Chart of the Day: S&P 500 Volatility

spx-9-12-16

Stocks surged back yesterday after dropping the most in nearly three months on Friday. The environment remains volatile and that is poised to continue with the next two critical catalysts coming next week: the Fed and BOJ.

 

Chart of the Day: Technical Tipping Point in Oil

cl-9-7-16

WTI crude oil futures approached a technical tipping point yesterday as they rallied into a near-term, downtrend resistance level. Where futures close today will be important for the near-term direction of energy prices

 

ECB Preview

The first of the major central bank decisions in September comes tomorrow via the ECB, and from a general standpoint the major question heading into this meeting is:

“Will the ECB ease further, hint at easing further, or stay firmly on the sidelines?”

Given the uncertainty surrounding tomorrow’s decision, I found myself in my home office last night writing our ECB Preview (sent to paid subscribers at 7 a.m. this morning) which explained:

1) What will make the meeting “hawkish” or “dovish” and

2) Provided the anticipated market reaction of stocks, bonds, the dollar, oil and gold for the three possible outcomes: The ECB meets expectations, the ECB is Dovish, or the ECB is Hawkish.

While I was working, my wife came in and asked me what I was doing and I told her, “Writing an ECB Preview,” and she asked, “What does the ECB have to do with stocks?”

In a few quick sentences I explained that the ECB was important because if it doesn’t hint at future easing, that will make German Bund yields go up, which will make Treasury yields go up, and that will make both stocks and bonds go down!

She smiled and told me, “I Can See Why People Subscribe!”

If you’re like me, never in your wildest dreams did you think when you started in this business that you’d have to be focused on what the ECB was doing because it could turn the US stock market.

In fact, I’m not even sure the ECB existed when I started in this business!

But, a Dot-Com bubble burst, financial crisis, QE Infinity and Negative Interest Rates later, here we are, and the simple truth is that if the ECB doesn’t do one specific thing tomorrow at their meeting and press conference, it will disappoint markets—and stocks will drop (more on that later).

We have spent the last few weeks making sure our paid subscribers know the list of six key events facing markets, because those events will cause at least short-term volatility, and knowing these events are looming helps advisors who subscribe to the full, paid edition of The Sevens Report
set the right expectation for clients… so that they aren’t blindsided if any of these events cause a market pullback.

And, if the ECB, BOJ or Fed disappoints markets and causes a spike in bond yields and pullback in stocks, our subscribers will be able to demonstrate to their clients they expected the volatility
and had a plan in place should things get worse.

That’s how advisors (both active and passive managers) use The Sevens Report
to improve client relationships and impress prospects.

Tomorrow’s ECB meeting does have the potential to cause a drop in stocks, so we want to make sure everyone knows

1) What’s Expected,

2) What Will Make the ECB Dovish and

3) What Will Make the ECB Hawkish.

We’ve included an excerpt of that research for you below as a courtesy:

ECB Preview (Sevens Report Excerpt)

To keep things in plain English, the ECB is important to advisors and their clients because the decision will move both the US bond and stock markets.

If the outcome of the ECB meeting is considered “dovish” that will be positive for US stocks
because that ECB decision will pressure German Bund yields lower, and that in turn will drag US yields lower and increase the case for justifying a further multiple expansion in stocks above 2200.

Conversely, if the ECB is taken as “hawkish” that will cause German 10-year Bund yields to likely turn positive, which will push US Treasury yields higher and weigh on US and European stocks. Below we have a guide to what’s expected, what would be considered dovish, and what would be hawkish.

What’s Expected: The ECB Hints at an Extension of QE.
The current ECB QE program ends in March, and most economists expect that Draghi will strongly hint that the current QE program will be extended for a second time, likely till the end of 2017. Likely Market Reaction: Restricted for Paid-Subscribers.

It will Be Hawkish If: There is no hint at a QE extension in December. If the ECB remains in a “Wait and See” mode given the more resilient EMU economy post Brexit, that will disappoint markets. Likely Market Reaction: Restricted for Paid-Subscribers.

