Once Again, the Bears Get Left Behind, Waiting, Hoping & Praying

Greetings from LA! Hopefully, this is the final day of a long, three city trip. I always debate compressing my trips into fewer ones so I can get a lot accomplished with less flying. In today’s case, this massive winter storm will likely result in my flight being canceled to Denver. So, my fingers and toes are crossed that I can get back to CT tonight and not have to deal with the masses tomorrow.

Last Friday, I wrote about what looked to be some early morning weakness with the key being how stocks closed that day as I was looking for a low sooner than later. Well folks, we didn’t have to wait long for the bulls to step up. After watching the pause to refresh morph into the mild pullback all of 3.37% from high to low and -2.14% on a closing basis, the bulls decided it was time to commit some cash.

All year long, my theme has been the same and unwavering. The Q4 decline saw the masses raise hundreds of billions of dollars in cash. When stocks bottomed at Christmas, they literally took off like a rocket and have not looked back. All those naysayers have been sitting and waiting for the other shoe to drop to reinvest their cash. They have disavowed and hated this epic rally right from the get go and every day ever since. They’re almost angry at this point for being so catastrophically wrong. I spoke with a few of those managers this week and instead of doing the mea culpa, they explained that everyone should look at 6 month and 14 month returns instead of focusing on their anemic 2019 performance. Interesting indeed.

For 11 weeks, the bears’ opportunity just hasn’t come. And stocks have pressed higher and higher. As I continue to write, when so many people are looking for a pullback, it rarely comes. In this case, the pauses were one to three day affairs. The recent pullback was five days but didn’t amount to much.

You can see how all this has played out below. The big test for the stock market will come when price tries to exceed that blue, horizontal line in the coming days or weeks. Right now, I am purely guessing that stocks will have a tough time breaking through and then running higher. I can certainly see a poke above and then pause or pullback and I can see a full break through and sharper reversal lower. Ultimately, as you know, I see all-time highs across all of the five major stock market indices with 30,000 as a possibility later this year. And while I am on it, Dow 50,000 in the 2020s.

As I said to CNBC reporter Fred Imbert yesterday, I think now that stocks have seen their first pullback since the bottom, the key is to watch which sectors lead from Friday’s low. That speak volumes about the health of the rally and I will comment on leadership in the next update on Friday.

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ECB & Feb Jobs Report Says NO to Fed

Greetings from 36,000 feet as I am heading from Florida to LA.

There were two major non-financial market news items from last week which I think warrant serious attention. The first was the European Central Bank (ECB) which downgraded their view of the European economy from 1.7% growth to 1.1% growth. That may not seem like “stop the presses” news, but with growth teetering around 1%, the ECB has to be very concerned about recession across Europe and not just in Germany. With that, a more restrictive monetary policy is dead on arrival.

The other piece of news was the February jobs report which came in at an anemic 20,000 new jobs, much, much less than expected. While this number is very volatile month to month and can be revised by 50,000 or even 100,000, the February report coupled with the ECB tells us that Jay Powell and the Fed is now definitively on hold for at least the next four to six months, if not the entire year. By the way, I absolutely believe that the Feb jobs report will be revised higher by at least 50,000, but that won’t change anything in my mind.

With Europe in trouble and China fading, there is no way our Fed is going buck the trend and push the envelope to normalize rates anymore. Just look below at the yield on the 10 year Treasury Note. In good economic times that are getting stronger, long-term interest rates would be rising, like we saw into October. Since then, 10 year yields have dropped from 3.25% to 2.65%, a clear sign that the bond market is worried about economic growth.

Why does this all matter?

Conventional wisdom says that stocks like lower rates as competition for money decreases. So if the Fed is done hiking rates, stocks should like that and go up. While that premise doesn’t exactly stand up to scrutiny, it’s worth noting.

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The Pullback to Buy is Here. But the Pundits Will Worry.

The pause to mild pullback eliminated the pause as the bears sunk their teeth into the markets a little deeper on Thursday. The March 4 peak and reversal day I referenced a few days ago now has a bit more significance although indices saw their highs on February 25. I am traveling so I won’t get to pay enough attention to the chatter, but I am guessing there will be some focus on the S&P 500 falling back to its average price of the last 200 days. Ignore it. It’s nonsense in here because the line is now flat, price can whipsaw around it and the other major stock market indices are no longer all lined up.

The S&P 400 and Russell 2000 continue to be the weakest indices, showing a clear “risk off” trend. That flies in the face of conventional wisdom because the dollar has been very strong which should hurt the huge, multinational companies and help those with the most domestic exposure. In other words, the mid cap and small cap indices should be getting a little tailwind over the large and mega cap indices. But as we know, conventional wisdom doesn’t always play out as expected in the markets.

