Will Dow 20,000 be a Ceiling

Will Dow 20,000 be a Ceiling – or a New Floor?

by Louis Navellier

December 20, 2016

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

Watch for me on TV: CNBC has asked me to be available on short notice for a special evening show if the Dow Jones Industrials hits 20,000.  I’m not sure if the Dow will hit 20,000 this week, since that big round number could turn out to be a temporary ceiling.  But whether or not 20,000 happens soon, I will be on CNBC’s Squawk Box on Wednesday, December 21st, at 8:10 am EST (5:10 am PST).  Check it out.

The big news last week was the surge in bond yields.  The 10-year Treasury bond now yields 2.60%, up from 1.78% just before the election.  When there is such as dramatic spike in bond yields, the stock market often stalls, and that is one reason why 20,000 may be a temporary ceiling for the Dow Jones Industrials.

Ceiling Image

One big factor holding back America’s big multinational companies is a strong U.S. dollar, which is now at its highest level in nearly 14 years (since early 2003).  Furthermore, the yield difference on two-year notes between Germany and the U.S. is now over 2% – the widest gap since early 2000.  The fact that Germany is characterized by largely negative interest rates and the U.S. now has rising interest rates is expected to continue to undermine the euro, British pound, Japanese yen, and other currencies which offer near-zero (or negative) interest rates due to relentless quantitative easing programs by their central banks.

In This Issue

Starting off, Bryan Perry will examine the conditions that might cap this rally going into early 2017.  Then, Gary Alexander dissects the soaring sentiment indicators that have lifted the market since November 8th. You’ll also want to read about Ivan Martchev’s tempting wager of a bottle of Dom Perignon champagne if 10-year Treasury rates hit 1% again.  Then Jason Bodner uses sunspot cycles to explain recent sector shifts.  At the end of today’s report, I’ll finish my analysis of the Dow 20,000 barrier and the new inflation threat.

Income Mail:
Conditions That Could Temporarily Cap This Rally
by Bryan Perry
Serious Headwinds Could Threaten a Perfectly Good Rally

Growth Mail:
Holiday Spirits Lift Consumer Sentiment (and Sales)
by Gary Alexander
Scary Political Projections Can Turn on a Dime

Global Mail:
Bond Traders Betting a Bottle of Dom Perignon
by Ivan Martchev
The Euro Breakdown Continues

Sector Spotlight:
No Sunspots! Is Armageddon Approaching?
by Jason Bodner
Strong Sectors Can Have Weak Fundamentals

A Look Ahead:
Dow 20k May be More of a “Magnet” than a Ceiling or Floor
by Louis Navellier
Inflation Threatens to Rise Above the Fed’s Target Levels

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

Conditions That Could Temporarily Cap This Rally

by Bryan Perry

Being that this is the season that reminds us of how much we as Americans should be thankful for, those invested in the stock market have an extra measure of holiday cheer that came almost totally unexpectedly. The benchmark U.S. stock indexes have rallied sharply in anticipation of fiscal stimulus measures by the incoming administration of President-elect Donald Trump with the S&P 500 stock index surging over 8% since the November 8th election, due in large part to sectors that are expected to benefit from his proposed policies.

The S&P financial sector has led the way with a gain of more than 17% as bond yields have spiked. Rising rates positively affect Net Interest Income, the lifeblood of a bank’s core earnings growth. The yield on the U.S. 10-yr Treasury Note touched 2.62% Friday, up from 1.78% the day before the election – a 47% jump in yield. This is a remarkable move – more remarkable than the gains in the stock market.

And then there is the breakout in the greenback. The U.S. Dollar Index (DXY), which trades against the other major currencies in the world, surged from 97.3 to 103.5, and is now at the highest level against the euro in over a decade with the ECB telegraphing a continuation of QE well into 2017. This has currency speculators predicting the euro (currently $1.0435) trading at parity (1:1 with the dollar) as the next target.

