Something for the Bears to Hang their Hats on

The Dow hit yet another all time high today and there hasn’t been a 10%+ correction in 35 months. When stocks opened sharply lower on July 10th, the bears came roaring out of hibernation calling for everything from a 10% correction to the end of the bull market. It was a sea of ugly red prices on my screen due to Portuguese bank worries, and weak China data. That decline didn’t even last a full day. Nor did the decline based on the -2.9% GDP print or Yellen’s previous press conference or a host of other headlines that were quickly absorbed.

I just cannot understand why more people are not excited about this market. It has truly been a bull market for the ages. The masses just keep hating and disavowing and predicting doom and gloom while the rest of us are smiling ear to ear for as long as we can. Bull markets do not end overnight and while this one continues to be old and wrinkly, it is generally healthy.

Because I am running out of ways to celebrate after all these years, I thought I would spend some time exposing some of small cracks in the pavement.

What can the bears hang their hats on?

For now, the S&P 400 and Russell 2000 are seriously lagging the Dow, S&P and Nasdaq. High yield bonds, a major canary in the coal mine, have been lagging for almost a month. The NYSE advance/decline line has not confirmed the recent all time highs and has been lagging all month.

Is that enough to end the bull market? Hardly, but it could certainly spell market pullback at any given time. Have we had these types of warnings before? Yes, many, many times during this bull market with most common outcome being a short-term pullback.

Weakness remains a buying opportunity and the Dow should continue to power higher to 17,500, 18,000 and perhaps even higher before all is said and done.

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Bears Out of Hibernation

Stocks open the day with the largest down opening in some time due to Portuguese bank problems, slowing Eurozone concerns and less than stellar data out of China. As hard to believe as it is, I have already seen a few articles calling this the beginning of a new bear market. Geez, how many time have we heard that over the past 64 months!

What we are seeing now is a routine, healthy and normal 3-7% pullback. Short-term downside risk looks to be above 16,200. After the market bottoms, the quality of the next rally to all time highs will decide whether there is a 10%+ correction later this quarter or not. Remember, at the peak only the other day, there were almost none of the usual warning signs seen to indicate any major decline let alone the bull market ending.

For months and months and quarters and quarters, investors have been waiting, hoping and even craving for a decline to get invested. Now that it’s here, I doubt many of them will even take advantage of the temporary sale in stock prices. They will rationalize why they shouldn’t buy with all of the bad news out there, only to regret it later and buy at higher prices.

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No Inflation Seen in Energy Prices

With the various global tensions impacting the energy market, I thought it was appropriate to write a few articles about crude oil and how viewing different time horizons yield very different opinions. This is part I to be followed by part II next week.

To begin with, energy and more specifically, crude oil, has an enormous impact on the global economy. From common sense items like heating our homes and powering our cars to more derivative things like chemicals and asphalt, crude oil is a vital ingredient in the global economy.

It still seems like yesterday that the pundits confidently proclaimed oil above $40 a barrel would cause a severe recession and $75 would spell depression. That was when Iraq invaded Kuwait in 1990 and of course, they were wrong. From its generational bottom at $10.65 in 1998, oil almost quadrupled by mid 2000 without any economic pause.

From the post 9-11 low at $17, oil once again quadrupled by 2006 to $78.40. And again, there was no economic slowdown let alone recession, save depression! It wasn’t until oil went parabolic in 2008, straight to $147 that, combined with the financial crisis, spelled doom for the economy.

What’s the takeaway from this very basic and brief study of energy prices?

*As we have seen since 1990, higher oil prices do not equal higher inflation.

*Runaway oil prices over a period of time don’t equate to a recession.

*Third and perhaps most important, in my opinion, the American consumer is very able to cope with higher energy prices as long as they occur over time and not in the form of a shock. Obviously, if gas was $10 a gallon, that would severely impact the economy, but $100 oil did not stop the global economy and I would argue that if the financial crisis was not unfolding, the economy may have paused and perhaps even mildly recessed, but it would not have collapsed solely due to oil prices.

Today, I am often asked where I believe crude oil is headed and at what level we should worry that the economy will be adversely impacted. First, it certainly looks like oil is headed higher, right from here at $104. Oil traded to fresh 2014 highs last month and is now resting. Once $108 is exceeded $115 should be next before long. That level is really the “put up or shut up” spot for energy and as a consumer, my “hope” is that the rally ends there. Surpassing $115 opens the door to some much higher scenarios that most of us do not want to see!