Lots of chatter lately about the Dow Transports below and how much weaker they are than the Dow Industrials. Pundits have almost universally concluded negative consequences. But the data don’t bear that out. More on this next week as it’s time to leave Fort Lauderdale and head up to Orlando.

The theme for Friday should be weakness out of the gate. I fully expect the bulls to put up a stand later this morning or right after lunch. The key will come after that when the bears try to knock the markets to new lows. I think a low is coming sooner than later and the big post-Christmas rally ain’t over yet. All those people who have been waiting and waiting for the pullback to buy will probably miss the boat in here as they always do. Now, they will worry that stocks are about to collapse. I am certainly ready to commit the dry powder I have.

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Buy Weakness Until Proven Otherwise

Stocks are continuing the recent pause or mild pullback. Monday’s action saw the indices reverse to the downside and now we’re watching to see if the market can close below Monday’s lowest level to signal further downside. The Dow, S&P 500 and NASDAQ 100 have exhibited the best relative strength with the S&P 400 and Russell 2000 much weaker this week. On the downside, I wouldn’t expect more than a few percent with the Dow likely to find a little low above 25,000.

This is all in the context of the post-Christmas rally being alive and well. Many indicators have suggested that stocks should have pulled back long before this week, but they are all in unison when saying that weakness should be bought.

On the sector front, only discretionary is really holding up better than the market. The other three key sectors are under pressure in the very short-term, but still very strong. Defensive groups like utilities, REITs and staples certainly behave well to go along with the more economically sensitive ones.

Junk bonds are digesting nicely and the NYSE A/D Line remains a rock. Don’t read too much into some of my negative comments. Stocks remain on solid footing and should mount another assault higher next quarter.

 

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Pullback Over? GDP Report a WOWZA

All week stocks have been in pullback mode but it sure doesn’t feel like it. What is the S&P 500 down from its intra-day peak? Not even 1%. Overnight trading suggests a test of 2019 highs. Again, when the masses have been sitting in so much cash all year, waiting for stocks to go down 5%, 10% and 15%, it provides a strong cushion against such a decline. The slightest bit of weakness continues to be bought, until it isn’t. And then a real pullback will begin.

This slight pause in the major indices hasn’t even touched any short-term determinants of trend. No glaring internal weaknesses. No sector warnings. No nothing. The test will come at the end of the day if stocks are near 2019 highs.

On Thursday, the government announced that Q4 GDP grew by a much better than expected 2.6%. My non-scientific stab in the dark thought it would be much lower. 2.6% with the government shutdown and collapsing retail sales is astonishing. There continues to be widespread underlying strength against pockets of despair in auto loans, credit cards and housing. I keep hearing the naysayers scream about recession coming next month, but they have been saying that since the election of 2016.

It’s really amazing. In my 30 year career, I have watched Reagan, Bush, Clinton, Bush and Obama all preside over varying economies. Almost uniformly, everyone rooted for a strong economy regardless of political persuasion. It’s certainly no secret that I was anything but a fan of Mr. Obama. However, I knew that his success would be my success. For the good of the country and its citizens, we all put politics aside and cheered for economic success as everyone won.

Today, very sadly and pathetically, that’s no longer the case. While I understand 100% how polarized our country is and how much hatred there is for Donald Trump, the country has now stooped to a new level. And I have heard it firsthand. People actually overtly and loudly root for a serious recession so Trump will fail in his reelection bid. That’s seems like treason to me. How could anyone hope for unemployment to rise? For people to lose their homes? Wipe away their savings? Raid their retirement accounts? That is about as despicable and disgusting as it gets.

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A Pullback? What’s That??

After a nearly vertical rise in stock prices since the Christmas bottom, the market seems to have put in a short-term peak on Monday. There is nothing to suggest that this will be anything more than a routine, normal and healthy pullback which could be a few days and a few percent or a longer period of sideways action.

On Monday, all five major stock market indices hit recovery highs and new highs for 2019. On Monday, all four key sectors hit recovery highs and new highs for 2019. High yield bonds made new highs on Tuesday as did the NYSE A/D Line. All of this suggests large scale underlying strength and not the end of the rally.

Former Trump lawyer, Michael Cohen, testifies before Congress today. I fully expect it to be a circus. It will interesting to see if the markets react to his testimony or questioning.

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Running Out of Descriptions

The epic rally from the Christmas bottom continues unabated. leaving more than a few people scratching their heads. The rally just isn’t conforming to historical norms and all those people waiting on the sidelines have been left behind, completely and utterly embarrassed. Actually, most of those people just keep digging their heels in to hate and disavow the rally. I can’t even count how many of those fast money guys and gals look like bigger clowns than they already are.

