Archives for January 2018

Trading Range Quietly Sets In

Two days ago, I wrote about a vicious, nasty and wicked reversal across the stock market. While the pundits and naysayers concluded various bearish scenarios, history and facts didn’t back that up to any strong degree unless you wanted to cherry pick. More times than not, after a one day, ugly reversal, a short-term trading range sets in, which I see occurring right now.

Interestingly, the biggest reversals this week were seen in the S&P 400 and Russell 2000 and those are the two indices which seem to offer the best upside right now. Semis, software and homebuilders have already overrun their reversal days with a few more sectors getting closer.

It certainly wouldn’t be a bad thing to have stocks pause and digest here. Intermediate and long-term studies continue to suggest higher prices while short-term studies, which have been wrong for months, suggest otherwise.

The real story is in the bond market where the yield on the 10 year note is breaking out. More on this next week.

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Nasty, Wicked, Ugly Reversal

No sooner did the ink dry on yesterday’s blog than the markets saw a very ugly and wicked reversal which saw the Dow give up almost 400 points from high to low. The “feel” I wrote about turned out to be prescient pretty quickly as volatility spiked in a huge way on a relative basis. Check out the chart of the VIX below over the last two days.

When you look at any of the major indices, sector or stocks, you will see what looks like a horrid reversal on the candlestick charts with prices opening at the top of the candle and closing at the bottom, a tall, red candle. The S&P 500 and Russell 2000 are below.

Most of the sectors look very similar to the indices so I will pick on biotech as it gave back the most ground I could find.

While these reversals look absolutely terrifying on the surface, especially when we hear pundits invoking the peaks in 2007 and 2000, historically, their bark is worse than their bite. Some do lead to declines with some declines of major significance. However, most just lead to a short-term bout of weakness or a mild pullback. Several other warnings would need to be present before I would consider one of these reversals to be ominous.

Of note, high yield bonds finished higher on Tuesday along with consumer staples which is now on breakout alert. Utilities are the sector which has been decimated as bond yields have jumped. They are getting close to an area where regardless of where they are ultimately going, a rally should begin.

I wrote about volatility picking up and that’s exactly what’s happening now. However, contrary to popular opinion, bull markets do not end with volatility just increasing from all-time or yearly lows. It’s months or more to work that higher before a bear even becomes possible. Breaking the back of a bull market is not a point in time. You can certainly expect the bulls to make a stand sooner than later.

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Volatility Index Acting Weird as Stocks Just Continue Higher

A new week begins and to no one’s surprise, stocks are set to open sharply higher. Even during the Dotcom bubble, stocks took a breather every now and then. In fact, they became very volatile during their melt up phase. That’s an element that has been lacking during this leg of the bull market.It’s not a great chart, but take a look at the volatility index below, also known as the VIX.

Essentially, since the year began, this index has gone up along with stocks, That is very unusual behavior as historically, stocks and the VIX move inversely, meaning they move in opposite directions. Behavior like this would typically lead to a pullback in stocks, but as we have seen time and time again, this is anything but a normal market environment. It’s something to keep an eye on.

I hate to use the word “feel” because as my golf coach would always lecture, “feel is not real”, but I do get the feeling that one of these sharply higher openings is going to be met with a nasty reversal to the downside. It may only last a day or even a week, but it should look a bit ugly. In this case, the VIX should likely spike higher than normal. Again, we’ll see.

Stocks continue to do nothing wrong to derail the bull market. The major indices are all in gear to the upside. Sector leadership is very strong. High yield bonds are participating. The NYSE A/D Line is making new highs. Nothing suggests an imminent end to theĀ  bull market, no matter how uncomfortable price action makes you.

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Small Caps Breaking Out. Certain Sectors like Dotcom/Bitcoin

After finally seeing a down day, the bulls came right back to work on Thursday with a blistering effort and very strong internals. That trend looks likely to continue into the holiday weekend. The real star of the day was the Russell 2000 index of small cap companies which had generally been consolidating nicely before bursting higher. You can see the blue line below which shows a ceiling where price has stopped three times before, also known as a flat top. Once price breaks out above the flat top and closes above it, it is typically a very positive sign. Unless small caps fail right here and close back below the blue line next week, they should continue to move higher and lead.

Looking like a Dotcom stock or Bitcoin, these two stodgy old sectors are in melt up phase. Both industrials and transports have been overpoweringly strong. I wrote about the bullish potential for transports near the bottom in November and they have exceeded my wildest upside projections so quickly.

Yes indeed. This is certainly a one of a kind bull market that won’t be repeated again anytime soon. I am just waiting to hear from folks that bear markets won’t happen again or stocks have a long way to go, although strategist Tom Lee did come out this morning and forecast another 300% to 500% left on the upside. SIGH…

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One Down Day. New Bear Market?

In what continues to be an epic start to the New Year, the stock market finally did see a down day, albeit very small. The major indices closed fractionally lower without any damage being done. Yes, some have mentioned that the rally is “narrowing”, meaning less participation, however the NYSE A/D Line just hit an all-time this week. That’s a hard case to make that trouble is looming.

Other have noticed that some of the weekly employment data is just beginning to soften and that sometimes leads to recession 6-18 months later. Okay. No arguments.

