Growing Concerns

As the title suggests, I am more worried now than I have been in a while, however, it needs to be taken in context. I really haven’t worried at all lately and I absolutely do not believe the bull market is over or close to being over. I don’t even believe the stock market is starting a 10%+ correction. My theme of late has been that of a trading range environment, but I now think that it may morph into a 3-5% pullback. Stocks are long overdue for some weakness and it should be healthy.

Last week, I discussed the Dow Transport and semiconductors as two reasons to give pause here. Neither situation has been corrected although the former is testing its 200 day moving average or long-term trend. The latter continues to bother me. There are now more issues. Apple reported another blow out quarter of earnings and said all of the right things. On the surface, that should be celebrated, however, many times when stocks have rallied and a high profile company blows out, the stock market often suffers over the short-term.

The sentiment surveys and option traders are showing a little too much confidence and complacency right now. It’s rare that stocks just continue unabated. The Dow Industrials are scoring new high after new high, yet the S&P 400 and Russell 2000 are moving in the opposite direction.

Those are just a few concerns I have, not to mention the previous overwhelming fascination with Amazon although Bezos’ reign as the world’s richest man was certainly short-lived.

Again, I am not calling for anything spectacular on the downside and it may only manifest itself in the continuation of the trading range. But the evidence is growing that weakness is on the way.

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Q2 GDP Frustrates Bears. Bezos Still Rich?

The government released its first look at Q2 economic output and the economy grew by 2.6% at first glance. While I would have been happier with more, it’s the second straight quarter that seems to be falling in line with my forecast. Earlier this year, I offered that Q1 GDP would come weak and below expectations with Q2 much stronger. That’s certainly the case today. I am also looking at Q3 to be stronger than Q2 with a shot at eclipsing the 3% mark. That won’t be easy. My forecasts were based on widespread deregulation and tax reform. While the former has been happening quickly but quietly, the latter isn’t even being discussed yet, a huge mistake in my opinion. I still believe tax reform is more than a 90% certainty, but it likely won’t have a positive impact on our economy until 2018.

All week long, the media fell over themselves, gushing that Amazon CEO, Jeff Bezos, was now the richest man on earth. As is often the case when something becomes so widely accepted or loved, the opposite happens. Amazon quickly gave back all of this week’s gains on a less than stellar earnings report. Classic buy the rumor, sell the news.

The tech sector, mid caps and small caps all saw reversals to the downside this week as all of the major stock market indices poked to new highs at the top of the trading range I have been discussing for a while. It’s likely that a pullback has begun and some mild weakness will ensue.

The two things that concern me most are below. First, I mentioned that semis need to make all-time highs as their software and internet cousins have. Rolling over first will definitely bother me.

Second, the Dow Transports are very quietly down 5% from the July peak. This bellwether index has definitely marched to its own tune for several years,  but I would still rather see it behaving a whole lot better. Thankfully, junk bonds continue to act well and confirm the new highs.

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Seasonals Say No, But Bulls Say Yes

The major stock market indices closed last week on decent footing and should be poised for further gains with the Dow and S&P 500 seeing new highs first . Even the recently hit NASDAQ 100 hung in and remains above the line in the sand I drew last week. However, this week is a seasonally weak one as it’s the five days immediately following June option expiration. We’ll see how that plays out as pre-market indications show a higher open.

On the sector front, it remains the “bizarro” world with the opposites now in charge. As semis and discretionary ceded, the bears were all over this “collapse” in leadership. However, as has been the case so many times during this epic bull market, rumors of its demise have been greatly exaggerated! Transports, banks, healthcare and industrials are now leading stocks to Dow 23,000. High yield bonds are chugging along and there continues to be broad participation. Don’t overthink it. Buying the dips is the correct strategy.

FYI. I have received lots of emails regarding Amazon and should people buy it. My short answer is NO. I am not a fan at $1000 after seeing it rally more than 100% in 18 months. While it will ebb and flow with the NASDAQ 100, I think there are better risk/reward opportunities elsewhere.

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Bulls Still in Charge (as is Amazon!)

The major stock market indices put in a very constructive day on Thursday with stocks opening at their lows for the day and closing in the upper end of the range. The beaten down NASDAQ 100 saw the best behavior as it tries to repair itself from two unexpectedly large and volatile down days over the past month from all-time highs. One clue will be a weekly closing price for this index and the semiconductors near the high for the week. That won’t happen today. As long as the major indices and tech sector do not close at new June lows, the bulls have the ball, even if that means some sideways movement for a bit.

Leadership continues to rotate with the banks and financials really stepping up along with transports, industrials, REITs and healthcare. High yield and the NYSE A/D Line scored all-time highs this week. All of this gives me additional confidence that after this pullback ends, another leg to 22,000 is coming.

The big news of the day is Amazon’s proposed buyout of Whole Foods which is certainly a landscape changer. Amazon being the disruptor that it is getting into the grocery store business? That is not going to make Costco and Kroger’s and WalMart and Target very happy! It will be interesting to see what happens with the Blue Apron IPO. Who really wants to compete with Amazon? Look what WalMart did to its competitors!

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Routine & Healthy Consolidation in Play

Last Friday, we saw the S&P 500 tick at all time highs for a few seconds. That’s anything but unexpected and certainly not newsworthy. What was “different this time” was that it was the only major index to score new highs before they all reversed sharply to the downside. That made calling for an overall market pullback fairly easy.

Over the past few days, the high flying, momentum driven tech stocks, like Google Netflix and Amazon have come under strong pressure, following in the footsteps of the biotech group which has fallen sharply since mid February. This type of action is usually seen near the end of routine bull market pullbacks (3-7%) and not at the onset. The leaders are typically thrown out after selling hits other areas of the market. Impressively, the stock market has been resilient in the face of than overwhelming economic data and some worrisome geopolitical events and news in China, Middle East and Ukraine.

Bullishly, stocks continue to hover around their average price of the past 21 days or one month of trading. At this point it looks like the next 2-3% move can be faded, meaning that whichever direction the market goes in the short-term should be temporary and will then go in the exact opposite direction.

Longer-term, the bull market remains alive and well, albeit old and wrinkly. The ingredients normally seen before a bull becomes a bear remain nonexistent, in spite of what may be said by the pundits. In fact, I don’t even see the usual caution signs for 10%+ correction. Buy the dips and sell the rips is the strategy to continue following until proven otherwise.

Outside the stock market, I remain on breakout watch for long-term treasury bonds, our largest position in our global macro strategy. I have been generally bullish on long dated T bonds since late last year when you couldn’t find anyone who was positive.