Blue Skies

Another day, more blue skies for the major stock market indices. The pain for the bears has to be strong and growing, but I have yet to see evidence that they are throwing in the towel en mass. And price action has done absolutely wrong to suggest anything more than a trading pullback.

As I mentioned the other day, I think it pays to be a little more vigilant here, not that I think we are going to see a full fledged correction or the need to make outright sales to raise cash. Sentiment has grown a little complacent and stocks are at all-time highs, sometimes an ingredient for a quick pullback. However, the plan remains the same. Until proven otherwise, pullbacks are buying opportunities.

The longer the market can go without giving up significant gains, the more likely the resolution will be sharply higher. As a bull, it would be great to see some sideways action for a week or so and then another blast higher to really squeeze the bears. Ultimately, I still believe that stocks will experience a major blow off to the upside before the bull market ends, however, it doesn’t look like that’s right here.

Sector leadership continues to rotate in an intermediate-term positive fashion with REITs, utilities and staples all ceding to consumer discretionary, semis, biotech.

Gearing up to visit Jeff Macke and the good folks at Yahoo Finance tomorrow and then see my old friend Melissa Francis at Fox Business on her show MONEY.

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Time to Be Careful

Before I dive in, let me be very clear, I remain bullish over most time frames. Nothing has changed. Five straight closes above 18,000 as I spelled out on CNBC last week and many times over the past six months may create a slingshot to 20,000 this year. The bull market is old and wrinkly but not dead. Same old lines from me.

The headline about being “careful” is more about the short-term and because stocks just broke out to all-time highs where risk usually increases. The major indices had been in a trading range for three months and just hit fresh highs over the past few days. Historically, this can lead to a quick surge higher as bears scramble to cover losses and bulls pile in. However, it can sometimes lead to a fast and sharp downside reversal which usually happens sooner than later.

At this point, I am not concerned yet that a double digit correction is here, just a little warning not to be complacent. The window of opportunity for the bears to make a stand is now, meaning over the next week. The longer stocks remain at new highs, the less likely a sharp reversal can take hold.

I will talk about sector leadership rotation tomorrow, but suffice it to say that it’s very encouraging! My position in the long dated treasury is not.

REMINDER: I will be on Fox Business’ Making Money with Charles Payne tonight from 6 pm – 7 pm. Tune in for a fast paced hour we talk markets, economy and a random group of topics.

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Lines in the Sand

The bulls are back to pressing against the upper end of the short-term trading range and should attempt to close above those lines in the sand. On the Dow, the level is 17975 on a closing basis while it’s 2073 on the S&P 500. Both are just a one day rally away. The S&P 400 already saw all time highs last week while the Russell 2000, long left for dead by the market, has a line in the sand at 1215 which is one good morning away. Finally, the Nasdaq 100, dominated by Apple and few other mega tech stocks, is breaking out of its multi-month period of digestion and is poised to see fresh highs shortly.

Unless the major indices fail to exceed their lines in the sand this month and rollover to new 2015 lows, the ball is firmly in the hands of the bulls and they will need to run with it.

On the key sector front, while the banks and transports continue their slumber, the semiconductors are starting to wake up. Fresh bullish leadership is emerging from the consumer discretionary sector and homebuilders while the defensive leaders like utilities and REITs are lagging. If this new trend continues, it would have very bullish implications over the coming months.

On the flip side, long-term treasuries have quietly taken it harshly on the chin with the exchange traded fund TLT down more than 5% from the highs. The are supposed to step right here…

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Bulls Trying to Step on Bears’ Throats

Earlier this week, I spelled out three possible scenarios for stocks with one very bullish, one mildly bullish and one bearish. I gave most weight to the mildly bullish one and least weight to the bearish one. Right now, stocks are marching more towards the very bullish scenario although the Dow breached the lows I had discussed in the mildly bullish scenario.

Looking at the five major indices, the Dow needs to close above 17,850 to set up a run to new highs and break the backs of the bears. The S&P 500’s number is 2065 while the S&P 400 is hitting fresh all-time highs as I type this. The Russell 2000 is already above its line in the sand and just needs to close well to stomp on the bears. Finally, the Nasdaq 100’s number is 4295, still more than 1% away and playing catch up.

Unless the major indices immediately reverse, and there is the employment report on Friday, the bulls should have enough juice to push higher with most indices scoring all-time highs this month.

Anything to worry about? With the bull market being 71 months old and more than 3 years without a full fledged correction, risk is there. The three key sectors, semis, banks and transports are not leading and don’t look powerfully constructive. Defense remains in charge, not exactly a ringing endorsement.

However, if the Dow sees 5 straight closes above 18,000, that will set up 20,000 as the next target in 2015.

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Bears Pulling a Pete Carroll?

The bears began Monday’s trading with the ball, seemingly just needing to breach the lows to force a wave of technical selling. It shouldn’t have been that difficult. After multiple intra-day reversals by the bulls stocks ended sharply higher on decent internals. While that all looks very nice and neat on a chart, I would have still preferred to see a clear breach of all recent key lows by at least the majority of the major indices. All we saw on Monday were the Dow’s bottoms being cleaned out.  Interestingly or curiously, the S&P 500 essentially saw the exact same level as in December while the S&P 400, Russell 2000 and Nasdaq 100 weren’t even close.

