Thursday, December 27, 2018

The Daily, Part 1 of 3, 12.27-18

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12/27/2018 Investment House Daily
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Investment House Daily Subscribers:


Targets hit: AMZN
Entry alerts: AVGO; VRSN
Trailing stops: None issued
Stop alerts: LLY

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The REPORT SCHEDULE is as follows:

Market Summary Video, Plays and Play Videos, and Play Table with play annotations will issue Wednesday, Weekend.

Monday a Market Summary video, new plays, play table annotations.

Tuesday and Thursday reports will contain the market summary, chart links to view the index charts, and updated play table.

Access to all current videos will remain assessable each day using the play links in the reports.

If any market circumstances arise where we see additional plays we want to prepare for the next session, we will of course issue those plays regardless of the day of the week.


- Stocks try to give up the Wednesday surge, then buyers show up the last two hours with a massive surge. To gains.
- Calls for a bottom abound, but the volatility is so massive it is hard to imagine it means a healthy market.
- CNBC and others hold specials to let you know if this is a bottom or not. Oh, thank you.
- Reasons this is likely not a bottom.
- If it is a bottom, however, we don't mind at all. We will play whatever we get, but of course, are also looking at history.
- Still looks as if there is some more upside and we have some more plays.

Huge down, huge up, then a head fake. The stock indices started lower, hung over from the record move higher on DJ30 Wednesday. What a hangover. DJ30 dropped 611 points at 2:20ET. Looked like another one-day wonder where all the ammunition was shot up Wednesday.

With the turn of a page -- or the microsecond it takes for an algorithm to kick in, stocks turned upside. DJ30 ran 871 points off the low to the close. NASDAQ 242 points low to close. Massive turns as buyers returned, most likely in the form of pension funds rebalancing to include more stocks as the year ends. The result: impressive upside out of very impressive downside.


This action suggests that a bear market rally is in place. With pension funds still likely in need to buy before yearend, a good push higher Friday, likely Monday, and possibly the momentum continues into the first week of the year.

Thus, we bought some more positions to play the move, AVGO and VRSN to go along with WDAY, AMZN, SAVE, TEAM -- those stocks with a lot of bounce in them. We also have an eye on TTWO, APC, TECD, YUM as possible new entries to play more upside. Definitely software stocks are making big moves upside even from crappy patterns (e.g. DATA, NOW, CRM), leading upside. FAANG is at best so-so, a shadow of the software moves. We do have a position in AMZN and even took some gain early session, leaving half to play the continuing bear rally.

The point: two days upside on the rebound, not a huge upside Thursday, and thus still some more upside up for grabs and we can still pick up some positions to play that pension fund end of year mandated buying.

Bounce versus Bottom

Yes, this is the conversation of conversations. Hell, CNBC is airing a special tonight discussing if this is a bottom or just a bounce.

I don't know what they are saying, but I am going to tick off some things to consider before people buy into the 'buy the dip, this is the bottom.' Sure, near term the character has changed: they bought the weakness Thursday. That happens in these tradable bear market rallies. It allows us to make some upside money on the bounce -- if you don't get married to the idea stocks have bottomed and MUST continue rising. They certainly can. I am not saying this is absolutely, 100% only a bear market bounce. I am saying it matches historical similar selloffs and bounces and that you have to keep that in mind -- AS YOU PLAY the bounce. If the bounce keeps going, well, these plays we have entered will make us more than bounce money and other stocks will build patterns over the recovery to keep the move going. If not -- we make the bounce money and then play some more downside plays as we did on the last drop.

Aside from the recent character, the action is just not action from a healthy market. A sharp selloff that hit a crescendo Christmas Eve. It was overdone, massively so based upon the internals (1200+ new lows, heavily negative A/D, heavy downside to upside volume) and sentiment (record outflows from stock funds, VIX finally, finally breaking upside). Trade issues, weaker economic data, Fed scare, yield curve inversion, and over the weekend Mnuchin calling bank CEO's, calling in the PPT. What a setup for a rally.

Realize also that the market selling started as the Fed began drying up its balance sheet. As it drained the liquidity the market sold off. Holy cow, that is 2000 all over again. From copious, indeed massive, liquidity to a dry, empty pool, veritable dust bowl of liquidity. The market partied as if the spigot would never run dry. It didn't, the Fed is just turning it off. Hard to keep the party going when the party liquor runs out. Oh sure, you can still dance, eat some snacks, make some small talk, try your best lines on the opposite sex, but it is just not the same. New Year's party without the bubbly.

The point: there is a REASON stocks fell. Withdrawing liquidity that the markets used to rally invokes Newton's third law: for every action there is an equal and opposite reaction. Or as Mathew McConaughey said in the movie 'Interstellar,' you have to leave something behind. Inject liquidity, stocks rise. Remove liquidity, stocks fall. Powell, trade, Mnuchin -- they were all just the parsley garnishing the steak.

