Junk Hanging In While Pullback Begins

This post is going to be short as I am planning on writing my special Fed piece as well as a full Street$marts before I head to New York City tomorrow. Nothing new to report. I remain negative for the next few weeks or so as the window of opportunity for a mid to upper single digit pullback has opened.

I have written about the split market and small warning from the NYSE A/D Line, however high yield bonds are hanging in nicely, at least for now, as you can see below. Sector leadership has been downgraded to neutral across the board.

Nothing new on the gold bottom. The metal saw its low in August while the stocks saw theirs this month. The longer gold doesn’t breach the August bottom, the more likely it holds.

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And FINALLY, the Dow Rings the Bell

Well folks, with the Dow Industrials finally scoring fresh all-time highs, we have every major stock market index plus all four key sectors seeing new highs since the bottom of the Q1 correction. My forecast is now complete. I can’t count how many times people told me that a new bear market started or this time I was going to fall flat on my face. Don’t get me wrong. I fall on my face plenty times. I just keep getting up.

As the Dow has raced higher this week, the market’s foundation has continued to weaken. There’s nothing new on that front, only that the split market with so many stocks making new highs and new lows has worsened. It’s not healthy. That doesn’t mean the bull market is over because I don’t think that’s the case. I do think stocks are in for a pullback.

If we do see a pullback, the most telling thing may be how the defensive sectors behave. Right now, utilities, staples and REITs could go either way. High yield bonds have been quietly strong but no stronger than many floating rate or levered loan funds. The rest of the bond market has struggled. While the NYSE A/D Line has been powerful all year, it’s been lagging on a short-term basis all month.

Finally, and most importantly, price has yet to trigger any indication of impending weakness. That’s what I will be looking for over the coming week or so to take action.

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Buy Yom Kippur But Participation is Waning

As the Jewish holiday of Yom Kippur is here, so ends the seasonal trend of selling Rosh Hashanah and buying Yom Kippur. It worked out very well this year, if you did the exact opposite! Rosh Hashanah was the most recent little low and stocks quietly rallied right through to Yom Kippur.

The Dow Industrials and the S&P 500 have reasserted themselves while the Russell 2000 and NASDAQ 100 have lagged, not exactly the healthiest backdrop. In sector land, banks continue to be weak and tiny bit concerning, especially when bond yields have rallied which is usually a tailwind.

High yield bonds have behaved reasonably well but the NYSE A/D Line has finally started to show some signs of deterioration and weakness. This condition can persist and not matter for three months or 23 months. It’s not a timely indicator, but it is very important.

Even though stocks have rallied of late, the internals have not kept pace, let alone lead. The short-term concern I have been writing about remains in place.

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Hindenburg, Titanic, OH MY!

As I did my usual weekend research and overview I am even more convinced that there is valid reason to have some short-term concern. By short-term, I am looking at the next three to five weeks and nothing more than a single digit pullback, worst case. Lots of little things have ans continue to pop up to go along with the negative seasonal headwind this time of year. However, the real and nasty bearishness of September has been muted by the bull market as I wrote here.

While price action in the major indices continues to be strong and price is the final arbiter, there are a number of secondary things that warrant attention. You have heard or read about the “dreaded” Hindenburg Omen or Titanic Syndrome. Those are two stupid names for a market condition that’s not as deadly as the name suggests. In essence, they are triggered when there is a split market, meaning lots of stocks making new highs and new lows along with a few other rules. Analysts look for clusters of these signals to signal weakness in stocks. While their track record is a little above average people love to cherry pick and highlight triggers at the bull market peaks of 2000 and 2007.

Given what I wrote, I still remain very confident that the bull market remains alive and reasonable healthy. More all-time highs should be in order next quarter and into 2019.

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Gold a Bit Perplexing. Stocks Due for Pullback

Let’s start with gold. A few weeks ago, I wrote a longer article in Street$marts about a major low in gold forming. It’s USUALLY not that difficult to spot. However, this time, gold and the gold stocks have been diverging with the metal holding the bottom while the stocks made new lows. See the charts below.

I can tell you that it’s  been a bit perplexing, but not unprecedented. And although I have been long-term bullish on the dollar since Q1 2008, I now find myself in one of those moments where the next month or two doesn’t look so hot for the greenback. If that comes to fruition, gold should rally.

Turning to stocks, I still have the same concern I voiced the other day. Price acts great, but I am not in love with what’s going on beneath the surface. There is no clear cut leader from the major indices. Discretionary and transports are leading powerfully. Semis are neutral at best. Banks are no better. Junk bonds have been quietly very good. The NYSE A/D Line has stalled out.

What would make me feel better?

