Nasty, Wicked, Ugly Reversal

No sooner did the ink dry on yesterday’s blog than the markets saw a very ugly and wicked reversal which saw the Dow give up almost 400 points from high to low. The “feel” I wrote about turned out to be prescient pretty quickly as volatility spiked in a huge way on a relative basis. Check out the chart of the VIX below over the last two days.

When you look at any of the major indices, sector or stocks, you will see what looks like a horrid reversal on the candlestick charts with prices opening at the top of the candle and closing at the bottom, a tall, red candle. The S&P 500 and Russell 2000 are below.

Most of the sectors look very similar to the indices so I will pick on biotech as it gave back the most ground I could find.

While these reversals look absolutely terrifying on the surface, especially when we hear pundits invoking the peaks in 2007 and 2000, historically, their bark is worse than their bite. Some do lead to declines with some declines of major significance. However, most just lead to a short-term bout of weakness or a mild pullback. Several other warnings would need to be present before I would consider one of these reversals to be ominous.

Of note, high yield bonds finished higher on Tuesday along with consumer staples which is now on breakout alert. Utilities are the sector which has been decimated as bond yields have jumped. They are getting close to an area where regardless of where they are ultimately going, a rally should begin.

I wrote about volatility picking up and that’s exactly what’s happening now. However, contrary to popular opinion, bull markets do not end with volatility just increasing from all-time or yearly lows. It’s months or more to work that higher before a bear even becomes possible. Breaking the back of a bull market is not a point in time. You can certainly expect the bulls to make a stand sooner than later.

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Volatility Index Acting Weird as Stocks Just Continue Higher

A new week begins and to no one’s surprise, stocks are set to open sharply higher. Even during the Dotcom bubble, stocks took a breather every now and then. In fact, they became very volatile during their melt up phase. That’s an element that has been lacking during this leg of the bull market.It’s not a great chart, but take a look at the volatility index below, also known as the VIX.

Essentially, since the year began, this index has gone up along with stocks, That is very unusual behavior as historically, stocks and the VIX move inversely, meaning they move in opposite directions. Behavior like this would typically lead to a pullback in stocks, but as we have seen time and time again, this is anything but a normal market environment. It’s something to keep an eye on.

I hate to use the word “feel” because as my golf coach would always lecture, “feel is not real”, but I do get the feeling that one of these sharply higher openings is going to be met with a nasty reversal to the downside. It may only last a day or even a week, but it should look a bit ugly. In this case, the VIX should likely spike higher than normal. Again, we’ll see.

Stocks continue to do nothing wrong to derail the bull market. The major indices are all in gear to the upside. Sector leadership is very strong. High yield bonds are participating. The NYSE A/D Line is making new highs. Nothing suggests an imminent end to the  bull market, no matter how uncomfortable price action makes you.

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Small Caps Breaking Out. Certain Sectors like Dotcom/Bitcoin

After finally seeing a down day, the bulls came right back to work on Thursday with a blistering effort and very strong internals. That trend looks likely to continue into the holiday weekend. The real star of the day was the Russell 2000 index of small cap companies which had generally been consolidating nicely before bursting higher. You can see the blue line below which shows a ceiling where price has stopped three times before, also known as a flat top. Once price breaks out above the flat top and closes above it, it is typically a very positive sign. Unless small caps fail right here and close back below the blue line next week, they should continue to move higher and lead.

Looking like a Dotcom stock or Bitcoin, these two stodgy old sectors are in melt up phase. Both industrials and transports have been overpoweringly strong. I wrote about the bullish potential for transports near the bottom in November and they have exceeded my wildest upside projections so quickly.

Yes indeed. This is certainly a one of a kind bull market that won’t be repeated again anytime soon. I am just waiting to hear from folks that bear markets won’t happen again or stocks have a long way to go, although strategist Tom Lee did come out this morning and forecast another 300% to 500% left on the upside. SIGH…

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One Down Day. New Bear Market?

In what continues to be an epic start to the New Year, the stock market finally did see a down day, albeit very small. The major indices closed fractionally lower without any damage being done. Yes, some have mentioned that the rally is “narrowing”, meaning less participation, however the NYSE A/D Line just hit an all-time this week. That’s a hard case to make that trouble is looming.

Other have noticed that some of the weekly employment data is just beginning to soften and that sometimes leads to recession 6-18 months later. Okay. No arguments.