It Will Be Dovish If: The ECB announces the extension of QE tomorrow, or hints at both the extension of QE and upcoming changes to the QE program.
To that latter point, one of the current issues with ECB QE is that there is a relative scarcity of bonds to buy in the market, so if the ECB is planning on materially extending QE it could also change the rules regarding what bonds it can buy (likely increasing the pool of corporate and sovereign debt). Likely Market Reaction: Restricted for Paid-Subscribers.

The key takeaway here is that uncertainty surrounding global interest rates is a becoming a more substantial headwind on stocks, and that’s why stocks were down again this morning, as the Bank of England Governor Marc Carney implied the Bank of England may not need to do as much stimulus as expected, post Brexit.

Bottom line, before stocks can move higher, there has to be clarity on the direction of interest rates, and that will only come from the ECB, Fed and BOJ.

If you do not have a morning report that is going to give you the plain English, practical analysis that will help you navigate those central bank events, then please consider a quarterly subscription to
The Sevens Report.
 

There is no penalty to cancel, no long term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market. 

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

 

Volatility Will be an Opportunity for the Informed Advisor and Investor in the 4th Quarter

We aren’t market bears, but we said consistently that things were going to be volatile in 2016, and we were right!

The market is not going to stay as quiet as it was this summer.

 

How could it, considering the events that are coming over the next few weeks:

  • The ECB Meeting September 8th: Will the ECB hint at more stimulus (bullish) or not (bearish)?
  • The Fed Meeting September 21st: Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st: Will the BOJ adopt “Helicopter Money Light” (bullish), or just do another inconsequential easing like in July (bearish).
  • First Presidential Debate September 26th: Will Trump get back into the race (bearish short term – and this is not a political opinion) or will Clinton maintain a comfortable lead (not bearish).
  • International Energy Forum September 26th: Will OPEC and Non-OPEC members agree on a global production “freeze” (bullish oil) or not (very bearish oil).

Some advisors and investors will be blindsided by the volatility
these events might create, but the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back), will be able to retain more clients and close more prospects.

We view volatility as a prime opportunity to help our paying subscribers grow their books of business and outperform markets
by making sure that every trading day they know:

1) What’s driving markets

2) What it means for all asset classes, and

 

3) What to do with client portfolios.

We monitor just about every market on the globe, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can both outperform the market and protect client portfolios.

All for $65/month with no long term commitment.

I’m not pointing this out because I’m implying we get everything right.

But we have gotten the market right so far in 2016, and it has helped our subscribers outperform their competition and strengthen their relationships with their clients – because we all know the recent volatility has resulted in some nervous client calls.

Our subscribers were able to confidently tell their clients 1) Why the market was selling off, 2) That they had a plan to hedge if things got materially worse and 3) That they were on top of the situation.

That’s our job, each and every trading day. And, we are good at it. We watch all asset classes to generate clues and insight into the near-term direction of the markets, but our most important job is to remain vigilant to the next decline.

While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro-based, fundamental opportunities that can help our clients outperform.

If you want research that comes with no long-term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.
 

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.
 

Best,
Tom

Tom Essaye
Editor, The Sevens Report

 

  

Chart of the Day: The 2016 Gold Rally Continues

GC 9.6.16

After Friday’s lukewarm jobs number and the two ISM data “whiffs” in the last few days, gold futures have legged higher, holding a key trend-line that has been in place since January.

 

What is a Dovish Hike?

One of the most enjoyable parts of my morning routine is reading about the history of each day, because doing this task daily shows you that indeed, history doesn’t necessarily repeat, but it does rhyme—and that was true again this morning.

Since Friday, stocks have been under modest pressure
as expectations for a 2016 rate hike go up, but the selloffs have been mostly contained, because at the Jackson Hole Fed conference last week Fed Chair Yellen declared that regardless of when the Fed hikes rates, overall interest rates will remain historically low for many, many years.

Well, today’s date in history offers a pointed example (one that was much more important than monetary policy) that the best of intentions sometimes simply can’t be fulfilled.

