Most recently, our short-term model looked for a trading top into the option expiration of two weeks ago when the S&P 500 (SPX/2169.04) was hovering around the 2190 level. While the SPX has not really given back very many points since then, many individual stocks have. Consequently, if there is no downside follow-through early this week to last Friday’s HUGE intraday downside reversal, it would not be surprising to see the SPX trade to new all-time highs into where our intermediate model targets the first real point of vulnerability is coming in mid/late September.
Speaking to Friday’s stunning reversal, quite frankly I didn’t understand why the D-J Industrial rallied over 100 points on Chair Yellen’s speech. But I do know, and have said it many times, that much of the time the first market move on any Fed statement tends to be a wrong-way move; and boy was that the case last Friday! By now every word and gesture from Ms. Yellen’s speech has been dissected and opined on, but I have not heard anyone talk about the most obvious observation from said speech. She went out of her way to tell us the Fed is ready to raise interest rates . . . the important phrase is “out of her way.&rdquo BANG, the odds of a rate increase for next month went from basically zero to about 40%. In discussing this with our chief economist, Scott J. Brown Ph.D., I asked him about this week’s all-important employment report and if he was anywhere near the consensus number of 180,000 jobs. Scott said he would take the “under” due to seasonal adjustments, government hiring trends, back to school, etc. “So what’s the number,” I asked. Scott said, “I think it’s somewhere around 150,000. Ladies and gents, if that is correct there will be no rate hike in September.
This week is a busy week for economic report with obviously Friday’s employment report being the major report. The “consensus call” is that nothing will happen in the various markets this week, a view we take issue with given last Friday’s action. Of course there was action in many of the other markets last Friday as well. The U.S. Dollar Index had a wild ride on Friday, but continues to look like a massive head-and-shoulders “top” in the charts (Chart 1), which we have been saying for over a year. The oil market also rode the Wild Mouse (mouse) and appears to be attempting an upside breakout on Friday’s unconfirmed rumor that, “Yemeni missiles hit a Saudi Aramco facility in Jizan” (rumor). Meanwhile, the underperforming bank index has staged an upside breakout (Chart 3), as has the emerging market index (Chart 4). Coincidentally, last week I did a joint conference call with GaveKal’s lead portfolio manager on their relatively new GaveKal Knowledge Leaders Developed World ETF (KLDW/$26.97) that is now available on the Raymond James platform (KLDW). Also of coincidence is the cover of Barron’s this week that reads, “[The] 10 Best Dividend Stocks,” which intuitively implies that theme is long of tooth and that “safe stocks” (low volatility stocks) are pretty expensive. Importantly, we continue to believe the equity markets are transitioning from an interest rate driven bull market to an earnings driven bull market and that the low water mark for this profit cycle came in 4Q15 (Chart 5).