High yield bonds? While they are down this week, they have certainly kicked it up a notch over the past new weeks.

With all of the major stock market indices at all-time highs and in gear to the upside, it’s really hard to find fault here for more than a mild pullback. As I continue to offer, strength does beget strength.

On the sector front, leadership is very, very strong, especially for so late in a bull market. Banks didn’t wait long to reward my forecast of new highs this quarter. Transports and discretionary continue to soar higher. Semis revisited their November peak this week and have paused for the time being. Putting it all together, this is not the kind of behavior stocks typically see before a significant decline begins, let alone the end of the bull market.

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Melt Up Continues as Goldilocks Rules the Employment Report

Four days in the New Year, four straight for the bulls. All major stock market indices remain at all-time highs. Nothing has been able to stop the stock market from surging higher. In fact, the move has been so powerful and widespread that after almost 9 years and 19,000 Dow points, the masses are FINALLY embracing the bull market. This can be seen in AAII sentiment figures, consumer confidence, Bitcoin and general public banter about how stocks have only one direction to go, up.

While that may be true, after 29 years in the business, when something seems so easy or so assured, it usually ends in ugly fashion, sooner or later. In this case right now, I think it’s the latter. Epic momentum which is exactly what we have now, doesn’t dissipate overnight. It not only takes time, but a series of rallies and declines to break the spirit of the bulls.

On Friday, the monthly employment report was released and it showed fewer jobs created than forecast, but still coming in close to 150,000. This number falls in the Goldilocks range of not too hot and not too cold. It means the Fed can continue on its shallow glide path of interest rate hikes in 2018. Of particular note, African American unemployment fell to the lowest levels ever. And those data go back to 1970. Yet another good piece of economic data.

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Junk Bonds Stepping Up. Everything Seems PERFECT!

Snowmageddon ’18 is here!

Let’s make it two straight days in the New Year and two straight all-time highs in the major stock market indices with Dow 25K up next which was my next target after 23,000. After five straight closes above 25K, 30K will likely be the next target. So far, stocks have done nothing wrong and I do not believe the rally is ending here. However, I do think that the market is going to form a short-term peak over the coming week and either pause or see a mild pullback before moving higher again.

Each successive rally is its own test and stocks haven’t failed a test in an awfully long time. If you want to find fault, you can point to the lagging banking sector or high yield bonds although the latter looks like its trying to kick it into high gear and lead now. Participation has been strong and excellent with the NYSE A/D Line seeing all-time high after all-time high.

Sentiment has certainly become greedy and giddy which is a negative. It seems like everyone is bullish on 2018 which concerns me, however, there is a scenario that I have mentioned before where the masses throw in the towel and stocks melt up to their final bull market high above Dow 30,000. For now, continue to enjoy the gains. Stocks are priced for perfection without much margin for error. I will try not to overthink it…

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Santa Arrives Late. Bulls Back in Control

Between my concerns about the last five days of the year and then the bullishness of the first day of the New Year, the market has been cooperating. Monday’s burst to new highs in essentially all of the major stock market indices puts the bulls firmly back in charge with the likelihood for some upside follow through on Wednesday. None of the major indices are doing anything wrong at the moment and they are all in sync to the upside. As such, unless the bears surprise today, the Santa Claus Rally will not fail to call and bears will not come to Broad and Wall, at least not in the near future.

While discretionary and transports both say all-time highs to begin the year, banks and semis did not. While neither of the laggards look worrisome, it’s something to keep in the back of your mind for later this quarter, especially if they start to decline when everything else rallies.

Sentiment is getting a little giddy as options traders are betting on a continuation of the advance. They don’t normally win. It looks like stocks should be building towards a short-term peak over the coming week or so before heading higher again later in January or early February to what could be a more meaningful high.

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Weak Close to 2017 Indicates Bounce to Begin 2018

Back to work. Lots going on. Many crosscurrents. I hope you had a safe and enjoyable New Year’s celebration. I am still thawing out from so many days in Vermont without seeing the thermometer get above 0. The stock market begins the new week, month, quarter and year with a rather disappointing close to 2017. It has been something on my radar screen for a few weeks as recent history has not been kind to the bulls over the last five days of the year. The S&P 500 needs to gain 11 points over the next two sessions to avoid triggering a failure in the Santa Claus Rally which I wrote about HERE.

Favoring the bulls on Tuesday is a trend which is active because the last day of the month closed lower, but the month was still higher. It has a high degree of accuracy. Additionally, the last week of the year was down in an otherwise up month and year which puts the market in a position to bounce to begin the New Year. During this bounce, the NASDAQ 100 is the odds on favorite index to lead higher.

Working against the bulls is that all five major stock market indices put in somewhat ugly reversal days, meaning they began the day at their highs in positive territory, but ended it at the lows in negative territory. All four key sectors followed suit to the negative.

High yield bonds bucked the trend to finish higher although they have been lagging and under pressure for the past two months. Crude oil, gold and other commodities also continued their uptrends and it will be interesting to see if they can hold ground. Finally, the Euro is at a crossroad and the currency may hold the key to what we see in equities over the coming few weeks.

Lots going on. More than any other time of the year.

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