On this day in 1935, then President Franklin D. Roosevelt signed Senate Joint Resolution 173, better known as the “Neutrality Act.”

It was a well thought out, well supported law that showed clearly the US had no intention of entering into any potential war in Europe. It was the right thing to do at the time and the intentions were clear.

And, we all know what happened a few years later.

My point?

You can have a carefully crafted set of polices built on the best of intentions, but a lot can change in just a few months.

The reason this event in history caught my attention is because over the past several days, in the wake of Fed Vice Chair Stan Fischer’s “hawkish” comments Friday and yesterday, the bulls started to downplay any potential negative influence of a rate hike because it’ll be what they call a “Dovish Hike,” or, a single rate hike followed by no hikes for a very, very long time. As such, the rate hike itself won’t be bearish for stocks.

Maybe that’s true, but the fact of the matter is the Fed has a very bad record of long-term forecasting (more on that below), so as the “Dovish Hike” scenario grows in popularity as a justification to buy stocks regardless of what the Fed does, I want to make sure that investors and advisors know:

1) What a “Dovish Hike” is,

2) What a “Dovish Hike” means for stocks, and

3) Why We Don’t Think a “Dovish Hike” Is a Reason to Buy Stocks

I know the long weekend is approaching and the last thing anyone wants to do is try and game the near-term path of interest rates, but the fact of the matter is we are approaching a tipping point in the bond market, and how it goes will have significant consequences on investor’s portfolios… because if this bond market breaks down and bond yields move higher, that will cause both stocks and bonds to drop at the same time.

So, it’s critical that investors understand, at least generally, what issues are facing the bond market and that you are following an analyst who understands what will move the bond market and who is watching it every day, because with 6 potential market moving events looming over the next month, waiting for a generic, dated, perma-bull piece from your custodians CIO isn’t going to cut it… not with a bond and stock market that are both still very extended.

We’ve included an excerpt of recent bond research for you below. Full, paid subscribers to The Sevens Report
received this information earlier this week along with specific tactical ETF suggestions to navigate the current environment.

What Is A “Dovish Hike?” (And Is It Good for Stocks?)

If the Fed is planning on executing a “Dovish Hike” it won’t be a medium- or longer-term headwind on stocks, but if it’s not a “Dovish Hike” and it’s the first of several, that will be an unanticipated headwind on stocks—so I want to make sure everyone is aware of what a “Dovish Hike” is, and why it’s not bearish short term, but at the same time also is not a reason to buy stocks.

What Is a Dovish Hike? A “Dovish Hike” is a clever title for a monetary policy strategy whereby the Fed raises Fed funds 25 basis points, but then explicitly says that the ceiling for the Fed funds rate is much, much lower than it was in the past (say 3% vs. previous 6%). So while the Fed is hiking rates, it can’t hike them very far given the economy.

What Does a “Dovish Hike” Mean for Stocks? Ostensibly, it’s positive beyond the short term. Yes, the idea that the Fed may raise rates sooner than later would be a potential short-term headwind. But beyond that, the idea that interest rates can’t return to pre-crisis levels is, supposedly, fundamentally dovish and it would help fuel a continued “low-rates-forever” rally. Assuming neither the BOJ nor ECB surprise markets hawkishly in September, a dovish hike in September would not mean that the rally cannot continue into the fourth quarter.

That Said, Is a Dovish Hike a Reason to Buy Stocks? No, We Don’t Think So (at least not for medium- or long-term investors). First, the Fed is no longer in control of longer-term interest rates, at least in the near term, so regardless of whether they keep Fed funds low over the next several years that likely won’t have that much effect on the direction of longer-term rates… and those rates are the key to the next move in stocks.

Second, the Fed’s longer-term forecasting ability is, frankly, terrible, so I’m hesitant to believe them when they say they know the new “long-term” ceiling for interest rates. As a reminder, in 2012, when the Fed first released the “dot” projections, many Fed officials had the Fed funds rate above 1% in 2014, and several had it above 2%… in 2014!

