Bulls Are Resilient

On May 8th, I first started discussing what I saw as a skewed risk/reward ratio with 500 possible points of upside and 1000 points possible on the downside. Over the years when there was a decent chance for stocks to decline, I often referred to it as a window of opportunity that stays open for a period of time before closing.

Three weeks after my comments, stocks have basically gone nowhere. We saw a brief dip when the “hysteria” over Russia and Jim Comey came out, but as I said at the time, it’s reality over rhetoric and the markets and economy don’t really care about all the nonsense. With high yield bonds and the NYSE A/D Line at fresh all-time highs, the window for a decline is quickly closing and may be closed.

The longer we go without another bout of weakness, the less likely it is to happen. The leaders keep on chugging and the laggards show no signs of stepping up. In short, stick with what’s been working until proven otherwise. Semis, tech, industrials and discretionary. At some point, energy is going to stop behaving so poorly, but I want them to prove it. With oil up from $44 to $51, the energy stocks have barely lifted their head. That’s just plain ugly and perhaps getting to the point where it’s so bad that it becomes good.

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Reality over Rhetoric

The markets begin the week with little changed from last week. Volatility remains absurdly low, but remember, regardless of what you hear on the financial shows, markets do not go down just because vol is low. And bull markets do not end with vol so low.

The major stock market indices are not in sync. The Dow continues in its range but looks to be testing the top of it. The S&P 500 should try to poke above its range and test all-time highs. The S&P 400 and Russell 2000 have pulled back the most and stopped exactly where they needed to to remain healthy but lagging. And the NASDAQ 100 remains the lone big winner, continuing its unabated, nearly vertical move higher. While nothing here is worrisome overall, I would rather see the majority behaving similarly.

On the sector side, it’s more of the same with transports and banks looking alike and needing some help. Discretionary is close to all-time highs and needs to get there this week while semis, like the NASDAQ 100, just continue to blow off higher.

All year long, I have talked about reality over rhetoric when it comes to DC and Donald Trump. Don’t get caught turning negative like so many have before because of the president’s unique behavior. It’s not relevant to the markets nor economy. The economy should print is a very strong number for Q2 and Q3 and the employment reports are solid. Of course, so are the markets although I continue see more limited upside than downside.

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Lines in the Sand Drawn

We saw a fairly strong selling wave on Thursday during the first hour of trading. However, by mid afternoon, the bulls stepped right back up and recouped all of the losses before closing modestly lower. Their resilience continues. Given how most of the major indices are positioned, the bulls need to score new highs sooner than later to reset the clock. On the bears’ side, a close below Thursday’s low should set a deeper pullback in motion. That’s the one I have had my eye on since last week.

Sector-wise, it’s more of the same, however, the banks are under more pressure and may be in jeopardy of a decline to new lows for 2017. That would certainly weigh on the stock market. High yield bonds, on the other hand, remain solid and that’s why I am not looking for much more than a modest decline towards Dow 20,000.

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