Euro United States Dollar Exchange Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The yellow caution flag (in my title this week) isn’t because of the recent spike in the U.S. dollar, but the spike in the October trade deficit (reported in early December). This happened well before the recent rate spike.

During October, the U.S. Dollar Index had been in a mild three-month decline, but the trade deficit surged 17.8% in October, rising to a four-month high of $42.6 billion, vs. a revised $36.2 billion in September. (Source: Wall Street Journal, December 6, 2016, “U.S. Trade Deficit Widened Sharply in October.”)

Container Ship in Baltimore Image

Based on this October data and the rising dollar since then, it stands to reason that the November and December trade data will show a further widening in the trade deficit that could prove to be a significant drag on gross domestic product (GDP) in the first quarter, especially with other central banks trying to devalue their sovereign currencies to boost exports. Solid domestic demand will increase imports and a continued appreciation of the U.S. dollar will limit the strength in exports. What’s most interesting, to me, is that imports from Mexico and China (Public Enemies #1 and #2 on Mr. Trump’s “unfair trade” hit list) recorded their highest levels in a year on a non-seasonally adjusted basis. The current trade deficit (and likely worsening of it just as Trump takes office) is very likely to gain top priority in his first 100 days in office.

Serious Headwinds Could Threaten a Perfectly Good Rally

There is little argument about what sparks a sudden and tremendous stock market rally such as we’ve seen: Rising expectations coupled with pent up demand account for part of the recent rise. Since November 8th investors have poured fuel on the fire of lofty expectations, but while everyone is acting like Trump’s policies are already working, he hasn’t taken office yet. High expectations, along with improving economic data and the Federal Reserve's recent decision to raise interest rates while signaling a quicker pace of hikes next year, have also served to strengthen the U.S. dollar and push bond yields rapidly higher.

As such, the strong U.S. dollar and rising bond yields could be laying the seeds for a sizeable pause in equity prices once the year-end window dressing by fund managers is complete. No one argues that rising bond yields are beneficial to banks, but they also lift the overall cost of capital for companies and shrink the relative valuation advantage some stocks have over fixed-income investments. The strong dollar and higher interest rates will at some point start to constrain earnings. In my opinion, it’s not a matter of “if,” but merely “when.”

In the first quarter of 2016, large multinational firms blamed the rising U.S. dollar for undercutting earnings. And just when the overall earnings from S&P 500 companies were ending an earnings recession in the latest quarter, the greenback vaults higher, threatening to be a major earnings headwind. Adding to the wind shear, stocks appear to be getting pricey, ending last week with a current price-to-earnings ratio for the S&P 500 at 20.8, well above its long-term average of 16.6, according to Thomson Reuters data. It’s not exactly a “perfect storm,” but wind shear, heavy rains, and headwinds can slow forward progress.

Perfect Storm Image

Less than six months ago (after Brexit – in late June/early July of this year), the yield on the S&P 500 was quoted at 2.19% while the yield on the 10-year T-Note was hitting bottom at 1.34%. As of last Friday, the S&P 500 dividend yield was 2.07% versus a yield of almost 2.60% for the10-year U.S. Treasury after six straight weeks of gains. As historical market moves go, that is a big valuation reset that, in conjunction with the S&P 500 trading with a 20.8 P/E, will certainly be a focus of discussion heading into year-end.

Stocks in “hot” sectors tend to get ahead of themselves, while stocks in unpopular sectors tend to get oversold to the downside. Last week, Financials gave back 1.15% while Telecoms and Utilities returned to the lead with 2.27% and 1.85% gains, respectively, even as Treasury yields ended near their highs. One reason for this disparity may be recent headlines about some bank insiders selling at a record rate.

Individual Insider Buyers Minus Sellers at United States Financial Firms Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As you can see in the above chart, insiders were buying their shares at the fastest pace since 2011 during the first quarter of 2016, when banking stocks were tanking. Insiders were also purchasing when the bull market was in its infancy (early 2009) and selling as it gained steam coming out of the Great Recession.

