Archives for November 2014

Holiday Tailwind then Headwind for Stocks

Historically, this is a quiet week for the markets with an upward bias. In other words, stocks usually drift higher without much fanfare. The market looks a little tired, but reaction may have to wait until after the country stuffs itself with food, football and fun. To begin the new week after the holiday, stocks usually experience a headwind where mild weakness is seen. Of course, since early 2012 most of the negatives suggested by history have been thrown out of the window in one of the most powerful bull runs ever.

As you know, my thesis hasn’t really changed in several years. The bull market is old and wrinkly, but still very much alive. Until investors stop selling into each and every single digit pullback and act like the sky is really falling, the bull market should live on. The pattern of investors waiting for a pullback during a strong rally to buy, only to see that decline and sell instead of buy has been commonplace since early 2012. When investors finally start buying any and all weakness as well as strength I will begin to get much more concerned about the end of the bull market.

Last week, I did a full Canaries in the Coal Mine article that indicated some caution flags, but nothing really serious. Since then, stocks have continued to rally, but two of the warning signs have become more severe, high yield bonds and the New York Stock Exchange Advance/Decline line. I don’t take these lightly and will be watching very closely over the coming few weeks. Because markets are in the home stretch for 2014 and so many hedge and mutual funds are trailing their benchmarks, a significant decline is very unlikely as managers will use any slight weakness at all to play the performance catch up game into year-end.

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Dow 20,000 and How We’ll Get There

My longstanding target of Dow 18,000 is now within a day or two reach if the bulls can muster the energy by Thanksgiving. If not, they may to wait until later in December. As you have read for several years, the bull market is old, but alive and should live on until enough people throw in the towel and stop predicting doom and gloom on every single digit pullback. If and when the Dow closes above 18,000 for a week, that will open up the possibility for 20,000 by mid 2015.

Earlier this week, I spent some time with the good folks at Yahoo Finance and my friend, Jeff Macke in particular. I always enjoy creating segments there as they are usually controversial, timely and thought provoking. They also inspire an awful lot of people to send me very “interesting” emails and post “unique” comments on Yahoo about me. Sometimes, I need the skin of a rhino to deal with the personal attacks, but it is what it is.

Dow 20,000 and How We’ll Get There

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Coal Mine Air Still Healthy… Says the Canaries