Point being, no one at the Fed knows what’s going to happen over the very longer term. They may believe that they’ll stay dovish for longer, but that simply may not be possible depending on a variety of factors, including what the ECB or BOJ do with policy, the global economy, inflation, etc. Bottom line, buying (or selling) stocks based on the Fed’s longer-term forecasts has not been the most successful investment strategy, and I don’t think this time will be different.

So, while the idea of a “Dovish Hike” could be a short-term catalyst for stocks, we do not see that as the catalyst for a real, sustained move higher unless it’s accompanied by very dovish actions by the BOJ or ECB. Until then, we will remain cautious and continue to contend that better economic growth is the key to a real, sustainable rally in stocks, not perma-low rates to compensate for anemic growth.

Bottom line, despite the media focus on a September or December hike, the more important issue with Fed policy is what they do after the next hike, as that will be a major factor in whether the S&P 500 can make significant gains from current levels.

What to Do Now: Tactical Allocation Ideas

The “Dovish Hike” scenario may not have a major influence on the broad markets initially, but it will have a continued influence on sector trading, specifically whether we see, finally, the start of a “Great Rotation” out of income-oriented sectors and into more cyclical sectors.

Several weeks ago we bought a regional bank ETF that we believed would help reduce any relative underperformance if we saw the start of a rotation out of safety and into cyclicals.
That decision has proven wise, because since then that ETF has rallied almost 9%, outperforming other cyclical sectors be nearly 5% and outperforming the S&P 500 by over 11% in just under two months!
If we do see a sooner-than-expected rate hike from the Fed, regardless of whether it’s a “Dovish Hike” or not, this ETF will continue to significantly outperform the S&P 500 and defensive, income-oriented sectors more generally, and we have continued to remind paid subscribers of this specific ETF.

We’re committed to making sure subscribers to our full morning report have the independent analysis they need to navigate macro risks while at the same time having the tactical idea generation that can help their clients outperform. 

If your paid subscription research isn’t giving you talking points to discuss with clients, monitoring the macro horizon to keep you aware of risks, and providing tactical allocation suggestions and idea generation, then please consider a quarterly subscription to The Sevens Report. 

If all we do is help you get one client, that will more than pay for the subscription!

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

Increased Market Volatility Will Be an Opportunity for the Informed Advisor and Investor

We aren’t market bears, but we said consistently that things were going to be volatile in 2016, and we were right!  

And, as we approach a series of 6 critical macro events, starting with Friday’s Jobs Report, the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back), will be able to retain more clients and close more prospects.

We view volatility as a prime opportunity to help our paying subscribers grow their books of business and outperform markets by making sure that every trading day they know:

1)  What’s driving markets

2)  What it means for all asset classes, and

3)  What to do with client portfolios.

We monitor just about every market on the globe, break down complex topics, tell you what you need to know, and give you ETFs and single stocks that can both outperform the market and protect client portfolios.

All for $65/month with no long term commitment.

I’m not pointing this out because I’m implying we get everything right.

But we have gotten the market right so far in 2016, and it has helped our subscribers outperform their competition and strengthen their relationships with their clients – because we all know the recent volatility has resulted in some nervous client calls.

Our subscribers were able to confidently tell their clients 1) Why the market was selling off, 2) That they had a plan to hedge if things got materially worse and 3) That they were on top of the situation.  

That’s our job, each and every trading day. 

And, we are good at it.

We watch all asset classes to generate clues and insight into the near-term direction of the markets, but our most important job is to remain vigilant to the next decline.

While we spend a lot of time trying to identify what’s really driving markets so our clients can be properly positioned, we also spend a lot of time identifying tactical, macro-based, fundamental opportunities that can help our clients outperform.

If you want research that comes with no long-term commitment, yet provides independent, value added, plain English analysis of complex macro topics, click the button below to begin your subscription today.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report

What Will Move Bond Markets

For the past two weeks, we’ve told you via these free excerpts that the markets were entering a critical six-week period that ultimately would decide whether the rally in stocks continues… or reverses.

