Coal Mine Air Still Healthy… Says the Canaries

With stocks soaring to new highs over the past few weeks, it’s a very appropriate time to see how the canaries are faring and if any have died. Remember, the more “dead” canaries, the more likely the bull market will follow suit. This is very long-term analysis and not helpful for much other than end of bull market warnings.
Let’s start with the Dow Industrials below and it’s great to see a clear and decisive all-time high right now, coming on the heels of a false move in October that breached the levels we saw in August. This fake out caught a lot of investors off guard, which has been and is causing them to scramble to buy at higher levels, making me very happy!
The S&P 500 is below and it looks exactly like the Dow Jones Industrials above. So far, we have two very alive canaries.
The first caution sign comes with the S&P 400 mid caps below. They peaked on the left hand side of the chart back in June and continue to see lower highs and lower lows. That is not the definition of healthy. However, they are only a few percent away from all-time highs, which would negate this warning, something I do think will happen shortly.
The small cap Russell 2000 is next and there clearly has been a problem since late June with a 14% total decline that has not fully recovered. A 5% rally would cure this problem, but that’s not as easy as the S&P 400 has it. I won’t label this a “dead canary”, but it’s certainly one with breathing problems.
Let’s turn to the technology laden NASDAQ 100 where you can see “all systems go” with fresh highs right now. This index looks like it’s wound up and ready to move sharply higher before long, even if it sees some minor weakness first.
Summarizing the major stock market indices above, for a 5+ year old bull market, they look surprisingly spry!
The Dow Transports are next and they look exactly like the Dow Industrials and S&P 500 with fresh all-time highs right now.
Turning to the two “key” sectors we watch, banks are only a few percent from fresh highs and they should get there before long after frustrating me over the past year or so with their inability to lead during rallies.
Semiconductors are below and this is one area I have always viewed as critical for the long-term health of a bull market. Historically, as go the semis, so goes tech. And as goes tech so goes the broad stock market. Semis peaked in September and now reside a few percent below that peak. They looks strongly positioned to see fresh highs before long.
Below you can see the cumulative New York Stock Exchange advance/decline line which is a fancy word for how all of the stocks on the NYSE are behaving in sum total, not just the biggest ones. Almost every single bull market dies after a warning from this indicator. What we want to see is the chart below looking like the Dow and S&P 500 which it is not right now. The line below MUST make a fresh high in order to avoid killing a very important canary. It’s not that far away, but action this week has also not been positive.
High yield or junk bonds are another very important canary and they are next below. Because junk bonds feel every ripple in the liquidity stream, economic weakness often manifests itself in this group first. High yield bonds usually “die” long before the bull market does so it’s often a very telling sign in advance. Keep in mind, however, that this group also gives false warning signs like it did when then Fed Chair Ben Bernanke caused the “Taper Tantrum” in May 2013.Right now, junk bonds are not at fresh highs, but close enough to correct before long. My concern is that since mid October this group has only upticked when stocks experienced very strong days. Normal or healthier behavior would see high yield add a little here and there on a daily basis during stock market rallies.
For a 5+ year old bull market, the canaries remain alive and mostly well, which fits into my own scenario for the bull to live on into 2015 with Dow 18,000 next on the list. Once 18,000 is reached, possible scenarios open up for 20,000, 23,000 and even higher. But let’s take one hurdle at a time and manage this in the present.
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Canaries Still Singing

With many all time highs seen in October, it is a good time to review the canaries in the coal mine for signs of trouble. Remember, canaries are only valuable at major market peaks and bottoms. For the vast majority of the time in between, they will be of little value.

We review all of the major stock market indices and sectors along with other key indicators of overall market health. At major market turning points, we will often see glaring divergences or non confirmations with a few of the indices, sectors and indicators lagging the move. Let’s do a quick walk with the major indices and see if we have any warning signs.

The Dow is first and it just recently scored an all time high, which washed away the very small yellow light in October.

dow

The S&P 500 is next and it, too, recently hit an all time high. 

sp

 The S&P 400 Mid Cap is below and look how quickly it went from laggard (mid Sep to  mid Oct) to leader now where all time highs were made.

mdy

 Ditto with the Russell 2000 Small Cap, which has been the single market leader since mid October and throughout 2013.

russ

 The NASDAQ 100 is next and this index has frustrated me somewhat this year, especially in the middle of the year. Although it still needs to rally roughly 50% to eclipse its Dotcom bubble all time high from 2000, the index is sitting in new 52 week high territory and that indicates strength.

ndx

 Summarizing the indices, they are all in sync and show no sign that the bull market is ending.

