Record Calm Stock Market Gets A Shock

Via Dana Lyons" Tumblr,

After a record run of muted movement, will recent volatility send negative shock waves through stock market?

The recent uptick in stock volatility has some investors on edge (OK, it is mostly just financial news editors on edge). The truth is, while volatility over the past week has seen an increase, it is not all that far away from the historical norm. Last Thursday through Monday, for example, the Dow Jones Industrial Average (DJIA) experienced 3 straight “volatile” days, with daily ranges of between 1% and 1.6% on all 3 days. Looking historically, however, we find that the average daily range in the DJIA over the last 90 years is 1.6%. Even during the current bull market since 2009, the average range is 1.08%. Thus, the recent action should hardly be characterized as volatile.

The reason it perhaps seems so tumultuous is because we are emerging from a long stretch of calm in the market – record calm, at that. Prior to Thursday, the DJIA had gone 72 days without experiencing a daily range as wide as 1%. If that sounds like a long stretch, it’s because it is a record. In fact, the record prior to this recent streak was just 49 days in a run that ended in late February of this year. And prior to 2016, the record going back to 1928, according to our database, was a mere 32-day streak back in 1944 – less than half the recent streak.

Furthermore, historically, there have been just 16 streaks that have lasted as long as 21 days, i.e., 1 month.

Interestingly, this recent streak is the first of any of the 16 that saw 3 straight 1% daily ranges immediately following its culmination. So is mean-reversion starting to rear its volatile head here following the record calm? And is there a nefarious message to the sudden uptick in volatility?

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Dow Jones Megaphone pattern, bounce of new support

Below looks at the Dow Jones Industrials Index over the past 100 years on a monthly closing basis-

In the early 1980’s the Dow used old resistance to become new support at (1), where a breakout and strong rallied followed.

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The Dow looks to be using old resistance as new support to push higher off of at (2) again.

Positive price action off new support at (2) continues. For bulls to get concerning long-term concerning message from this pattern, support would need to be taken out at (2).

 

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White House Considering Mohamed El-Erian For Fed Vice Chair

In what will come as a big surprise to many Fed watchers, moments ago the WSJ reported that among other candidates, Mohamed El-Erian, former deputy director of the IMF, former head of the Harvard Management Company, Bill Gross" former partner at Pimco until the duo"s infamous falling out, and one of the few people who - together with John Taylor - actually deserve the nomination, is being considered for the Fed Vice Chairman role. DJ also added that Kansas banking regulator Michelle Bowman is also being considered. From the WSJ:

The White House is considering economist Mohamed El-Erian as one of several candidates to potentially serve as the Federal Reserve’s vice chairman, according to a person familiar with the matter.

The process of selecting the Fed’s No. 2 official began this month after President Donald Trump nominated Fed governor Jerome Powell to succeed Fed Chairwoman Janet Yellen when her term expires next February.

The WSJ adds that there is a broad range of candidates under consideration for post, and that the White House will focus on monetary policy experience for post.

Reportedly, the White House is also considering the nomination of a Kansas banking regulator for a seat on the Fed’s board of governors, according to two people familiar with the matter.

Michelle Bowman was confirmed as the Kansas bank commissioner in January and would be nominated to a spot reserved for a community banker or regulator of community banks. In 2014, Congress reserved one of seven seats on the Fed’s board for a community banker and the position has never been filled.

For those unfamilair, here are some recent perspectives on El-Erian"s recent thoughts:

• El-Erian likes Bitcoin/Blockchain


• Fears a China Minsky Moment


• Is aware of equity market disconnect from reality


• Thinks The Fed Put is gone


• Is not surprised by low inflation

And some recent notable quotables:

• "The Fed"s embarked on this beautiful normalization: It has stopped [quantitative easing], it has raised rates, it has declared a path to reduce its balance sheet without disrupting markets and without derailing the global recovery. And I don"t think anybody will want to mess with this beautiful normalization”


• “We don’t understand very well why inflation is low. And therefore, should inflation be an over-determining factor in monetary policy? On the other hand, how concerned is the Fed about elevated asset prices?”


• “I suspect the market is too sanguine when it comes to how much central bankers are thinking about the risk of financial instability down the road."