Well, that six-week stretch of events started with a bang last Friday as Fed Vice Chair Fischer surprised markets by basically saying Friday’s jobs report would decide whether the Fed would hike rates in September.

As a result, bond yields spiked and stocks dropped.

And, if Friday was any indication, we’re in for a wild ride as the markets navigate the remaining 6 key critical central bank/macro events between now and September 26th (more on that below).

We never like to see the markets go down as all of us are generally “long” stocks, but Friday was a good day for us here at The Sevens Report, because it validated what we’ve been saying to our paid subscribers for the past several weeks:

Specifically, that whether stocks resume the July rally or break down from here will depend on the bond market, and as a rule, anything that sends bond yields up will be negative for stocks, and anything that sends bond yields down will be positive for stocks.

While other research publications were simply providing recaps of a dull market during the majority of August, we were consistently telling our subscribers that the bond market is the key and the coming several weeks were going to be critical—and on Friday afternoon (and continuing today), our advisor subscribers were able to demonstrate to their clients they were on top of markets and in control of their portfolios!

In fact, one subscriber wrote in and said it was the “Plain English” analysis of the bond market that’s helped him strengthen a relationship with a high net worth client, and he’s pretty sure that he’s going to get an additional allocation because, as the client said, his other advisors seemed to have “taken August off” given the quiet market.

That’s the kind of feedback that makes the early wake ups and long hours of work worth it, and the best part is that our subscriber only had to spend less than 10 minutes each morning reading our daily macro report. That’s how The Sevens Report
helps advisors grow their business.

Every trading day at 7 a.m. we provide plain English, concise analysis of:

  • Stocks
  • Bonds
  • Commodities
  • Currencies and
  • Economic Data

And, our daily report takes less than 10 minutes to read each day!

Finally, we do it at a cost that’s substantially less than our competition (and less than one client lunch per month), and that’s why we continue to believe we offer the best value in the paid research space!

Given last Friday’s “hawkish” surprise from Fed Vice Chair Fischer, it’s critically important for all advisors to understand what is really driving the bond market
(it’s not a Fed rate hike) because where bonds go from here will determine the next move in stocks.

We’ve included an excerpt of that research as a courtesy.

Understanding What Will Move the Bond Markets (It’s Not Rate Hikes)

The question of when the Fed hikes rates has come back to the forefront for investors, as expectations for a rate hike in September or December have increased following the hawkish comments from last Friday.

But it is very important to understand that while the media will focus on the Fed hike drama, easily the most important thing to understand about the bond market right now is that the Fed has little to no control over whether 10- and 30-year Treasury yields stay in a downtrend (good for stocks), or reverse and start to trend higher (bad for stocks).

Whether the Fed hikes in September, December or 2017 won’t resolve the major issue facing stocks right now, which is the near-term direction of global 10- and 30-year bond yields.

Instead, there are two other central banks that control the direction longer-dated Treasury yields:

  1. The European Central Bank (ECB) and
  2. The Bank of Japan (BOJ)

For US stock and bond investors, what those banks do in September is much, much more important than what the Fed does between now and December.

Now, I said that the Fed doesn’t control longer-term interest rates anymore to a friend this weekend, and he was incensed that I could utter anything so “stupid.”

But, I pointed out that over the past two years, we’ve seen the Fed:

  1. End the QE program and
  2. Hike Fed funds 25 basis points

Yet, during that two-year period, yields on the 30-year Treasury are down 80 basis points, from 3.1% in December 2014 to 2.1% post Brexit, and yields on the 10-year Treasury are also down 100 basis points (or 1%), from 2.3% to 1.33% post Brexit.

CHART

So my question to him was: If the Fed is still in control of longer-term Treasury yields, how can this be possible?

The answer is they aren’t in control any longer as the Treasury market has been overrun by foreign buyers due to the actions of the BOJ, ECB and now BOE.

The reason this is important for advisors and their clients is this:

Between now and year end, whether stocks resume their rally will depend on whether the ECB and BOJ are more hawkish than expectations, not the Fed.

