Banks & Transports Still Tired. Modest Pullback Here.

Last Friday, I discussed what appeared to be tired behavior in the banks as they were selling off on good earnings news after rallying sharply into earnings season. Citigroup and JP Morgan were the examples. This morning, Goldman Sachs and Morgan Stanley beat earnings expectations, yet reaction has been muted with the former opening sharply higher and then selling off while the latter is hanging tight. I would not be surprised to see Morgan Stanley buck the trend in the short-term and finish better than its peers have.

Another one of my key sectors, transports, is following through to the downside after seeing its own “key reversal” last week, another sign of a tired sector. While I am not looking for a substantial decline in either sector, I do believe the upside is now capped and the best case is some sideways activity for a few weeks.

On the stock market index side, I continue to be of the opinion that an October pullback remains in the cards as I have discussed for the past few weeks. Nothing big or traumatic. Just a modest, single digit bout of weakness. On Monday with new highs in the Dow and S&P 500, there were more stocks declining than advancing on the NYSE. That comes off an all-time on Friday in the NYSE A/D Line. While one day does not amount to much, it does support my over theme of a slightly tired market.

If you would like to be notified by email when a new post is made here, please sign up HERE

Banks Warning, Hold Key to Bull Market

Since late July I have been in the camp looking for a trading range with a mild/modest pullback. I remain of that opinion today. Should stocks gather themselves and score fresh new highs this month, I think it will be a good opportunity for theĀ  nimbleĀ  to sell for a modest move lower into October. All along, I have written about a mid single digit pullback and that’s still my target. I do not believe we will see a 10%+ decline and certainly, the bull market is not over.
I am not going to rehash my rationale for why a trading range/pullback and why so modest right here, but I do want to add color to a previous concern, the banks. As you know, the banks/financials are one of my four key sectors to a bull market’s health. The others being semiconductors, consumer discretionary and transports.
Remember that the banks peaked in February 2007, long before the stock market did in October as you can see below. A 2 1/2 year, 50%+ debacle followed suit.

Before the Dotcom Bubble burst in 2000, the banks double topped in July 1998 and April 1999 before the bull market ended in March 2000. A 50%, 2 1/2 year collapse ensued.

Last week, the banks were at their lowest level in three months while the S&P 500 was one good day from all-time highs. That’s not exactly healthy behavior and can lead to some kind of trouble for stocks. Additionally, the banks had also sunk below their long-term trend, more popularly know as the average price of the last 200 days (200 day moving average). However, let’s also remember that not all poor behavior by the banks leads to a 50% or even a 20% stock market decline.
As the new week began and Hurricane Irma’s ferocity did not cause the damage expected and certainly not the worst case scenario, stocks opened with a relief rally that ended up powering higher all day. The banks were a leader. This morning, as I type this, banks are once again leading and have rallied right back to the pink line or their long-term trend, giving a sigh of relief to the bulls. You can see that important chart below.
However, nothing has changed fundamentally, not a single thing, or really technically for that matter. And the Fed is still slated to announce their balance sheet taper plan next week with the likelihood of one more rate hike in December. Bank earnings are unlikely to accelerate from here. The economy’s output has improved as I have been writing about all year, but a recession still looms in President Trump’s term.
The three month low does not look the a low of significance or not the ultimate bottom. It appears to be just a spot for a bounce before moving lower. It will be interesting to see how price behaves now that it has bounced. Bulls really want to see the group close above the pink line below (long-term trend) for a week straight. Failure to do so will likely result in the pink line beginning to trend down with price beneath it. That’s a bad set up. Also, the price lows for 2017 are at the blue line, another line in the sand the keep a close eye on.
The final area of the chart above I want to point out is the far right side where I have red and green lines with question marks. I am being the master of the obvious to say the banks can go in either direction, but I really do think there is a binary outcome from here although it isn’t likely to be in straight line fashion. I just don’t see the sector staying in that trading range. It’s either going to breakout to the upside or breakdown. The next few days and weeks are likely key although a massive breakout of significance will oftentimes begin as a fake out in the opposite direction first.

If you would like to be notified by email when a new post is made here, please sign up HERE

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.

If you would like to be notified by email when a new post is made here, please sign up HERE

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.

If you would like to be notified by email when a new post is made here, please sign up HERE

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.

If you would like to be notified by email when a new post is made here, please sign up HERE