Archives for May 2014

Bulls Hangin’ Tough

With the bearish seasonal headwinds this week, the bulls have done a nice job not giving up any ground so far. In fact, the bulls powered ahead on Tuesday and held firm on Wednesday. It certainly looks like the Dow and Nasdaq 100 want to join the S&P 500 at new highs this week. Although the S&P 400 and Russell 2000 have been laggards, they have certainly led the parade over the past week.

The real news so far this week has been in the bond and gold markets. As you know, I have been very positive on bonds since late last year, often calling myself “the only bond bull in America” or more recently, “no one”, as in “no one called this rally in bonds.”

Long dated treasuries continue to trade well and I expect some of the bears to throw in the towel now. And that’s why I am getting a little nervous being so bullish. It’s time to tighten up those stops and contemplate taking some chips off the table. With the Fed continuing the taper and the economy supposedly doing better, the bond market ain’t believin’. Something dark lies ahead.

Gold on the other hand is now falling sharply towards the sub $1200 target I have mentioned of late. Unless the shiny metal immediately reverses course, it’s going to be ugly until the metal hits bottom, probably next quarter.

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Bear Trap and Dow 17,000

A week ago today, the major indices saw a solid red day that had the pundits talking correction and investors running for cover. One day later, however, the bulls closed the door on the bears, trapping them in some bad selling decisions. From there, the bulls had control right into the Memorial Day holiday and that should spill over early this week.

The Dow has already hit an all time high and the S&P 500 should be soon to follow. Even the Nasdaq 100 could get there before long, but the S&P 400 and Russell 2000 need a lot more help. That has been and remains a thorn in the intermediate-term health of the bull market.

Seasonal and volume trends create some headwinds after the holiday so it will be very instructive to see how the bulls behave on Tuesday and Wednesday. Further strength this week will bode well for a move above 17,000 next month while weakness should just be temporary or create a short-term trading range.

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Speaking Out of Both Sides of my Mouth

It was such a pleasure and privilege to spend an hour on Fox Business’ Opening Bell with Liz Claman, one of my all time favorite anchors. She was hysterical off camera and we had a lot of fun with the various segments which I will publish here over the next week. The whole Fox Business crew was incredibly nice as they always are. I can’t wait to do it again, hopefully next month.

The first topic we covered was Market Flashing Warning Signs. This is not a new topic for blog readers, but it’s one that I imagine will be front and center for some time. As supported by fierce sector rotation, including taking the momentum groups out and shooting them, the stock market is transitioning into the next and final stage of the bull market. At this point it looks like the final top isn’t until 2015, but I will take the information as it is presented.

Although stocks have basically gone nowhere since late February and really all year, we have seen somewhat of a schizophrenic market with the Dow up triple digits one day and down triple digits the next. While that may seem frustrating on the surface, the bulls say it is a sign of underlying strength that after such a powerful advance, the bears cannot make any meaningful headway. The bears on the other hand, say that the stock market is distributing stock from strong hands to weak hands as a major peak is developing. In fact, they can both be correct depending on one’s time frame.

It is definitely bullish in the short-term that stocks are holding up so well with all of the geopolitical nonsense and Fed tapering. At the same time, trading ranges like we are seeing now, often resolve themselves with a final blast higher to a peak that leads to corrective behavior over the intermediate-term. That’s putting the cart before the horse as we have not yet seen the blast off by any of the major indices.

For now, we need to watch the indices as they attempt to breakout or down from the range. I am absolutely loving the action in emerging markets, not only because our EM strategy is finally killing it after a few challenging years, but also because it was one of my trades of the year, long EEM and short IWM. It’s also a positive for the bull market.

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Just Call Me “No One”

FYI, I have the privilege of co-hosting Fox Business’ Opening Bell this Monday from 10:00am – 11:00am. Maria Bartiromo is on vacation so I finally get to meet Liz Claman after being interviewed by her for years and years. I am a HUGE fan!

All Time Highs… Bull Market Alive

Earlier last week, I wrote an article called All Time Highs on Tap where the Dow and S&P 500 would see all time highs unaccompanied by the other major indices. There has been an ongoing divergence or non confirmation with the Dow and S&P 500 that has some calling for the bull market to end here. I could not disagree more.

While some of the ingredients may be in place when bull markets end, many of the key ones, like the NYSE advance/decline line, are not. Much of 2012 and all of 2013 saw a very powerful bull rally, perhaps even borrowing some of this year’s return. In January, I forecast a digestive type year and remain in that camp. There are going to be times to make money and times to preserve money, but most of the time it will be a year to sit in a trading range.

Sector Rotation Vicious

Sector leadership rotation has been fierce this year and I don’t think that’s about to end until we see a full fledged 10%+ stock market correction. This action is causing some short-term frustration in our sector program, but that’s one of the consequences that this type of investing sometimes brings.

Strength in REITs, utilities and consumer staples along with the incredible rally in the treasury bond complex are all forecasting something on the dark side this year. Whether that’s a single event or big picture issue, it should not be ignored.

Something Dark Out There

As an aside, the 10 year note yield is almost at my 2.50% downside target. For the time being, I am just going to sit back, watch, and enjoy the large position we have in our global macro strategy. Last week, I saw an interview with Brian Belski on CNBC’s Squawk Box where he said that “no one saw this treasury bond rally coming”. That just seemed like an excuse for Brian getting it wrong or he gave me the new nickname, No One.

European stocks continue to do very well and I am glad our global macro strategy has had a position here for a long while. One of my strongest trades of 2014 was in the emerging markets after they were left for dead to begin the year. EM hasn’t been kind to investors, present company included, for several years and I am glad they are reemerging as leaders, excluding China and Russia. Some are explaining this rally away as simply a play on the rally in bonds, but that’s a dangerous path to go down as both stocks and bonds in the US have both rallied since early February, breaking the expected inverse correlation.