If that happens, yields on Bunds and JGBs (Japanese Government Bonds) will rise and that will cause Treasury yields to rise too, regardless of whether Yellen trots out with a dove on her shoulder and promises to never hike rates again!

The critical bottom line is this: The financial media will be totally consumed with whether the Fed is going to hike rates in September, but from a stock standpoint (specifically whether stocks rally in Q4 or pullback) what the ECB does on September 8th and what the BOJ does on September 21st are much, much more important.

They are in control of longer-dated Treasury yields, and longer-dated Treasury yields will decide the next move in stocks and we will make sure you stay focused on what’s really important in the bond markets over the coming six weeks.

Make Sure You Have the Plain English and Actionable Analysis to Navigate the Next Six Weeks

We will give our advisor and investor subscribers the plain English talking points to help them turn any Fed or central bank-based volatility into an opportunity to demonstrate their knowledge of markets and impress current clients and prospects.

And, we are going to provide that same level of analysis for the remaining 6 key events that are coming in September, events that will decide whether this rally extends into the fourth quarter

  • Friday’s Jobs Report: Will the number increase the odds of a September rate hike (and if so cause more short term declines in stocks).
  • The ECB Meeting September 8th:  Will the ECB hint at more stimulus (bullish) or not (bearish)?
  • The Fed Meeting September 21st:  Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st:  Will the BOJ adopt “Helicopter Money Light” (bullish), or just do another inconsequential easing like in July (bearish).
  • First Presidential Debate September 26th:  Will Trump get back into the race (bearish short term – and this is not a political opinion) or will Clinton maintain a comfortable lead (not bearish).
  • International Energy Forum September 26th:  Will OPEC and Non-OPEC members agree on a global production but (bullish oil) or not (very bearish oil).

If all we do is help you navigate the month of September correctly and help you get properly positioned in client accounts for the fourth quarter, we will have more than covered our subscription costs.

If you do not have a morning report that is going to give you the plain spoken, practical analysis that will help you navigate the coming six weeks, then please consider a quarterly subscription to
The Sevens Report.
 

There is no penalty to cancel, no long-term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

 Value Add Research That Can Help You Grow Your Business in 2016

Our subscribers have told us how our focus on medium-term, tactical opportunities and risks has helped them outperform for clients and grow their businesses.

We continue to get strong feedback that our report is: Providing value, helping our clients outperform markets, and helping them build their books:

Thanks for your continued insight; it has saved my clients over $2M USD this year… Keep up the great work!” – Top Producing FA from a National Brokerage Firm.

“Let me know if there is anything else that you need from us. Thanks again for everything. I really enjoy the Report – it is helping me grow my business and stay on top of things.” –  Independent FA.

Great service from a great company!!” – FA from a National Brokerage Firm.

“Great report. You’ve become invaluable to me, thanks for everything…!  –  FA from a Boutique Investment Management Firm.

Subscriptions start at just $65 per month, billed quarterly, and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to The Sevens Report right now.

Begin your subscription to The Sevens Report right now by clicking this link and being redirected to our secure order form.

Finally, everything in business is a trade-off between capital and returns.

So, if you commit to an annual subscription, you get one month free, a savings of $65. To sign up for an annual subscription simply click here.

Best,
Tom

Tom Essaye
Editor, The Sevens Report

Chart of the Day: Gold

GC 8.29.16

Gold futures are currently in a “consolidative pullback” from the post-Brexit highs in June, however the longer-term trend remains a bullish one.

 

Chart of the Day: S&P Closes at a 3-Week-Low

SPX 8.25.16

Although it was a choppy and seemingly uneventful session, the S&P 500 did quietly close at a 3-week-low yesterday. Today, Yellen could spur all sorts of different moves, but from a purely technical perspective, yesterday’s close was a bearish, near-term development

 

WHY STOCKS DROPPED YESTERDAY

Yesterday’s dip in stocks was not because of an EpiPen, regardless of what the financial media said.

