Reliable Contrarian Indicator Says Stocks Could Rise 25%

By Chris Ciovacco

Positive Returns 97% Of The Time

Based on current readings of their “sell side indicator”, Bank of America/Merrill Lynch (BOAML) recently wrote in a research note to clients:

“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 97% of the time, with median 12-month returns of +25%,”

Recommended Stock Allocations Remain Low

The BOAML indicator is based on the recommended stock allocations inside portfolios. A typical benchmark equity allocation is 60%-65% of a portfolio. Presently, the recommended allocation is significantly below that range, coming in at 51%. If the recommendations moved back to the historical mean, as they typically do, money would continue to flow out of bonds and into stocks. More information about the BOAML signal can be found on Yahoo Finance.

A Separate Rare Signal Also Leans Bullish

Has any other longer-term signal appeared recently that aligns with the possibility of double-digit stock gains over the next 12 months? Yes, this week’s stock market video covers a monthly S&P 500 momentum and trend signal that has occurred less than 10 times over the past 23 years. The signal was triggered at the end of November. Even more importantly, the signal was also triggered recently in numerous risk-on ETFs, such as small-caps (IWM), mid-caps (MDY), energy (XLE), copper (JJC), materials (XLB), and the total stock market (VTI), which may be due in part to allocation shifts based on President-elect Trump’s platform. Bearish signals have been triggered in defensive assets such as bonds (TLT), utilities (XLU), consumer staples (XLP), and healthcare (XLV), which may be due in part to post-election shifts regarding growth, earnings, taxes, deficits, and inflation.

Continue reading Reliable Contrarian Indicator Says Stocks Could Rise 25%

Cisco and Target Are Not Really About Cisco or Target

By Jeffrey Snider of Alhambra

The words of the day are apparently “sluggish” and “challenging.” Overnight both Target and Cisco, bellwethers in retail and tech, respectively, were both the subject of intense scrutiny. Target released earnings that “beat” while revenues and really same store comps were particularly weak. Year-over-year, sales declined 7.2% total (revenues from Q2 2015 include Target’s pharmacy business which was sold to CVS late last year), while same store sales were down 1.1%. Even the company’s digital channel struggled, where +16% sounds terrific but was significantly slower than +23% in Q1 and +30% in Q2 2015.

How does the company explain these results?

While we recognize there are opportunities in the business, and are addressing the challenges we are facing in a difficult retail environment, we are pleased that our team delivered second quarter profitability above our expectations.

That was the bland, boilerplate response of Target’s CEO and Chairman, Brian Cornell. Thus, the word “challenging” was repeated over and over today throughout the media, especially in relation to its troubling forecast:

Citing a challenging environment, Target issued weak third-quarter guidance and lowered its forecast for the year. The company now expects to earn $4.80 to $5.20 a share, compared with prior guidance of $5.20 to $5.40. It expects comparable sales in the third and fourth quarters to come in flat to down 2 percent. It had previously said it expected full-year comparable sales to grow 1.5 to 2.5 percent.

The news from Cisco was perhaps even grimmer, though the company won’t release earnings until later today. A tech news site, CRN News, reported that sources close to the company shared plans to layoff 20% of Cisco’s global workforce. It should be noted that this is still an unconfirmed rumor, and will remain that way until the earnings report when the “quiet” period expires.

Searching again for reasons why such a major firm would be delivering such bad news, Reuters, the mainstream news outlet that first distributed the CRN report, could only manage “sluggish.”

Continue reading Cisco and Target Are Not Really About Cisco or Target



Alice's_Adventures_Under_Ground_-_Lewis_Carroll_-_British_Library_Add_MS_46700_f45v“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?” –Alice in Wonderland

Silver out performs gold as both rise with Treasury bonds, which are in turn rising with stocks, as Junk bonds hit new recovery highs while USD remains firm as inflation expectations are out of the picture. This is highly atypical, maybe even unprecedented.

Some, deeply dug into their particular disciplines and biases, might say it is dysfunctional, as this backdrop simply does not make sense using conventional methods of analysis. Why again did I name this service Notes From the Rabbit Hole?

When the S&P 500 was robo rising month after month, year after year as it did from 2011 to 2015, you did not need the market report with the funny name because all was linear and as it should be. The same actually, could be said for gold. It was linear and as it should be in its relentless downtrend. Casino patrons simply ride the trends!

But today things are making sense simply because we don’t have a need to make them make sense as linear thinkers would do; we go with the indicators and charts.

As I watch the macro burp up all kinds of paradoxes and inconsistencies, I can’t help thinking back to the day that the ‘Hero’ announced Operation Twist, which in turn got me announcing “they are painting the macro”. When Ben Bernanke took the bold step into the great unknown of extreme and unconventional policy I felt the markets had been disconnected from commonly accepted wisdom maybe not for good, but for as long as the system and its current modes of operation are in effect.

To review, Operation Twist forced changes upon the macro because it “sanitized” (the Fed’s actual word for it) inflation expectations right out of the picture. The mechanics of this sanitization were the Fed selling short-term Treasury bonds (putting upward pressure on short-term yields) while simultaneously buying long-term Treasury bonds (putting downward pressure on long-term yields). The yield curve was changed from out of control (up) to in control (and down trending). From the Calculated Risk blog (…

Continue reading at →