few winning positions so far in 2016, with gains of 3.4% and 1.4% respectfully so far in January, most of the precious metals mining shares have been poor performers. While I am not sure why gold/silver mining shares have been weak (except ABX & AEM), It's not hard to imagine that the specter of four interest rate hikes this year from the U.S. Federal Reserve and the resulting positive impact of higher U.S. interest rates on the U.S. Dollar may have investors in the precious metals arena just a little bit nervous (understatement!). But what if the Fed backs down this coming Wednesday from its hawkish stance as signaled following its last meeting in December 2015? What will happen to gold and silver prices when investors realize that the U.S. Federal Reserve is NOT going to raise interest rates in 2016, and it may even lower them! And if U.S. economic results continue to disappoint, could the Federal Reserve actually initiate another round of "quantitative easing" (QE4)? For gold and silver prices to rally sharply, all that has to happen is for the FOMC to decide this coming week that maybe four rate hikes this year are off the table for now. While the Fed probably won't announce this action definitively, it probably will convey a much more dovish monetary stance, and gold, silver, and related investments will then surge sharply higher!

Bottom line:

1. The U.S. Dollar looks vulnerable to a major correction

2. Gold and Silver prices look ready to breakout on the upside

3. Gold and Silver mining shares look historically cheap right now

U.S. Dollar Index Daily Chart with Computer-generated Buy & Sell Signals

U.S. Dollar Index Weekly Chart with Computer-generated Buy & Sell Signals

Barrick Gold (ABX) Daily Chart with Computer-generated Buy & Sell Signals

Major Gold Miners Index (GDX) Daily Chart with Computer-generated Buy & Sell Signals

Russell 2000 Index Daily Chart (RUT) with Computer-generated Buy & Sell Signals

Russell 2000 Index Monthly Chart with Computer-generated Buy & Sell Signals

Where Is The Bottom In Crude Oil Prices?

After falling 35% in 2015, crude oil prices are down another 20% so far in 2016. Price action in the futures market this past Friday (01/15) could be described as a selling climax, but the rebound from intra-day lows was probably less than bulls may have hoped for. My own view is that crude oil prices will not trade significantly below $30/barrel for any extended period and that a meaningful rally will begin very early this coming week. I further believe that prices will soon rise above $30/barrel to begin a sustained advance to at least the $40/barrel area.

Much has been made in the financial press of the "flood gates" now open for Iran to add to current global surplus of oil production relative to demand, following the official lifting of sanctions yesterday. There is a widely held view that Iran will immediately add 500,000 barrels per day to global production on the open market, and within 12 months this number will be close to 1,000,000 barrels per day. While I am skeptical of these forecasts, few would argue the fact that this is the widely held consensus view right now.

"Buy the rumor, sell the news!" is a well known trading strategy often used by successful traders. I see the lifting of sanctions on Iran as the exact reverse in terms of timing the bottom in crude oil prices. In other words, we all should have been shorting crude oil on the expectation of the lifting of sanctions against Iran. However, now that sanctions have actually been lifted, shorts need to be covered and new longs established. I am not an oil trader, but this makes sense to me.

Here are a few noteworthy items from the last couple of days relating to crude oil prices:

(1) Jeff Currie, Head of Commodities Research at Goldman Sachs, has been among the most vocal bears on crude oil prices over the last year. Despite skepticism from me in a column several months ago, his incredible forecast of a $20 handle for oil has clearly been met, and his views relating to this particular commodity market must be respected. On Friday, Mr. Currie indicated that crude oil prices may be close to a bottom and that the expected rebound would take prices back to the $40/barrel area by June 2016. 

2. Russia, the world's largest producer of oil and the world's second largest exports at 7.3 million barrels per day in recent months, appears ready to curb production (for a number of different reasons). The Russian "state-owned" oil-pipeline monopoly Transneft said on Friday that Russian companies are likely to cut crude shipments by more than 6% over the course of 2016. This translates into a cut of almost 500,000 barrels per day which represents about 1/3 of the daily excess supply on the global market right now. Since Saudi Arabia has been consistent in its policy statements over the past year that it will NOT reign in production without cooperation from other major Non-OPEC producers to do the same, does Russia's announcement on Friday qualify? In other words, will Saudi Arabia finally curb production (or at least change its bearish rhetoric) in response to the latest Russian comments from Transneft?

