Archives for October 2016

A Little More Concern Creeps In

At least we had one day where stocks closed firmly! As has been the case for more than a week, but really over the past month, sellers continue to snuff rallies that begin the morning. The bears say that this is a market on the verge of collapsing under its own weight. The bulls counter that with all the selling into rallies, stocks remain just a few percent off their recent highs.

What I am seeing is my pullback theme continue to play out during the beginning of what is usually a very strong time of year seasonally. You also have a tale of different indices with the Dow and S&P 500 mired in a two month range with the NASDAQ 100 just making a new high this week. Somewhat concerning is the action in the S&P 400 and Russell 2000, former leaders, which are now breaking down from their trading ranges.

On the encouraging side, we still have strong leadership from three of the four key sectors. Semis and transports are just off their recent highs while banks and making new highs now. Discretionary looks crummy. High yield bonds scored new highs this week and the NYSE A/D Line is digesting constructively.

While stocks often delay the beginning of the typical Q4 rally during an election year, I wouldn’t be surprised if the S&P 500 has a sharp, but temporary breakdown below 2120 just before election day. That would be a another dip to buy.

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Canaries in the Coal Mine Part III – My Two Favorites

Updating the two, and perhaps, most important charts from last week, we can first see the New York Stock Exchange Advance/Decline Line which measures participation in rallies and declines. Before a bear market hits, you will almost always see this line peak well before price does. In other words, the troops were dying in a battle but the officers survived until the bitter end. In today’s case, this indicator still very powerfully supports the bulls.

Finally, high yield bonds are below where I am using the PIMCO High Yield Fund as a proxy for the sector. It just hit a fresh high. Just like the NYSE A/D Line, junk bonds almost always peak well before the major indices.

If I had to rely on just a few canaries, these two would be at the top of my list. Right now, both a very supportive of the bullish case and higher prices before the bull market finally ends. Keep in mind that while every bear market typically begins with these two canaries dying, they will sometimes give false warnings and then come back from the dead.

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The Streak Has Been Broken – Gold Teetering

After four straight afternoon fades in the stock market and one neutral day, the bulls FINALLY were able to overcome a gap down open and closed near the highs for the day on Friday. However, one day doesn’t change the pullback theme of the last six weeks.

Today, stocks are going to open higher with help from several deals announced along with Europe on firmer footing. AT&T buying Time Warner for $85 billion certainly is an eye opener, so much that no one is really talking about TD Ameritrade buying Scottrade and Rockwell buying B/E Aerospace. Mergers and acquisitions activity can definitely be a catalyst for the next leg higher in stocks, especially since no one has really been focused on this of late.

Back to the stock market’s behavior, I want to see multiple days of stocks closing in the upper 25% of their daily range along with at least solid internal to go along with the already good leadership in technology, transports and financials. Gold has been bouncing as I started discussing here.  However, all that’s really been happening is a clinging to the rising 200 day moving average as you can see below in pink. At the recent lows, both the 200 day moving average and an old trendline in blue seemed to contain the decline, but should gold rollover sooner than later, I don’t think we will see the same outcome.

gdx1

It’s already a busy week with M&A activity, but more than 150 S&P 500 companies will report earnings not to mention that the election is just two weeks from tomorrow. With the Dow still well above 18,000 and biotech pummeled, the market isn’t giving Donald Trump much of a chance.

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Canaries in the Coal Mine Part II – The Key Sectors

Moving to the four key stock market sectors from the indices I don’t see as strong a sign, but it’s definitely not a weak one yet. The bellwether for technology, semiconductors, is first and you can clearly see a sector that is “large and in charge” or “long and strong” to use some trading desk rhymes. This is very bullish long-term.

Banks are next and contrary to popular belief, rumors of their demise have been greatly exaggerated. Quite simply, the banks do not look bad here and would look outright powerful when they close above their September peak which they are on track to do.