Today’s lofty investor sentiment assumes that earnings will be accelerating and the economy will be strong enough to withstand these headwinds. This optimism constitutes a silver lining against the challenges of higher rates, a higher dollar, and some quick and heavy profit taking in the hot bank sector.

What is going on is quite normal for a recovering economy and especially one that is forecast to move into a higher gear in a market where technology affords capital to make gigantic adjustments in a rapid time frame. The recent rise in rates and the U.S. dollar are hallmarks of economic growth, provided the increases happen at a steady pace. As long as rates are rising for the right reasons – and the economy is proving that out, for now – it should be a potential positive for equities, because any market pause should be temporary as earnings eventually rise to close the spread on today’s high market multiple.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

Holiday Spirits Lift Consumer Sentiment (and Sales)

by Gary Alexander

Sing along with me…

“Strings of street lights, even stoplights, blink a bright red and green,

As the shoppers rush home with their treasures.”

--from “Silver Bells” (1951), a hit for Bing Crosby, written by Jay Livingston and Ray Evans

“It’s beginning to look a lot Like Christmas, everywhere you go.

Take a look at the five-and-ten, glistening once again….”

– another 1951 holiday hit (for Perry Como, written by Meredith Willson of “Music Man” fame) 

The biggest shopping day of the year isn’t “Black Friday” (after Thanksgiving). It’s “Super Saturday,” the last full-weekend Saturday before Christmas. This year, Super Saturday fell on December 17, since Christmas Eve isn’t a full shopping day. According to a survey released last Friday by the National Retail Federation and Prosper Insights & Analytics, about two-thirds of American adults (155 million people) planned to shop on that day, vs. 99 million on Thanksgiving weekend.  (Source: Fortune, December 16, 2016)

Ed Yardeni’s Morning Briefing last Thursday (“Tis the Season,” December 15, 2016), added these facts:

  • “The National Retail Federation expects November and December sales, excluding autos, gas and restaurant sales, to increase 3.6% year-over-year, higher than the 3.2% increase in 2015 and the 2.5% 10-year average. Its forecast includes bricks-and-mortar and online sales.
  • “The International Council of Shopping Centers predicts a 3.3% year-over-year increase in sales at physical stores in November and December, compared to 2.2% in 2015….
  • “Craig Johnson, founder and president of Customer Growth Partners…expects November and December retail sales to rise 4.5% y/y, which is higher than his 4.1% initial forecast made in mid-October. His forecast excludes sales of autos, auto parts, fuel oil, gasoline, and restaurants. If he’s correct…it will mark the first time since 2014 the figure has topped 4%.”

Johnson also predicts “internet sales will account for about 17.5% of total retail sales and grow by 13.5%-14.0% y/y.” He reasons that consumers have more money from “decent real income growth over the last year” as “real personal disposable income rose by 2.7% y/y in October.” Also “the US unemployment rate stands at 4.6%, down from 5.0% a year ago. And consumer confidence has improved. The University of Michigan’s preliminary index of consumer sentiment jumped from a 14-month low of 87.2 in October to 98.0 in mid-December – within 0.1 points of January 2015’s 98.1, the highest since the start of 2004.”

United States Consumer Sentiment Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The University of Michigan Sentiment Poll leaped nearly 11 points in the last two months. Did the recent election really cause this massive move in consumer sentiment? Richard Curtin, director of the University of Michigan survey, answers: “When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys.” In fact, that part of the survey that tracks respondents’ opinions of the government’s economic policies rose to its highest level since 2009.

Looking back further, the all-time low in the University of Michigan Sentiment poll was 51.7 in May, 1980, shortly after the DJIA reached its 1980s low of 759 on April 21st. Political polls showed incumbent Jimmy Carter leading Ronald Reagan by 10 points. But after Reagan won, consumer sentiment soared.