Dow Hits 23,000 - There's Just One Thing

Just four weeks since The Dow crossed 22,000...but thanks to Goldman, Boeing, Caterpillar, 3M, and JPMorgan (accounting for over 500 Dow points), the mainstream media"s favorite index just topped 23,000 for the first time ever...

With the Top 6 names driving 50% of the index"s move...

However, it seems options traders ain"t buying it...

If everything"s so awesome... why are investors buying Dow protection with both hands and feet?

As retail piles in, so professoinals are hedging to extremes.

Finally - for good measure - "Industrial" Production remains well below 2014 highs... but the "Industrial" Average is soaring...

After Quietest September Ever, Stocks Face Ominous 'Curse Of 7' In Q4

After the quietest September in history for U.S. stocks...

Things may about to get a little more exciting - entering the final months of 2017, that last digit doesn’t bode well, if history is any indication.

As Bloomberg reports, some of the biggest fourth-quarter declines in the Dow Jones Industrial Average have occurred in years ending in seven, the worst being in a Black-Monday plagued 1987.

This year’s risks include a proposed tax overhaul in the U.S., expected policy shifts from central banks around the world and China’s twice-a-decade party congress.

Dead.Market.Walking

While all eyes have been focused on the incessant rise in the price-weighted farce known as The Dow Jones Industrial Average, a funny thing happened in the "real" market...

The S&P 500 went nowhere... 2474, 2473, 2473, 2470, 2477, 2478, 2475, 2472, 2470, 2476, 2478, 2472, 2477...

How unusual is this? Simple - it"s never, ever (in 90 years of S&P history) happened before...

Since The Fed (et al.) began tinkering (red shaded box), markets have slowly (and now quickly) died.

Perhaps even more worrisome, Investors are positioning for more of the same...

There has never been a bigger speculative position tilted towards still-lower volatility...ever!

Low Volatility Will Make The Next 5% Drop In The Dow "Feel Like 1987"

The VIX has recently flirted with its all-time closing low, analysts worry that volatility has been so low for so long that analysts are worried that the next sizable negative shock will cause investors to panic and dump their holdings.

Other than a handful of selloffs over the past couple of years (Aug. 2015, Jan. 2016, June 2016), Federal Reserve-led easing has guided markets steadily higher since the crisis. As MarketWatch reports, The Dow hasn’t experienced a 5% drop since 2011, and before that a 5% drop hadn’t happened since 2008, when there were 9 such drops. The blue-chip index closed at a record high on Friday, leaving it just 200 points shy of 22,000. At this level, a 5% selloff would equate to a 1,100-point, one-day slide in the gauge - an eye-popping four-digit drop.

Art Hogan, chief market strategist at Wunderlich Securities, says the market isn’t prepared for a large selloff because "garden-variety" volatility has been largely absent from US stocks for the last year.

""I would say no because we’re out of practice. Your usual standard garden-variety volatility just hasn’t been around, and we haven’t seen it for 12 months," Hogan told MarketWatch.

"Quiet markets have been the norm and not the exception and I think a major pullback is going to feel a whole lot larger for lack of experience and the numbers are larger," he said.”

Hogan isn’t the first strategist to point out the market’s vulnerability to a sharp rise in the VIX. As Morgan Stanley’s Chris Metli said in a research note exploring what a “short vol unwind” might look like. Low volatility has produced a regime where the risks are asymmetric and negatively convex, so being prepared for an unwind is critical, since a 3% or 4% move in the S&P 500 can have a disproportionately large impact on the VIX as dealers and exchange-traded products rush to hedge.

According to Marketwatch and Dow Jones data, even a 2.5% drop in the Dow, adding up a 550-point decline, could rattle investors. Moves of this magnitude, while still relatively rare, are far more frequent, with 564 such moves occurring in the Dow since 1901. The most recent slump of this magnitude occurred on June 24, the day after the Brexit vote, when the Dow tumbled about 610 points, or 3.4%. There were three such moves in 2015. The S&P 500 is also long overdue for a major pullback.

As for the S&P 500, 61 of the past 67 years have seen at least one 5% drop, or 91% of all years, according to Ryan Detrick, senior market strategist, at LPL Financial.

