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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Not the Fetal Position

Last week, my theme focused on a pullback in the stock market. More importantly, my strong opinion was that it wasn’t a bout of weakness where people should sell in to, but rather to use that opportunity to buy the dip or re-position a portfolio to where it should be over where it was.

Friday was an ugly day across the board. Overwhelmingly red. 96% of the volume on the NYSE was in stocks that were down. Besides stocks, bonds and commodities were hit very hard as well. If you came in owning positions, there was nowhere to hide. Few pundits I heard or read said to buy. The bulls and bears are debating whether this was just another scary short-term wonder or if this is the shot across the bow for much more downside. I think you know where I stand.

As of Friday’s close, stocks are down a grand total of 3%. Key sector leadership in transports, semis and especially banks remains strong. High yield is extended but still look good. There is broad participation. This is not the time to build a bunker, stock it with canned goods and water and get in the fetal position. The bull market isn’t over. The rally isn’t over.

Volatility has certainly spiked. I expect that to remain elevated as the market digests Friday’s rout by the bears. Early indications point to a lower opening for stocks, but it’s unlikely we will see a repeat of Friday’s decline. Look for early weakness to subside and see if the bulls want to step in by lunch. The next few weeks should see a number of ups and downs, especially with the Fed meeting, but Dow 19,000 shouldn’t be that far off. Focus on the horizon and don’t let those loud and habitually wrong perma bears cloud your judgement.

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Pullback Remains But Transports…

The Dow and S&P 500 are still lagging the other major stock market indices in pullback mode, but contrary to what you may think, this remains a very healthy environment for stocks. In the strongest markets, the more “risk on” indices are the ones charging ahead. That’s the case now with the S&P 400, Russell 2000 and NASDAQ 100. The NYSE Advance/Decline Line which measures broad participation recently scored yet another all-time high and high yield bonds are hanging in well.

That’s not the landscape ever seen when a bull market ends or even a correction.

Stocks remain in pullback mode and I expect to hear some noise from the bears today and early next week. We should be on the lookout for talk from the “floor traders” that stocks are breaking down at key levels and that could mean the end of the post-BREXIT rally. That’s the same chatter we have heard since mid-July and I don’t give it much credibility. We haven’t even seen a 2% decline since BREXIT which I continue to say that it shows tremendous underlying strength. This little bout of weakness may become 2%, 3% or even a little more. And if so, I remain firm that it will be yet another good buying opportunity on the way to Dow 19,000, 20,000 and perhaps much higher.

On the sector side, think of how many pundits left the transports for dead earlier this year. They said the collapse called for an impending recession with a nasty bear market. Talk was renewed post-BREXIT; yet now, that group is leading the market and is close to breaking out. While all-time highs are almost 20% away and unlikely to be seen anytime soon, the transports recent surge is definitely a positive development for stocks.

Finally, the perma dollar bears seem to be waking up again as the end of the month approaches with calls of collapse, calamity and doom. More on this next week.

Have a great weekend!

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