Still in a Pullback

Over the past few trading days, stocks gathered a little steam, but I still think the markets are in the midst of yet another pause or tiny pullback. It is amazing, however, that we have not seen a 1% in either direction since the post-BREXIT rally in early July. I have been saying nonstop that we saw historic strength coming out of the Y2K like BREXIT and that strength would not dissipate so quickly. Frankly, I thought we would have seen at least a 2-3% pullback by now and I have been the most ardent of bulls. The underlying power has been more than impressive.

On Tuesday, the NASDAQ scored a fresh all-time high. (Is that redundant?) Coupled with the S&P 400 at new highs, you may be questioning how that’s still a pullback. The other major indices are lagging a bit and there has been much power behind the recent little rally. Don’t get me wrong. I am very happy that the bears remain at bay. The longer stocks can stay up here, the more likely we will see an upside resolution.

Leadership remains strong and diverse with semis, software, internet, financials, industrials, materials and energy on top. As discretionary rests, the transports are really stepping up here. Defensive groups have moved to the back seat and high yield bonds continue to resist selling. It’s hard to argue with what’s going on although the vast majority of pundits continue to disavow and hate this bull market. That makes me comfortable over the intermediate-term as Dow 20,000 remains attainable later this year or early next. I don’t how these people who are paid to be in stocks and make money can be so wrong for so long. Remember, it’s okay to be wrong. It’s not okay to stay wrong.

The clown parade just continues to grow. Soros, Druckenmiller, Icahn, Zell, Trump, Fink, Gundlach, Gross, Faber, Auth, Faber, Yusko, Singer.

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Is THIS the Week When the Sky Falls?

Roughly one month ago, after an historic lift off post BREXIT, stocks had become overbought which is a technical term for a little too far too fast. Most pundits in the media were calling for a pullback before they would buy. As I have discussed for longer than I have been writing this blog, the masses seldom get what they want or predict.

When stocks bottom, the first rally is usually very powerful as it catches the majority off guard. From there, the next period is usually very telling of what happens over the intermediate-term. If the bears get going and make progress, the next few weeks to months are neutral at best. However, if the bulls can keep powering ahead without ceding much downside, it typically leads to more upside.

Since this latest rally began, and really since February, I have said that any and all weakness should be used as a buying opportunity until proven otherwise. 1-3% are your typical pullbacks during bouts of unusual strength. With stocks coiling up for several weeks, I warned that a fakeout to the downside followed by an immediate move to the upside would be one scenario to watch for. That’s exactly what happened for all of the major indices except the Dow.

Stocks start a new week overbought yet again but with few cracks in the pavement. I have discussed leadership rotation before and we are definitely seeing what I wanted to see for the march to Dow 20,000. Defensive groups are ceding to offensive groups. Even the “long forgotten by me” banks have exploded higher and are threatening to actually lead. That’s something I certainly did not see coming. Let’s see if the transports can also step up to help semis, software, materials and discretionary. And don’t forget about energy as a laggard play to catch up.

Lots of good things continue to happen in the stock market. As long as Soros, Druckenmiller, Zell, Trump, Icahn, Cuban, Gundlach, Auth, RBS, Faber et al continue to boldly call for a worldwide financial crisis and Armageddon, pullbacks should be contained to 3% unless some exogenous hits.

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What’s SUPPOSED to Happen versus What ACTUALLY Happens

Earlier this week, I mentioned that stocks were coiled up and looking for a big move. Since then, only the NASDAQ 100 has done anything and that was really just on Apple’s earnings beat. Overall, it’s been a very quiet week without any volatility at all. That’s likely to change sooner than later, but unlikely to be today.

As I have mentioned over and over, the post-BREXIT thrust, pullbacks are likely to be shallow as the masses were caught off guard and are now clamoring to buy. Those waiting for a 10% correction will probably be waiting a while unless an exogenous event hits, in which case, they won’t buy anyway!

The government reported that Q2 GDP clicked at 1.2%, well below estimates of 2%. I won’t rehash my long-term theme about the typical post-financial crisis recovery which I have been spot on about since 2009. On a day like this, I always find it instructive to see what’s supposed to have versus what actually happens. Treasury bonds should rally. The dollar should fall. Gold should rally. Crude oil is a toss up.

On the sector front, utilities, staples, REITs and telecom should lead as they are all defensive and provide yield. Industrials, materials and discretionary should lag as they more economically sensitive. High yield bonds should lag.

Let’s watch what bucks what is supposed to occur for signs of change.

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FOX Business TODAY & Dow 20K

I am going to be on Fox Business’ The Intelligence Report with Trish Regan today (Friday) at 2:50 pm edt discussing my forecast for stocks and the markets, especially with the Fed set to meet next Tuesday & Wednesday. Trish is heading back from Cleveland so Ashley Webster is filling in.

It has been truly amazing what a little rally has done to market sentiment. At the BREXIT bottom, as the pundits, masses and media all panicked and headed for the hills with cash, our models could not have been any more positive and stronger. I pounded the table to commit cash and resist the urge to sell. I laid out a very bullish road map which was the most positive forecast anyone could find.

