Archives for May 2017

Odd Day on Thursday Gives Warning

Thursday was an interesting day in the stock market. All of the major indices were up nicely in the morning. And while the S&P 500 and NASDAQ 100 continued making new highs into the afternoon, the S&P 400, Russell 200 and Dow Industrials did not with the first two seeing real weakness during the afternoon.

Additionally, even though the NYSE A/D Line and high yield bonds also scored new all-time highs as you can see below, the former went from +1400 net advances to +100 (second chart) even though gains were strong in the S&P 500.

While one day doesn’t mean a whole lot in the grand scheme of things, I did want to point this out as it’s very unusual behavior and may signify a market that’s a little tired over the short-term. It says absolutely nothing for the intermediate and long-term.

Any and all weakness remains a buying opportunity until proven otherwise. Dow 23,000 remains our next upside target for the Dow, possibly later this year. The bull market is intact.

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Bulls Are Resilient

On May 8th, I first started discussing what I saw as a skewed risk/reward ratio with 500 possible points of upside and 1000 points possible on the downside. Over the years when there was a decent chance for stocks to decline, I often referred to it as a window of opportunity that stays open for a period of time before closing.

Three weeks after my comments, stocks have basically gone nowhere. We saw a brief dip when the “hysteria” over Russia and Jim Comey came out, but as I said at the time, it’s reality over rhetoric and the markets and economy don’t really care about all the nonsense. With high yield bonds and the NYSE A/D Line at fresh all-time highs, the window for a decline is quickly closing and may be closed.

The longer we go without another bout of weakness, the less likely it is to happen. The leaders keep on chugging and the laggards show no signs of stepping up. In short, stick with what’s been working until proven otherwise. Semis, tech, industrials and discretionary. At some point, energy is going to stop behaving so poorly, but I want them to prove it. With oil up from $44 to $51, the energy stocks have barely lifted their head. That’s just plain ugly and perhaps getting to the point where it’s so bad that it becomes good.

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Missing the Excitement

While nothing has really changed regarding the risk and reward for stocks, the bulls have moved the major indices a bit further than I thought they would after last week’s one day drubbing. Frankly, I thought we would see a few days up and then rollover for another decline towards the lower end of my risk range, Dow 20,000. Instead, the Dow is in the upper middle, giving the edge to neither group.

The bears can point to the Russell 2000 lagging badly or banks not participating, but in the end, with high yield bonds and the NYSE A/D Line at new highs, any and all weakness has to be bought. Now, if the banks, discretionary and transports all rollover here without rallying first, then, we have some more things to worry about. Unless and until, Dow 20,000 or so looks like the downside with Dow 21,500 as the upside. It’s not too exciting…

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Bears Whipped into a Frenzy. Half Way There

I find it mildly amusing that after a 3000 point rally in the Dow, bears and pundits have been whipped into a frenzy because the Dow went down 370 points in one day. Talk about overly dramatic and idiotic. The bull market ain’t over folks, the same line I have said every day, week, month, quarter and year since 2009. Disavow and hate as they may, the bears have been, are and will be wrong.

Don’t get me wrong. One day, the bull will end, but it’s not right here and the signs aren’t there for an ending so soon.

Wednesday’s decline did much to begin to build the next wall of worry for the Dow to run to 22,000 and perhaps hit my 23,000 target. The Dow is now half way to my downside risk area of just below 20,000. The trading range, pullback in four of the major stock market indices which began in early March continues today.

Semis, banks and transports were hit very hard yesterday. Discretionary went down, but not nearly as much. Staples, utilities and REITs behaved very well, which is exactly what you would expect although in the final throes of a decline, the baby gets thrown out with the bathwater. I won’t be surprised to see these defensive groups get hit with the ugly stick if this declines makes it my downside risk zone.

When volatility explodes from low levels like it did on Wednesday, the normal pattern is a period of heightened volatility long after the final low is made and stocks begin their next assault higher.

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Impeachment? Another Watergate? What Will the Bears Say Next?

With yet another story “breaking” about President Trump, the markets seem to finally care, even if it’s only a short-term pullback which I believe it is. Day after day, week after week and month after month, there has been an ongoing deluge of negative stories in the press about Trump, whether deserved or not. The markets just kept yawning and moving higher.

Until today.

I would expect a barrage of impeachment calls and calls for independent investigations, etc. Markets will likely keep an eye on this, but I absolutely do not believe the bull market is over. This should be nothing more than the short-term pullback I have written about. Remember, for a few a weeks I have offered that the upside is roughly 21,600 on the Dow while the downside is just below 20,000. That makes the risk/reward against the bulls over the short-term.

For today, let’s see where the major indices close versus their open. If the bears are going to step up, you would expect them to make some downside noise and print an ugly tall, red day.

This pullback should be used as yet another buying opportunity. I do not believe this is a repeat of the 1970s and Watergate. The economy and markets certainly look nothing like that period. Don’t get shaken out by the headlines!

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Reality over Rhetoric

The markets begin the week with little changed from last week. Volatility remains absurdly low, but remember, regardless of what you hear on the financial shows, markets do not go down just because vol is low. And bull markets do not end with vol so low.