Yes, Hilary Clinton’s EpiPen comments did remind everyone of the healthcare induced pullback in 2015, but this time that’s largely a political distraction.

By far the most important thing that happened yesterday was that we learned 8 of 12 Regional Federal Reserve Bank Presidents requested a Discount Rate hike in July.

That’s potentially very important, because it means the chances of a rate hike in 2016 are higher than previously thought—and that is a threat to this market rally.

That’s the real reason stocks dropped yesterday, not some EpiPen political drama.

I included that analysis in the full, paid edition of The Sevens Report
this morning (which was delivered to subscribers at 7 a.m.), and I got some great feedback.

One subscriber, a wealth manager with ML, called and told me that he reads three things every morning: Gartman, The Sevens Report, and some of ML’s research.

He said Gartman had great information, but it was long and he really doesn’t need to know about pricing trends in cotton or the inner workings of Japanese politics.

The ML research was comprehensive, he said, but it was typical “Ivory Tower” stuff that was full of jargon and often tough to discern a clear, concrete takeaway.

He went on to say he subscribes to The Sevens Report
because every day it tells him, in plain English, what’s important in all asset classes: Stocks, Bonds, Commodities, Currencies, Bonds, and Economics.

No jargon, no obscure facts, just the information you need to know, in plain English, every day at 7 a.m.

And, he added that it didn’t hurt that the cost of The Sevens Report
was about 1/10th that of the Gartman Letter!

The truth is, this is a very difficult market, in part because there are unending distractions that take advisors and investors away from the key forces driving all asset classes right now: Global bond yields.

That’s why we consistently bring our subscribers (and you via these free excerpts) back to global bond yields, because they will decide whether stocks break out and extend the rally or break down and suffer a nasty pullback.

That’s why yesterday the most important piece of information was the revelation that at the July FOMC Meeting, for the first time in 2016, a majority of Regional Fed Bank Presidents called for a discount rate hike.

That’s a potential problem for stocks for two reasons:

  • First, recent history implies a majority of Regional Fed Bank Presidents calling for a discount rate hike is a precursor to a Fed Funds rate hike, and
  • Second, the market is still largely ignoring that fact as there is still just a 30% chance of a hike in September and a 50% chance of a hike in December.

Both of those numbers are too low, and both represent a potential risk to this stock market rally.

Understanding the outlook for US and global interest rates is the key to successfully navigating the markets for the rest of 2016, and we’ve included an excerpt of recent rate research as a courtesy.

Demand for a (Discount) Rate Hike Grows (Sevens Report Excerpt)

Easily the most important thing that’s happened so far this week is that a Fed document was released Tuesday that revealed for the first time in 2016, a majority of the Fed’s Regional Bank Presidents requested a reserve rate hike in July.

History tells us that implies that a majority of FOMC officials think the time for a Fed funds rate hike is sooner than later (like in the next month or two). For reference, the last time eight Regional Fed Bank Presidents requested a reserve rate hike was September and October of last year, and the Fed hiked in December.

But the important takeaway for any stock and bond holder is this:

The Fed may indeed be closer to a rate hike than the market expects.

And, that’s starting to be reflected in Fed Fund Futures as they have risen over the past week.

  • Last week, Fed Fund Futures showed just a 20% chance of a September rate hike.
  • Now, Fund Funds Futures reflect a 30% chance of a September rate hike.
  • Last week, Fed Fund Futures showed just a 40% chance of a December rate hike.
  • Now Fed Funds Futures reflect a greater than 50% chance of a December rate hike.

And, despite that, the S&P 500 is less than 1% off the recent highs.

That should be a concern, because the idea of forever-low global rates and no 2016 Fed rate hikes spurred a 7% S&P 500 rally in July, and if that proves to be untrue, then there’s a risk of a pullback.

Bottom line, there is mounting evidence that global and US interest rates may not stay as low as the stock market has currently priced in, and that is a risk to the entire July/August rally. Again, we won’t know the outlook for rates until the end of September. But the bottom line is that markets are very, very complacent with regard to any future rate hikes, and there is growing evidence that a rate hike is in the works.