Even that wasn’t bullish enough!

To me, there was only one path post-BREXIT; stocks were going to fresh all-time highs this quarter on the way to my longstanding target of 20,000. Thank you to the Dow and S&P 500 for cooperating already. Look for the S&P 400 to follow shortly. Today, after a very broad-based and historic rally, the pundits and masses are suddenly positive and looking to buy. The clown parade is full of clowns!

Leadership has most definitely changed from the purely defensive camp to more offensive with more changes on the way. And high yield (junk) bonds continue to lead and exhibit strength. This is one fun market.

As we all know though, trees don’t grow to the sky and stocks will likely pause to digest or even pullback a few percent here and there. I do not believe the stock market will see any significant downside here. It looks like weakness should be limited to the low single digits on a percentage basis at most. Could we see 4-5% down? Sure. However, there are so many investors waiting to buy that dips are likely to be shallow and bought fairly quickly until proven otherwise.

Finally, I want to thank FOX61 in CT for accepting my suggestion to do a BREXIT segment on the local news. I thought it was really well done and focused on the mom & pop investor. Here is the link.

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And NOW They Want to Buy?

Although fresh all-time highs are making headlines, making it seem like there’s a lot of action, the past week has been fairly quiet for stocks. On the surface, it looks like the first leg of the post-BREXIT rally has ended. However before you think about turning negative, I remain very positive on the intermediate and long-term. It’s the short-term that looks like a pullback or coin flip as sentiment has become a little too giddy and the pundits have all come full circle to power of the bull.

That initial move off the BREXIT low when the masses were panicking and I was pounding the table to buy created some historic thrust readings which typically indicate more strength and higher prices for a while. As I have said since the market bottomed in February, weakness should be used as a buying opportunity until proven otherwise. With so many investors caught off guard by the melt up, pullbacks are likely to be shallow for a while. That doesn’t mean stocks will continue to soar in the short-term. I can certainly see a scenario where 1-3% bouts of weakness are the floor with 1-3% rallies as the ceiling for now.

Sector leadership is also changing dramatically. The defensive leaders in REITs, telecom, staples, metals and utilities are beginning to cede to semis, software, retail, builders, healthcare, industrials, etc. That’s very healthy even though banks and financials remain absent. And let’s not forget the continued importance of high yield bond leadership and credit spreads narrowing.

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Like a Broken Record

I read a stat last night that said only 1% of Americans hold off taking social security until 70. That low number really surprised me as it means 99% of Americans do not get the maximum amount of social security. When I meet with clients and prospects, one of the foundation conversations is when to take social security and why. If you are approaching retirement or already take social security, do yourself a favor and spend some time researching this!

Back to the markets, stocks have run harder and faster than even I thought. And that’s saying something! Of course, the revisionist pundits have been out in force changing their tune from selling after the BREXIT vote to knowing it was the time to buy. I call this the clown parade. One thing is clear from reading this blog; not only did I stay firmly in the bullish camp, but our models gave reinforcing buy signals at the bottom. MUCH better to be lucky than good!

The major stock indices are extended and could use either a pullback or pause to refresh, but momentum has been very strong. Some would call it historic and I could not easily disagree. Strength begets strength until it doesn’t. Since the BREXIT bottom, small caps and technology have led with mid caps following closely. The Dow and S&P 500 are trailing which is very bullish over the intermediate-term as it shows investors taking on risk.

We now have the Dow and S&P 500 at all-time highs, but the S&P 400, Russell 2000 and NASDAQ 100 still have some work to do. Like a broken record, until proven otherwise, weakness remains a buying opportunity.

On the sector front, semis, software, telecom, internet, discretionary, industrials, healthcare, homebuilders, REITs, staples, utilities and precious metals all are behaving very well. While I mentioned that the more defensive sectors might be under pressure after the stronger than expected jobs report, they have held up well as the more aggressive groups have come on strong. There is no debating that this rally has been very broad-based.

Junk bonds have also reengaged in leadership at the same time as treasury bonds are finally pulling back. Long-time readers know how much stock I put in junk bond performance. I am not quite sure what to make of the treasury bond rally rally and decline. It’s not your typical “risk off” or risk avoidance trade.

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On the Way to Dow 20K

With the short-term volatility over the past few weeks, this is no clear trend to take advantage of post today’s employment report. By that, I mean, our short-term trading system specifically created for this report has no strong edge. The report came in strong and pre-market indications are for a higher open which can sometimes point towards a short-term peak.

With the much better than expected report, the recent market leaders may be under pressure. Utilities, staples, REITs, telecom and precious metals all should be watched closely.

It’s been roughly four days of sideways action for stocks so the market could certainly push higher and press the bears. However, while I continue to be positive on almost all time frames, I just don’t think the major indices are ready right here to blast off to 20,000. That’s coming, but I would be surprised if it’s before Labor Day. (Cue to markets. PLEASE surprise me!)

Random things of interest. Amazing how the collapsing British Pound was the supposed cause for the the markets hitting the BREXIT skids. However, the pound has been down the last 6 days with stocks rallying. Media and pundits wrong as usual.