Long Term United States Consumer Sentiment Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Scary Political Projections Can Turn on a Dime

Almost every day, we are beset with negative headlines and terrifying threats by pundits telling us that the economy and stock market are doomed. Here are two examples from yesterday’s date in history:

On December 19, 1984, the British government formally agreed to return Hong Kong to China after 99 years of British control. The turnover date was announced to be July 1, 1997. Almost immediately, those who could afford to buy (or bribe) a foreign visa did so. The Hong Kong dollar and the Hang Seng stock market index fell, along with real estate values, which dominated the Hang Seng index. The construction industry collapsed. The Hang Seng stock index reached a low of 747 in July, 1984 and remained under 1,000 for most of the year. It took great courage to buy Hong Kong stocks then, but they were a great buy. As it turned out, the Hang Seng index reached 16,375 on July 1, 1997 – the date of the British hand-over – and it nearly doubled again in the next decade, reaching 31,350 in 2007 for a 42-fold gain in 23 years.

More recently, on December 19, 1998, President William J. Clinton’s impeachment process began when the House approved two articles of impeachment – perjury and obstruction of justice. The Dow Jones Industrial average (DJIA) closed at 8,903 that day. How would the market fare if that happened today?  A market crash? Hardly. The Dow gained 25.2% in 1999 (Clinton was acquitted on February 12, 1999).

Now we come to the latest reversal of political, economic, and market fortunes after the recent elections:

Last August, shortly after the political nominating conventions ratified Clinton and Trump as the two major party candidates, William Buiter, Chief Economist at Citigroup, and his team warned[GA1]  of a global recession if Trump won. His team said that a Trump win would cut world growth by 0.7-0.8 percentage points and could “easily” push growth below 2%, the threshold that indicates a looming recession. But last week, Buiter and his team reversed course and raised their 2017 forecast for global growth to 2.7%. (Source: Business Insider, December 12, 2016, “RPT-Investment Focus: Among the shocks, steady global growth is the biggest surprise.”)

In a report released November 28th, the economists at the Organization for Economic Cooperation and Development (OECD) were even more optimistic. They raised their 2017 global growth forecast from 2.9% to 3.3%. They also raised their 2018 global growth GDP projection to an even healthier 3.6%.

On October 31st, Andrew Ross Sorkin wrote a New York Times analysis of what would happen after a surprise Trump victory. First, he quoted MIT economist Simon Johnson, who said a Trump presidency would “likely cause the stock market to crash and plunge the world into recession.” Sorkin added that Johnson’s “pessimism is shared by many economists across Wall Street, from Citigroup to Goldman Sachs. Each cites a different set of reasons the markets will fall if Trump wins.” Groupthink failed again!

These Trump warnings were merely the latest in an eight-year-long “wall of worry” that has dominated this bull market. Last week, Ed Yardeni published a series of charts which showed “55 panic attacks followed by relief rallies since the start of this bull market.” Among the more serious panic attacks:

  • May 2010: Greek Debt Crisis/Flash Crash 
  • August 2011: U.S. Debt Downgrade Crisis
  • May 2012: Greek and Eurozone Debt Crisis
  • January 2013: Fear of the Fiscal Cliff and Sequestration
  • October 2014: Global Growth Fears and an Ebola Scare
  • August 2015: The ETF “Flash Crash”
  • June 2016: Brexit fears, followed by fears of a Trump victory

Source: Yardeni Research, December 14, 2016 Market Briefing “S&P Panic Attacks Since 2009)

Yardeni reminded us that “just before Election Day, the S&P 500 was down for nine consecutive days from October 25th to November 4th. It was triggered by fears that Hillary Clinton might lose the presidential race after the FBI announced on October 28th that it was re-investigating her email scandal.”

After Trump won, however, investors suddenly turned bullish, as “the market quickly realized that President-elect Donald Trump actually had an economic plan that was very bullish for stocks, as long as he backed off on his anti-trade tirades. He also had Republican majorities in both houses of Congress.”