I wrote often that the market would have to give back the gains based on QE if there was nothing more than QE. Through 2016 there was nothing more. The tax cuts have added something, some real growth, and it will still take place -- IF the Fed does not kill it all off. Remember what I said: the economy was just in a slowdown in a continued rise -- until the Fed stepped in at the wrong time and is turning a slowdown into an economic top. It always does, just hoped Powell was a bit smarter. He talked as if he was at first, but then he took off the mask and revealed the faces of all predecessor Fed chair's in some kind of John Carpenter horror movie monster. Yes, I was a fool for hoping.

The only thing I was wrong about was the catalyst. It would have happened sooner but for the tax reform. The Fed stopped QE but it was not withdrawn. I postulated the stoppage would be enough, but it took the withdrawal to again invoke Newton's third law. It makes some sense: the real action was moving the balance sheet back down versus just stopping adding the garbage to the balance sheet.

That strongly suggests this is not over. That the Fed has, as usual, screwed it all up. That it is tightening into a slowdown and turned a slowdown into a meltdown. It is not done. While it might pause in rate hikes as Art Cashin and others are saying, it is NOT stopping the balance sheet reduction. The bigger of the two? The balance sheet reduction. Greenspan's rate hikes in late 1999 and into 2000 were, at first, not the main catalyst. It was the draining of liquidity that seized up the financial markets and then the economy. The rate hikes were the bird that landed on the car teetering on the cliff and sent the car over the edge. The damage was done; the bird just happened to pick that place to land.

Now the other side of the argument. Perhaps the damage done by the Fed is not that bad. Perhaps the tax cuts are stronger. Perhaps the tax cuts will make up ALL the difference in the balance sheet withdrawal and rate hikes and offset their damage and more, justifying this bounce marking a bottom, maintaining ALL the QE gains and adding more on top of that. I am sorry, but as much as I like these tax cuts in terms of generating real investment and growth (they have -- just look at the new businesses, new jobs, wealth creation), so much more has to be done to generate that kind of economic growth to justify the fake QE gains. We need a real healthcare system, not the ACA disaster. Hundreds of thousands of regulations need tearing up. The playing field between the huge monopoly companies and small businesses needs to be leveled. Lots more. With a divided Congress and the House out to get the President and not let him have one win (the democrats have approved in the past $25B for border security measures yet won't spring for $5B for the President), there won't be enough done to generate that kind of economic reform. The additional tax cuts, etc.? All out the window.

The market knows this. The market has shown this. Most likely, despite the experts saying the market has it wrong, it likely has it right. There are so many saying this massive volatility is normal because of algo trading and a lot of concern about a lot of issues (trade war, impeachment, Fed bungling, government shutdown), that is, they are saying it is different this time. Again, it rarely is different and the market's action usually tells the tale.

The biggest clue: there are damn few great setups in great stocks. Most stocks are bouncing from getting their patterns torn to pieces. There are exceptions such as TEAM, WDAY and a few others, but not the plethora of good patterns ready to lead. Perhaps they set up if the rally holds and the indices consolidate. They tried that from October into December, however, and the trading range broke down in the most recent selling. It had the perfect opportunity to form up patterns, and indeed there were a few then as well, but they folded.

What do I say to that? So what?! We will play the market that is there, whether the market got it right or it defies its past in a huge 'it's different this time' move. I would love the latter as that means the economy will still improve and those hard-fought gains the past 1.5 years continue versus the Fed torpedoing them after the prior 10 years of hell for the middle class Americans. They will start more businesses, take more risks, create more jobs, create wealth -- and put it into the stock market. How great would that be? Clue: very great.

Thus, though I do not expect that, we play the great setups upside just as we are for this one. If it continues, awesome. If it does not, as we suspect, then we bank the upside bounce gains when the move stalls and load up the downside again as on the last drop, playing that continuing trend lower.

Last week I said 'embrace the downside.' Don't take that the wrong way. I am simply saying people need to accept the downside in bear markets lasts a long time and to view it the same way they view making money when the market trends higher: recognize it and take advantage of it when it sets up. When the downside sets in, it can be as good and indeed is often better than the upside as the downside moves often are strong and fast. Use it! Make the money and be cool with it. The upside will return at some point and you will see the patterns set up in great stocks and ask yourself 'why are all the experts so negative when the patterns are so good, when sentiment is so bad, and the economic data is showing glimmers of getting just a bit better?' At that point you will realize they are likely all wrong and when those great patterns break higher, then you buy in on the ground floor of the recovery.

We will play this rally as it has a reason to move, e.g. pension fund rebalancing, first of year money allocation to the market. That can make us great money upside. When it starts to falter we lock up some upside gain and see if there are a lot of good upside patterns forming that just need a test to finish their work, or if a lot of stocks have moved up to resistance and are rolling over. We play what the market presents.

Have a great evening!



