Big Day for the Bulls But No All Clear Yet

Stocks bounced very strongly on Monday led by banks, semis and transports which just happen to be three out of four of my key sectors. That’s one for the bulls. The beaten down Russell 2000 index of small caps led the major indices higher and that’s another good sign for the bulls as the Dow Industrials definitely lagged the rally. While participation was decent, the number of stocks hitting new highs and new lows was not encouraging as they were almost equal. That’s one for the bears.

Given that all five of the major indices closed above last Thursday’s high, the rally should continue today, at least until lunch. High yield bonds did not have a stellar day on Monday and they are supposed to step up today. “Supposed” to is the operative word.

I do expect the bears to put up a fight before new highs are seen. That little battle will certainly go a long way into concluding whether my call for the pullback to continue is right or wrong. I also believe that tensions with North Korea are on simmer and will reignite over the coming month.

I tweeted about the Dow Transports on Monday which you can see below. This is not a new chart. I have been discussing it for the past few weeks as potentially a leading indicator for stocks. This sector was the first to exhibit weakness and then test the blue line which is its long-term trend, aka the 200 moving average. At the end of last week, the transports once again revisited its long-term trend and tried to reverse. On Monday, the group powered higher and confirmed a bottom of potential significance is in place. The upside target for this move is 9600.

The interesting “tell” will be if the rally fails in the transports and closes below the Q3 lows. At that point, we will watch to see if any other indices follow suit.

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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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Bulls Not Ready Just Yet

As we head into the holiday shortened week, the bulls don’t seem ready just yet for that next assault higher. Last Wednesday’s reversal still looms and there are small wounds that need to be healed. Don’t forget that our markets are closed on Friday for Good Friday and liquidity may be a touch lower because of the first two nights of Passover on Monday and Tuesday.

All of the major stock market indices experienced sharp reversals last Wednesday and while I do not believe they are significant, they should offer a little bit of hesitation over the short-term. The true “all clear” sign won’t be confirmed until they close above last Wednesday’s high which I think may take a week or more, even though the stock market is in a seasonally strong period.

On the sector front, the defensive ones like staples, utilities and REITs continue to quietly deliver, but I don’t think they will lead the next rally. I am now watching for signs that energy might finally be ready to step up and help after basically stinking it up all year. With transports also percolating nicely, wouldn’t that be interesting and unexpected to see!

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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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