On December 8th – exactly a month after the election – the Wells Fargo/Gallup Small Business quarterly survey, conducted November 11-17, revealed the highest optimism among small business owners in eight years. The index shot up to 80 in November – up 12 points from its reading of 68 in August.

Due to this rapid uptick in business sentiment and growth projections, Yardeni raised his S&P earnings projections for 2017 from $129 per share to $142, and from $136.75 to $150 for 2018. This translates to 19.8% earnings growth in 2017. His 2017 target for the S&P 500 is now 2400 to 2500 (from 2258 now). (Source: Ed Yardeni, December 13, 2016, “Earnings in a Trump World.”)

Have a Merry Christmas and Happy New Year!

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

Bond Traders Betting a Bottle of Dom Perignon

by Ivan Martchev

Last week, as the 10-year Treasury yield closed at 2.5916, someone presented me with somewhat of a surprising challenge: “I would bet you a bottle of Dom Perignon that the 10-year Treasury won’t be at 1% in 2017, as you have previously suggested.”

I took a second to think about accepting that bet. The offer came somewhat from left field as my opponent had done this before, so I quickly made a counter-offer:

“OK, I would take the bet on the condition that it is not in 2017, but by the time President Trump’s first term ends, specifically by January 20, 2021. If the 10-year Treasury declines below 1% by that date, I would be waiting to see a bottle of Dom Perignon in front of my office door.”

Luckily, there is a credible witness to me accepting this challenge. Below is an elaboration of the reasons why I accepted the offer. I have explained some these reasons in my recent columns, but I will summarize them here, as it appears safe to assume that my betting opponent had not read them.

There has never been an expansion in the U.S. economy lasting longer than 10 years since the National Bureau of Economic Research (NBER) began to date recessions. The longest expansion began in March 1991 and peaked in March 2001 – running exactly 120 months, or 10 years. A former Federal Reserve Chairman even coined the term “irrational exuberance” to characterize this longest such growth period.

If one were willing to do some historical research, one could say that there has never been an expansion in the U.S. economy lasting longer than 10 years, as before NBER there was ample anecdotal evidence that strongly suggests this fact. Before the late 1700s, there was no U.S. economy, just a British colony. But since British colonial rule ended, there have been 47 recessions with no expansion longer than 10 years.

Where are we in the economic cycle now?

The Great Recession of 2007-2009 ended in June of 2009 according to NBER. In June 2017 we would complete year #8 of the present economic expansion. History suggests that President Elect Trump is likely to face a recession in his first term in office, based on the timing of all recessions in U.S. economic history. I am keenly aware that President Trump is the first President with no political past and, in that regard, he is making history himself, but can he overpower the well-established economic business cycle?

United States Central Bank Balance Sheet Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Treasury yields tend to decline in a recession and the Fed tends to carry on more accommodative monetary policies. The last such time they bought trillions of government bonds in order to suppress long-term interest rates to help the economy. Who is to say they won't do that again? I know President-elect Trump suggested he wouldn’t nominate Janet Yellen for another term, but he does not get to run the Federal Reserve. Another round of QE may be coming in his first year in office, strongly suggesting that his first term as President is the preferable time period to pick for the 10-year note to go to 1% or lower.

Ten Year Treasury Note - Monthly OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We have also had recessions where Treasury yields have risen leading up to the recession of 1981 when Fed Chairman Paul Volcker “broke the back of inflation,” but in my opinion we are not in a such an environment for Treasury yields at the moment. The 10-year Treasury yield has doubled off an all-time low three times since December 2008, so the present spike in interest rates is not all that uncommon.

Global Ten Year Yields Table

This comparison of global 10-year yields shows higher yields in some developing economies (like Brazil, India, and Russia) but the U.S. is offering much higher rates than most of the rest of the developed world, particularly Japan and Europe, which have a very serious problem fighting deflation. Since there isn’t enough “yield” in the rest of the developed world for institutional buyers that need it, much of that demand for risk-free assets targets the Treasury market, capping yields near the 3% mark, in my opinion.

