Archives for May 2016

Buy the Dip

As you know, I turned short and intermediate-term positive again last Monday. My long-term bullish view never changed. Stocks rallied really nicely for most of the week and should see higher highs coming in June. I closed Friday’s post with a comment that a pullback this week would not be so bad. I think it’s here and should be routine and healthy with a quick bout of 1-3% weakness. There is one caveat which I will mention in another post if the scenario puts that in play.

The Dow has been lagging the move and I expect to see some leadership develop after the pullback. The S&P 500 came just shy of the April highs. The S&P 400 is seeing its highest levels of the year along with the Russell 2000. This is not a negative set up. REITs, utilities and staples are in an interesting pattern that needs to be watched closely here.

Semis and banks continue to lead with transports and discretionary in the middle of the pack. This is¬† not a negative set up. Junk bonds remain strong and the NYSE A/D line is at new highs. Sentiment remains muted. I saw Blackrock turning “neutral” on stocks this morning, whatever that means, but it certainly not a negative for the market. Barron’s headline¬† was “The Stock Market Won’t Crash – Yet”, certainly not the exuberant cover you would normally see ahead of a large decline.

Gold has come to a point where it is “supposed” to bounce. While I do believe the highs are in for a while and we will ultimately see much lower prices, the bulls should put up a fight right here. Strength should be viewed as a selling opportunity.

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Bulls Have Room to Run

Having turned negative on stocks on April 21, I warned last week that our models were close to turning positive again. What I didn’t realize at the time was that it was going to happen just a few hours later and confirmed on Monday. If you recall, I wasn’t expecting anything major on the downside, just some normal and healthy weakness, or a pause to refresh before heading higher again. I did believe that it would be the largest pullback since the rally began in February and that’s exactly what transpired.

On Monday, for those portfolios that take positions in the major indices, we went all in by equally weighting the Dow, S&P 500, S&P 400, Russell 2000 and NASDAQ 100. Other portfolios covered short positions and/or removed hedges as well as added to equity positions. Thankfully, the stock market cooperated on Tuesday and gave us some instant gratification.

As we head into the long weekend, the NYSE A/D line sits at an all-time high. High yield bonds are but one day from new highs. Semis and banks are at new highs for 2016. Sector leadership is solid overall, but not powerful as the transports need to step it up. Sentiment went from a bit too enthused to neutral. That’s just as expected given the mild nature of the decline.

Life is okay for stocks right now and a short-term pause next week won’t be bad.

Gold, on the other hand, is threatening to break down as smart money is at all-time levels of pessimism. Should this occur, I can certainly make the case that a 20% decline could unfold this year into what I would view as the best buying opportunity in years. Given that we run two independent gold equities strategies, I am very much aware of what a gold decline could do to those stocks.

Have a great weekend and a heartfelt thanks to all those who have so bravely served our country!

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Bears Still in Control but Bulls Getting Closer

As you know from the suddenly negative piece below, I temporarily abandoned my bullish stance on April 21. At that time, we significantly raised cash, hedged and/or purchased securities that don’t perform with the stock market.$marts20160501.pdf

At that time and every week since on, I did not believe that stocks were on the verge of collapse or that a new bear market was unfolding. It just looked like a normal, healthy and much needed pullback that should end up as the largest bout of weakness since this latest rally began on February 11.

On the positive side, selling has been very orderly over the past month and stocks are still not that far from new highs. The chart below is the New York Stock Exchange Advance/Decline line which really just shows participation in the market. A rising line means more and more stocks are going up. This is best used over the intermediate and long-term. As you can see, since mid-February, it has showed a very broad-based and powerful rally without much giveback during the pullback.

My favorite intermediate and long-term canary in the coalmine, high yield bonds shown below, have also been behaving very well and exhibiting the type of behavior normally seen before large declines or bear markets.

What’s impacted our models is the major stock market indices were acting very tired from two months of going straight up, coupled with sentiment looking frothy. By “frothy”, I mean that the masses went from despondency in February to comfort at the end of March to ebullient by April 20. That combination has a high degree of accuracy in stopping the advance and seeing stocks pullback.

Looking at the Dow, another few percent decline would make the market more attractive from a risk/reward level, assuming high yield and the NYSE A/D line didn’t weaken substantially. I also want to see good behavior from at least three of the key sectors, semis, banks, consumer discretionary and transports.

Over the intermediate-term, stocks don’t seem to be poised to blast off to 19,000 should they poke through all-time highs this quarter. In other words, for now, I think that the market’s trading range will continue with strength to be sold into and weakness to be bought. Eventually, later this year, stocks should begin an assault in 19,000 and 20,000 and possibly even much higher.

