Yet Another Sign of Confirmation

The chart below is one I first learned about from my good friend, Tom McClellan. Tom and I have known each other for 25 years and I always enjoy our email threads regarding research. Below you can see the the S&P 500 in the top chart and one of Tom’s indicators in the bottom which is called the McClellan Summation Index. How it is created doesn’t matter, only that it’s a measure of thrust and participation in rallies and declines.

What I want you to notice are times when it falls below -500, depicted by the lower blue horizontal line. That indicates widespread and steady selling for a period of time. Obviously, price normally follows suit. After becoming sufficiently oversold around -500, a rally will develop sooner or later. Once the rally gets going, the key is to get this indicator above +500. The higher the better. Essentially, doing so indicates an “all clear” or like a rocket ship, it has achieved escape velocity where it won’t fall back to earth.

Nothing is foolproof. All of the models and indicators I use generally work the majority of the time. The more things that line up, the stronger the conviction I have. In this case, the indicator has rocketed all the way to +918, way above the +500 line in the sand. In the simplest terms according to this indicator, the rally is for real and here to stay.

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Just Keeps Powering Ahead

By now there should have been some pullback, any pullback. But no, the stock market continues to defy the odds. Sure, there have been a few small pauses, but nothing close to even a 2% decline. All the way up, naysayer after naysayer just keeps disavowing and hating the rally. I do love how many people continue to revise history and say that they called the bottom and the magnitude of this rally. In my next life, I am coming back as a newsletter writer who never manages money so my performance can’t come back to haunt me when I stink it up.

At this stage in the rally, all five major stock market indices are making new highs for 2019. Guess what? So are all four key sectors. And so are high yield bonds. And the NYSE A/D Line just scored an ALL-TIME HIGH!

Seriously, what’s left for the bears to point to? The VIX? I said it was going to be late, but it, too, gave the “all clear” when it finally closed below 16.

Yes, at some point sooner than later stocks will pause and then pullback. But, I have been saying that for a while. What may end up happening is that when stocks finally pause or pullback, it ends up being a multi-month trading range to set up the next leg higher later in the year. It’s been one heckuva risk on market.

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No Cigar for the Bears

I had thought by now that stocks would have paused or taken a little 1-2% mild pullback. There was evidence last week. There was evidence over the past two days. So far, no cigar for the bears. This is very much typical behavior when the stock market emerges from a major bottom as we saw at Christmas. They just don’t give you a chance to comfortably buy after the train leaves the station. Any and all pauses and pullbacks are shallow until a real one does come which pretty much signals an intermediate-term period of pause.

The 200 day moving average certainly hasn’t stopped the bulls’ march. Overbought indicators haven’t done any damage either. All four key sectors are making new highs for this move as I type this. High yield bonds are close to all-time highs!

Finally, the NYSE A/D Line which you can see below is but one strong day from all-time highs! This makes me chuckle as I vividly recall how the vast majority of pundits said a bear market had begun and 2019 would be disastrous for stocks. Now, some of these clowns are revising history with the “but, but, but” nonsense instead of just doing the easy mea culpa. One of these “floor traders” and fast traders on TV was the loudest of loudmouths in December and early January, virtually guaranteeing the Dow was heading below 20,000 in Q1. He saw absolutely no scenario by which stocks could see a major bottom and resume the bull market. Another joker I was on Fox Business with cries everyday stocks rally that it’s all just manipulation. It’s all fake he says. As long as people disavow this rally, it is going to continue.

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After a Brief Pause or Pullback, All System Go Again

The stock market continues to do very little wrong. Since the Christmas bottom it’s been almost a mirror image of the relentless selling wave I mentioned so often for two months. In fact, as I wrote this, the stock market has just recovered 100% of the losses from that final, nasty sell off. Recall that the almost unprecedented wave was where stocks closed lower than where they opened for 10 straight days, likely not seen since the 1930s. Additionally, stocks closed in the lower half of their daily range all 10 of those days, which has not likely been seen since the 1930s although without intra-day for the 1970s, it is possible this behavior occurred then. The bottom line as I discussed many, many times, that was one heckuva selling wave in December.