Highly deflationary outcomes are yet to materialize – including a hard (no-trade deal) Brexit and a hard (overnight) Chinese devaluation to help with the busted Chinese credit bubble. The Chinese financial system is not operating properly in such an environment and a hard devaluation bypasses the financial system and stimulates the economy in a more direct manner. The Chinese have done this before, in December of 1993. I think by the end of President Elect Trump’s first term, China is likely to perform a hard devaluation again. All such outcomes point to a complimentary bottle of Dom Perignon by 2021.

The Euro Breakdown Continues

There is also something weird going on in Europe, where Eurozone confederation bonds are firmly stuck in negative yield territory closing Friday at -0.4503% while German bunds have positive yields closing on Friday at 0.3140%. EFSF (confederate) bonds now offer negative yields, as well as 10-year Swiss government bonds that yield -0.0990%. I have never seen such a divergence, since EFSF bonds were issued in 2012, where the euro confederate yields move lower while German bund yields move higher.

European Financial Stability Facility Bond Yield versus Ten Year German Bond Yield Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One of those two yield charts is wrong and I fear it may be the bunds, if Brexit and other complications materialize.

The low on the EURUSD cross rate from last week was $1.0366, which is a level notably below the previous multi-year low from March of 2015 at $1.0455. For all intents and purposes, the euro has now taken out support that defined the trading range $1.05 to $1.15 over the past 19 months.

Euro United States Dollar Exchange Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The most obvious target is euro/dollar parity (1-for-1), which will most likely be challenged in early 2017, particularly if we see multiple Fed rate hikes. I am not yet convinced of the multiple Fed rate hike scenario in 2017 as we were supposed to have multiple Fed rate hikes in 2016 and ended up with one. Still, with or without Fed rate hikes, the euro has some serious issues that suggest a retest of the low it hit right after introduction, near 83 U.S. cents, or even the all-time “synthetic” low near 70 U.S. cents in 1985.

The reason why the synthetic euro low of 70 cents is in play in the next couple of years is political. If there are more Brexit-like votes in the Netherlands, France, and Italy with the EU’s newfound political instability, the chances increase dramatically that the EU will break apart. Under such a scenario even 70 cents may not hold, as extreme as it looks. Then my free bottle of Dom Perignon is all but guaranteed!

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

No Sunspots! Is Armageddon Approaching?

by Jason Bodner

Where did all the sunspots go? In case you don’t remember (or forgot) what sunspots are, they are the darker and cooler portions of the sun. Last summer, there were reports about a sudden and massive decline in the number of sunspots. The sun has been spot-free for the first time in years. In fact, at its peak in April of 2014, there was an average of 116 sunspots. Since June 3, 2016, however, the sun is blank.

Reduced Sunspots Image

No sunspots! Is this the beginning of Armageddon? If current geopolitical headlines haven’t broken your spirit, perhaps sunspots might help drive you over the edge! But the truth is that the sun – like practically everything in nature – is cyclical. The sun is on an 11-year sunspot activity cycle. Sunspots ebb and flow with the activity of the sun, and the current lack of sunspots indicates that we are at a “solar minimum” in the current cycle. The explanation has something to do with the magnetism beneath the surface of the sun.

I have written previously here that the poles of the sun spontaneously change at the solar maximum, the peak of solar activity. This happened several years ago. Now, at the solar minimum, there are all sorts of side effects we earthlings can expect. The upper atmosphere should cool and condense, which allows space junk to come closer to the planet. The heliosphere – the region of space under the sun’s influence – also becomes smaller, which increases the risk of space objects getting zapped by cosmic rays. One thing is sure, though: The earth will continue to turn and life as we know it will go on, relatively unchanged, even though there are massive political changes afoot. But we can postpone Armageddon for another day.