High yield bonds? While they are down this week, they have certainly kicked it up a notch over the past new weeks.

With all of the major stock market indices at all-time highs and in gear to the upside, it’s really hard to find fault here for more than a mild pullback. As I continue to offer, strength does beget strength.

On the sector front, leadership is very, very strong, especially for so late in a bull market. Banks didn’t wait long to reward my forecast of new highs this quarter. Transports and discretionary continue to soar higher. Semis revisited their November peak this week and have paused for the time being. Putting it all together, this is not the kind of behavior stocks typically see before a significant decline begins, let alone the end of the bull market.

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Melt Up Continues as Goldilocks Rules the Employment Report

Four days in the New Year, four straight for the bulls. All major stock market indices remain at all-time highs. Nothing has been able to stop the stock market from surging higher. In fact, the move has been so powerful and widespread that after almost 9 years and 19,000 Dow points, the masses are FINALLY embracing the bull market. This can be seen in AAII sentiment figures, consumer confidence, Bitcoin and general public banter about how stocks have only one direction to go, up.

While that may be true, after 29 years in the business, when something seems so easy or so assured, it usually ends in ugly fashion, sooner or later. In this case right now, I think it’s the latter. Epic momentum which is exactly what we have now, doesn’t dissipate overnight. It not only takes time, but a series of rallies and declines to break the spirit of the bulls.

On Friday, the monthly employment report was released and it showed fewer jobs created than forecast, but still coming in close to 150,000. This number falls in the Goldilocks range of not too hot and not too cold. It means the Fed can continue on its shallow glide path of interest rate hikes in 2018. Of particular note, African American unemployment fell to the lowest levels ever. And those data go back to 1970. Yet another good piece of economic data.

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Junk Bonds Stepping Up. Everything Seems PERFECT!

Snowmageddon ’18 is here!

Let’s make it two straight days in the New Year and two straight all-time highs in the major stock market indices with Dow 25K up next which was my next target after 23,000. After five straight closes above 25K, 30K will likely be the next target. So far, stocks have done nothing wrong and I do not believe the rally is ending here. However, I do think that the market is going to form a short-term peak over the coming week and either pause or see a mild pullback before moving higher again.

Each successive rally is its own test and stocks haven’t failed a test in an awfully long time. If you want to find fault, you can point to the lagging banking sector or high yield bonds although the latter looks like its trying to kick it into high gear and lead now. Participation has been strong and excellent with the NYSE A/D Line seeing all-time high after all-time high.

Sentiment has certainly become greedy and giddy which is a negative. It seems like everyone is bullish on 2018 which concerns me, however, there is a scenario that I have mentioned before where the masses throw in the towel and stocks melt up to their final bull market high above Dow 30,000. For now, continue to enjoy the gains. Stocks are priced for perfection without much margin for error. I will try not to overthink it…

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Santa Arrives Late. Bulls Back in Control

Between my concerns about the last five days of the year and then the bullishness of the first day of the New Year, the market has been cooperating. Monday’s burst to new highs in essentially all of the major stock market indices puts the bulls firmly back in charge with the likelihood for some upside follow through on Wednesday. None of the major indices are doing anything wrong at the moment and they are all in sync to the upside. As such, unless the bears surprise today, the Santa Claus Rally will not fail to call and bears will not come to Broad and Wall, at least not in the near future.

While discretionary and transports both say all-time highs to begin the year, banks and semis did not. While neither of the laggards look worrisome, it’s something to keep in the back of your mind for later this quarter, especially if they start to decline when everything else rallies.

Sentiment is getting a little giddy as options traders are betting on a continuation of the advance. They don’t normally win. It looks like stocks should be building towards a short-term peak over the coming week or so before heading higher again later in January or early February to what could be a more meaningful high.

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Weak Close to 2017 Indicates Bounce to Begin 2018

Back to work. Lots going on. Many crosscurrents. I hope you had a safe and enjoyable New Year’s celebration. I am still thawing out from so many days in Vermont without seeing the thermometer get above 0. The stock market begins the new week, month, quarter and year with a rather disappointing close to 2017. It has been something on my radar screen for a few weeks as recent history has not been kind to the bulls over the last five days of the year. The S&P 500 needs to gain 11 points over the next two sessions to avoid triggering a failure in the Santa Claus Rally which I wrote about HERE.