Stocks “should” have paused and mildly pulled back already. But I guess that with so many people watching and waiting, the market just keeps confounding the masses and powering ahead. It’s hard to believe, but the Dow is getting close to all-time highs, something I forecast for later this year. And I have been one of the most bullish on record. Just like when they laughed at my bearish Facebook last August, they laughed when I called for all-time highs in 2019.

Semis, discretionary, banks and even transports are all long and strong. High yield bonds are clicking all-time highs. The NYSE A/D Line is at new highs. Eventually, one of these morning rallies will fade and stocks will pause. However, it will either be very shallow and not allow a comfortable entry or will be the beginning of the longer trading range setting in that frustrate bull and bear alike, but the bulls will have all those fat profits to sit on.

 

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VIX Says Full Steam Ahead for Bulls

While stocks “paused” on Thursday, it’s something you can hardly see on a chart. Since the Christmas low, all the market has given back has been one to two days here and there. Remember, in the strongest of trends, a two day pullback is really all you get until the first real trading range sets in to frustrate bull and bear alike.

Below is a chart of the S&P 500 followed¬† by the Volatility Index or VIX. As you know, when stocks go up, volatility usually goes down and vice versa. Interestingly and surprisingly, right at the Christmas low in stocks, volatility was at it peak. That is rare and unusual as the VIX usually sees less buying pressure right before it’s about to collapse when stocks bottom.

Anyway, for two months I have written about the unmagical level of 16 on the VIX. I have been waiting for the VIX to close below 16 to signal another “all clear” for bulls. 16 was important because you can see how it acted as a floor during the Q4 rally attempts. On February 4, it finally achieved that mark.

Finally on the VIX, it is now comfortably below 15. If somehow I am completely wrong and this whole huge, epic rally is a bull trap in an ongoing bear market, the VIX would not be below 15. In the 2000 to 2002 bear market as well as the 2007 to 2009 one, the VIX never traded comfortably below 15 until the entire bear market was long over.

So, no, I don’t think the rally is over. And no, I don’t think this is a bear market right now.

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Just Keeps Powering Ahead

By now there should have been some pullback, any pullback. But no, the stock market continues to defy the odds. Sure, there have been a few small pauses, but nothing close to even a 2% decline. All the way up, naysayer after naysayer just keeps disavowing and hating the rally. I do love how many people continue to revise history and say that they called the bottom and the magnitude of this rally. In my next life, I am coming back as a newsletter writer who never manages money so my performance can’t come back to haunt me when I stink it up.

At this stage in the rally, all five major stock market indices are making new highs for 2019. Guess what? So are all four key sectors. And so are high yield bonds. And the NYSE A/D Line just scored an ALL-TIME HIGH!

Seriously, what’s left for the bears to point to? The VIX? I said it was going to be late, but it, too, gave the “all clear” when it finally closed below 16.

Yes, at some point sooner than later stocks will pause and then pullback. But, I have been saying that for a while. What may end up happening is that when stocks finally pause or pullback, it ends up being a multi-month trading range to set up the next leg higher later in the year. It’s been one heckuva risk on market.

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No Cigar for the Bears

I had thought by now that stocks would have paused or taken a little 1-2% mild pullback. There was evidence last week. There was evidence over the past two days. So far, no cigar for the bears. This is very much typical behavior when the stock market emerges from a major bottom as we saw at Christmas. They just don’t give you a chance to comfortably buy after the train leaves the station. Any and all pauses and pullbacks are shallow until a real one does come which pretty much signals an intermediate-term period of pause.

The 200 day moving average certainly hasn’t stopped the bulls’ march. Overbought indicators haven’t done any damage either. All four key sectors are making new highs for this move as I type this. High yield bonds are close to all-time highs!

Finally, the NYSE A/D Line which you can see below is but one strong day from all-time highs! This makes me chuckle as I vividly recall how the vast majority of pundits said a bear market had begun and 2019 would be disastrous for stocks. Now, some of these clowns are revising history with the “but, but, but” nonsense instead of just doing the easy mea culpa. One of these “floor traders” and fast traders on TV was the loudest of loudmouths in December and early January, virtually guaranteeing the Dow was heading below 20,000 in Q1. He saw absolutely no scenario by which stocks could see a major bottom and resume the bull market. Another joker I was on Fox Business with cries everyday stocks rally that it’s all just manipulation. It’s all fake he says. As long as people disavow this rally, it is going to continue.

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