With stocks soaring to new highs over the past few weeks, it’s a very appropriate time to see how the canaries are faring and if any have died. Remember, the more “dead” canaries, the more likely the bull market will follow suit. This is very long-term analysis and not helpful for much other than end of bull market warnings.
Let’s start with the Dow Industrials below and it’s great to see a clear and decisive all-time high right now, coming on the heels of a false move in October that breached the levels we saw in August. This fake out caught a lot of investors off guard, which has been and is causing them to scramble to buy at higher levels, making me very happy!
The S&P 500 is below and it looks exactly like the Dow Jones Industrials above. So far, we have two very alive canaries.
The first caution sign comes with the S&P 400 mid caps below. They peaked on the left hand side of the chart back in June and continue to see lower highs and lower lows. That is not the definition of healthy. However, they are only a few percent away from all-time highs, which would negate this warning, something I do think will happen shortly.
The small cap Russell 2000 is next and there clearly has been a problem since late June with a 14% total decline that has not fully recovered. A 5% rally would cure this problem, but that’s not as easy as the S&P 400 has it. I won’t label this a “dead canary”, but it’s certainly one with breathing problems.
Let’s turn to the technology laden NASDAQ 100 where you can see “all systems go” with fresh highs right now. This index looks like it’s wound up and ready to move sharply higher before long, even if it sees some minor weakness first.
Summarizing the major stock market indices above, for a 5+ year old bull market, they look surprisingly spry!
The Dow Transports are next and they look exactly like the Dow Industrials and S&P 500 with fresh all-time highs right now.
Turning to the two “key” sectors we watch, banks are only a few percent from fresh highs and they should get there before long after frustrating me over the past year or so with their inability to lead during rallies.
Semiconductors are below and this is one area I have always viewed as critical for the long-term health of a bull market. Historically, as go the semis, so goes tech. And as goes tech so goes the broad stock market. Semis peaked in September and now reside a few percent below that peak. They looks strongly positioned to see fresh highs before long.
Below you can see the cumulative New York Stock Exchange advance/decline line which is a fancy word for how all of the stocks on the NYSE are behaving in sum total, not just the biggest ones. Almost every single bull market dies after a warning from this indicator. What we want to see is the chart below looking like the Dow and S&P 500 which it is not right now. The line below MUST make a fresh high in order to avoid killing a very important canary. It’s not that far away, but action this week has also not been positive.
High yield or junk bonds are another very important canary and they are next below. Because junk bonds feel every ripple in the liquidity stream, economic weakness often manifests itself in this group first. High yield bonds usually “die” long before the bull market does so it’s often a very telling sign in advance. Keep in mind, however, that this group also gives false warning signs like it did when then Fed Chair Ben Bernanke caused the “Taper Tantrum” in May 2013.Right now, junk bonds are not at fresh highs, but close enough to correct before long. My concern is that since mid October this group has only upticked when stocks experienced very strong days. Normal or healthier behavior would see high yield add a little here and there on a daily basis during stock market rallies.
For a 5+ year old bull market, the canaries remain alive and mostly well, which fits into my own scenario for the bull to live on into 2015 with Dow 18,000 next on the list. Once 18,000 is reached, possible scenarios open up for 20,000, 23,000 and even higher. But let’s take one hurdle at a time and manage this in the present.
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Even My Bullish Forecast Wasn’t Bullish Enough

Three weeks ago as the stock market was being labeled as “in collapse”, I wrote about the bottom being formed and offered two scenarios for the market to follow. Of course, both scenarios were generally bullish, each ending at new highs, but the length of time varied. Below you can see that same chart updated with market action over the last three weeks.

 In short, the stock market responded even more bullishly than my very bullish forecast with all time highs being achieved in a matter of weeks from what was being called “the end of the bull market” and a “total game changer of a decline”.

Today, the Dow, S&P 500 and Nasdaq 100 are behaving very well with fresh highs occurring on an almost daily basis. The S&P 400 and Russell 2000, however, are lagging and need to step up sooner than later or risk will once again grow for a 4-8% pullback.

As I have said ad nauseum for several years, the bull market remains alive. It is old by historical standards, but bull markets do not die from old age. They die from a host of other factors, usually including mistakes made.

When you see a vertical rally like what’s been happening since mid October with so many caught off guard, some profit taking is naturally to be expected. However, with so many on the outside looking in, especially with the sprint to year-end, any weakness should be temporary and short-lived. Until proven otherwise, dips are buying opportunities.

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Dow Theory Trend Change… Again

Last week, I wrote an article explaining how traditional Dow Theory worked, at least the way I learned that it worked. In that piece, Dow Theory confirmed a trend change to the negative side. While describing what transpired to give this warning, I also wrote that my own projections for the Dow were to the 18,000 level and I would be surprised if stocks didn’t see all-time  highs.

After the Japanese caught the markets off guard with their own shock and awe on Friday, we have yet another Dow Theory Trend Change and in doing so, wiped away any early warning sign that Dow Theory was giving. Both the Dow Jones Industrials and Transports are at new highs, a late confirmation for the bulls, but a confirmation nonetheless. This sudden shift from one side to the other and back again is often referred to as a whipsaw and definitely exposes one of the weaknesses in Dow Theory.

Below you can see what I tried to depict above in chart form. Stocks have run very hard, very fast and are certainly due for a breather. But as I have said for several years, the bull market remains alive. Any and all pullbacks are buying opportunities until proven otherwise.

Tomorrow, be on the lookout for a special election post!

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