All this together, the bulls have a little advantage here but must use it right away. If and when Monday’s lows are breached on a closing basis, that would likely set off a sharp “whoosh” lower of several percent across the board as I mentioned in Monday’s three scenario piece. For now, keep an eye which sectors are leading and lagging for signs of change. Eventually, the short-term “all clear” signal comes when the S&P 500 closes above 2064.

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Bears Trying to Run It In

Congratulations to the New England Patriots! I didn’t root for you, but a win is a win, even in the face of the single worst offensive play called in the history of  big game sports.

Stocks begin the week with the bears in mild control even following Thursday’s reversal. Early this week should be very key to see which way the short-term winds blow. On the S&P 500 and its weaker cousin, the Dow, price has declined to the same general area for the fourth time since early December. While not impossible, it’s unlikely that a “quadruple” bottom will hold.

The scenarios end up being:

Most bullish – stocks hold the lows from last week and the bulls take over control right away and begin and advance to new highs

Modestly bullish – stocks see further selling of 2-3% before bottoming and beginning a solid rally to the end of the quarter towards the old highs

Bearish – stocks knife right through the lows of the past two months and plummet straight to the levels seen at the October “Ebola Bottom”

At this point, I think scenario number two is the most likely  with number three as the least likely.

Sector leadership remains defensive and we really need to see that change before talk of Dow 20,000 begins again. High yield bonds are showing a very bullish short-term pattern and they should be watch closely, especially if energy continues to bounce from the last week.

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Heading into the Weekend

Some of the pop in volatility this week is starting to be wrung out as the markets close the week. On Thursday we saw a nice reversal across the board, however the internal numbers were nothing to write home about. Additionally, I would have much preferred to see the lows from at 2015, if not December 2014 breached before the reversal took hold. That would have given a good flush to weak handed holders.

For now, the major indices remain in the two month trading range without a huge edge either way. Sector leadership is also unwavering and favoring the defensive areas like healthcare, biotech, utilities and REITs. Homebuilding is the outlier leader on a short-term basis.

Unless something changes dramatically by 4pm, the stock market will close down for the second straight month with the “all important” month of January being negative…

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Fed Day Model and Trend

The FOMC concludes their two day meeting today, surviving the “epic” and “historic” blizzard. The model for the trading day is to see stocks in a plus or minus range of 0.50%, but generally we see mildly rising prices until 2pm and then increased volatility with an upward bias to the close.

The Fed trend is to be long the stock market from yesterday’s close to today’s close based on a variety of historical factors. That trend has an accuracy rate of 77%. Should the market end higher today, it would set up another trend for stocks to be lower tomorrow although not as strong as today’s trend.

Expectations are for the Fed to do absolutely nothing at today’s meeting, but everyone will be parsing the statement for clues that the FOMC will forestall raising rates until late this year or even into 2016. You already know that I vehemently disagree with any rate hike anytime soon and believe that QE should not have ended. I have said this for years, but I will say it again. Our economy and to some degree, our markets, are not strong enough to stand on their own two feet.

We can argue whether we should have QE’ed $5 trillion at all, but once the program began, it has to be seen to its rightful end. I don’t believe the Fed did that.

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Bears to Pounce at the Open

Stocks look to open sharply lower this morning on a variety of news events, although none that are singularly that bad. Greece is in the headlines yet again and frankly, if they are going to exit, let’s just get it over with. Their economy and market is not even a rounding error in the grand scheme of things, but a Grexit will open the door to the southern European countries saber rattling about an exit if they are not bailed out.

The open should put the major indices close to saying “hello” to last Thursday’s low, which is the line in the sand on a closing basis for the bulls over the short-term. On a day like this, I always look closely at which sectors lead and lag. I am most interested to see if the previous leaders are still leading or the previous laggards are still lagging.

I would fully expect to see treasury bonds and corporates rally today along with gold, REITs and maybe utilities. Tech should be under strong pressure given Microsoft’s big earnings miss. Most important, today’s close will be very telling.

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Lots of News This Week

While last week was certainly news filled, this week will be even busier as the northeast plans for another snowmageddon. At the bus stop this morning, our new neighbors who are from Dublin talked about the more than 10 cases of water they bought. When I stopped laughing, I asked them what they planned to do with all that water. And while they were at it, I asked them if they also bought canned goods and ammo! That conversation gave me a good chuckle to start my day.

After the blizzard prep, we will be hearing about the actual “epic” and “historic” storm until the clean up takes over. Although I would rather head to Vermont like I did when the 40 inch “epic” and “historic” storm hit two years ago, I promised my wife that I would stay home since they are forecasting high winds and possible power outages. What kind of father and husband would I be if I celebrated a powder day while my family was stuck home freezing?!?!

Anyway, besides the storm, Apple and Google are set to report earnings this week and both are potential market movers. We also have the Fed meeting on Tuesday and Wednesday with a 2 pm announcement on the 28th.

Looking at the stock market, the short-term line in the sand is remaining above last Thursday’s low on a closing basis. Should the bears muster enough energy to take stocks beyond that, the market is probably going to new 2015 lows and below the December bottom. But let’s cross that bridge if and when. For now, defensive sectors are leading and that is telling potentially two very different stories.

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