Since the Christmas low, stocks have bounced very nicely in a complete reversal of behavior and even past the zone I first forecast on December 21. I recall being countered by other pundits that stocks wouldn’t even see my zone by April. The selling was supposedly too widespread and damaging. So many pundits, analysts and members of the media were calling for a new bear market. While that final relentless selling wave saw mostly red days on the chart below, the rally since has been mostly green days, meaning that stocks have closed higher than where they opened.

Since the Christmas trough we saw two separate days where the percent of volume in advancing stocks was greater than 90%. That’s very powerful and usually leads to extended stock market gains. Additionally, there were a number of “thrusts” seen which really means that the number of stocks going up over a certain time period completely and utterly overwhelmed the number of stocks going down. In other words, more confirmation that the Christmas bottom was a major one.

Finally, the pink line on the chart below represents the average price of the last 200 days, more popularly known as the 200 day moving average. It’s a widely viewed way to define the long-term trend. Sometimes, because many managers act on this for some odd reason, price can bump up or down against it and then pause or move in the opposite direction for a spell. Computerized trading programs love to push markets around popularly watched areas like the 200 day moving average and force others to pile on.

I mention all this about the pink line because the S&P 500 just hit that area on Tuesday as you can see below. I would venture to guess that the computer algos had a hand in this. More than likely, stocks are about to either pause or mildly pullback 1-2%.

All of the aforementioned can be seen in the chart below.

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Range Bound for Now But Bulls Should Test Higher Early This Week

Stocks still have done nothing wrong since the rally began in December. Since the peak last week, they have been quietly digesting massive gains by mildly pulling back. For all major indices, the stock market should be range bound for a bit, bound by last week’s high and perhaps a few percent lower. If and when last week’s highs are exceeded, the widely watched average price of the last 200 days should provide a short-term ceiling.

Coming in to the new week, I am expecting the bulls to mount at least a little upside, if not a full test of last week’s peak. Sector leadership should be a little more selective and we will see how high yield bonds perform. So far, they have been the very important quiet leader and I do not believe the economy will turn down without junk bonds lagging first.

 

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Stocks A Bit Tired But Not Sick At All

The rally off of the historic Christmas low has been nothing short of amazing. It’s only now that folks are realizing its magnitude and power. Stocks still  have not done anything wrong, but are certainly a little tired. I will have more on my upcoming issue, state of the market, either later today or tomorrow.

Stock index leadership has healthily rotated during the rally and now we have the NASDAQ 100 and Russell 2000 leading. That’s a good thing. Semis have literally come back from the dead and are forcing the bears to buy very uncomfortably. Banks remain a leader but are constructively pausing right here. Discretionary look a lot like semis so I guess the consumer isn’t dead just yet as so many have claimed. Finally, transports, which were among the biggest losers during the decline, have bounced back strongly although I am having a tougher time gauging much from their action right here.

High yield bonds continue to beat their chest, taunting all those  bears who thought recession was here. Frankly, it’s been a short-term rally for the ages over the past month and it’s not over. Several folks have asked about the New York Stock Exchange Advance/Decline Line which I haven’t shown in a while. That’s because there isn’t much to glean from its behavior. It’s doing exactly what it’s supposed and what the bulls expect.

Take a look below. The top chart is the S&P 500 while the bottom is the NYSE A/D Line. All is well for now. The NYSE A/D is stronger than the S&P 500 but that’s not really predictive.

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MONSTER Jobs Report, BUT…

As I sat down to craft today’s piece just after the January jobs report was released, I found myself sidetracking from the short-term reaction to the report to a sort of state of the markets if you will. So, I went with it, writing for several hours on where stocks stand today. I will publish that early next week.

Today, I was shocked when I heard that the economy created more than 300,000 new jobs in January, almost double what economists predicted. I thought it was a typo. Did the shutdown somehow screw up the data? Were government workers exactly a little revenge? Then I saw very little reaction in pre-market trading so I knew something else was up. A number like 300,000 isn’t normally seen at this stage in the cycle.

Well, it turns out that while the 304,000 was correct, the December and November reports were revised downward by a total of 70,000 jobs, still making the three month average a whopping 240,000. This is beyond great news for any economy, let alone one more than 10 years into an expansion. Even better, wages continued to grow by more than 3%, the number that naysayers have focused on for more than a decade.