The Dow transports are below and they are vitally important to confirm highs and lows with the Dow industrials. In the current case, the transports are and have been a market leader all year and that continues today as all time highs made.

tran

 The semiconductors are next and they are so important because they reside at the beginning of the technology food chain. The only caveat with them is that they are very volatile and can give more false warning signs that the others. As with the NASDAQ 100, they are far away from all time highs, 175% to be more precise, but they are currently seeing 52 week highs and their best levels since 2001.

semis

 The banks are below and are nowhere near the high they hit in 2007. That’s okay, but more recently, they have not exceeded the high they saw in June of this year. I consider this a mild warning sign.

bank

 The New York Stock Exchange Advance/Decline line is next, which measures the cumulative number of stocks going up and down each day. Until very recently, warning signs were given that the rally was becoming more and more selective. As you can see, the A/D line blasted through the previous all time highs and there is no longer a warning here.

NYAD

 Finally, the high yield bond sector is below using the PIMCO High Yield Fund as its proxy. I felt strongly that the peak seen in May of this year was THE high and that this was the first nail in the coffin for the bull market. Junk bonds have certainly surprised to the upside since the Fed did not taper in September and the run has been very strong, causing me to waver on whether the May peak could be slightly exceeded. In any case, this remains a warning sign, but not nearly as much as before.

PHYDX

Over the past few months, the market has breathed life into a few of the canaries on life support and the bull market remains alive and well. Because we do not have a preponderance of warnings, it will likely take at least a decline followed by a narrow rally to before we start seeing canaries die.

Canaries Still Breathing Okay

I haven’t done a canaries in the coal mine update in a while, but with the major market indices hitting fresh highs last week, it’s time to check if any are dead. Remember, canaries in the coal mine are only useful at bull market peaks and bear market troughs. In other words, they are very helpful at spotting beginnings and endings of bull markets, but not much in between. They are so important because they usually give ample warning that a bull market is living on borrowed time as the canaries begin to die.

Let’s start with the major indices as they should all be in new high or fresh highs for 2013 territory. The Dow is first and you can see the all time from last week on the right side of the chart. 

dow

The S&P 500 (very large companies) is next and it, too, hit all time highs last week.

 s&p

The S&P 400 (medium size companies) is below and it is in line with the first two from above. The S&P 400 is usually the big leader during the mid stages of the bull market as many companies in this index experience their glory years or growth and financial stability.

mid 

The Russell 2000 (small companies) is next it saw all time highs last week. This has been the index leader since the June 24 low and pretty much entire bull market from 2009. There have been a few warning signs along the way, but they keep repairing themselves to health.

rut 

The technology laden NASDAQ 100 is the final major index and it has done a remarkable job at playing catch up, not only in the very short-term (since mid July) but also over the past year or so.

ndx 

In summary, all major stock market indices recently saw fresh highs indicating that the bull market is not close to ending. 

The Dow Jones Transportation Index is below and this serves two purposes. First, it’s a minor index after we look at the major ones. Second, old school Dow Theory offers that the Dow Industrials and Transports should be in sync during major rallies and declines to confirm the long-term trend. At bull market peaks like 2007 and 2000, we usually see one index fail to confirm the other’s price move. In other words, if this bull market were ending, we would either see the Industrials or Transports fail to make their final price peaks together. At this point, that’s not the case.

tran 

Turning to the bellwether sectors, the banks continue to lead and see new highs on each successive push higher in the stock market. This is healthy action. On a separate note as I mentioned on CNBC’s Closing Bell last week, the banks remain one of the most unloved sectors in the market in spite of their huge price gains and leadership role. I am not a fundamental researcher,  but if investors can look past the major players like J.P. Morgan, Citi and Wells Fargo where new government regulation may present some head winds, the regional banks and small banks may present some good opportunities, especially if a mergers and acquisitions wave begins.

banks 

With overall sentiment towards the banks negative, this group should continue its leadership role and be a good buy candidate after market declines.