The transports are below and while a longer-term chart would show a sector 20% below its bull market peak from 2014, the here and now looks wound up and ready to break out to the upside. There is sufficient energy built up in this group that could help lead the stock market on its next leg higher to 19,000.

Finally, consumer discretionary is below and I would have to rate it neutral at best. It has some work to do to regain a healthy grade.

The good news for the bulls is that none of the sector canaries are dead or on life support.

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Make It Four Straight

For the fourth day in a row, stocks lost steam later in the day. While the internals continue to improve, price is always the final arbiter and the 6 week pullback continues for now. At the same time, gold is popping a little and crude oil just scored a one year high, both against a strong dollar which is unusual.

Both semis and software are bouncing from their first bout of weakness off the high while banks exploded higher on Wednesday. Energy was also a leader and transports are treading water just below their recent highs. The concern here is that the rest of the sectors don’t look so hot. They will definitely need to repair themselves before the next leg higher begins for stocks.

Regarding the debate last night, there was absolutely nothing said to impact the markets. Hillary looks like a 75-80% winner at this stage. All you need to do is look at the biotech sector as an inverse proxy for her victory. Trump still needs the Dow below 18,000 to have a shot.

For now, patience remains the operative word. Buy on weakness and prune into strength until proven otherwise. We need to see  few days where stocks close near their highs.

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Another Gap. Trade & Fade?

After Thursday’s reversal, Friday’s early action looked promising as I left the office before lunch to celebrate my 15th wedding anniversary playing golf with some friends at Foxwoods before the wives met us for dinner and gambling. At least the dinner went well! However, as has been the case lately, opening gaps have often been the high or low point for the day as was seen on Friday as well as on Monday. This is certainly not a sign of great strength. One indication that the pullback is over will be when we get one or two days where stocks open higher and then continue to build momentum right into the close.

With Netflix beating earnings estimates by a wide margin and the financials continuing to beat, stocks look like they want to follow Europe and Asia at the open with another gap higher. On the Dow, S&P 500, S&P 400 and Russell 2000, all we are seeing is traders buying at the lower end of the range and selling in the middle of the range. The NASDAQ 100 remains stronger and the leader, but that too, is digesting.

On the sector front, it’s really more of the same although a touch weaker with semis and transports leading the leaders. The defensive groups, utilities, telecom, staples and REITs remain weak. Healthcare, which falls somewhere in between, has really taken it on the chin as Hillary Clinton’s ascension to the Oval Office has become much more likely lately. That’s also a reason why biotech has fallen more than 10% over the past month.

On the flip side, as I often mention, high yield bonds continue to scrape along just below new highs and the NYSE A/D Line scored an all-time high last month, indicating widespread and healthy participation in the rally.

Stocks remain in the same pullback mode I have written about for more than a month. While frustrating, it’s not necessarily a bad thing as the resolution should strongly to the upside above 19,000.

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Is Pullback Mode Finally Over???

With yesterday downside break of the very obvious trading range in the Dow, S&P 500 and S&P 400, the pundits were all over this in the media. Just like I did yesterday, I often warn to be careful of a trap. Very apparent breaks of trading range will many times result in a quick and sharp snap back as I offered. In the short-term, that is exactly what occurred on Thursday as the bears got trapped in the first hour and the bulls pushed from there and into Friday.

While it looks pretty on a chart and all may now be fine again, I am a little hesitant to call for 19,000 on this move. I want to see more over the coming week. Yesterday’s close was a nice spot to add to longs or commit some cash.

Semis, while red on the day, finished at their highs and are following through this morning. The other three key sectors, transports, banks and discretionary, still have some work to do over the coming days. High yield remains very solid.

Have a great weekend!

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Stocks & Treasuries Looking to Diverge

With indications of morning weakness, the Dow, S&P 500 and S&P 400 will be breaking down from their six-week digestion patterns. Amazingly, for the past six weeks these indices have basically traded from high to low inside the range they saw on September 9 & 12.

spy

This action does not change my thinking about a continuing pullback and not some large scale collapse. The first thing I want to see is whether this potential breakdown is held for more than a few days. Many times, indices break up or down from a widely followed range, only to see that reversed quickly and sharply in the days ahead which traps a large group of traders.

