The Bears Are Wrong

With the French elections going the way of the Euro bulls and corporate earnings continuing to exceed expectations and the high level details of Trump’s tax plan released, the stock market had itself a nice little run on Monday, Tuesday and half of Wednesday before getting a little tired. What a difference a week makes.

The bulls made some solid ground with NASDAQ 100 and Russell 2000 seeing all-time highs and the S&P 400 only a whisker away. The Dow and the S&P 500 need one more big up day to join their siblings. It’s very important that they do not fail here. For the past month, I have written much about the market pullback that is long in time but short in price. Last week, a host of short-term indicators were flashing oversold in bull market. That was yet another opportunity to follow what I have been saying almost every week since early 2016.

Pullbacks are a buying opportunity and weakness should be bought until proven otherwise. Yet at every juncture, the bears were louder in the media giving all sorts of reasons why you shouldn’t buy and why stocks were headed for doom. Eventually, they will have their day in the sun,  but not now and not soon. The bull market remains alive and well with perhaps another quick rest period coming, but not really actionable. Don’t get caught up in the rhetoric.

Leadership is solid with semis and discretionary at new highs and banks are really trying. Transports are starting to concern me a little, but that’s from a short-term perspective, at least so far. The rest of the sectors look pretty good, especially for so late in the bull market. High yield bonds are kicking back into high gear and the NYSE A/D Line is making new highs again. The bears are wrong.

Two areas I am closely watching now are gold and energy. The metals miners failed to make a new high this month and have no declined more than 12%. Even if they are headed another 5%+ lower, there may be a quick trade in there to the upside. Energy stocks on the other hand have been decimated all year and since December. I have looked for signs of a bottom, but they flamed out very quickly. Sooner than later, there will be a very good risk/reward opportunity to buy this group. Stay tuned…

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Reality over Rhetoric. Bulls are Large and in Charge

I have long said and continue to reiterate on a regular basis that it’s not so much what the news is, but rather how the markets react. Clearly, the markets celebrated the French election results as the two main political parties were cast aside. Independent, Emmanuel Macron and nationalist, Marine LePen will face each other in a runoff on May 7. It doesn’t matter if you love or hate either candidate nor what they stand for, much like we saw with Trump and Clinton. The markets like the result. With Macron leading by a wide margin in the polls, markets are pricing in his victory. LePen hopes to continue to ride the Trump train and prove the polls wrong.

Anyway, while I am not the biggest fan of news creating the start of a market rally, the bulls are clearly and definitely “bulled up” for a run to all-time highs. The NASDAQ is already there with the Russell 2000 and S&P 400 not far behind. Recall, they have been leading. The S&P 500 is a little bit further back with the bringing up the rear. That’s all positive over the intermediate-term. My only caveat is that the major stock market indices must all make all-time highs sooner than later or risk developing more serious concerns. Let’s cross that  bridge if and when.

On the sector front, semis and discretionary are leading the four key sectors. Banks and transports have a ways to go, but don’t rule them out of new highs. Software, homebuilders, industrials and materials have stepped up as well in this broad-based advance. Even utilities and staples from the defensive group are at or near new highs. High yield bonds are healthy and the New York Stock Exchange Advance/Decline Line is scoring yet another all-time high. This is not how bull markets end!

The bears keep talking about valuation and Trump as the biggest threats to the bull market. While valuation is important over the long-term, it’s a terrible timing tool and is usually early by quarter, if not years. Regarding Trump, rhetoric versus reality. Don’t get caught up in the headlines and tweets. Things are okay and improving. Dow 21,500 should be next with 23,000 after that.

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Sector Canaries Healthy with Some Small Wounds

Turning to the four key sectors I follow, we don’t have as strong a picture as the major indices, but they are still okay. Semis are first and they have been the strongest for some time, almost too strong, but that’s a topic for a different piece. While they have yet to eclipse their Dotcom bubble high from 2000, they continue to make new highs for this bull market.

Banks are next and after a dizzying pace following the election and prospects for reduced financial regulation, they leveled off and are now under pressure from the potential for less rate hikes. Banks should do better in a tightening cycle as rates move farther and farther from zero where their net interest margins improve dramatically. Their early March peak is in line with where it should be, worst case and this is not flashing warning signs just yet.

Consumer Discretionary is next and it looks somewhat similar to the semis with a series of new (and healthy) highs.

Finally, the Dow Transports are below. They peaked with the majority of the stock market in early March, but have since shown the most weakness of the four key sectors. This is the one I would most keep an eye on for future warning signs.

All in all, the sector canaries remain alive but a tiny bit wounded.

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Sector Leadership Immunizes Stock Market from Bear Market

On Friday, I wrote about the Russell 2000 and what a potential breakout could mean for the stock market. At the open today, this index hit a fresh all-time high. Before breaking out the balloons and party streamers, let’s see if it can close at new highs and not give back too much over the coming days. With the Dow closing above 20,000 for five straight days I will have a new target very shortly that looks to be several thousand points higher.

Turning to key sector leadership, it’s continues to be strong and constructive. Semis have paused of late, but continue to trade right up against new highs. While extended, the rally should still have legs.

Banks, which have traded in a tight range since early December, are trying to breakout to the upside right now. Only a failure here and break to the downside would cause me to temper my intermediate-term enthusiasm.

Like the banks, transports have also been in a trading range since early December and are trying to breakout higher  now. That is certainly bullish from an economic standpoint.

Finally, consumer discretionary, which I did not think would quickly reassert itself heading into 2017, has done just that. It now stands at all-time highs.

It’s really hard for the bears to argue that a bear market or even 10%+ correction is close at hand. The major stock market indices are back in gear to the upside as well as the four key sectors. Of course, this strength never, ever precludes a routine, normal and healthy 2-5% pullback. In this case, as I have said for many years, weakness is a buying opportunity.

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