Archives for July 2018

Market May Need Some Help from Banks

If you follow me on Twitter, you know I wasn’t enthralled with Friday’s session. While price action in the major stock market indices was strong, more stocks were down on the day than up. Additionally, banks reacted poorly to earnings and high yield bonds closed at their low of the day. Again, it was only one single day, but there was some mild weakness beneath the surface.

On the sector front, there isn’t much new. Discretionary is the lone leader among the four key sectors. Semis and transports continue to be the most frustrating for bulls and bears as strength is sold and weakness is bought without much progress being made by either side. Banks are a little weaker as they head to the lower end of their range. With earnings being released on a daily basis, we should see some large moves. As I mentioned on Fox Business with Charles Payne the other night, the most bullish thing the banks can do is to go up in the face of bad news. That kind of behavior could signal the start of a major rally in financials which would certainly juice the broad market.

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Trapped Again. What Do the Bears Do Now???

Following up from the piece earlier this week, Bull Markets Don’t End Like This, the path of least resistance continues to be higher even though the Trump administration added tariffs on another $200 billion in Chinese goods. As you would expect in the most powerful bull markets, the news was just a one or two day pullback/pause after stocks had appreciated 3% over the previous four days. In other words, it was yet another in a long line of bear traps.

I still cannot get over how many people absolutely refuse to analyze the data and believe the facts. They either became negative way too early or never even got off that mark after 2008. If you get sucked into the rhetoric instead of reality, I guess the consequences are severe. Now, don’t get me wrong; this whole tariff war is going to end badly for everyone involved. Unfortunately, I feel confident about that. However, that day isn’t today or tomorrow and stocks still look attractive, appealing and like they want to move much higher first.

The Dow Industrials have finally started to show signs of leadership. We will have to see if that’s real or fleeting. After that the NASDAQ 100 is the leader. Unusual combination? Yes, but as long as we have some of the relatively riskier assets leading, that’s okay. Ultimately, the S&P 400 and Russell 2000 will die before the rest and the Dow should one of the ones left standing at the end.

Finally, it would be nice to get the high yield bond sector moving, even though I strongly believe it has peaked for this cycle. That’s okay, though. There is still money to be made here using shorter-term time horizons.

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Bull Markets Don’t End Like This

Over the past week we have seen two decent signs of the low along with two disappointing signs for the bulls. On Thursday, it became clear that the bulls were just teasing the bears and that the path of least resistance was higher. I was also heartened that one of my primary short-term models turned positive before the July 4th holiday.

From here, I fully expect the S&P 400, Russell 2000 and NASDAQ 100 to score all-time highs this month. I think the S&P 500 will follow suit this quarter. The Dow Industrials have been lagging all year as the Trump tariff tantrum weighs heaviest on that index. I still believe the index will see all-time highs, probably this quarter, and should finally lead if there is any break in the tariff dispute.

While high yield bonds have struggled mightily over the past month, they have perked up a bit over the past week. However, they are back to stinking and remain my biggest concern for the long-term health of the bull market. I do think this canary has died for this cycle.

Finally, the best news of the day is that the New York Stock Exchange Advance/Decline Line has surged back to all-time highs, a condition that typically insulates stocks from a bear market, at least 90% of the time. While it’s not foolproof, a 90% accuracy rate is good enough for me. The perma-bears and bear market proponents are barking up the wrong tree, for now.

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Banks in Trouble

Stocks ended the month of June with the bears showing a tiny bit of teeth during the afternoon as the major stock market indices gave up most of their gains. The multi-week June swoon looks to continue at the open on Monday as more of the Trump tariff tantrum weighs on stocks with Canada now fighting back. Semiconductors also have some negative news and that supports my concern of leadership change from the the NASDAQ 100 to perhaps the value stocks.

As I mentioned last week, banks got through their stress tests and looked to run sharply higher as trading began on Friday. That celebration was short-lived as sellers came in and closed the sector at its lows for the day. It is certainly not a good sign when a beaten down sector can’t rally on good news. Couple that with a flattening yield curve and lower intermediate-term interest rates, the banks are concerning me and will continue to do so until they show some leadership.

By the way, when I write about the banks, I generally mean financials although sometimes their paths diverge. The broad-based financials are below and you can see that both sectors move pretty much in lock step.

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