Archives for May 2015

Bulls Not Ready to Surge Just Yet

In what seems to be the trend for most of 2015, price breakouts above previous high points have largely been rejected. While that’s not to say that the bears have come in and taken control over the intermediate-term, we have seen small pullbacks until the bulls get ready to step up again. Eventually, as I have written about all along, this three or six month trading range will resolve itself to the upside; it just doesn’t look like it’s right here and now.

spMy from the bullish camp, I think it’s a strong positive that the bears cannot make any meaningful headway on declines. The bulls may step aside at new highs, but they come right back to work into any pullback. Eventually, the economy and fundamentals will catch up with price and then we will see stocks blast again to the upside.

The bears, on the other hand, are leaning on the market being on the expensive side as well as sentiment being too positive. They also are hanging their hats on the strong dollar and the Fed about to raise rates. I don’t buy any of their arguments for more than the short-term.

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American Pharaoh Begins the Week at the Highs

The bulls begin the new week a little higher than this time last week and within striking distance of all-time highs in the Dow, S&P 500 and S&P 400. Not a single thing has changed in my bullish intermediate and long-term outlook. The stock market should continue higher on its way to Dow 20,000 with periodic bouts of weakness to keep everyone honest. As I have been writing about since early 2012, any and all pullbacks should be viewed asĀ  buying opportunities until proven otherwise.

Depending on how you view the last six months, stock have either been digesting since early February or as far back as November. Ultimately, the market should resolve itself to the upside. In a perfect world, we would see sufficient negative sentiment build up to give stocks enough juice to blast higher, but it doesn’t always work out so neatly. While they certainly could run higher from here, I don’t believe this is blast off time just yet. That day is coming though. Rather, I think we’re stuck in this mean reversion market where buying weakness and selling strength (breakouts) is the name of the game for now.

Leadership continues to evolve and the banks seem poised to finally take the torch for the next leg of the bull market. If the semiconductors and transports can also step up, we could see the makings of a very powerful move across the board with consumer discretionary already driving the bus. That would be the best of all bullish worlds, but it’s putting the cart before the horse.

Speaking of horses, what an amazing performance by American Pharaoh at the Preakness on Saturday. Once the skies opened up and the torrential rains hit, I thought for sure that she would really struggle on the muddy track. And in the middle of the race, it looked like she was starting to run out of gas. But as she turned for home and came down the stretch, it looked like she kicked it into a gear no one had ever seen before and ran away with the race. We all know the people at the Belmont couldn’t root any harder as a win at the Preakness means a windfall day for New York in a few weeks.

Could American Pharaoh have some similarities to the stock market???

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Portfolio Impact from Jobs Report

The question now for portfolio managers like myself is, “does one good employment report turn the tide?”

Since I already mentioned that I all but dismissed the poor Q1 GDP number and I am not giving much weight to the weak March employment, I do believe that Friday’s report is the start of the next upward swing in our frustrating but positive post financial crisis recovery. With that, the intermediate-term outlook for stocks has brightened for many although unchanged from my already bullish vantage point. The three or six month trading range in the S&P 500, depending how you view it, should be resolved to the upside, whether that’s convincingly this quarter or next. Sometimes, in order to end a trading range, markets move violently from one side to the other, often breaching key levels and forcing traders to take action, only to immediately reverse course in a sustained move in the other direction.

Regardless of how the current trading range resolves itself, I anticipate sector leadership coming from some familiar names as well as two fallen angels. Semiconductors, long a canary in the coal mine for the tech sector, are poised to resume their rally. Consumer discretionary, left for dead countless times during the bull’s six plus year reign, continues to confound the bears and lead.

One of my top sector picks for 2015, home builders, are getting ready for another run higher, even in the face of potentially higher rates. On the surprise side, the transports, leaders from previous years appear to be ending their six month plus period of digestion and poised for another assault on all-time highs. Finally, the banks and diversified financials, with several nails in their coffin, are at last finding fertile ground for leadership status after five years of being pulled along. This fallen angel could really shock and surprise the masses and give this old and wrinkly bull market new life later this year as net interest margins significantly increase.