The Next Six Weeks Will Be Critical for this Rally

For now, this remains a market largely stuck in neutral at the moment and in need of resolution on several key upcoming events before it can break meaningfully past 2200 in the S&P 500, given current valuations.

Specifically, the overhang of global rate uncertainty needs to be resolved before stocks can resume the forever-low-rates rally and extend multiples and valuations beyond current levels.

And, that process will begin tomorrow with Yellen’s Jackson Hole speech.

Generally, it’s expected that Yellen will be (as usual) dovish in her comments tomorrow, and if so, that could provide a short term boost for stocks. But, that’s not going to cause a real breakout in the markets
because what happens to US interest rates is as much a function of global events as it is Fed policy.

The risk tomorrow is that Yellen offers a “hawkish” surprise for markets, and that surprise combines with recent hawkish Fed rhetoric to cause a low volume, potentially sharp decline in stocks.

In tomorrow’s full, subscriber-only edition of the Report, we’re going to detail:

  • What to Expect from Yellen’s Comments
  • What specific comments or phrases will make her speech more “dovish” than expectations, and therefore short-term positive for stocks.
  • What specific comments will make her speech more “hawkish” than expectations, and thus increase the risk of a pullback.
  • And what specific policy will frankly “spook” markets and cause a decline.
  • And, most importantly, what sectors and ETFs will outperform regardless of the speech.

Paid subscribers to The Sevens Report will have this information at 7 a.m. tomorrow, in plain English and it’ll take them only a few minutes to read it, so they will be prepared to quickly and confidently answer any client questions about the Fed, and propose tactical ideas for how to potentially profit from a “dovish” Fed or protect portfolios from a “hawkish” Fed.

We will give our advisor and investor subscribers the plain English talking points to help them turn any Fed or central bank based volatility into an opportunity to demonstrate their knowledge of markets and impress current clients and prospects.

And, we are going to provide that same level of analysis for the remaining 5 key events that are coming in September, events that will decide whether this rally extends into the fourth quarter

  • The ECB Meeting September 8th: Will the ECB hint at more stimulus (bullish) or not (bearish)?
  • The Fed Meeting September 21st: Will the Fed hike rates (very bearish), hint at hiking rates in December (bearish) or stay ultra-dovish (bullish)?
  • The Bank of Japan Meeting September 21st: Will the BOJ adopt “Helicopter Money Light” (bullish) or just do another inconsequential easing like in July (bearish).
  • First Presidential Debate September 26th: Will Trump get back into the race (bearish short term – and this is not a political opinion) or will Clinton maintain a comfortable lead (not bearish).
  • International Energy Forum September 26th: Will OPEC and Non-OPEC members agree on a global production but (bullish oil) or not (very bearish oil).

If all we do is help you navigate the month of September correctly and help you get properly positioned in client accounts for the fourth quarter, we will have more than covered our subscription costs.

If you do not have a morning report that is going to give you the plain English, practical analysis that will help you navigate the coming six weeks, then please consider a quarterly subscription to The Sevens Report.

There is no penalty to cancel, no long term commitment, and it costs less per month than one client lunch!

With thousands of advisor subscribers from virtually every firm on Wall Street and a 90% initial retention rate, we are very confident we offer the best value in the private research market.

I am continuing to extend a special offer to new subscribers of our full, daily report that we call our “2-week grace period.”

If you subscribe to The Sevens Report
today, and after the first two weeks you are not completely satisfied, we will refund your first quarterly payment, in full, no questions asked.

Click this link to begin your quarterly subscription today.

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Best,
Tom

Tom Essaye
Editor, The Sevens Report


Chart of the Day: Oil’s Recent Rally

CL 8.23.16

Despite the early week pullback in the energy market, WTI futures are continuing to trend higher right now thanks to speculation that global oil producers may “freeze” production next month in an effort to defend prices. Today, the weekly EIA Report released at 10:30 a.m. ET will be in focus.