"‘The inevitable 5% drop will be a shock to nearly everyone,’ Detrick said. ‘We’ve been historically spoiled so far this year, but as the economic cycle ages, we fully expect more volatility the remainder of this year and the likely 5% correction to take place as well,’ he said.”

Still, it’s important for investors to remember that while a 5% might “feel like 1987,” it’s necessary to “flush out the weak hands,” Detrick says.

“The important thing to remember is the Fed is still accommodative, earnings continue to improve globally, and inflation is contained - meaning any pullback could be a nice opportunity to add equity exposure.

Although a 5% correction might feel like 1987 to some of us about now, pullbacks and volatility are perfectly normal parts of bull markets and are needed to flush out the weak hands.”

Market luminaries including billionaire investor Howard Marks and Nobel Laureate Robert Shiller have warned investors to be cautious. According to Shiller’s CAPE ratio, a popular measure of equity valuations, S&P 500 valuations are at levels only seen twice before: in 1929 and 2000. Shiller said on CNBC Thursday that he “lies awake worrying” about how long this period of quiet will last. Doubleline Capital founder Jeff Gundlach said his fund bought up VIX calls when the index hit its most recent lows.

To be sure, investors are willing to pay a premium for protection. According to Bank of America, the market has never "trusted" the VIX as little as it does now, and has never before been willing to pay, and bet, more for upcoming imminent sharp moves.

Stock bulls; Concerning if weakness starts here

Although the major stock market indices are just a few percent from all-time highs, the market is clearly at an interesting and important juncture here.

Since setting new all-time highs in March, the major stock market indices have churned sideways, with only the market leading Nasdaq Composite (INDEXSP:.INX) making marginal new highs.  While this divergence may seem minor in the scheme of things, it comes at a time when chart patterns are testing resistance on longer time frames.

Today, we’ll look at two charts (covering 4 major indexes) that active investors need to be watching.

Dow Jones Transportation Index

The Dow Transports (INDEXDJX:DJT) may be in the process of creating a repeating historical (bearish) pattern that reared its head in 1998-99 and 2007-o8. The bulls will need the transports to blow through the red resistance line to breathe a sigh of relief. If not, it could spell trouble for the transports. You’ll also notice the current uptrend line at point 1 (blue). A break below this line would be the first warning to investors.

The transports are a key cog in our economy, so they also tend to be a key indicator for stocks historically.

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This article was written for See It Markets.com.

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Pedro da Costa: "I Tried To Ask Yellen about The Fed Leak"

Submitted by Pedro Nicolaci da Costa

I once asked Janet Yellen a rather straightforward question that would echo for much longer than I expected.

It was March 2015, and the Federal Reserve was under pressure from Congress to reveal details about an internal investigation into how key details of its interest rate policy deliberations had made their way into a report by a private sector firm.

I was a reporter at the Wall Street Journal*, and I asked the following at a press conference:

Let"s make something clear: Like any journalist, I love a good leak. But this was not your typical leak of important information to a journalist who then reported it to the public.

This was the sharing of private, market-sensitive details with a private party — Medley Global Advisors — which then shared that information with its clients. The leak, it should be noted, happened all the way back in 2012 but it was still being discussed in 2015 because — despite the Fed"s internal investigation — nobody seemed to have gotten to the bottom of what had happened.

And back in 2012, any read on what the Federal Reserve might do to suppress interest rates as the US economy continued to crawl out of the Great Recession, could lead to huge profits for the traders who bet on such things. These days, traders are thinking about the next rate hike. Back then, interest rates were already at zero and the real insight gleaned from Medley"s report was how aggressively the Fed would work to keep them there by using its balance sheet.

My question to Yellen had to do with basic public trust in the Fed. Why should the American people believe the central bank is working in its best interests if policymakers chat privately with movers and shakers on Wall Street? This was an alarming trend I had been reporting on since 2010, when I co-authored a report for Reuters entitled "Cozying up to big investors at Club Fed."

In it, my colleagues and I detailed other instances of market-moving information inappropriately being shared with investors, a trend we first observed when Fed officials speaking to bankers and hedge fund managers at conferences would suddenly go silent when a reporter walked by.

