Bulls Won’t Go Down Without a Fight

As I wrote the other day regarding the dramatic reversal in the NASDAQ 100, this bull market is not going to die easily nor without a fight. Even pullbacks and corrections have been and will be tough to come by. As I have seen a few small short-term concerns pop up, I still believe the bulls are going to fight hard to prevent any significant price damage.

As I am keenly watching for signs of even a short-term peak, the major indices still have the look of wanting at least one more high above this week’s high. The indices just don’t appear to be complete in their upside right here. Banks, semis and transports have stepped up a little this week as discretionary is finally showing signs of tiring. That’s okay. High yield bonds have rallied, but they are far from leading and I continue to believe the final peak has been made for this cycle.

With stocks lulling people into a sense (false or not) of security, the geopolitical backdrop is as toxic and loud as ever with the President constantly tweeting, counter punches by the democrats and even some from his own party and stream of comments from global leaders. In the end, as I have said since inauguration day, successful investors will be the ones who separate rhetoric from reality. Reality is that the economy has accelerated higher, consumer confidence and sentiment are at or near all-time highs and unemployment is near historic lows. The reasons and credit do not matter.

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Technology Reversal. WOW!

After Monday’s close, highflying FAANG stock, Netflix, reported very disappointing subscriber growth. It was a shocker. The company’s stock plummeted after hours, over night, pre-market and as stocks opened Tuesday morning to the tune of 15%. 15%! That’s almost a crash. The tech-laden NASDAQ 100 followed suit and the selling spilled over into the broad market as you would expect.

Analyst after analyst and pundit after pundit uniformly poured ice cold water on the technology sector with the most positive person calling for a much needed pullback while the negative Nellies called for a bear market, crash and 50%+ decline. I don’t recall hearing a single person advise buying the dip. That was so interesting because buying the dip was the strategy that was immediately rewarded, almost to the minute.

Below you can see charts of Netflix and the NASDAQ 100 with each bar representing 5 minutes.

It was the single most dramatic turn of events in the NASDAQ 100’s history with the index closing at a new high according to my friend and data miner extraordinaire, Jason Goepfert of sentimentrader.com.

While I certainly don’t want to put too much weight on a single reaction to one earnings report, it does speak to the underlying strength in the tech sector and how difficult it will be to ultimately kill this bull market. Impressive behavior is an understatement.

With all that said and gushed, none of the recent short-term concerns in the rest of the stock market which I have discussed of late have been eliminated. Banks and semis are a little better. Discretionary continues to chug along. Junk bonds are hanging in.

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Market May Need Some Help from Banks

If you follow me on Twitter, you know I wasn’t enthralled with Friday’s session. While price action in the major stock market indices was strong, more stocks were down on the day than up. Additionally, banks reacted poorly to earnings and high yield bonds closed at their low of the day. Again, it was only one single day, but there was some mild weakness beneath the surface.

On the sector front, there isn’t much new. Discretionary is the lone leader among the four key sectors. Semis and transports continue to be the most frustrating for bulls and bears as strength is sold and weakness is bought without much progress being made by either side. Banks are a little weaker as they head to the lower end of their range. With earnings being released on a daily basis, we should see some large moves. As I mentioned on Fox Business with Charles Payne the other night, the most bullish thing the banks can do is to go up in the face of bad news. That kind of behavior could signal the start of a major rally in financials which would certainly juice the broad market.

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Trapped Again. What Do the Bears Do Now???

Following up from the piece earlier this week, Bull Markets Don’t End Like This, the path of least resistance continues to be higher even though the Trump administration added tariffs on another $200 billion in Chinese goods. As you would expect in the most powerful bull markets, the news was just a one or two day pullback/pause after stocks had appreciated 3% over the previous four days. In other words, it was yet another in a long line of bear traps.

