Archives for June 2019

Change in Character. Opportunity for the Bears

Earlier in the week, I offered that very short-term, nimble traders could sell the rally as stocks were beginning to look a little tired. I stick by that and still believe that’s a good strategy. Since then, several of our models have started to turn negative which changed my tone to be more defensive and less “risk on”. I think that will likely be the case into Q3 although that’s purely a guess. Of course, I could be wrong and might have to chase stocks higher down the road.

When I do a quick sector review, most of them look very similar with the exception of the defensive ones. They look tired which can be corrected by sideways movement or an orderly pullback. Utilities, REITs and staples look much healthier unless they close below their lows of last week. High yield bonds are holding up really well and that is one sector worth keeping front and center. Without junk bonds rolling over, it will be difficult for the bears to make much noise in stocks.

On the horizon we have the Fed set to meet this month along with the G20 and the anticipated meeting between Trump and Xi. Either could be a positive or negative catalyst although I have a tough time believing that Powell & Co. will cut interest rates this month.

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Sell the Rally? Mexico, Mega Mergers and Meat

The markets start the new week with an absolute cornucopia of news. We have mega mergers, Mexico, meat and employment. Obviously, the most important news comes as no surprise to anyone; the deal with Mexico to avoid the first in a series of tariffs on Mexican goods in response to the border and immigration. Stocks rallied sharply last week with an expected deal with Mexico as a significant contributor. The weaker than expected employment report on Friday was greeted with cheers as the markets were now expecting the Fed to cut interest rates at least three times by the end of Q1 2020.

After the strong run last week and the big up opening expected today, the stock market certainly has the feel of an opportunity to sell the news for the very short-term, nimble trader. Just like stocks went down very far an very fast, they rebounded in similar fashion. There is nothing wrong with taking a few chips off the table for a few days or so. Let’s see which indices and sectors lead today and how they close. Utilities saw a big downside reversal on Friday. If other “risk off” sectors follow, that could see funds eventually flow into my four key sectors which are “risk on”.

I want to finish by offering a few comments about the hottest IPO of 2019, Beyond Meat. The stock has now surged from roughly $40 to more than $160 in about a month. While everyone was focused on Lyft and Uber, this teeny, tiny company with a sliver of revenue has gone absolutely parabolic, reminiscent of the Dotcom days. There is no way to justify this behavior. It’s pure speculation, greed and froth. I don’t care about its future prospects. Should we start to see other IPOs behave like this, we will have a much bigger problem on our hands. For now, I consider thisĀ  a one off.

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Stocks Bottom on Schedule Catching Most By Surprise

For the last two weeks, I have written about the bottom I saw coming and how I would favor stocks over bonds. I didn’t write about a 10%+ correction nor a bear market beginning. I was very clear that I thought the stock market was experiencing a routine, normal and healthy bull market pullback that began on May 1 after the last Fed meeting. On May 13 as many of our short-term indicators signaled that the vast majority of the weakness should be over, I was concerned that the decline did not seem complete. I thought we needed to see at least one more move to new lows where the major stock market indices did not close near their lows for the day. We saw that on May 29 and again on June 3 where the pullback appeared to be over.

As I write about all the time, bull markets typically end a certain way. At the peak on May 1, there was not a single indication that the bull market was ending. As the pullback gained steam, there was an ever-growing chorus of gurus calling for the end of the bull market for all of these far fetched reasons like tariffs and recession. The market said otherwise. I was surprised at how investors were reacting to a little ole 6% pullback.

Option traders in the bottom half of the chart below were positioning for much lower prices. As you know, en masse, they are usually wrong. Sentiment surveys were showing a spike in bearishness that is usually seen after at a 10% decline. I don’t what had people so amped up for lower prices, but they were quickly punished.

As stocks bottomed this week, the media scrambled to assign credit for the low. First it was Fed Chair, Jay Powell, who essentially said nothing new. Then it was some mildly weaker economic data followed by hopes that a deal with Mexico would be reached. Today, we hear that stocks are rallying because monthly jobs data was weak and would lead to a rate cut. I also saw the media say that stock are up because Chinese President Xi said he likes President Trump. You just can’t make this stuff up.

As stocks have been rallying, look at the lower chart below which represents the number of stocks making new 52 week highs on the New York Stock Exchange. There is real underlying strength here and clearly no sign of a bear market or major collapse.

Finally, among many things in the media which have been wrong, I found it so beyond “curious” that word leaked out that famed investor Stan Druckenmiller had sold all of his stocks and bought treasury bonds after Trump’s tweet regarding Mexico. What took so long? Why did it come out precisely as stocks had bottomed? The skeptic in me wonders whether the timing coincided with Druckenmiller trying to buy stocks again after they already left the starting line.

It’s amazing how quickly stocks turned on a dime and the news narrative has changed from all of the negative consequences concerning tariffs and the coming recession to the Fed about to begin a rate cutting cycle which would rescue the economy and markets. My tune has never wavered. The bull market remains alive and al-time highs should be seen in Q3.

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Volatility to Continue But Bull Market Remains Alive

Last Thursday night, I wrote a quick piece about the latest tariff tantrum from the President. Early indications were that the stock market was looking at a very ugly opening on Friday. Bears were hoping for an all-out rout, but I wasn’t sensing that. In the end, most of the major indices closed slightly lower than they opened, meaning that not much transpired during market hours.

As we start the new week, I would expect the bears to make some more noise sooner than later. Pre-market indications have stocks down again. Whether it’s today or tomorrow, the bulls should try and step up to stem the tide. If Monday is a big down day, I would froth at the mouth to buy a down opening on Tuesday. If Monday morning sees another wave or two of selling, I would use that as an opportunity to commit capital to stocks.

Stocks are down 6%+ from the May 1 high. Investors are acting like it’s down 10%+. Sentiment is very negative. Options traders are lining up with negative outcomes. The New York Stock Exchange Advance/Decline Line hit its all-time high last Monday as you can see below. 90% of the time, bull markets don’t end like this.

June should be a volatile month and the bears could push a little lower before all is said and done. However, at this point, investors need to be on guard for some out of the blue good news to reverse the trend. Yes, as much as it pains me to say, it could be a tweet.Gold is acting well as are emerging markets. Be careful with long-dated bonds. They have melted up and ripe for a downside reversal

The bull market is definitely not over and I am looking for all-time highs in Q3.

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