Archives for June 2014

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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Russell Trying to Join Party

Over the past few months I have often warned about the caution signs being given by the major stock market indices not all being in sync together. With 32 months passing since the last 10%+ correction, the bearish camp is hoping that age alone will befall this market. History suggests otherwise.

Historically, major index non confirmation or divergence is typically a sign of a market about to correct or in the most extreme cases, the end of a bull market. This behavior was seen at the secular peaks in 2007 and 2000 as well as major peaks in 2011, 1998 and 1990. But before you jump to the bearish conclusion, it was also seen other times during bull markets that led to only minor (<10%) declines. The key factor in determining the seriousness of the warning sign is how many other flashing red lights are also active. Today, there are but a few.

In this case, as you know, I believe the bull market is aging, but not dead, and a 10%+ market correction is not around the corner, at least not yet. Rather, I have been waiting for either the major index warning signs to dissipate or many more to pop up and snare the stock market in a 4-8% pullback.

With the Nasdaq 100 and S&P 400 joining the Dow and S&P at new highs, only the Russell 2000 (seen below) is left to join the party. The reason I am not overly worried about the small caps lagging is because they have been leading the rally over the past week and very well could challenge their all time highs before long. A change in that performance over the coming weeks would cause me to expect a pullback but not much more.

rut

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Early Equals Wrong

The bull market of 2009-2014 has to be one of the most disavowed, unloved bull markets of all time. Each and every time it sees even routine weakness, bears come out of the woodwork with calls of 1929, 1987 and 2007 all over again. And then stocks stop declining and continue on their merry way higher. This is exactly how long-term bull markets survive, thrive and work higher.

I can’t tell you how many very smart (and some not so smart) industry colleagues have been either calling for the end of the bull market or for a 20% decline for years. I read their weekly newsletters and just scratch my head, not because they are wrong. I am wrong more times than I want to remember. It’s okay to be wrong in this business, but you cannot stay wrong for months and months, quarters and quarters. You can’t break out prominent interviews and articles from others who are also wrong and use them to substantiate your wrong position. Too many people sit and wait with losing positions and reason it away as being early. In this business, early equals wrong.

It isn’t until the masses buy every dip that the bull market begins the topping process. Remember, I said “begins” not “bull market immediately ends”. If you remember back to late 2007 and early 2008, stocks pulled back during the fourth quarter and the masses bought. And when the market had a 20% decline in January 2008, only short-term sentiment became sufficiently negative to support a rally. Intermediate and long-term sentiment remained positive until the Lehman fiasco, which is why it was difficult to hammer out any type of significant bottom.

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What’s Up with That?!?!

Last week, there were at least three announcements that made me scratch my head and think “are you serious?”

Apple spent $3 billion to buy Beats, a headphone maker which sells inferior products as my experts tell me. Good job Beats!

Steve Ballmer paid $2 billion for the embattled L.A. Clippers. My best friend whose group recently purchased the Milwaukee Bucks for a record $550 million also bid on the Clippers and valued the franchise at well under $1 billion. Donald Sterling gets rewarded for being a racist and lunatic.

Troubled PIMCO, which I have written about before HERE, coaxed former insider Paul McCulley to unretire. Reading into the press release, McCulley who is best known in retirement for his long mane of hair with beard to match committed to working only 100 days per year or roughly 40% of the time. Does anyone else think Bill Gross was desperate?!?!

Smart people sometimes do dumb things. Smart people who are rich sometimes do even dumber things. Why? Because they can…

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Draghi Delivers… Bears Lie in Wait

In one of the better telegraphed moves out of the European Central Bank, Mario Draghi & Company gave the market what it had been expecting, using some fairly heavy ammunition to provide stimulus to Europe’s struggling economy. He may not have gone to Hank Paulson’s bazooka just yet, but they are getting close!

Thursday was a solid win for the bulls as the Dow, S&P 500, S&P 400 and Nasdaq 100 all scored new highs for 2014 with the lagging Russell 2000 leading the day in terms of price gains. A sore spot for theĀ  bears to focus on has been the lack of confirmation by most of the major indices, but that has all but been eliminated with just the small caps needing to catch up.

Sector action was impressive across the board and the bulls continue to stampede each and every short-term opportunity, like the one I wrote about just two days ago. Some of the short-term concern remains with today’s employment report many times acting as a fulcrum for short-term move in the opposite direction.

I may sound like a broken record, but until proven otherwise, all short-term pullbacks are buying opportunities. The bull market may be old and wrinkly, but very much alive. Unless 2014 is a precedent setter, the usual pieces for a bear market are simply not in place and even 10%+ corrections should lead to more all time highs.

For today, a celebratory opening will offer the bulls a good spot to take some chips off the table, something I will consider for the first time in a long, long while. This bull market continues to be one of the most disavowed in my 25 year career. Investors seem to have this strong bearish anchor but temporarily get excited at new highs on news. That’s not a successful long-term strategy.

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Bears Get Another Opportunity

On the Bullish Side

It has been a relentless 10 day assault by the bulls with the Dow, S&P 500 and Nasdaq 100 scoring new highs while the S&P 400 and Russell 2000 are fighting to lead. Europe remains near new highs and emerging markets have had a very strong run, much to my delight!

The New York Stock Exchange Advance/Decline line continues to see all time highs which has very positive intermediate-term implications for stocks as it is an excellent sign of liquidity in the system. Sector leadership has been okay, but certainly not great.

HOWEVER…

In the very short-term, there are several signs that the next 1-4% move should be down. Bounce back behavior in the banks and consumer discretionary sectors have not lit a fire under the S&P 500 like it normally does.

Although I think using volume as a primary indicator is a thing of the past, there are a few precedents for such anemic volume at all time highs, especially ahead of the big employment report on Friday. And speaking of that report, it’s unusual for stocks to run into the data at all time highs and then continue to plow higher.

Markets are expecting the European Central Bank to provide some kind of stimulus tomorrow morning and have rallied into that event. Finally, it doesn’t take a genius to figure out that stocks have been very strong over the past 10 days and clearly due for some kind of rest.

The take away is that while a short-term pullback should be expected, I would use it as a buying opportunity until proven otherwise. Dow 17,000 and higher isn’t too far away.

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Squawk Box on Monday @ 6:30 am EDT

I am really excited and looking forward to being with Joe, Becky and Andrew on CNBC’s Squawk Box on Monday the 2nd @ 6:30am discussing the stock market’s latest surge on negative news. It should be a spirited discussion!