Algos Plus Momentum, Herd Behavior Equals Wipeout In Stocks

Monday came as quite a surprise for many investors, as stocks sent a strong message of dislike about something, though nobody is certain just what sparked such a massive selling spree.

For the NASDAQ, it was complete wipeout of last week's gains, minus another 160 points. The other indices were down nearly as much as they were up all of last week.

As noted in Money Daily's Weekend Wrap, technical analysis, showing divergent positions amongst the major indices, was suggesting an imminent breakout in one direction or another. It seems that the market decided to make down the dominant direction... for now.

One might expect these divergences to be resolved in short order, though markets today are guided so much by programmatic trading and headline-chasing algorithms, it's difficult to pinpoint where the breaks are actually occurring and in just what direction they are going to move.

Volatility, as persisted throughout October, appears not to have abated, more than likely the result of many diverse factors, rather than just one. The increased employment of computer algorithms, combined with the market's distinctive her behavior, manifested as "momentum," produced another of 2018's banner sessions to the downside.

The Dow's 602-point drop was the 15th biggest in market history, but also the seventh largest of 2018, a distinction that will not be lost on market observers. 2018 figures to already be the most volatile year in market history.

All that can be said going into the holiday season is to be guardedly guarded. This time does appear to be different. America is beset by warring political parties in Washington and Wall Street is unhappy, at a time in which stocks are already overvalued and due for a mean reversion.

While this one-day event was a scary sight, it almost certainly will not be the last.

Dow Jones Industrial Average November Scorecard:

Date	Close	Gain/Loss	Cum. G/L
11/1/18	25,380.74	+264.98	+264.98
11/2/18	25,270.83	-109.91	+155.07
11/5/18	25,461.70	+190.87	+345.94
11/6/18	25,635.01	+173.31	+519.25
11/7/18	26,180.30	+545.29	+1064.54
11/8/18	26,191.22	+10.92	+1075.46
11/9/18	25,989.30	-201.92	+873.54
11/12/18	25,387.18	-602.12	+271.42

At the Close, Monday, November 12, 2018:
Dow Jones Industrial Average: 25,387.18, -602.12 (-2.32%)
NASDAQ: 7,200.87, -206.03 (-2.78%)
S&P 500: 2,726.22, -54.79 (-1.97%)
NYSE Composite: 12,343.51, -194.02 (-1.55%)

WEEKEND WRAP: TA (Technical Analysis) Shows Split Indices, Preferences

By most accounts, the week past was very solid. Midterm elections went to a split decision, the Fed Held firm on interest rates and stocks generally responded with gains. Apparently, Wall Street is perfectly satisfied with Donald J. Trump in the White House, Republicans in control of the Senate, and Democrats holding sway in the House of Representatives. The Dow, in particular, was the big winner, posting its second straight week on the upside, leading the majors with a gain of 2.84%, suggesting that big business is still the motif of the Republican party.

On the slightly more moribund side of the ledger, the NASDAQ, thanks largely to a selloff in tech equities, fared the worst, though still registering a gain of two-thirds of a percent.

What is striking to those steeped in charting discipline is the variegated construction of the major indices. In the interest of brevity and clarity, a table serves best to understand where stock indices are currently residing.

The table below shows where each of the major indices stand in relation to their various moving averages.

Index	50-day MA	200-Day MA	40-Week MA
Dow	Above	Above	Above
NASDAQ	Below	Below	Below
S&P 500	Below	Above	Above
NYSE COMP.	Below	Below	Below
Dow Trans.	Below	Below	Below

Obviously, the Dow is presently the favored index, having cleared all the hurdles which allow it to be pointed for more success. On the other hand, the NASDAQ, NYSE Composite and Dow Transportation Index are all trending negatively, offering signals in broad swathes that all is not as well as the Dow would have us believe.

The S&P hovers in no-man's land, below the 50-day, but above the 200-day. The 500 major stocks represented cumulatively are offering value, though direction is far from assured.

The Dow Transports have been included because of its unique relationship to the Industrials. Transportation issues are largely overlooked by the financial media, though their importance in general markets should not be undersold. If the companies that move goods, services and people are struggling - even in the face of dramatic declines in fuel prices - something is not right.

What should this suggest to the investor?

Perhaps it is nothing more than big money preferring to buy well-known names with solid track records (the 30 Dow stocks) while shunning the lesser-known companies represented in the broader indices. The S&P probably offered the best indication: that, according to current sentiment, stocks are somewhat fairly valued. Continued divergences such as are showing in the table cannot last for long. Either the positive vibe from the Dow will serve to lift other areas and sectors, or the broadly-defined mid and small-cap stocks in the composite indices (and the transports) will pull all boats crashing into the shoals.

One might expect these divergences to be resolved in short order, though markets today are guided so much by programmatic trading and headline-chasing algorithms, it's difficult to pinpoint where the breaks are actually occurring and in just what direction they are going to move.