The Dow joining the other indices and scoring an all-time high. The NYSE A/D Line joining the Dow. Banks stepping up or at least outperforming the S&P 500.

I am not overly negative or worried about a big decline, but I also don’t think stocks are rocketing higher from here. A pullback sooner than later seems in order.

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Becoming a Little Concerned

Sell Rosh Hashanah, buy Yom Kippur. The age old stock market adage for this time of year. I can tell you that no one was discussing that at synagogue over the past two days. As you can imagine, it was AAT, all about Trump, the good, the bad, the ugly and the otherwise. Normally, as you know, I would insert myself right into the conversation. However, given the holiday and toxic nature of politics right now, why bother. Everyone has their opinion and no debate is likely to change that.

Stocks saw reversals on Monday and again on Tuesday, first to the downside and then to the upside. Net, net, we saw a small rally. Leadership is faltering. Semis and banks are breaking down. Dow Jones Transports scored an all-time high while the Dow Industrials did not. The horribly named Hindenburg Omen and Titanic Syndrome have been flashing repeatedly this month, signaling a narrowing of participation.

I am becoming a little more than mildly concerned.

And gold is certainly frustrating bulls and bears.

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Role Reversal

The NASDAQ 100 and by default, the technology sector has led the markets all year. That’s certainly no secret. Value stocks have lagged not only this year, but every year since the bull market began. In fact, they are about as cheap relative to growth as they have ever been. This week, there has been somewhat of a reversal of fortunes as the tech-laden NASDAQ 100 has come under strong selling pressure while value stocks have held their own.

Does that sound familiar?

That’ s what started to happen as the Dotcom Bubble began to burst in March 2000. No, I am not predicting anything like 2000-2002, just making an observation. The market’s foundation remains very solid today while it was crumbling in early 2000.

Although semis are selling off with tech, the other three key sectors remain in leadership. Junk bonds are fine and the NYSE A/D Line recently scored yet another all-time high. Definitely not the behavior typically seen at the end of a bull market.

It’s interesting that as the bears beat their chests on every bit of geopolitical news that comes out, especially when concerning Donald Trump, stocks don’t even miss a beat. As I have said since Trump was elected, the market simply does not care about his tweets, attacks, behavior or anything else that’s not related to the economy. It’s reality over rhetoric or policy over personality. That has to be so tough for the bears to accept when all they have done is rationalize why stocks should be going down for the past 9 years.

Finally, while the gold stocks have made new lows this week, the metal has not, creating an interesting divergence…

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The Misunderstood Bearishness of September. The Real Facts

I cannot believe that September is here. That was the fastest August ever! With the turn of the calendar, the stock market now enters what has historically been the worst month if you look back 100 years. Of course, none of us have been investing that long and as we all know, markets can and do morph. In other words, over time, markets are at least efficient enough to arbitrage away most known calendar effects. Sometimes, the trend starts early, but sometimes the trend becomes impotent.

Last month at this time, I wrote about how August had morphed into a flat month historically, regardless of whether the stock market began the month in a bull or bear market. That trend did not work out so well in 2018 as August turned out to be a very nice month for the bulls.

So here we are in September. Since 1928, the month has returned -1.1% on average with down months beating up months by 10. Since 1950, it’s only lost .53% on average. And since the bull market began in 2009, on average, September has closed up by more than 1%!

Returns are in the eye of the beholder or certainly depending on what time horizon you use.

Let’s look at what happens during bull and bear markets. September closes up almost .50% when beginning the month in a bull market versus down 2.7% when in a bear market. This statistic certainly seems more important than how September has fared overall as it suggests that when in a bear market, September is really poor which skews the overall average.

Now, let’s finish this off with looking at how August, another traditionally challenging month, can impact September’s performance.

When August closes higher, September has been in the red by roughly 1/3%. Since 2000, that figures more than triples although it is negatively skewed by two massive bear markets.

When August closes up during a bull market, September trends to the positive by roughly .25% and that figure triples since 2000.

In short, although I offered an awful lot of stats about September and its historical poor returns, it seems like the most important determinant is whether the month began in a bull or bear market. In today’s case, stocks are clearly in bull mode, thereby muting the negativity of the month.