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Bull Market’s Peak

The stock market hits the new week with a tiny headwind from post holiday seasonality. Last Thursday’s solid employment report finally got at least some bulls to celebrate, but it’s still very muted. At Dow 17,000 after a 10,000 point rally in the market, you would think that the majority would be in a good mood, even giddy. But that’s just not the case.

Before the bull market ends, history suggests a 10%+ correction, which we haven’t seen yet. And before the 10%+ correction, we are supposed to see a 4-6% pullback, which we haven’t seen. Bull markets typically do not peak out of nowhere and certainly not with the solid foundation this one still has.

I continue to scratch my head when I speak with, watch or listen to all this negative market chatter. At some point, probably sooner than later, we will have some weakness in stocks. Maybe that’s 500 points or 1000 points or even 1500 points. But the bull market should not end out of the blue without warning.

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Dow 18,000 Next as Twitter, Investors, Advisors and Media Root for Bears

Small Caps Play Catch Up in BIG Way

When we last left off, the major stock market indices were all playing nicely together except for the small cap Russell 2000 which had seen a full fledged 10% correction, but was beginning to bounce. The performance of that one index was a key ingredient to the bears’ negative stance on the market. At that time, here and on the blog, I dismissed the Russell’s warning and went so far as to call for all time highs before long.

On the first day of the new month and quarter, the Russell 2000 joined the S&P 500, S&P 400, Nasdaq 100 and Dow to score fresh all time highs. At the same time, the New York Stock Exchange Advance/Decline Line, which is a barometer of health on the NYSE also saw a new all time high along with many other sectors and indicators. This continues to be intermediate and long-term positive for the bull market.

More shorter-term, the market can best be described as grinding or creeping higher day after day. When you are on the correct side, there is nothing better. This kind of market has been seen many times since 2009 but rarely before that. The most common ending is a sharp and fast decline that wipes out a lot of gains in short order but does not end the bull market. At some point that scenario will become more likely.

The Market People Love to Hate

Remember, as I have now said for two years, this bull market may be old and wrinkly, but certainly not unhealthy or about to die. It continues to be the most unloved and disavowed bull market of my lifetime. Instead of friends asking me for the latest or greatest “hot” tip which I would expect at Dow 17,000, I am frequently pushed to opine as to when this all ends or when the big correction is coming.

And it’s not just individual investors. On a daily basis I speak with other advisors as well as the media. It really surprises me how many peers have been negative, are negative and will be negative. This is a market where people in my industry should be raising lots of money. Markets have been “easy”, meaning there has not been any significant downside since June 2012.

I think it’s very hard to run an investment management business being a perma-bear or holding on to the belief that although stocks have rallied, they remain in a secular (long-term) bear market that began in 2000 with the Dow at 11,750. That’s crazy in my humble opinion.

On the media side, they may have finally realized that I have a better face for radio than TV, but it certainly feels like they are not as interested in my bullish stance anymore now that the market has rallied. I have lost several opportunities lately because my opinion wasn’t bearish or I wouldn’t forecast some kind of doom (my word) on the horizon.

You can accuse the Fed of manipulation or supporting the market or anything you want. But the reality is that this has been one of the most powerful bull markets of all time. From my seat, as long as investors ask questions about the downside, advisors are bearish, the media only wants to sell negativity and my Twitter feed is full of bears, the bull market will live on.

How It Usually Ends

Yes, the market is 33 months from its last 10% correction and some surveys show complacency, but bull markets do not usually end with a whimper. There are typically many warning signs long before the bear comes out of its cave. Today, we have almost none. Additionally, the market historically sees a 10% correction where the end of the bull market is claimed by the masses, only to see yet another rally to new highs take shape. We haven’t even seen the correction yet. And before the 10% correction, there should be a modest 2-4% pullback.

Don’t get me wrong. Investors need to remain vigilant and active and on top of their holdings. Or hire someone like me to do it! (Shameless plug) Throwing caution to the wind and taking a “get me in at any price” mentality will likely end in ruin. Eventually, stocks will pullback, probably sooner than later, and finally correct 10% or more. But as I have been saying for years, any and all weakness remains a buying opportunity until proven otherwise. These kinds of markets are rare and should be fun. It’s too bad that so many can only see negativity.

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Squawk Box @ 6:05am Monday

Looking forward to joining Joe, Becky and Andrew at 6:05am on Monday discussing the Dow hitting my 17,000 target (18K is next), Thursday’s solid employment report and what’s in store for the second half of 2014.