The semiconductors present a much different picture. They are so vitally important because of their leadership in the technology sector and technology’s leadership in the overall stock market. The semis not only are a long-term canary, but also have some good predictive power for intermediate-term moves, something that would make a good article for the next issue.

 semis

I have to admit that this group can be a bit frustrating at times because it gives more warnings than any other canary and the only warning that really matters for the end of a bull market is the final one. As you can see below, the semis did NOT see fresh highs last week and their price is already creeping back into the range we saw during May and June. This is not good behavior and bears watching closely.

The New Stock Exchange cumulative advance/decline line is next. For newer readers, this simply represents the number of stocks that go up and down each day totaled over time. I have found it to be an excellent barometer of liquidity and overall market health even though its warnings can range from a few months to almost two years as we saw in the spring of 1998. Detractors will point to the number of non operating companies that litter the NYSE, but that’s exactly why I find this indicator so useful. Those non common stocks are typically closed end bond funds (CEFs) that are acutely sensitive to interest rates. The combination of common stocks and CEFs has proven to be a valuable long-term indicator when the major stock market indices march higher without the NYSE A/D line.

From the chart below, we see twin peaks in May and July, a very mild warning with price going much higher, but nothing that indicates impending doom. This is another canary that should be closely watched now.

NYAD2

Finally, let’s take a peak at high yield (junk) bonds as depicted by the PIMCO High Yield Fund. You can use any of the major funds or the ETFs. I just choose PIMCO because it is a very large fund with a long track record. Junk bonds are so important because they are acutely sensitive to ripples in the liquidity stream as well as the economy. They are at the bottom of the credit hierarchy and money typically flows out of the sector at the first sign of economic trouble or decrease in liquidity.

PHYDX 

You can see how the fund made its high in May and sold off dramatically into June. What is unusual is that this decline occurred without stocks cratering. In fact, high yield bonds saw more carnage than stocks. And as stocks vaulted higher in July and August, the high yield sector could barely muster a rally to get back half of what it lost. This canary appears to be dead for this cycle. If junk bonds rollover again and we the PIMCO fund in the mid 9.40s, I think that will spell at least some short-term trouble for stocks. 

In summary, the canaries are generally healthy with only one dead (high yield) and maybe two on heightened observation (semiconductors and NYSE A/D line). Before this bull market ends, I expect to see many more canaries on the dead list.

 If you would like to discuss how your portfolio is acting now or could behave if more canaries bit the dust, please contact me directly by hitting REPLY or calling the office at 203.389.3553.

Markets Stabilized… For Now

Here is the segment I did with Fox Business. I think Adam Shapiro was trying to interview me as a bull, but he ended up calling me a bear. Truth is, I am an opportunist right here and willing to play both sides of the market for a while. I think big rallies can be sold and short-term panics can be bought.

http://video.foxbusiness.com/v/2506211035001/markets-stabilizedfor-now/

Stocks at Inflection Point

Here is the article based on my interview with CNBC’s European Closing Bell from May 1.

http://www.cnbc.com/id/47243367

The 2012 bull market still has further to run, according to Paul Schatz, president of Heritage Capital, an independent investment banking and advisory firm. Instead of a major selloff, Schatz believes that the equity markets will only peak later on in the year, or early in 2013. But he’s undecided about whether this will incorporate a “sell in May and go away” mantra.

Fuse | Getty Images
 

“We see two possible paths. One is that the major indices go right back to new 2012 highs in May and then race to all-time highs in the third quarter or early fourth quarter,” he told European Closing Bell. “The other scenario is that stocks use May to pull back and take out the April lows before bottoming and then heading to new 2012 highs in the third quarter.”

Schatz’s reasoning is that the huge amount of central bank liquidity in the system is only going to get bigger.

“The Fed remains, and there’s still a torrent of liquidity in the system,” he said. “The ECB is just warming up. They have printing presses for trillions and trillions of stimulus for the rest of the decade.”

Schatz also downplayed the effect of the euro zone debt crisis on the equity markets. “It’ll be hard-pressed to say that Spain being in a recession[cnbc explains] is going to end this bull market.”

Even though Schatz is bullish in equities, his company still has a sizeable position in U.S. Treasuries.

“The U.S. fiscal house may not be in good shape, but on a relative basis, it’s better than most of Europe and Japan and there remains a sizeable bid under the market from the Fed and foreign governments,” said Schatz.