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Growth/Value Back to Dotcom Bubble Peak

Under the large umbrella of the U.S. stock market, there are indices, sectors, market capitalizations and style boxes. For example, the five major stock indices are the Dow Jones Industrials, S&P 500, S&P 400, Russell 2000 and NASDAQ 100. Sure, you can argue that the NASDAQ belongs instead of the 100. We also have large cap, mid and small cap along with growth stocks and value stocks. I often write about different kinds of leadership in good times and bad times, especially on the blog.
For those not totally familiar, growth stocks are companies that are expected to grow at a rate much faster than the market. While some are profitable and some are not, those which have earnings usually see their earnings grow much quicker than the overall stock market. Growth stocks typically do not pay dividends as they plow any and all available cash back into the company for growth. Growth stocks are almost always found in the technology and biotech sector although they can be found elsewhere as well.
Value stocks are the exact opposite. Those stocks usually have earnings and their growth rates are often slower than the market’s. Their valuations are typically less expensive than the market’s and certainly the growth stocks’. Price to earnings or PE is one popular metric analysts use to determine value along with price to book value and free cash flow. Most value companies pay dividends to shareholders as a way to entice investors to buy the stock.
When companies come public, they are usually growth companies who do not have any earnings. Apple Computer in the early 1980s, Microsoft in the mid 1980s and Amazon in the mid 1990s are some of the more glamorous ones. Ford went public in the mid 1950s among a tremendous amount of hype, glory and exuberance. As companies progress and mature, they begin to earn money and more money and perhaps pay a dividend. Their growth rates peak and begin to slide and slide along with their PE ratios. In short, they go from growth to value.
Intuitively, the average person believes that growth companies have better track records of rewarding shareholders than value companies. However, the opposite is true. People are very surprised to learn that over the long-term, value typically beats growth.
Now that I have given you a brief tutorial on what growth and value are, let’s turn to the observation I was attempting to make.
I love to compare things in the market, on a daily basis, on a weekly basis, on a monthly basis. There are all kinds of trends that develop. Some even offer warning signs.
Below you can see a chart of large cap growth divided by large cap value. When the line is going up, growth is beating value. When it is going down, value is beating growth. For all of the 1990s growth trounced value, fueled in large part by technology. Eventually, growth saw two peaks in 2000 as the Dotcom Bubble was about to burst. From that 2000 peak, you can see that value led all the way to 2007 as growth gave back nearly 100% of its massive gains.
The chart above doesn’t continue to present as the indices are no longer available to me. Instead, as you can see below, I picked up two ETFs which essentially say the exact same thing although the two ETFs began trading in 2000.
Let’s start with the far left Dotcom peak and subsequent bottom in 2007. Since 2007, growth has trounced value and almost back to the nosebleed levels of the Dotcom Bubble high against value. There is nothing super special or meaningful about a specific relative price level. The growth/value relative value line could keep going up and become even more expensive than it was at the Dotcom Bubble Peak.
However, it is certainly very concerning from a relative valuation standpoint that growth has decimated value for so long. In other words, while valuation isn’t a great timing tool for the end of a trend, it absolutely does say that sooner than later, value stocks should begin to outperform growth stocks in more than just a small way and for more than just a few days, weeks or months.
The best example of today’s hot growth stocks is FAANG, Facebook, Apple, Amazon, Netflix and Google. I wish Tesla was part of that group as well. You already know that I am bearish on Facebook and Tesla for the next few years. Netflix is next when a catalyst appears. I think all three stocks can decline by at least 50% by 2021.

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Record Highs in Stocks, Record Economic Output, Record Corporate Profits

And the beat goes on. I know stocks must be close to a pause because one of my market buddies asked me if stocks will ever go down again. Of course, he was kidding, but he and I ask each other idiotic questions from time to time during very strong trends. Stocks remain strong. That’s inarguable.

Index leadership is excellent. Same for sector leadership. Sure, the banks could step up a little more and they probably will when bond yields go up for more than a few days. Junk bonds are at all-time highs as is the NYSE A/D Line. Gold reversed lower on Tuesday so this could be the real test for the bulls to put up an important fight.

This morning the government revised Q2 GDP to +4.2% from 4.1% which doesn’t mean much except that Q2 was very nice, while consumer confidence is about as high as it ever gets. People feel good about the economy and they should, for now.Q3 won’t be so easy and my recession watch begins a year from now through the 2020 election.

As I am typing this, I am arguing with someone on Facebook about how good the economy is. Besides clearly hating Trump, his feeling is that the economy is not so strong because of the income equality gap and the economy could collapse if Trump’s supposed legal troubles increase.

I flat out dismiss this. It’s pure nonsense.

If Trump left tomorrow, what economic policy would change? MAYBE the tariffs would slowly go away which would be an economic boost not hindrance. Tax reform and reduced regulations wouldn’t change at all. The country is way too concerned with give credit or blame to the person residing in the White House. Long-time readers know that I prefer to say things like the president presided over a recession rather than caused a recession. One person can only do so much.

Anyway, we have record highs in stocks, record economic output (GDP), record corporate profits, etc. No matter which side of the aisle you sit on, things are pretty darn good right now, of course, completely ignoring our national debt.

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