Archives for December 2019

Was That All?

On Wednesday, I wrote that stocks were supposed to bounce and not to be surprised if they regained all they lost a few days earlier. However, the odds did not favor the whole pullback/consolidation being over. I am still in that camp although with this morning’s much stronger than expected employment report and the pre-market surge, I guess I have to be open to the notion that the little bout of weakness is over. We will certainly see in the coming days if all of the major stock market indices can hit fresh highs.

As I have mentioned for a month, by turning neutral to slightly negative in the short-term, it simply meant that I was basically in a holding pattern and not committing new money to stocks nor raising risk levels. In a perfect world, any pullback would be used to make some small modifications for the run into year-end I have been discussing.

I have been saying that leadership from the Dow, S&P 500 and NASDAQ 100 should cede to the lagging S&P 400 and Russell 2000. I continue to believe that with the two latters finally hitting all-time highs early in 2020. My four key sectors are all in good shape. Semis and banks continue to lead and be strong. Transports have a strong ceiling overhead but I expect that to be breached in early 2020.

Discretionary offers an interesting opportunity as you can see below. Price has been in a range for 6 months with continued compression. Highs are lower. Lows are higher. Think of a coiled spring. Usually, prices will ultimately continue with the previous trend, in this case, higher. Sometimes, prices breach one side first as a fake out and the immediately head in the opposite direction, trapping the masses. In this case, while I believe the upside will win out, it doesn’t pay to take a stance right here.

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3 in a Row for the Bears as ISM and Trump Give Aid

The bears are on a three day winning streak with Tuesday scoring the most points and the chorus growing louder that this is anything but a harmless little pullback. On Monday, the media chalked up the decline to the ISM survey which was disappointingly weak. If that was truly the case, why did bonds also sell off? If the economy was weakening, shouldn’t bonds have rallied? My good friend, Tony Dwyer (@dwyerstrategy), offered that the media reported a disappointing number based on one account whereas another account showed that number to be stronger than expected. Tony said that stocks were just looking for an excuse to decline, something I have been writing about for three weeks or so.

On Tuesday, the on again, off again trade tantrum with China was suddenly back on as President Trump’s 5:15am off handed comment about possibly not having trade deal in place with China until after the 2020 election may be the best course for the U.S. That sent overseas markets plummeting and the U.S. stock indices opened near its low for the day with the Dow down more than 400 points. From there, very quietly, stocks slowly crept higher all day and into the close. With so many money managers sitting on boatloads of cash and only four weeks left in the year, there won’t be many more opportunities for folks to buy into weakness in hopes of playing some catch up into year-end.

Looking at the major stock market indices, the Dow has pulled back to a logical area to find buyers. The S&P 500 and NASDAQ 100 still have another 2% or so to go. The weaker S&P 400 and Russell 2000 are basically there. However, I still don’t believe the all-clear has been sounded. Stocks are supposed to bounce from here, so don’t be surprised if they regain all that was lost on Tuesday. However, I don’t have strong conviction that the mild pullback is 100% complete.

Speaking of the weak Russell 2000, I direct you to the chart below and the lower horizontal, blue line. It seems like bull and bear alike has been focused on that line in the sand for some time in the small caps. As you can see on the far right of the chart, price finally broke above the blue line which simply represents the top of the trading range we have seen all year. While the bulls began to celebrate, it was short-lived as the bears immediately put up a fight, pulling price back into the 2019 range. Chartists will call this a false breakout, which can be a powerfully bearish signal if we price follow through to the downside, something I am not counting on just yet. I think the bulls have some dry powder up their sleeves and will not allow the bears to make much progress this month.

December is off to a less than stellar start, which is somewhat typical as I mentioned on Monday. Stocks usually find a low around the third Friday of the month, plus or minus a week. I expect this December to be no different. The cracks in the pavement I have been discussing for three weeks won’t be magically fixed and if my scenario is correct, price will rally despite these warnings into what may be an even bigger warning come January.

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Lots of Action Across the Board – Stay Alert

Welcome back from Thanksgiving! I hope you had a safe, fun and meaningful holiday!! For me, I was very thankful to be alive after my mid-May mishap. As usual, I will have the various details of the Schatz Thanksgiving feast in an upcoming Street$marts.

With 11 full months in the books, December trading starts today. The last month of the year is typically a very bullish one, especially when it begins in rally mode. 2018 was certainly an outlier that caught the masses off guard. I do not believe 2019 will look anything like a year ago and I expect more new highs into January before things possibly change.

When we left off last Monday, I wrote about the holiday-shortened week being bullish with healthcare being the biggest surprise of late and how much I liked the behavior from my key sectors. A week later, I can revert back to my previous position of several weeks being short-term neutral to a little negative into what I think will be an up opening. I don’t see anything big on the downside. Just a little pause or mild pullback. All that means is that I am not really interested in committing new money or raising risk, just staying the course until something changes.

The “haves” on the index side hung in well on Friday with the “have nots” struggling. I want to see how the mids and smalls fare on Monday. Semis, transports and banks all look like good buys into weakness. Discretionary may be as well but that group hasn’t acted as well as the others. Industrials and materials remain strong and biotech looks like a tech stock from 1999. Energy is the lone dog and it’s susceptible to tax loss selling for another few weeks. I changed my tune about utilities over the past weeks and no longer love that sector. Too far, too fast with way too many people turning positive. I do, however, still like Staples on the defensive front.

High yield bonds had a really nice week last week and I expect that to continue into the New Year. Commodities, but crude oil in particular, had an awful close to the week and I want to see if that was an illiquid aberration or the start of something more on the downside. Gold, however, looks interesting for more than just a few days as long as last week’s low isn’t breached on a close. The gold stocks could be starting a rally into the New Year.

In the next update, I will discuss the breakout in the small caps and if it’s real.

Lots going on.

Stay tuned…

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