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Plodding through the Pullback

Not much has changed this week. As has been the case since April 21, I am still looking for lower prices, but nothing dramatic. The selling has been orderly and constructive. The NYSE advance/decline remains very strong and healthy, not what you typically see during bear markets or large declines. High yield (junk) bonds, which we have owned for months, continue to behave very well with oil stable and rising. The major stock market indices are only a few percent away from areas where I would become interested again.

Of the four key sectors, there is not much to glean. They are all okay at best. The rest are scattered with software, energy, industrials, materials and staples looking the most constructive. Retail has performed the worst with new calls, yet again, for recession. I don’t see that happening this year.

All in all, stocks remain on the quiet side, for now.

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“Bounce” Teetering

The “bounce” I mentioned here remains alive although it is living on borrowed time. I continue to believe the ultimate low remains in front of us. Retail and consumer discretionary stocks have been the latest to take it on the chin with a slew of poor earnings from Macy’s Nordstroms, etc. This sector is one of my key vital four groups and it’s important for the bull market’s health to keep the majority of them moving forward. While I do not believe it has short-term implications, I do think that losing leadership from a few of the key four could spell trouble later this year.

For the bulls, it’s very important to see a daily close above this week’s peak to set the stage for an assault on all-time highs this quarter. For the bears, closing below this week’s low along with last week’s more important low would begin the next small leg lower for stocks where I believe the real bottom is. I am also keenly watching high yield bonds as they are acting like stocks and the market needs their leadership.

Besides the aforementioned weak sectors, semis, telecom, banks, industrials, materials and transports are behaving weakly. If the bulls are to mount a charge, we need to see at least some of these groups regain health. The stock market will not hold up with just precious metals, consumer staples and utilities leading the way.

Finally, don’t look now, but the U.S. dollar is threatening to rally hard again. I don’t have the sense that it’s THE next big rally, but it could be a decent one.

Have a great weekend!

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Here Comes the Bounce

The major stock market indices staged an impressive comeback on Friday as they all reversed early losses to close nicely higher. Given the very orderly pullback along with some modest losses of roughly 3% except in the NASDAQ, the odds now favor the bulls stepping up right here for at least a short-term bounce. Should the bounce materialize, the next question will be if it’s a bounce all the way to new highs or just back towards 18,000 before rolling over again.

With the NYSE advance/decline line still acting so strong, it’s unlikely that this indicator will help us much on this rally. High yield bonds, however, is one area that we should very closely watch for clues about the next month. Plainly put, we want to see them head to their old highs, if not outright score new ones. Should stocks rally without junk bonds, my opinion will be that the stock market is in for a deeper bout of weakness this quarter.

While almost every major sector saw a reversal on Friday, not all are behaving constructively. REITs, staples, and precious metals are clearly the leaders, but those are not the usual suspects during healthy advances. Discretionary, industrials and materials have constructive price patterns, that is, as long as Friday’s low was the end of the weakness. Should these sectors close below Friday’s lowest price, I think the stock market would struggle to find other good leadership groups to push it higher.

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Bears Knocking on Door Again

The major stock market indices are under pressure for the second day in a row, potentially threatening to close below last Friday’s low which is a line in the sand I spoke about on Monday. We will see what happens after 4pm. The selling continues to look orderly and there is not much internal damage being done to the market so far. Semis and banks concern me the most as the bull market can survive without either but not both. Most of the other sectors are pulling back as you would expect, but the defensive groups telecom, staples, utilities and REITs are firming. High yield bonds remain solid but that can change quickly.

The currency market has probably seen the most action with the dollar seeming to put in a low on Thursday. After an 8% decline since December, there is a lot of room for a bounce. That means that currencies like the Yen, Euro, Loonie and Aussie should see weakness, possibly significant, over the coming days or weeks. That would also mean a soft patch in energy prices.

Lots going on right now and volatility is on the upswing!

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Bulls then Bears and Finally Bulls

The stock market had a nice little reversal on Friday as the bulls fended off morning weakness to close well off the lows. While I remain in the pullback camp and see lower prices ahead, the bulls should have enough ammunition to mount a small rally here. If Friday’s lows are closed below anytime this week, I would become slightly more concerned than I already am regarding the short-term, but I don’t think that’s the most likely scenario here.

On the sector side, most still look very constructive although semis, healthcare and biotech are the problems. High yield bonds remain strong and the NYSE advance/decline line behaves like a new bull market was just launched as you can see below. For all those perma-bears who continue to wrongly believe that stocks are in a bear market, this one chart below refutes all claims.


All in all, the stock market remains healthy over the intermediate-term, but the short-term risk/reward ratio favors the bears a little. Just your typical, routine and healthy pause to refresh.

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