After the Yellen press conference, I took two weeks of paid leave for the birth of my daughter. When I returned, my editor at the paper told me I would no longer be attending Fed press conferences. No reason was given, and I left the job a few months later.

Market bloggers speculated the Fed had "banned" me from the press conference. I have no reason to think that was the case because the central bank let me back in as soon as I changed news organizations.

Fast-forward to April 4, 2017: Richmond Fed President Jeffrey Lacker resigns abruptly after admitting he was a source of the leak.

As soon as I saw the news, the whole press conference incident flashed before my eyes.

But Lacker"s admission that the Medley leak originated with him doesn"t entirely settle the matter.

We know Yellen also met with Medley herself. Why? What did she say to them? Former Fed economist and Treasury official Seth Carpenter was also under scrutiny on the issue. What were the results of the Fed"s own investigation? And of Congress"?

Also: Why did it take Lacker so long to come forward?

I"ll have to keep asking.

*I"m identified in that transcript as a reporter for Dow Jones Newswires, even though I was working for The Wall Street Journal, because both publications are part of the same company and, by tagging me as a Newswires reporter, Dow Jones could get more than one person in the room.

The "Other" Dow Theory Is Waving A Red Flag

Via Dana Lyons" Tumblr,

While the Dow Industrials remain near all-time highs, the Utilities are well off of their highs; this has signaled trouble in the past.

Back in May 2015, we wrote a series of posts on divergences in the equity market. The series was partially inspired by the considerable attention being paid to the prevailing divergence between the Dow Jones Industrial Average (DJIA) and the Dow Transportation Average (DJT). Of course, the relationship between those 2 indices form the basis of the popular “Dow Theory”. And while there are multiple stipulations to the Dow Theory, its crux is based on the confirmation or divergence between the 2 indices. And the failure at that time of the DJT to confirm the new high in the DJIA was concerning some market observers.

Upon a study of the historical relationship between the 2 indices, our assessment was that the Dow Theory, or at least that part of it, was a bit overrated. It’s not that it was wholly irrelevant. Indeed there were multiple examples of divergences signaling major cyclical tops in the markets. And, in fact, that May 2015 occasion marked a significant intermediate-term top prior to the considerable market weakness over the subsequent eight months. However, we found the divergences to be just too unreliable as a market signal.

On the other hand, there were other divergences occurring at the time that we felt were more worthy of investors’ concern. One such divergence dealt with the sister index of the DJIA and DJT, i.e., the Dow Jones Utility Average (DJU) (as an aside, for all you Dow Theory disciples, we are not applying the actual Dow Theory rules to the DJU, just the divergence statistics). The DJU was also badly diverging at the time and since we had similar historical data as the DJIA and DJT, we thought we would take a look at those such divergences. As it turns out, large divergences of the Utilities historically demonstrated much more reliability as a harbinger of trouble than the Transports, according to our study.

We bring this up today because while the DJIA continues to hang up near its highs, the DJU is once again diverging, sitting well off of its 52-week highs. Thus, we revisited the 2015 post and updated the divergence study. Specifically, we looked for any time that the DJIA traded at a 52-week high while the DJU was at least 10% below its own high. Since 1943, there have been 73 days matching this criteria (many of the dates fell in clusters; though the clusters were of similar numbers of days so we included all such days).

We will note that at last week’s DJIA 52-week high, the DJU was 9.4% below its high so it barely missed meeting this criteria. However, there were numerous occurrences in November and December that qualified. And once again, if recent history is any guide, this might be a problem down the road because the performance of the indices following such divergences has not been good (FYI, by “recent”, we mean since 1943; such divergences prior to that were not as damaging.):

As the table shows, in the intermediate-term following these divergences, returns on both the DJIA and the DJU were exceptionally weak. After 3 months, the DJIA was lower by a median -4.1%, with 80% of the occurrences showing losses. The DJU was also down a median of -4.1% after 3 months, with 75% losers. 6 months after the events, median returns were even worse for the DJIA and DJU at -4.9% and -7.5%, respectively. And even out to 12 months, the majority of these divergences saw both indices lower.