The major stock market indices are not in sync. The Dow continues in its range but looks to be testing the top of it. The S&P 500 should try to poke above its range and test all-time highs. The S&P 400 and Russell 2000 have pulled back the most and stopped exactly where they needed to to remain healthy but lagging. And the NASDAQ 100 remains the lone big winner, continuing its unabated, nearly vertical move higher. While nothing here is worrisome overall, I would rather see the majority behaving similarly.

On the sector side, it’s more of the same with transports and banks looking alike and needing some help. Discretionary is close to all-time highs and needs to get there this week while semis, like the NASDAQ 100, just continue to blow off higher.

All year long, I have talked about reality over rhetoric when it comes to DC and Donald Trump. Don’t get caught turning negative like so many have before because of the president’s unique behavior. It’s not relevant to the markets nor economy. The economy should print is a very strong number for Q2 and Q3 and the employment reports are solid. Of course, so are the markets although I continue see more limited upside than downside.

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Lines in the Sand Drawn

We saw a fairly strong selling wave on Thursday during the first hour of trading. However, by mid afternoon, the bulls stepped right back up and recouped all of the losses before closing modestly lower. Their resilience continues. Given how most of the major indices are positioned, the bulls need to score new highs sooner than later to reset the clock. On the bears’ side, a close below Thursday’s low should set a deeper pullback in motion. That’s the one I have had my eye on since last week.

Sector-wise, it’s more of the same, however, the banks are under more pressure and may be in jeopardy of a decline to new lows for 2017. That would certainly weigh on the stock market. High yield bonds, on the other hand, remain solid and that’s why I am not looking for much more than a modest decline towards Dow 20,000.

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Bulls Still in Control Over Long-Term

Let’s continue on the same theme I started the other day, risk versus reward. While I firmly believe that the bull market remains alive and fairly healthy, I do not like the risk/reward right here. My view is that Dow 21,600 is the upside ceiling while downside risk looks to be 20,000 or even a little lower. That’s just not the set up you want over the long-term and I think pruning and protecting is the right call here, whether it works out or not. Longer-term, Dow 23,000 remains my target. I am definitely not a bear nor calling for a bear market or even a correction.

When I look at sector leadership, I see that semis and discretionary are making new highs in sync. That’s healthy. Banks and transports remain in ranges which is neutral. Junk bonds are still strong and the NYSE A/D Line is essentially at all-time highs. Bear markets do not begin with this kind of internal strength. Don’t overthink this. We have a short-term red flag. That’s it.

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Sell The News

Not much has changed in the stock market since last week as volatility continues to be historically low. While the S&P 500 poked above the recent range on Friday, the rest of the major indices weren’t exactly in line. That’s not a big deal. Small caps looked like they were getting ready to step up, but we haven’t seen signs of confirmation just yet.

Two things I did find interesting were the April employment report, released on Friday as well as the French elections on Sunday. 211,000 new non farm jobs were created in April which came in better than expected and further supports my thesis that Q1 has become habitually weak. 211K is also significantly above April 2016 so on the jobs front, the economy is improving.  In France, with both major parties left out of the final runoff, centrist Emmanuel Macron soundly defeated Marine LePen, very much as expected. Even the crummy pollsters couldn’t screw this one up.

I noted on Twitter late last week that it seemed like stocks had fully priced in a decent employment report as well as Macron victory. With a much better than expected jobs report, stocks should have rallied much more. And in fact, I attribute the afternoon strength to investors covering shorts (bets against the market) and getting longer into the Macron victory. It certainly seemed like “everyone” wanted to own stocks before the weekend, which is very different behavior from recent Fridays.

While people are celebrating Macron’s win, the markets should respond without much fanfare. Should stocks rally at the open on Monday, I would view it a gift of a selling opportunity. But really, anything other than a selloff at the open may be a short-term selling opportunity as stocks would not be responding favorably to good news.

This is not the time to chase the stock market!

I think the upside risk is 500 points higher and the downside is at least twice that. Taking some profits here is not a bad idea or at least protecting the downside.

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Looking for Mr. Volatility

Greetings from 39,000 feet as I am on my way home from the west coast. A quick visit in Scottsdale followed by my annual industry trade association conference in San Diego and I cannot wait to get home! If all goes well, that was my last trip to CA this year. It’s just brutal getting there from Hartford these days and the NY airports are a mess and awful to get to.

The Fed concluded their two day meeting today and as expected, interest rates were left alone. Given the recent weak patch in the economic reports, Yellen & Co. would have had a tough time justifying a hike. That should come in June. Normally, one or two of models offer a strong edge today or in the days after a meeting. That was not the case today nor the rest of the week. Stocks behaved as they normally do with a maximum move of plus or minus .50% until 2 PM and then a bigger move. However, it was still very quiet the rest of the day and volatility has all but disappeared, especially in the Dow and S&P 500.

Just look at the last 7 days in the S&P 500 below. Stocks have not only gone nowhere but the daily range from low to high has been historically small.

There’s an old adage that says, volatility compression leads to volatility expansion. It doesn’t say in which direction, however. That means we should be on guard for a larger move in the S&P 500 sooner than later. While the odds favor a move in the same direction as the previous trend, that assumption can be dangerous to your portfolio. If the upside and the bulls are to win out, they will need the S&P 400 and Russell 2000 to get back in gear and at least equally perform. Both indices have been big laggards of late.

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