Strong Sectors Can Have Weak Fundamentals

The most predictable theme of the market lately has been that it has been decidedly unpredictable. Over recent years we have seen exaggerated trends of weak energy, strong energy, strong REITs, weak REITs, weak financials, strong financials, strong healthcare, weak healthcare…. I could go on through most of the other sectors, but I think the point is clear. A two-word summary of the markets since 2014 has been “sector rotation.” Up and down or in and out of favor, these sector rotations have been rapid and dramatic.

Oftentimes, these rotations started as small corrections or little “pops.” In a few weeks, these small trends would sometimes snowball into significant and prolonged moves. Our recent seismic shifts can be blamed on (or attributed to, depending on your camp) the surprise outcome of the U.S. elections. As we have highlighted recently, Financials and Industrials have been the powerhouse sectors of the past few weeks.

It’s nearly impossible to pinpoint the exact moments when market moves exhaust themselves but the data I have been seeing recently points to a lightening up of institutional buying. This coincides with the recent huge rally in equities across the board with much of the buying taking place in the small cap space.

As we watch this strong market continue and wait for the inevitable pullback, it is worth reiterating that so many of the stocks in Financials, Industrials, and Energy do not have impressive sales and earnings. In fact, in many cases, it’s quite the opposite. So, as this rally heightens, one has to wonder when the shifts will come in the opposite direction. Rallies can certainly be technical and prolonged, but at some point, either the fundamentals or the technicals have to catch up with the recently-inflated market prices.

Here’s last week’s daily tally, with Janet Yellen’s downbeat Wednesday words depressing all 11 sectors.

Standard and Poor's 500 Daily Sector Indices Changes Table

Looking at the full week just past, we saw a pop in Telecom, Utilities, and Healthcare. However, the latter two sectors have been unloved for most of the past three months, down -1.66% and -3.58% respectively. Financials took a breather, falling -1.15% for the week. Another extremely popular long since November 8, Industrials fell -1.60% for the week, while Materials fell -1.52%.

Standard and Poor's 500 Weekly Sector Indices Changes Table

Standard and Poor's 500 Quarterly Sector Indices Changes Table

Is this just a pause in our bull run? Is this just position-covering ahead of a slower holiday time of year?  Or is it the possible beginning of a new sector rotation? While no one knows for sure, January will certainly bring about more rhetoric, more headlines, many more tweets, and possibly even some actual governing or real change. The market’s next move is anybody’s guess, but after the New Year begins, analysts often like to revise their forecast after the holiday season is over. No one wants to be a Grinch!

The market’s recent rally has been awe inspiring and a boost for the general mood. Sentiment has swung dramatically bullish, as the market reaches new highs seemingly on a daily basis. Tech stocks have been facing recent headwinds, while financials and industrials have the wind firmly at their backs. What the future will bring is unclear, but like sunspot activity cycles – which are actually predictable – the one constant in these sector shifts is that they occur frequently. They also occur without warning, and will likely continue to do so until a firming factor appears. That firming factor may be policy clarity of the new administration, including tax policy, international relations, etc. It’s rhetorical to say a lot depends on how things shape up after January 20, 2017. But as John F. Kennedy said, “Change is the law of life.”

John Fitzgerald Kennedy Image

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Dow 20k May be More of a “Magnet” than a Ceiling or Floor

by Louis Navellier

At the top, I asked whether Dow 20,000 would be a ceiling or a floor.  After weighing all the evidence, I predict it will be neither.  It may act more like a “magnet,” a central point that keeps drawing the market up (following a correction) or down (following a manic rise).  Previous round numbers seemed to act like magnets.  The Dow first closed over 1,000 in 1972, but then it went down sharply in 1974.  It last closed below 1,000 in late 1982.  Then, when the Dow broke 10,000 in early 1999, it fell as low as 7286 in 2002 and 6547 in 2009 before closing over 10,000 “for good” in mid-2010.  For the big round numbers of 1,000 and 10,000, it took the Dow a full decade between breaking the “ceiling” and establishing the new “floor.”