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Stats: +260.37 points (+1.14%) to close at 23138.82

Stats: +25.14 points (+0.38%) to close at 6579.49
Volume: 2.44B (-5.06%)

Up Volume: 1.49B (-780M)
Down Volume: 902.84M (+612.84M)

A/D and Hi/Lo: Advancers led 1.03 to 1
Previous Session: Advancers led 3.81 to 1

New Highs: 1 (-6)
New Lows: 301 (-411)

Stats: +21.13 points (+0.86%) to close at 2488.83
NYSE Volume: 1.075B (+1.22%)

Up Volume: 2.48B (+1.456B)
Down Volume: 376.845M (+340.458M)

A/D and Hi/Lo: Advancers led 1.18 to 1
Previous Session: Advancers led 6.91 to 1

New Highs: 6 (+2)
New Lows: 219 (-589)


VIX: 29.96; -0.45. After the breakout, VIX is in a normal breakout test, likely with a couple of days testing to the 10 day EMA. Then it could be ready to break higher again, meaning stocks would be selling.
VXN: 34.37; +0.67
VXO: 33.99; +1.16

Put/Call Ratio (CBOE): 0.96; -0.10

Bulls and Bears:

Falling and rebounding to where they were four weeks back. Starting to converge. This coming week's numbers should show a bull dive and bear jump, converging the two to levels not seen since 2016.

Bulls: 39.3 versus 45.5

Bears: 21.4 versus 20.4

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.

Bulls: 39.3 versus 45.4
45.4 versus 46.7 versus 38.3 versus 39.6 versus 42.9 versus 42.5 versus 50.5 versus 51.9 versus 56.3 versus 61.8 versus 60.6 versus 59.0 versus 57.7 versus 60.1 versus 59.6 versus 57.7 versus 57.3 versus 54.9 versus 54.5 versus 54.9 versus 55.3 versus 52.4 versus 47.1 versus 47.6 versus 52.0 versus 55.5 versus 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00

Bears: 21.4 versus 20.4
20.4 versus 21.50 versus 20.6 versus 19.8 versus 19.0 versus 19.8 versus 19.8 versus 19.0 versus 18.3 versus 18.5 versus 18.6 versus 18.3 versus 18.1 versus 18.3 versus 18.1 versus 18.3 versus 18.3 versus 18.6 versus 18.8 versus 18.6 versus 18.5 versus 18.5 versus 18.6 versus 18.4 versus 17.6 versus 17.8 versus 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2


Bonds: 2.774% versus 2.811%

Historical: the last sub-2% rate was in November 2016 (1.867%). 2.811% versus 2.736% versus 2.788% versus 2.803%. versus 2.762% versus 2.821% versus 2.855% versus 2.895% versus 2.913% versus 2.908% versus 2.884% versus 2.863% versus 2.854% versus 2.892% versus 2.915% versus 2.979% versus 2.993% versus 3.032% versus 3.061% versus 3.058% versus 3.059% versus 3.048% versus 3.065% versus 3.074% versus 3.056% versus 3.065% versus 3.116% versus 3.127% versus 3.147% versus 3.186% versus 3.239% versus 3.228% versus 3.222% versus 3.201% versus 3.22% versus 3.146%

EUR/USD: 1.1432 versus 1.13588. Euro breaking higher over the 50 day MA, giving a breakout another try.

Historical: 1.13588 versus 1.14015 versus 1.13708 versus 1.13828 versus 1.13755 versus 1.13533 versus 1.13049 versus 1.13604 versus 1.1376 versus 1.13244 versus 1.13657 versus 1.1404 versus 1.1376 versus 1.13970 versus 1.13360 versus 1.13199 versus 1.13934 versus 1.13682 versus 1.12973 versus 1.13325 versus 1.13380 versus 1.13829 versus 1.13818 versus 1.14484 versus 1.14172 versus 1.13308 versus 1.13264 versus 1.13124 versus 1.12348 versus 1.13475 versus 1.1364 versus 1.14329 versus 1.14228 versus 1.14090 versus 1.13881 versus 1.14019 versus 1.13394 versus 1.13455 versus 1.13760 versus 1.14042 versus 1.13757 versus 1.3972 versus 1.14682 versus 1.14626 versus 1.1538

USD/JPY: 110.845 versus 111.190.

Historical: Last below 109 in June 2018: 111.190 versus 110.337 versus 111.223 versus 111.21 versus 112.521 versus 112.477 versus 112.653 versus 113.382 versus 113.634 versus 113.634 versus 113.385 versus 113.022 versus 112.66 versus 112.71 versus 112.813 versus 113.581 versus 113.474 versus 113.402 versus 113.559 versus 113.781 versus 113.510 versus 112.972 versus 113.007 versus 113.077 versus 112.617 versus 112.831 versus 113.585 versus 113.576.

Oil: 44.61, -1.61.

Gold: 1281.10, +8.10. Still moving to a higher high on this breakout.

End part 1
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