I still cannot get over how many people absolutely refuse to analyze the data and believe the facts. They either became negative way too early or never even got off that mark after 2008. If you get sucked into the rhetoric instead of reality, I guess the consequences are severe. Now, don’t get me wrong; this whole tariff war is going to end badly for everyone involved. Unfortunately, I feel confident about that. However, that day isn’t today or tomorrow and stocks still look attractive, appealing and like they want to move much higher first.

The Dow Industrials have finally started to show signs of leadership. We will have to see if that’s real or fleeting. After that the NASDAQ 100 is the leader. Unusual combination? Yes, but as long as we have some of the relatively riskier assets leading, that’s okay. Ultimately, the S&P 400 and Russell 2000 will die before the rest and the Dow should one of the ones left standing at the end.

Finally, it would be nice to get the high yield bond sector moving, even though I strongly believe it has peaked for this cycle. That’s okay, though. There is still money to be made here using shorter-term time horizons.

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Bull Markets Don’t End Like This

Over the past week we have seen two decent signs of the low along with two disappointing signs for the bulls. On Thursday, it became clear that the bulls were just teasing the bears and that the path of least resistance was higher. I was also heartened that one of my primary short-term models turned positive before the July 4th holiday.

From here, I fully expect the S&P 400, Russell 2000 and NASDAQ 100 to score all-time highs this month. I think the S&P 500 will follow suit this quarter. The Dow Industrials have been lagging all year as the Trump tariff tantrum weighs heaviest on that index. I still believe the index will see all-time highs, probably this quarter, and should finally lead if there is any break in the tariff dispute.

While high yield bonds have struggled mightily over the past month, they have perked up a bit over the past week. However, they are back to stinking and remain my biggest concern for the long-term health of the bull market. I do think this canary has died for this cycle.

Finally, the best news of the day is that the New York Stock Exchange Advance/Decline Line has surged back to all-time highs, a condition that typically insulates stocks from a bear market, at least 90% of the time. While it’s not foolproof, a 90% accuracy rate is good enough for me. The perma-bears and bear market proponents are barking up the wrong tree, for now.

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Banks in Trouble

Stocks ended the month of June with the bears showing a tiny bit of teeth during the afternoon as the major stock market indices gave up most of their gains. The multi-week June swoon looks to continue at the open on Monday as more of the Trump tariff tantrum weighs on stocks with Canada now fighting back. Semiconductors also have some negative news and that supports my concern of leadership change from the the NASDAQ 100 to perhaps the value stocks.

As I mentioned last week, banks got through their stress tests and looked to run sharply higher as trading began on Friday. That celebration was short-lived as sellers came in and closed the sector at its lows for the day. It is certainly not a good sign when a beaten down sector can’t rally on good news. Couple that with a flattening yield curve and lower intermediate-term interest rates, the banks are concerning me and will continue to do so until they show some leadership.

By the way, when I write about the banks, I generally mean financials although sometimes their paths diverge. The broad-based financials are below and you can see that both sectors move pretty much in lock step.

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The Low Looks In

In yesterday’s post, I mentioned that the window for a low had just begun to open and that I thought stocks were still on pace to find buyers by the end of next week. The bull seem to have cooperated on the early side of the time range although I am certainly not beating my chest that I called the bottom to the day. Today is month and quarter end so I wouldn’t be surprised to see some “curious” activity, especially this afternoon.

I think if the Dow can close above 24,500, especially on a Friday, that would give me some comfort that at least another 1000 points were on the way. The S&P 400, Russell 2000 and NASDAQ 100 are “supposed” to head back to all-time highs sooner than later if they are going to retain their leadership. Speaking of leadership, I am keenly watching for signs of change over the next week or so. There seems to be movement percolating and it could be substantial.

Banks are breathing a sigh of relief after the Fed released the stress tests last night with even Deutsche Bank bouncing. Banks have really disappointed this year and are now being pressured by lower long-term rates and a flattening yield curve. If the sector can somehow ignore these headwinds and head higher, that could the stock market a well needed shot of adrenaline for a big move in Q3.

