VIX Says Full Steam Ahead for Bulls

While stocks “paused” on Thursday, it’s something you can hardly see on a chart. Since the Christmas low, all the market has given back has been one to two days here and there. Remember, in the strongest of trends, a two day pullback is really all you get until the first real trading range sets in to frustrate bull and bear alike.

Below is a chart of the S&P 500 followed  by the Volatility Index or VIX. As you know, when stocks go up, volatility usually goes down and vice versa. Interestingly and surprisingly, right at the Christmas low in stocks, volatility was at it peak. That is rare and unusual as the VIX usually sees less buying pressure right before it’s about to collapse when stocks bottom.

Anyway, for two months I have written about the unmagical level of 16 on the VIX. I have been waiting for the VIX to close below 16 to signal another “all clear” for bulls. 16 was important because you can see how it acted as a floor during the Q4 rally attempts. On February 4, it finally achieved that mark.

Finally on the VIX, it is now comfortably below 15. If somehow I am completely wrong and this whole huge, epic rally is a bull trap in an ongoing bear market, the VIX would not be below 15. In the 2000 to 2002 bear market as well as the 2007 to 2009 one, the VIX never traded comfortably below 15 until the entire bear market was long over.

So, no, I don’t think the rally is over. And no, I don’t think this is a bear market right now.

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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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Trump Tariff Tantrum Again

Stocks came back from some mild morning weakness on Friday but still look like they want to pause to refresh as the on again, off again continuation of the Trump Tariff Tantrum is front page now. In the very short-term, it’s pretty easy. Closing above last week’s highs gives the bulls energy to move higher. Closing below Friday’s low means stocks could see a mild 2-3% pullback before heading to all-time highs in Q3. The seasonal trends show some weakness ahead as it is the week after option expiration with stocks in an uptrend. I believe the hat tip goes to Rob Hanna of Quantifiable Edges but I am not 100% sure.

While banks have pulled back and need to stabilize, semis are still okay but really need new highs. I keep writing about transports as they look like the next major sector to take off and lead. That’s still the case as they seem poised to run to new highs.

Bonds on the other hand, look like they have a little life, especially if they close above Friday’s high. The more the masses have become aware that rates have gone up so dramatically in absolute terms, the more I have been positive on bonds. While I continue to believe that the 35-year bull market in bonds ended in July 2016, there will be plenty of opportunities on the long side over the coming years and decades. It’s just like with stocks. While they have gone up, up, up for more than 9 years, they have been plenty of times to position for a move in the other direction.

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Bears May Have Reason to Celebrate But It Will Be Short-Lived

On Wednesday with most of our tried and true Fed Day trends muted, I mentioned the possibility for a negative set up. With the S&P 500 down on statement day, that set up a shorting opportunity for yesterday, today and into next week. Nothing big, just some potential mild weakness after a very nice run into the Fed meeting.

If any weakness does materialize, it will be interesting to see if tech cedes leadership in favor of value. With the NASDAQ 100 it certainly doesn’t appear that way and my call for a change in leadership in favor of value does seem a premature and a bit foolish. Speaking of the NASDAQ 100, I am a little  bothered that semis remain below their highs. That needs to be watched closely for signs of a more serious divergence and warning. Investors have been more focused on software and internet which is okay in the short-term.

Looking at the other three key sectors, banks remain mired in a trading which I continue to believe will resolve itself to the upside next quarter. Transports have been strong and leading and should also see all-time highs next quarter. Consumer Discretionary has been the strongest leader over the past 6 weeks, but I would imagine the upside acceleration begins to slow sooner than later.

Finally, as I started to mention late last week, high yield bonds no longer stink. They have been kicking it up a notch of late, but still remain nowhere near their 2017 highs.

The bottom line. Any short-term weakness should be bought.

 

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Leadership A Changin’

Stocks appear to be shrugging off the reversal I wrote about last week, pretty much as expected. There is a lot of the news docket this week with the Fed meeting on Tuesday and Wednesday as well as the summit in Singapore with North Korea. While the latter will be all the focus, the former has a much better chance of moving the markets. You should expect another special Fed edition shortly.

Over the past week or so, index leadership in the stock market has been showing signs of changing. While the Dow has been lagging for most of the year, it is perking up in the short-term and it is now rated number one against the S&P 500, S&P 400, Russell 200 and NASDAQ 100. After that, the S&P 500 and S&P 400 are essentially tied with Russell 2000 and NASDAQ 100 bringing up the rear. This probably comes as a surprise since the last two ranked indices have been leading the rally and the Dow has performed the worst.

Getting a little more granular, value stocks seem to be finally attracting some interest over growth. It’s been a long, long time with large cap looking slightly better than mid cap. Could the FAANGs be losing a little luster?!?!

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