Crude oil seems to have put in an intermediate-term peak and may be transitioning from a trading range to decline. That’s important to watch and see how stocks react to that.

High yield bonds are hitting new highs for 2016 which is anything but bearish for stocks.

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Separating Pretenders from the Contenders

Greetings from 34,000 feet as I head to CO for the weekend with my wife and some friends. Of course, they’re all her friends because who would really want to hang out with me?!?! As is typical when I take a day or two off, Mother Nature thumbed her nose at me with a forecast of rain, rain and thunderstorms with highs in the low 60s and lows in the upper 30s. Thanks!

We may have set a record for sentiment shift in a single week. Just one week ago after the Brits said adios to the EU, at least for now, and the global markets collapsed, the talking heads all “knew” this would happen. I saw forecasts of 10%, 15% and even 20% in the downside. By Wednesday, they all said they called the bottom. What a bunch of clowns. It is interesting to note that the very well-respected Lowry’s and Jim Stack who had been bearish for over a year used the two-day decline and two-day rally as cover to turn positive. Subscribers pay an awful lot of money for those services and I would have given them better advice for free right here!

It’s been a powerful three days for global stock markets and while today is starting out okay, I would be very surprised if we powered ahead after lunch with the long weekend looming. The bulls did a remarkable job into month and quarter-end which made me very happy, but I am not putting on my rose colored glasses just yet. Yes, I am still bullish over the intermediate and long-term. I think we will see all-time highs this quarter. However, I would not be shocked for stocks to pause sooner than later to digest and calm down a bit as most of the major indices approach the levels seen just before the vote. Nothing dramatic. Just a little pullback.

While I have been long and positive on most of the defensive sectors for months and they have been leaving, I would still like to see some of the more aggressive groups step up. I saw a fairly compelling study last week regarding the semis and it would be really nice to see them lead over the summer. The NASDAQ 100 has been lagging and that could really create some enthusiasm and excitement. Healthcare is quietly making a move that few are noticing while my aforementioned telecom, REITs, staples and utilities all seem a little extended here.

On the questionable side, I still don’t know what to make of banks and financials. Materials and transports are lagging for sure. The pilot just said to get ready for landing so I am cutting it off here.

Wishing you a very fun and safe July 4th holiday with lots of good weather!

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Who Knew?!?!

Thanks to everyone who tuned in for my BREXIT segment on FOX61 in CT yesterday. You view it HERE.

A few days post BREXIT and all seems well in the financial world. Listening to the business channels, everyone called the top and now everyone called the bottom. Isn’t revisionist history wonderful! Until proven wrong, I will keep referring to the Playbook I first outlined last Friday for a clue as to where stocks go from here. So far so good. On Monday, I shared what history said about big down days on a Friday. They led to more selling of 1-3% on Monday before a possible reversal was seen on Tuesday or Wednesday. At the close on Monday, one of our stock market models gave a fresh indication to buy the major stock indices which frankly, came a little earlier than I thought.

Just like clockwork, the famed “Turnaround Tuesday” was like a layup as the bulls stepped up in a huge way, regaining most of what was lost on Monday. Just like that the market went from 90% of the volume on the downside to 90% on the upside. However, before we start to celebrate new highs, let’s see if stocks can recoup their losses from last Friday, something I think they will have a tougher time doing right here. The odds favor this rally running out of steam first.

Over the intermediate-term, not a single thing has changed from my positive and bullish point of view. Stocks should head higher to a some type of Q3 peak.

Things to note.

While bonds melted up on Friday and Monday as stocks fell hard, bonds still managed to rally on Tuesday. Semis have been hit very hard and need some time to regain leadership as their previous rally suggested. Banks and materials look crummy. The same defensive groups, utilities, staples, REITs and telecom remain strong as does the precious metals sector.

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Red is the Theme Short-Term But Green is on the Way

After Friday’s big down day which historically has occurred less than 1% of the time, the model for Monday is another large red day of 1-3%. From there, stocks should attempt to form a low on Tuesday or Wednesday and rally for a few days to a week. This is right in line with the Playbook I offered here on Friday.

As you would expect, the financial sector has been hit the hardest, but I am a little surprised that technology has been so weak. Semis, specifically, saw new highs last Thursday and are now down 10% in two days. What has been leading, remains leading, namely defensive sectors like REITs, staples, utilities and precious metals. Long-term treasury bonds have exploded higher, sending yields close to all-time lows. That’s definitely a plus for the mortgage market!

Investors all over the country are wondering what to do now. While trying not to sound flippant, if people weren’t nimble enough to take action before the vote, personally, I wouldn’t overreact emotionally like investors usually do during major geopolitical events. We are in a period of short-term pain, but that should not dictate the long-term plan for gain.

What I found amazing from my weekend reading was how many pundits were now calling for recession within 9 months because of the vote. My head is still shaking, especially when it comes to the U.S. While we are long overdue for a mild recession, I absolutely do not believe it will be caused by the BREXIT vote.

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