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Tug O’ War Continues

Last week, I had the pleasure of joining the Squawk Box gang for some early morning Fed and market talk. It was a good discussion and I always enjoy when Joe leads the segment. At the end, he went off on a World Cup tangent but before cutting away, I had to throw out “Dow is going to 18,000″, which stopped that conversation dead in its tracks as the triumvirate quickly jumped on that. You can click here for the segment.

Turning to the stock market, we don’t have much new information to discuss today. There have been a number of very short-term negatives that if played out, would lead to another buying opportunity. So far, the bears have been unable to make much headway except for seeing stocks tread water in bullish fashion. The longer the bulls can stave off the bears when the evidence tilts towards the bears, the more likely the market is to see another leg higher.

Specifically in the stock market, we had taken a very large position in the Russell 2000 small caps, which I wrote about earlier. With dramatic outperformance over the past month, that position is being wound down with a more balanced index skew or fully into the mega caps. Mind you, I do not believe the rally in small caps is over, just that the risk/reward for outperformance is no longer heavily in its favor.

Gold has been the real story post FOMC meeting and that was one of the key things I wanted to watch along with bonds. Unfortunately, our gold positions were jettisoned into the Fed meeting after a very good run and did not enjoy this last leg higher. Gold is in a very interesting position and one I certainly did not anticipate. Additional strength here sets up a target to $1400, but also removes a very bearish scenario to under $1100 over the intermediate-term. Right now, gold looks like solid into any weakness as long as risk is limited to a few percent.

Crude oil is a whole other story and the topic of a full article in the soon to be released Street$marts.

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Much Ado About Nothing from Yellen & Fed Today

My how time flies…

It’s Fed decision day again with Janet Yellen set to announce another $10 billion cut from bond purchases, keeping the FOMC on pace to wind down QE Unlimited later this year. After the 2pm announcement, Ms. Yellen will head over to the always entertaining (NOT) press conference.

One thing I am sure of is that the Fed chair will not commit another rookie, foot in mouth, Joe Biden esque’ gaffe by committing to a specific timeline for interest rate hikes. Everyone knows that rates hikes are coming next year although I continue to disagree 100% as I have since Bernanke first floated the QE taper trial balloon in May 2013.

Until the Fed’s statement is released, we can expect a very quiet stock market, +-0.50%, as we historically see. After 2pm, it’s the norm to see some fireworks in both directions although the trend says that stocks should finish in the black on the day.

For a change, I am more interested in how bonds and gold react to the FOMC announcement than stocks. The stock market remains on solid footing and the bull market should continue into 2015. Bonds and gold are in a different position, especially in the short-term…

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Short-Term Pullback Continues

Stocks head in to the new week with the bears in control over the very short-term. That’s it. Not the intermediate-term and certainly not the long-term. The major indices peaked last Monday and look like they are digesting the recent gains in very orderly fashion. More all time highs should follow when this pullback concludes.

The next rally is the one I would pay particularly close attention to, especially in the small caps. The Russell 2000 is SUPPOSED to hit fresh highs. Should it fail when the others do, it would then open the possibility for more a more substantial decline, perhaps in the 5-9%. But that’s getting way ahead of ourselves.

For now, let’s see which sectors decline the most and entice buyers first. I also want to see how one of our biggest positions in long-term US treasuries performs. They are poised to see new highs for 2014 over the coming weeks as I have written about ad nauseum here. The trade from late 2013 is certainly long in the tooth by my standards and sentiment is beginning to bare that out.

Finally, it’s FOMC week and I will have more to say on that topic tomorrow and Wednesday.

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Refuting the Bears

Bears will point to overly bullish sentiment readings and anemic volume as reasons to be wary of “The Big One” or bull market ending. They are absolutely correct regarding the sentiment surveys, but this story has been seen before. And sentiment is almost always much frothier than the high positive readings of today. Sometimes, a correction unfolds while other times the market enters a trading range. And in outlier cases, every once in a long while, stocks begin to melt up to a major peak down the road.

Total stock market volume has become one of the most misunderstood and overused indicators. In the good old days, it was a valuable analytical tool, however, with the proliferation of exchange traded funds (ETFs), high frequency trading, decimalization and off exchange dark pools, New York Stock Exchange volume is no longer accurate in my opinion or largely valuable.

The entire bull market since 2009 has been on a lower and lower reported volume with higher and higher prices. In fact, heavily increased volume has only been seen during pullbacks and corrections since 2009. Technical analysts Edwards and Magee of Technical Analysis of Stock Trends fame will probably roll over in their graves with this comment, but reported volume does not really matter anymore in technical analysis. (That should open the floodgates of emails from the TA crowd.)

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