Have a safe and enjoyable weekend! Heat wave here in New England. UGH…

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Window Beginning to Open for a Low, BUT…

As I wrote twice this week already, I don’t think the pullback was over just yet. My original thought was it was a 5-7 day affair which has a low in place by next week in the 23,500 to 24,000 range for the Dow. The market is entering that zone now and puts today on watch for a bottom if we can get some early selling to be thwarted by mid-afternoon.

While the Dow and S&P 500 continue to be the weakest major indices, the S&P 400, Russell 2000 and NASDAQ 100 have seen more straight line declines. All are just about to enter zones where the bulls should begin to fight a little harder. Those three charts are below.

If I had to look at how or why I could be wrong, semis couldn’t make new highs this month when the NASDAQ 100 did. That’s a non-confirmation or negative divergence. Additionally, the decline in the semis has been more severe.

Adding to the semis problems, the banks have really struggled  and need to stabilize sooner than later. The stock market is unlikely to mount a significant rally without the banks and the semis together although losing one wouldn’t be the death knell.

Let’s see what today holds. Very quietly, utilities have rallied all month and 8 straight days, very much unlike how they behaved during the February decline. With staples and REITs holding their own, it gives me some pause about what I see as very strong economic numbers in Q2 and Q3.

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Bears Attack. Bulls Defend.

Stocks were experiencing a strong selloff on Monday right through lunch. Then Trump trade chief, Peter Navarro, hit the media circuit to “clarify” what was being reported by the Wall Street Journal which was a cessation of Chinese investments into U.S. technology companies. Now normally, Larry Kudlow would have been the administration’s mouthpiece, but he has been recovering from a heart attack. So, the most protectionist person in the administration had to come out as less protectionist. An odd day for sure.

Stocks rallied over the final 60+ minutes, mitigating some of the losses. You can see below what looks like the same chart from yesterday. It basically is except that we now have a full day of trading for Monday and it’s clear that the bulls defended the widely watched 200 day moving average which I wrote about on yesterday.

Notice that this is third time in 2018 where prices have visited and kissed this line. Again, the line itself has no magic. No mystical powers. It’s just very widely watched and followed. And sometimes, it can become a self-fulfilling prophesy as computer-based algorithms gun for price to move down to the line to entice others to take action. On Monday, the bulls defended that area.

Anyway, as I wrote yesterday, I still do not think we have seen the bottom from which prices will rocket to all-time highs. It seems like we need some more work on the downside. While the masses were fretting about the tech bloodbath, I explained on Nightly Business Report last night that there are absolutely no indications that yesterday was anything more than one bad day, certainly not the end of the tech bull market.

In fact, as you can see below on the far right of the chart, price just declined to the horizontal blue line which is where bulls and bears fought a number of previous battles during 2018.

The pullback doesn’t appear to be over. There could or should be an attempt at a bounce even though the final week of June doesn’t have the greatest track record. If so, watching the sectors that lead will say much about what lies ahead. The signs for Q3 remain very positive.

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Bears Out of Hibernation

The bulls could barely muster a feeble bounce on Friday, especially after the Dow was down 9 straight days, something that does not occur too often in a bull market. Keep in mind, however, that those 9 down days only amounted to a 3.4% decline which is basically one or two bad days. Additionally, as you can see below, the Dow is once again visiting its average price of the last 200 days, more affectionately know as the 200 day moving average.

As many of you know, there is nothing magical nor special about the the 200 day moving  average except that it is widely watched as a gauge of the long-term trend. This is the third time this year that the Dow is visiting it. The Dow has been the weakest major index and this could be the beginning of the end for that underperformance.

Looking at the other four major indices, none of them are even close to their average price of the last 200 days which can be good or bad, but I think good in this case.  In the very short-term none of the major indices look to be at their lows just yet and opening indications are for an ugly down start to the new week. Seasonally, this week is negative which continues the trend from last week and right to quarter end on Friday. In all likelihood, stocks should trade lower before they bottom, but there is a good chance to see a low in the next 5-7 trading days.

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