Why is this happening so late in the economic cycle?

It’s nothing new. Trump and the GOP gutted 700+ regulations. They cut taxes for corporations and individuals. Hundreds of billions of overseas profits have, are and should continue to flow back into the U.S. Those are the reasons behind the two year resurgence.

Eventually this will end. And you know how critical I have been of Jay Powell and the Fed trying to arrogantly and ignorantly raise interest rates AND sell assets from their balance sheet. It’s fertilizing the landscape for a mild recession. It’s coming. I am sure of it. It’s just not coming right now.

Stocks are looking a little tired and may want to pause or mildly pullback here.

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Semis & Junk Bonds Say the Bears Are Wrong

After trying to score new recovery highs late last week, stocks are set to open modestly lower to begin the week full of earnings and the first FOMC meeting of the year. For now, I am sticking with the same theme from last week. The market is in pause or pullback mode. So far, stocks have done nothing wrong.

Leadership has been strong and constructive with all four key sectors contributing. I have to say; behavior in the semis is extreme right now. After the sector surged 6% last Thursday, Intel announced poor top line revenue yet the sector tacked on big gains on Friday. I haven’t seen this kind of action in a long time. And today, Nvidia also announced bad news, so we shall see what the bulls can do, if anything. Absence a lot of selling, the bulls would be firmly in control which portends good things for the tech and the market.

Finally, junk bonds have really come on strong and are trading at their highest levels since November, much stronger than the stock market. This is yet another sign that the bears are wrong over the intermediate-term. If the 20% decline in Q4 was just the beginning of the bear market, you would expect the credit markets to experience feeble bounces, not the powerful rallies we have seen in both high yield and bank loans since December 26.

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Risk in Both Directions is Small

In Monday’s post, I briefly discussed “V” bottoms and their rarity. I also mentioned that stocks had come very far, very fast and that a pullback or pause was due right about now. So far, stocks have perfectly paused and mildly pulled back. If the rally from the Christmas low remains fully intact, the pullback should be over with either some additional sideways action for the market or a return to new recovery highs next week. It’s that easy right here.

If stocks see any further weakness that closes at a new low for the week, then the market has more to go on the downside with the possibility for the initial thrust rally to be over at last Friday’s close. At this point, there aren’t any strong clues as to which way the market wants to go, but the risk is very small in both directions.

You can see a familiar chart, recently redrawn, below where I drew in those blue lines on December 21 to show the most logical area that the first bounce should head. In reality, the bulls pushed even further and now reside above it. I know this chart looks a little different. It’s because I somehow either deleted or moved my other chart template and I had to create this new one.

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“V” Bottom But Pullback Due Right About Now

Stocks closed at their highest levels since December 6th on Friday, wiping out 100% of the vicious and relentless selling wave I wrote about for so long. So far, the bottom has had the shape of a “V” which is not only rare, but generally uncomfortable for me as “V” bottoms are more characteristic of bear market than bulls. To counter that, there have been numerous confirmations that the rally since the Christmas low is a blast off of a new bull market leg. While I am much more inclined to side with the latter, I am also not dumb enough nor arrogant enough to believe I know better than the market. As I always do, we will take it day by day and week by week and see what the market tells us.

Stocks have come very far, very fast as I keep hearing from the pundits in the media. Well folks, that depends on your time frame. While the stock market closed at its highest level since December 6 and has recovered 100% of the vicious and relentless selling wave from last month, it’s right back at the price levels where we saw lows in October, November and early December. In other words, stocks went straight down and straight up. I also think they are due for a pause or pullback right here and now.

Looking at leadership I try to basically ignore it very early in a rally as we usually see the hardest hit stocks and sectors rally the most out of the gate. Now, don’t get me wrong. If we didn’t see those instruments run hard early on, I would certainly comment on it. However now, banks, biotech and energy have all led in 2019, two of the three sectors I like for 2019 in general. High yield bonds and levered loans have taken off and that adds more credence to the rally. The bulls have done nothing wrong to indicate anything more than a brief pullback is due, but with heightened volatility, it’s certainly no time to be complacent.

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