Short-Term Tea Leaves Say Bulls About to Step Up

The stock market remains on the defensive as I have written about for some time, not that this is a repeat of 2008 or even 2011. It’s not even your garden variety 10%+ correction. Stocks remain in the range they have been in for most of 2015. From a bullish perspective, it’s a good intermediate-term sign that after the huge run up we have seen, the bears can’t even muster a 10% correction. From the bearish perspective, stocks have stalled and there has been internal damage done. As you know, I strongly side with the former.

Too much bullish sentiment has been one of my chief concerns over the past few months and while that has not totally abated, it’s not as bad as it once was. Behavior from the Dow Jones Transportation index has been poor since late last year and for the most part, that continues today. I do believe that when the market launches the next significant rally, the transports will be in a leadership position.

Bears keep pointing to the declining number of stocks participating in the rallies as a serious warning sign. If that number was much worse, I would be much more concerned. Remember, the New York Stock Exchange advance/decline line, saw all-time highs in April, a good sign, although it fell off when the Dow hit its most recent peak in May.

Sector leadership has been very bullish. No one can argue that point. If the economy was on the verge of recession, we would typically see defensive sectors like consumer staples, utilities and telecom leading. They are all lagging while banks, discretionary, semiconductors and biotech are in charge. Bad markets usually don’t begin with this kind of leadership. I will concede that I am concerned about the poor performance in high yield (junk) bonds as they are one of my favorite canaries in the coal mine.

In short, I believe we are in for more of the same for now. Stocks remain range bound where strength can be sold and weakness carefully bought. In the very short-term, there is enough to support a rally in stocks beginning today or tomorrow. I don’t think it will go very far, but for the nimble, it’s worth watching. Should stocks not be able to head higher by the end of day on Wednesday, I would take that as a sign of more weakness and a potential downside break of the smaller trading range. On the Dow, that’s 17,600.

Eventually, I continue to believe that the ultimate resolution of this multi-quarter period of sideways movement is higher on the way to Dow 20,000.

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Paul Schatz, President, Heritage Capital
Paul Schatz, President, Heritage Capital
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