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An Hour on Fox Business’ Opening Bell

I am really excited to join Liz Claman who is subbing for Maria Bartiromo from 10am to 11am on Monday the 19th on Fox Business’ Opening Bell.

Having been interviewed by Liz many times during her tenure at CNBC, I can’t wait to meet her and co-host the show for a full hour. She is one smart woman!

As I worried about having enough to say, I am often reminded by my family that I don’t know when to shut my mouth and stop talking so I shouldn’t worry about the hour.

All Time Highs on Tap

Despite significant warnings from the S&P 400 mid caps, Russell 2000 small caps, Nasdaq 100 and a host of sectors, the Dow Jones Industrials and S&P 500 are poised to see all time highs this week. The headlines will look nice and investors may cheer, but serious damage remains beneath the surface over the intermediate-term.

Yes, we remain long various indices and sectors, but we will likely lighten up or hedge on a quick spurt higher. If we do see a run to new highs, it will be very telling to see how the lagging indices perform versus the leaders.

Additionally, as I have written about many times before, I think I have been just about the only long dated treasury bond bull around. It has been a fantastic run. I am keenly interested in how treasuries behave should stocks breakout to the upside. For much of 2014, bond bulls have stepped up into every pullback and that indicates something negative brewing on the horizon for the economy or stock market.

Longer-term, the bull market is intact and certainly has the look and feel of being in the final stage which can last months, quarters or even a few years. Evidence for this conclusion can be seen in the divergence in the major indices as well as the fierce sector rotation into REITs, consumer staples and utilities.

The best scenario for the bulls would have stocks shoot higher and form a top over the next month. From there, a pullback or correction lasting into the summer would restore some pessimism and repair some of the internal damage. That could set the stage for a better leg higher later in the year above Dow 17,500 or even 18,000.

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Key Sectors Sending Up Bearish Warning Signs

Last week, in Major Indices Issue Warning, I discussed how the strength in the Dow and S&P 500 were masking weakness in the other major indices and how a warning sign was given. Today, I go a step further and dive into the key sectors of the stock market.

We begin this section with the S&P 400, Russell 2000 and NASDAQ 100 all showing relative weakness, a clear red flag. Below is the first key stock market sector and also one of the two components of Dow Theory.

The Dow Transports should confirm all highs in the Dow Industrials and vice versa. When one doesn’t, a non confirmation or divergence develops. At the most recent all-time high in the Dow Industrials, the Dow Transports did NOT make an all-time high, clearly a warning although one that can be rectified quickly and easily.

The banks are below and you can see a much bigger problem as they are nowhere near their 2014 highs and in a clear pattern of lower highs and lower lows. This issue can’t be easily fixed.

The semiconductors are next with a pattern of lower highs but higher lows. There is a clear warning sign as the last all-time in the Dow is definitely not confirming or even close. This is also a red flag for the NASDAQ which is a red flag for the major indices.

 

One of the important bright spots of the market is the New York Stock Exchange Advance/Decline line which is continuing to score all-time highs. Almost without precedent, bull markets do not end until the NYSE A/D line fails to confirm the final high in the Dow Industrials and S&P 500. That’s definitely not the case today.

 

Finally, the high yield (junk) bond market is one of the best canaries in the coal mine to gauge the health and strength of a bull market. Left for dead almost a year ago, junk bonds did a 180 and remain in a very solid position, another positive for the bull market.

All in all, we have two big picture indicators that remain bullish, but a host of others flashing the warning sign. My conclusion is that the bull market remains alive, but is building towards an intermediate-term correction, especially if the Dow and/or S&P 500 see all-time highs this quarter.

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All-Time Highs in Sight

This is it.

Put up or shut up time for the Dow and S&P 500.

Both are positioned constructively to power to all-time highs over the next week. And I think they will. With sentiment mixed, it’s hard to believe that there will be any mass celebration of new highs, especially with the index problems I discussed here. In fact, I think there is very little chance that the three other major indices will confirm the Dow and S&P 500 at new highs. This is all part of the stock market transitioning to the final stage of the bull market which could last months, quarters or even a year or two.

Leadership has changed as I discussed on Yahoo Finance, yet few are embracing it. Energy, consumer staples, utilities and REITs are now heading the charge. Previous leaders have gone from buying the dip to selling the rally, which is forcing me to opportunistically rebalance portfolios.

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Economy “Booming”

288,000 NEW jobs created in April.

Unemployment rate plummets to “only” 6.3%.

The U.S. economy is back!

Does it feel like that to you or your friends?

My thesis since the crisis began has been that post financial crisis recoveries are frustrating. They tease and tantalize on the upside but rarely deliver. GDP growth never hits “escape velocity” and unemployment remains stubbornly high. With the government printing a 6.3% that’s hard to still say “stubbornly high”.

Digging into the details a little more, the labor force participation rate fell to 62.8%, the lowest level since 1978. Almost 1 million people left the labor force. Zero Hedge wrote a good piece about this here.

With wages not growing and people giving up on looking for a job, this is the main reason markets are not celebrating the 288,000 number. Additionally, it seems like at least once over the past few years, we see a monthly print close to 300,000 new jobs created only to have cold water poured on it over subsequent months.

Remember, the actual news isn’t as important as the markets’ reaction to the news. Before you fire off an email to me that the Russia/Ukraine situation led to Friday’s underwhelming performance, stocks looked crummy in the pre-market minutes after the jobs numbers was released. We “should” have seen a huge up day in stocks and really bad day in bonds. That just wasn’t the case and yes, I understand that there were geopolitical events in the air as the day wore on. Monday could be a very telling day for the short-term.

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