I also want to see how powerful today’s action is to the downside and if any sectors buck the trend. The defensive utilities, staples, REITs and telecom are the most likely candidates.

As I mentioned the other day, treasury bonds have been hit with the ugly stick and are trying to bounce back from the 200 day moving average which is just the average price of the last 200 days and a popular measure of the long-term trend. If the declines in treasuries is so strong, I would only expect a short-term bounce here as sentiment is now at a bearish extreme.

tlt

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Pullback Mode Remains the Short-Term Theme

My general theme of pullback mode for stocks continues in all of the major indices except for the NASDAQ 100. Gold and silver have been a more exciting story, but they, too, have paused since I wrote about them last week. Sector leadership remains very strong with semis, banks, transports and energy near their highs at the same time the defensive group has been weak.

I wrote about consumer staples looking especially troubled a few weeks ago and nothing has changed. They had been dynamite all year and became very expensive on a fundamental basis during the first half of 2016. Since then, their price behavior has been poor as it looks like big money has been quietly selling the rallies.

On the bond side, treasuries have been hit with the ugly stick and they are approaching an area where they are “supposed” to at least bounce. If they cannot, I would begin to argue that much lower prices are ahead and into 2017. High yield, on the other hand, just scored yet another new high last week. This continues to give me comfort that a bear market scenario remains off the table for a while.

With Yom Kippur beginning at sundown today and lasting through sundown tomorrow, I would expect liquidity to dry up later today as well as tomorrow. That could make for a quick exaggerated move. Finally, the old adage of Sell Rosh Hashanah and buy Yom Kippur ends tomorrow. Stocks are now about to begin the most favorable time of the year.

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Canaries in the Coal Mine Part I – The Major Indices

For the past month, four of the five major indices have been in pullback mode after three of the five spent the previous month digesting gains from the huge post-BREXIT rally. While that theme continues today, I think the market is getting closer to resuming its uptrend with the Dow heading to 19,000.

Turning to the purpose of this article, I am going to first go through the major indices in the context of canaries in the coal mine to see what kind of shape they are in for the long-term. Then we will look at the four key sectors before finishing up with the NYSE A/D Line and high yield bonds.

For those new to my semi-regular canaries in the coal mine pieces, it’s my way to gauge the health of the bull market over the long-term. The stock market has corrected, 10%, 15% and even 20% without warnings from the canaries, but the canaries have always caught big bear markets. When we saw 10-20% bull market corrections, the canaries just tell us that the bull market isn’t over and to expect new highs at some point. This was the case during the 10-20% corrections in 2010, 2011, 2015 and 2016. And they were right each time.

The canaries did a very good job of warning about 2000 as well as 2008, however, keep in mind that they may give a few false warnings before the real one hits. It’s not a trading system and it really only matters when certain indicators are making new highs while others aren’t. I typically combine this with some really big picture indicators, like margin debt and sentiment, to fully gauge whether stocks are healthy or warning of a new bear market.

With all that said, let’s look at the major stock market indices. The Dow Industrials are first and you can see that along with the S&P 500 in the second chart, both saw their most recent highs in August.

The S&P 400 mid cap is next and it scored its most recent high in September which is good because this index usually peaks before the Dow and S&P 500 or coincidentally.

Below you can see the Russell 2000 which made a high with the S&P 400 in August and a slightly higher high last month, underscoring the market’s comfort level with risk in the small caps. The Russell usually peaks well before the Dow and S&P 500 as a new bear market begins.

Finally, the tech laden NASDAQ 100 is below and it just hit its most recent high last week. This is very supportive of the bulls over the long-term as this index is a leading bellwether

With the NASDAQ and small caps leading the major indices, the bull market is alive and well and not close to ending, regardless of what happens over the next day, week or month.

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