A related article by Bernie Schaeffer of Schaeffers Research offers some insight into how well the Dow Industrials and Transports perform under various conditions. The article references November, 2016, and readers should know well what happened in the weeks and months following the general presidential election. Stocks soared, with numerous record highs met and broken.

Should this period - after a midterm election - respond similarly? Technical analysis would say yes, though, as the wizards of Wall Street are always keen to remind: past performance in no indication of future results.

Caveat Emptor indeed.

Dow Jones Industrial Average November Scorecard:

Date	Close	Gain/Loss	Cum. G/L
11/1/18	25,380.74	+264.98	+264.98
11/2/18	25,270.83	-109.91	+155.07
11/5/18	25,461.70	+190.87	+345.94
11/6/18	25,635.01	+173.31	+519.25
11/7/18	26,180.30	+545.29	+1064.54
11/8/18	26,191.22	+10.92	+1075.46
11/9/18	25,989.30	-201.92	+873.54

At the Close, Friday, November 9, 2018:
Dow Jones Industrial Average: 25,989.30, -201.92 (-0.77%)
NASDAQ: 7,406.90, -123.98 (-1.65%)
S&P 500: 2,781.01, -25.82 (-0.92%)
NYSE Composite: 12,537.53, -84.51 (-0.67%)

For the Week:
Dow: +718.47 (+2.84%)
NASDAQ: +49.91 (+0.68%)
S&P 500: +57.95 (+2.13%)
NYSE Composite: +215.73 (+1.75%)

Fed Signals More Rate Increases; Market Dynamics Favor Investment Diversity

In what can be characterized as more of a sigh than a panicked scream, stocks sold off Thursday afternoon when the Fed wrapped up its November FOMC meeting, announcing that they had no intention of changing plans for a fourth federal funds rate increase this year and at least three more in 2019.

Of the four major insides, only the Dow managed to post a gain, though it was minuscule, at a mere 10 points.

Fears that the Fed might put some kind of kibosh on the Trump expansion have been stocked by the president himself, who would prefer lower interest rates in order to keep the punch bowl of cheap money full. It's unlikely President Trump will get his wish, because the Fed plan has been in place for years, is currently being executed and seems - despite pullbacks in stocks in February and again in October - to be working as well as can be expected.

The US economy has roared back to life over the past year, thanks in part to Trump's individual and corporate tax cuts, repatriation of foreign funds by companies, and still fairly easy policy by the Fed.

While the stock market does not provide complete portfolio of the US economy, it does act as a kind of proxy. Stocks generally gain when the economy is doing well, and falls when recessions hit or external events cause disruptions to the usual flow of funds into equities.

Buybacks have been providing an inordinate amount of upside for the general markets. 2018 is on pace to set a record for corporate stock buybacks, which has an immediate effect on valuations by reducing the number of shares outstanding. To the general public, stock buybacks look like regular buying, as they operate in the background and the actual buyers are not disclosed. It's assumed that as companies buy their own stock rather than reinvest in equipment, facilities, workers, or expansion of their businesses, the sellers are funds and/or large stakeholders, reaping profits and moving on to the next apple ripe for picking.

Generally seen as good practice, stock buybacks don't actually add value, though in terms of shareholder value, they do return more profits in higher share price and, often, increased dividends. It's a great panacea for stockholders, who merely have to hold shares and profit. This scenario has been unprecedented, but has lasted since the Great Financial Crisis of 2008-09 and continues to provide a backstop to stocks. When the buybacks stop, so will the easy money for shareholders, but, the practice still appears to have more to run, though the pace has slowed over the past three to six months.

All of this has created a very dynamic and fluid market, in which all manner of investment strategies can produce solid results. With wild swings on nearly a daily basis, individual stocks or sectors (via ETFs) can be either held, sold short or bought. The current environment is likely a major boon to brokers such as Merrill Lynch, Schwab, eTrade and others in the game, who undoubtably will be seeing increased trading in an active, unbridled market.

Thus, the answer to the age-old question, "Buy, sell, or hold?" might today be answered correctly by responding, "all of the above."

Dow Jones Industrial Average November Scorecard:

Date	Close	Gain/Loss	Cum. G/L
11/1/18	25,380.74	+264.98	+264.98
11/2/18	25,270.83	-109.91	+155.07
11/5/18	25,461.70	+190.87	+345.94
11/6/18	25,635.01	+173.31	+519.25
11/7/18	26,180.30	+545.29	+1064.54
11/8/18	26,191.22	+10.92	+1075.46

At the Close, Thursday, November 8, 2018:
Dow Jones Industrial Average: 26,191.22, +10.92 (+0.04%)
NASDAQ: 7,530.88, -39.87 (-0.53%)
S&P 500: 2,806.83, -7.06 (-0.25%)
NYSE Composite: 12,622.04, -57.06 (-0.45%)

Wall Street Gives Election Results Thumbs Up

Gridlock assured as Democrats took control of the House of Representatives and Republicans held sway in the Senate, Wall Street roared with approval sending stocks to their best levels in nearly a month, October's declines a fading memory with major indices posting solid two percent-plus gains across the board.