Don’t despair.  It won’t take that long for us to look at 20,000 in the rear-view mirror, since 20,000 isn’t an iconic number – like 1,000 or 10,000.  We’ll have to wait for Dow 100,000 to add the next new digit to the Dow.  At worst, I think we may spend only a year or two with 20,000 Dow acting as a “magnet,” but I wouldn’t be surprised if 20,000 becomes a new floor soon after Q4 earnings are announced in the next couple of months.

Instead of looking at big-stock indexes, I prefer looking at specific stocks and sectors.  Jason is our sector expert and he’ll keep you up-to-date on what’s hot (and what’s not) in the S&P sectors, but you can also look at the various indexes to see which ones are rising most rapidly and which ones are lagging. Since the Friday before the elections (November 4, 2016), the six-week winners have been small stocks and Dow stocks:

Six Week Index Leaders Table

Industrials have been strong.  That is one reason the Dow Industrials have done so well.  But one reason why the Dow Industrials failed to break 20,000 last week was that the Fed temporarily spooked the stock market on Wednesday by Yellen’s comments after the Fed raised the fed funds to a 0.50%-0.75% range.

Even though this move by the Federal Open Market Committee (FOMC) was widely expected, Yellen hinted that they expect to raise key interest rates three more times in 2017.  Specifically, the FOMC said, “In view of realized and expected labor market conditions and inflation,” they felt they would have to keep raising key interest rates.  I should add that in December 2015, the FOMC implied that it would raise key interest rates four times, but they only raised rates once – late in the year.  The truth of the matter is that the Fed will remain “data-dependent,” so market rates will likely dictate the FOMC’s 2017 decisions.

Inflation Threatens to Rise Above the Fed’s Target Levels

Speaking of “data,” on Wednesday, the Labor Department reported that the Producer Price Index (PPI) rose 0.4% in November.  Excluding food and energy, the core PPI rose by a more modest 0.2%.  Due to tight inventories, there was some apparent wholesale inflation, but businesses are now actively rebuilding inventories, so this wholesale pricing pressure may ebb in the upcoming months.  In the past 12 months, the PPI has risen 1.8%, which is the fastest 12-month rate of wholesale inflation since mid-2014.

On Thursday, the Labor Department reported that the Consumer Price Index (CPI) rose 0.2% in November.  Food prices declined -0.2%, while energy prices rose 1.2%, so excluding food and energy, the core CPI rose 0.2%.  Most of the inflation on the consumer side seems to be energy related, although rents (up 0.4%), transportation (up 0.3%), and medical care costs (up 0.5%) also rose.  Overall, the CPI has risen 1.7% in the past 12 months and – like the PPI – is running at the highest full-year rate in two years.

On Wednesday, the Commerce Department reported that retail sales rose only 0.1% in November, the smallest increase in retail sales in the past three months, but I remain very suspicious that online sales are not being properly measured by the Commerce Department.  The National Retail Federation is expecting retail sales (including online sales) in November and December to rise by 3.6% compared to last year.

Also on Wednesday, the Fed announced that industrial production declined -0.4% in November, due largely to a -4.4% drop in utility output.  The details were interesting.  For instance, manufacturing declined -0.1% due largely to a -2.3% decline in vehicle production.  Excluding vehicles, manufacturing output rose 0.2%.  Especially encouraging was that mining activity rose 1.1% due largely to rising energy production.

All in all, rising inflation should give the Fed reason enough to raise rates again, but they (and I) will be watching these temporary drops in retail sales and industrial production to see if they turn around.

Finally, I should add that on Tuesday, China’s National Bureau of Statistics reported that industrial output rose to a 6.2% annual pace and retail sales rose 10.8% in the past 12 months.  Overall, worldwide industrial production and retail sales are improving, which is good news for improving global GDP growth in 2017.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

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Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

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Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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