Favoring the bulls on Tuesday is a trend which is active because the last day of the month closed lower, but the month was still higher. It has a high degree of accuracy. Additionally, the last week of the year was down in an otherwise up month and year which puts the market in a position to bounce to begin the New Year. During this bounce, the NASDAQ 100 is the odds on favorite index to lead higher.

Working against the bulls is that all five major stock market indices put in somewhat ugly reversal days, meaning they began the day at their highs in positive territory, but ended it at the lows in negative territory. All four key sectors followed suit to the negative.

High yield bonds bucked the trend to finish higher although they have been lagging and under pressure for the past two months. Crude oil, gold and other commodities also continued their uptrends and it will be interesting to see if they can hold ground. Finally, the Euro is at a crossroad and the currency may hold the key to what we see in equities over the coming few weeks.

Lots going on. More than any other time of the year.

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Where is Santa Claus?!?!

Last week, I wrote about the much heralded Santa Claus Rally and last five trading days of the year. If you weren’t able to read the piece, I think it’s a good unbiased analysis debunking the notion that this time of year is like shooting fish in a barrel. With 2012, 2014, 2015 and 2016 all limping in to close the year, the trend has really been quite the opposite. So far in 2017, Santa has barely been seen with but one day left in the year.

Now before you conclude that the bears have been in control lately, the Dow, S&P 500, S&P 400 and Russell 2000 have all basically gone sideways of late with the NASDAQ being the weakest index, down marginally. It still seems like the bulls should resolve this little range with an early 2018 upside breakout next week. Banks, transports and discretionary all look like they want to run higher into January while semis have really disappointed and have me questioning whether their leadership has ended for a while.

High yields bonds, which have rallied of late, are still well below their Q4 all-time high peak. That’s my biggest domestic concern heading into 2018. However, the NYSE A/D Line continues to make all-time highs which should forestall any bear market or full fledged correction for the foreseeable future.

Currencies have been unusually quiet for this time of year, but that’s one asset class where I see fireworks in 2018 as the massive capital flows into the US I have mentioned for years should finally come to fruition. At the same time, while commodities have rallied this quarter, I see that asset class as having much more upside potential with crude well on its way to my $100 target over the next few years.

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Debunking Santa & the Last 5 Days of the Year’s Bullishness

Here it is; the last five days of trading for 2017. So far, it’s been the least volatile year in history. And barring any truly unspeakable geopolitical event, it will end that way as well. The stock market hasn’t seen even a 5% decline, let alone any full fledged correction. Those most rewarded were the ones who did absolutely nothing all year, similar to 1995. I don’t think 2018 will be a repeat, but that’s a story for a different day.

You may be hearing about the Santa Claus Rally (SCR) now. People define it all different ways or they just leave it nebulous so they can spin the result to fit their thesis. Yale Hirsch of Stock Trader’s Almanac fame (and a perennial must own book now written by his son Jeff) coined the phrase, “If Santa Claus fails to call, bears may come to Broad & Wall”.

Research showed that if the last five trading days of the year and first two trading days of the New Year (Santa Claus rally) did not show a positive return, a bear market or significant correction was likely during the coming year. While that was certainly the case years ago, recent history since 2001 shows a significantly muted trend and I wonder if this trend has been fully diluted because of computerized trading, the proliferation of ETFs or even decimalization.

Bears love to point out that Santa did not call in 1999 nor 2007 when two devastating bear markets were about to unfold. However, Santa also did not call in 1990, 1992, 1993 and 2004, yet no bear market or major correction ensued the following year. Santa also did not come in 2014, but I am sure proponents of this trend would point to the 15% summer decline as evidence that it “worked”. In 2015, Santa was a no show and stocks were in in the midst of a 15% correction which bottomed on January 20, 2016. How would they score that?

Conversely, Santa called in 2010, but stocks saw a 20% decline in 2011. Santa came in 2000 and 2001, however 2001 and 2002 were awful bear market years. 1997 saw a big Santa Claus rally, yet 1998 had a 20% correction. The same can be said about 1989 and 1986.

As stocks enter the final 5 days of 2017, most pundits have been spewing that it’s a “lay up” or “easy money” for stocks to continue higher into year-end because it’s “always” happens. The data do not support that, especially of late with 2016, 2015, 2014 and 2012 all down fractionally on the S&P 500. And let’s face it, stocks do look a little tired. The S&P 500 hasn’t closed above its opening price for more than a week.

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