So while the recent simultaneous, confirming highs in the Dow Industrials and Transports has Dow Theorists quite bullish at the moment, the lesser-watched relationship between the DJIA and the Utilities is not quite so positive. Will this divergence be a sign of trouble again this time? There are no guarantees. However, if the historical pattern holds true, we can expect the weakness to begin soon as it has been over a month since the November-December occurrences.

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More from Dana Lyons, JLFMI and My401kPro.

US Stocks Are Now The Most Over-Priced Since The 2000 Crash

Submitted by Tim Price via SovereignMan.com,

On March 30, 1999, the Wall Street Journal’s front page headline blasted the good news across the world:

“Dow Industrials Top 10,000”

The day before, the all-important US stock index, the Dow Jones Industrial Average, closed above 10,000 for the first time in history.

It was a major milestone, and investors cheered.

A few investors, however, were concerned.

They felt that US stocks were too expensive, and the entire market was in a dangerous bubble.

But the Wall Street Journal answered those naysayers, as the headline of the second article on the front page ominously read:

“If this is a bubble, it sure is hard to pop.”

They were right. Sort of. The Dow Jones Industrial Average continued to climb for the next 8 1/2 months.

But on January 14, 2000, it peaked… and then started a horrible 2-year decline that wiped $5 trillion of wealth from investors.

Yesterday the Dow Jones Industrial Average hit another major milestone: 20,000.

You might even have heard the sound of champagne bottles being simultaneously uncorked by jubilant traders at 4pm Eastern Time.

But Dow 20,000 should give any rational individual pause to reflect on the possible consequences.

After all, the single most important characteristic of any investment is the price when you buy it.

It doesn’t matter how spectacular your investment is. If you overpay for it, you have no margin of safety.

And as the market affirmed yesterday, US stock prices can be expressed in a single word: expensive.

It’s not the fact that the Dow hit 20,000 that makes US stocks so expensive. The price of a stock alone doesn’t tell you much.

It’s important to look at the price of the stock relative to other important metrics, like cash flow, book value, sales, earnings, etc.

US stocks right now are selling at the HIGHEST price-to-sales ratio in at least 15 years, and far higher than it was before the 2008 crash.

Similarly, the cyclically-adjusted Price/Earnings ratio of the US stock market is now at its highest level since the 2000 crash, and higher than it was before the 2008 crash.

Looking at other metrics like Enterprise Value to EBITDA (a measure of a company’s core business operating cashflow), US stocks are also at their most expensive levels since the 2000 crash.

Certainly, US stocks could continue to become more expensive. Perhaps they go up forever.

Or perhaps an astute investor should start looking for a margin of safety.

Once significant measure of safety is a company’s Price/Book ratio. This is essentially a reflection of how much an investor is paying relative to the value of a company’s “net worth”.

This matters.

In his book What Works on Wall Street, author James O’Shaughnessy conducted an analysis of the investment strategies that were the most (and least) successful in the US stock market for a period of over 50 years.

One of the most successful strategies? Buying companies with LOW Price to Book ratios.

One of the least successful strategies? Buy companies with HIGH Price to Book ratios.

Over the long run, value investing beats just about everything. And these extremely high multiples in the US market clearly do not qualify as good value.

This is not to say that the entire US market is overvalued; there are still pockets of value in North America. But they are becoming much more difficult to find.

Looking abroad, however, there are a number of other markets overseas where valuations are MUCH more attractive.

If North America stands out by way of high valuations, for example, Japan stands out by way of low and attractive ones.

One third of the entire Japanese stock market has a cash flow yield (Enterprise Value / Cash From Operations) of over 15%.

No other developed market comes close to that.

And as analysts from European bank SocGen point out, Japanese companies also have more net cash than listed businesses in any other country:

More importantly, Japanese companies are being actively encouraged to pay higher dividends and buy back their shares.

Whereas the balance sheets of US companies are groaning with years of accumulated debt, Japanese balance sheets are the healthiest in the world, and they are awash with cash to give back to their shareholders.

Japan is very enticing to value investors, and it’s a great example of how looking abroad and expanding your thinking to the entire world can yield very compelling results.