Out of the election results, there was no blue wave or red dawn but rather a kind of purple haze hanging over Washington, with the usual noise an rancor interrupted only temporarily on Tuesday night into Wednesday morning. By 11:30, President Trump was at the podium, singing his own praises and sending congratulatory messages to the politicians he helped get elected to federal positions.

It didn't take long for the news media to begin hectoring the president over immigration, dealings with Democrats, the Mueller probe, and various other needling, needless issues. Trump was at his usual boisterous best, telling some reporters to sit down and lambasting others.

Shortly after Trump left the press gaggle, news that Jeff Sessions would step down as US Attorney General broke across the wires, and stocks continued their march higher. Sessions' letter of resignation began with the words, "At your request..." signaling that Trump had planned for the removal of Sessions in advance of the midterms and timed his resignation for immediately following results of the elections.

Trump quickly named Matthew Whitaker, Sessions' chief of staff, as acting Attorney General. Whitaker has been openly critical of the Mueller probe into Russian meddling in the 2016 presidential election, echoing Trump's oft-repeated message that the entire investigation amounts to nothing more than a "witch hunt."

With the path ahead for President Trump more clearly defined, Wall Street can look forward to something resembling sanity in Washington. With Whitaker now in charge of the DoJ, the Mueller probe will likely be reigned in and shortly concluded, ending one of the lengthiest politically-inspired goose chases in American history.

The midterms past, Trump will aggressively advance his agenda, though the rancor from the opposite side of the aisle is likely to become even more manic, illogical, and contrived. Trump has made no friends in the media, and, with the Democrats in control of the House, the politicking leading up to the 2020 presidential election will become more pronounced than ever.

In the meantime, President Trump and his team will plow ahead with initiatives on trade, jobs, infrastructure, and regulatory reform, and there's little the Democrats can do about any of the administrative functions guided by the chief executive. With control of the Senate, Trump also can find smooth sailing for appointees, the Republican majority assuring confirmation of just about anybody he sends up for approval.

Dow Jones Industrial Average November Scorecard:

Date	Close	Gain/Loss	Cum. G/L
11/1/18	25,380.74	+264.98	+264.98
11/2/18	25,270.83	-109.91	+155.07
11/5/18	25,461.70	+190.87	+345.94
11/6/18	25,635.01	+173.31	+519.25
11/7/18	26,180.30	+545.29	+1064.54

At the Close, Wednesday, November 7, 2018:
Dow Jones Industrial Average: 26,180.30, +545.29 (+2.13%)
NASDAQ: 7,570.75, +194.79 (+2.64%)
S&P 500: 2,813.89, +58.44 (+2.12%)
NYSE Composite: 12,678.17, +198.10 (+1.59%)

Dow's Recent Gains Are Adding Up

With the midterm election turmoil nearly out of the way, stocks have begun the month of November in grand, year-ending fashion, the Dow Jones Industrial Average posting gains in three of the last four sessions, and, extending back into the final days of October, five of the last six were winners.

This string of positives has managed to erase much of the pain that accompanied October, which registered as the worst month of 2018 for stocks. In the past seven sessions, the Dow has advanced nearly 1200 points, an impressive performance, and should continue the path forward since there are few impediments ahead.

The Fed's FOMC meeting this Wednesday and Thursday should prove a non-event, as the committee is almost certain to stand pat on interest rates until the December meeting, when a 25 basis point hike in the federal funds rate is a virtual lock.

The overall outlook is strong for stocks presently, though headwinds could still emerge, October's declines still fresh in the mind, but, sentiment seems to have shifted from selling into rallies to buying on dips once again, and the Dow has regained roughly half of the losses incurred since marking an all-time high on October 3rd.

Other indices have followed suit, though the NASDAQ continues to lag, with many of the tech leaders now laggards, representing, to some, buying opportunities. To others, these tech firms have become no-go zones, appealing only to the most speculative of investing types.

Markets prefer stability, and November appears to offer plenty in the way of complacency and compliant data readings. With holidays straight ahead, it would not be a surprise to stocks exceed their previous highs.

Dow Jones Industrial Average November Scorecard:

Date	Close	Gain/Loss	Cum. G/L
11/1/18	25,380.74	+264.98	+264.98
11/2/18	25,270.83	-109.91	+155.07
11/5/18	25,461.70	+190.87	+345.94
11/6/18	25,635.01	+173.31	+519.25

At the Close, Tuesday, October 6, 2018:
Dow Jones Industrial Average: 25,635.01, +173.31 (+0.68%)
NASDAQ: 7,375.96, +47.11 (+0.64%)
S&P 500: 2,755.45, +17.14 (+0.63%)
NYSE Composite: 12,480.06, +55.75 (+0.45%)