Not surprisingly, defensive sectors like REITs, consumer staples and utilities (another sector pick for 2015) should continue to struggle and potentially be dragged up by the market, best case, rather than lead it higher.

In the very short-term, I do have some concern from the usual post employment day hangover effect on stocks. Data miners can provide a stream of historical examples, but in plain English, when the stock market opens much higher and closes well with volatility falling sharply, the next few days to a week are often, 75% of the time, challenging and down.

Overall, Friday’s employment report, while just meeting expectations, essentially threaded the needle and reaffirms my view that the economy remains in a typical, uneven, post financial crisis recovery. The aging bull market is far from over.

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April Employment Report Turns the Tide

One of my long held beliefs is that it really doesn’t matter what the news is, only how the markets react. In almost 27 years of trading, investing and watching, I have seen it too many where the news is so powerful in one direction, yet the market reaction is the exact opposite. Hence, the terms “buy the rumor, sell the news” or “sell the rumor, buy the news”. And sometimes, the news is as expected, yet markets see a more violent reaction. That was the case on Friday with the April employment report.

Since the economic recovery began in 2009, my thesis has been that the U.S. will have your typical post financial crisis recovery, seen many times previous after the Great Depression part I, South America, Latin America and Japan. Growth teases and tantalizes on the upsides, yet ever fully reaches escape velocity where GDP feeds on itself. Historically, it takes two full recessions to return the economy to its previous “normal” state. After six years, that’s where our economy remains.

After another brutal winter in the eastern half of the country first quarter GDP growth was borderline recessionary, just like we saw in 2011. We have now seen the “seasonally adjusted GDP” show some odd negative seasonal tendencies in Q1 that are not being adequately adjusted since the recovery began. Since I remain sanguine on the economy and bullish on the stock market, that leads me to believe that our economy will bounce back strongly in Q2 and Q3, just as it’s done over the past few years.

Getting back to Friday’s jobs report, non-farm payrolls grew by 223,000, equaling expectations while the unemployment rate came in at 5.4%, the lowest since May 2008. The U6 unemployment rate, which measures the unemployed and underemployed came down to 10.4% from 11% in March. Keenly watched hourly earnings only increased by 0.1%, keeping any wage inflation concerns solidly under wraps.

The best description I can give of this report is Goldilocks, not too hot and not too cold although some in the perma-bear (continually wrong) camp are hanging their hats on the older ages of those filling new jobs rather than how well dispersed the new jobs were across sectors. Stocks soared and bonds bounced back. Anyone left hanging on to a June interest rate hike by the Fed has to be convinced that is has barely a puncher’s chance of occurring and that while September may be on the table, it’s looking less than 50-50. The jobs market is solid and stable, but far from overheating. I think the Fed needs to see a very good Q2 GDP print in a few months coupled with at least two or three straight employment reports showing a minimum of 250,000 new jobs created.

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Tug O’ War Continues

Like a seesaw or maybe a pinball machine, the major stock market indices continue to bounce from the low end of the trading range to the upper end and back. Remember, that for the past month or so, I have written about the short-term looking somewhat murky, but the intermediate and long-term remain solid. Market pullbacks come in two forms. The first is that price declines somewhat sharply and quickly, which shakes out some of the weak handed holders. The weakness also serves to build up the necessary pessimism to launch the next rally.

The other form of pullback is what we are seeing right now, sideways digestion or consolidation. This ends up frustrating both bulls and bears until both sides pull back high conviction positions in the market and wait for a clear resolution. Oftentimes, the market will exceed one end of the trading range, force action and then immediately reverse and head to the other end of the range where the real break out occurs.

My point right now is that the market is digesting and short-term volatile. It’s during these periods when buying rallies and selling declines is the worst plan until the skies clear. Just two days ago, it looked like a run to the upside was possible. Now, it looks like lower prices lay ahead.

Sell in May and Go Away? I will dive into that tomorrow.

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