3. Today, Bloomberg news reported that Saudi Oil Minister Ali al-Naimi said that crude oil prices will rise and he now foresees that market forces and cooperation among producing nations will lead to renewed stability. "I am optimistic about the future, the return of stability to the global oil markets, the improvement of prices and the cooperation among the major producing countries," al-Naimi said. Saudi Arabia currently produces 10.25 million barrels per day, up 750,000 barrels per day over the past year. Could these comments by Saudi Oil Minister Ali al-Naimi be an immediate "game changer" in the oil markets?

4. In the latest PIMCO "Economic and Market Commentary" blog, dated January 15th, Greg Sharenow makes a solid case for the end of the current downturn in crude oil prices, and perhaps even a compelling case for a decent rebound immediately ahead. Mr. Sharenow says that refinery margins remain robust given incredibly strong demand for gasoline and jet fuel. He also points out that spreads between short-term and long-term crude futures contracts are narrowing, which is apparently bullish. When there is demand weakness or an oversupplied market, usually the nearby contract declines more than the longer term contracts (a widening in spread prices). And most interesting to me from Mr. Sharenow's blog is the fact that WTI crude is now priced higher than Brent crude which has NOT been the case, on balance, since 2010. The reason for this is related to the fact that domestic U.S. onshore production has declined by at least 600,000 barrels per day in the 7 months ending October 2015. And since the data here is available only through October 2015, this production decline is probably significantly higher if we include results from November, December, and January (which have yet to be published).

In the interest of full disclosure, I currently have a 30% portfolio allocation to energy stocks. And if one of my stocks is any indication (SM Energy with a 22% short interest), there may be extreme levels of bearish sentiment by often-wrong investors in this space. Also in the interest of full disclosure, I now have a 40% allocation to a diversified portfolio of gold and silver mining shares. As you can see from one of the charts below, the benchmark Philadelphia Gold/Silver Stock Index (symbol XAU) is now at its lowest level since the year 2000 when gold was priced at $250/oz as compared to its current price near $1,090/oz. Is there value in the mining space right now? I believe that current share prices in the precious metals mining sector now represent what may very well be a "generational" buying opportunity! Unfortunately, for me to be right here, the U.S. Dollar needs to retreat significantly in foreign exchange dealings against most major currencies. Fortunately, my research now indicates that the Greenback is ready for a major downside correction as foreign exchange traders soon begin to realize that the U.S. Federal Reserve will NOT raise interest rates in 2016, and it may even CUT RATES in response to rapidly deteriorating U.S. and global economic data.

Postscript written Monday, January 18th at 11:00 AM CT:

In the latest data released by the U.S. Commodity Futures Trading Commission, for the week ended January 12th, speculator short positions in WTI Crude Oil futures surged 15% to the highest in records dating back to 2006. Net long positions fell to the lowest in more than five years. I view this massive one sided bet as the single best technical indicator that crude oil prices are about to rebound sharply.

Oman is now the first major non-OPEC oil producer to say it would slash its output in coordination with other countries. This morning, Oman's Oil Minister Mohammad bin Hamad al-Rumhy announced that Oman is ready to cut its total crude oil production by 5% to 10% in order to help stabilize prices.

Other OPEC and Non-OPEC producers are soon likely to follow the lead of Russia and now Oman in announcing planned cutbacks in crude production! Can a major rebound in crude oil prices be far behind?

U.S. Dollar Index (symbol DXY) Daily Chart with Computer-generated Buy & Sell Signals

U.S. Dollar Index (symbol DXY) Weekly Chart with Computer-generated Buy & Sell Signals

 

Oil Services ETF (symbol OIH) Daily Chart with Computer-generated Buy & Sell Signals

Oil Services Index (symbol OSX) Monthly Chart with Computer-generating Buy & Sell Signals

Philadelphia Gold/Silver Stock Index (symbol XAU) Monthly Chart with Computer-generated Buy & Sell Signals