Stocks Continue to Creep But Best Opp for Pullback is Now

It’s really the same old story as we begin the new week and the final full week of October. The intermediate and long-term continue to look strong as they have for days, weeks, months and quarters. Nothing has changed. The short-term is the time frame where it’s neutral at best. I have said all month that the bulls need a little rest, but they haven’t seemed to care.

Today, as I look at the five major stock market indices, the Dow is looking more and more like a tech stock and the NASDAQ 100 like a stodgy Dow stock. That’s not exactly the behavior normally seen in the healthiest of markets. However, as I wrote last week, the bulls have been running like they’re in Pamplona!

At this point, there aren’t many cracks to concern me more than just a cessation of the advance or the modest pullback I have been wrongly writing about all month. Key sector leadership is good. Secondary leadership from industrials, materials, energy and healthcare is even better. High yield bonds and the NYSE A/D Line are at all-time highs.

It’s been one of those “creeper” markets as Jason Goepfert of Sentiment Trader calls it, where day in and day out, stocks just slowly climb higher and higher. Martin Armstrong, one of the few outside reads I have, calls it a “vertical market” where everyone “gets drunk at the party but no one is really having a good time”. It’s the kind of market where is you are long, you just sit back and grin. If you have been waiting to buy, it hasn’t been any fun. Having been on the wrong side of a creeper years ago, it was one of the most frustrating periods in my 20 year career.

The bottom line is that stocks remain a little tired and if that modest pullback is coming, it should be here right now.

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Bulls Running Like Pamplona

This is looking more and more the running of the bulls in Pamplona. They just stampede anyone and everyone in their way. After the two strongly positive seasonal trends ended after the first week of October, there was sufficient evidence that stocks were due for a pause to refresh or modest, single digit pullback. That’s what I was looking for. Nothing big. Nothing significant. Nothing really actionable. Just your garden variety reset.

Stocks came out of the gate to the upside on Friday after what I kiddingly referred to as a one day bear market on Thursday. All of the major stock market indices are at or essentially at all-time highs. Bears can’t argue with that. My four key sectors are also acting very well with semis and banks at new relative highs with transports and discretionary catching up. In recent weeks, I wrote about the poor behavior by the banks, but that is changing today.

High yields, while not leading and looking a little lifeless, are still just a day or two from all-time highs. The NYSE A/D Line is also just a whisker from new highs. On the other hand, defensive sectors, like utilities, telecom and staples are the worst sector performers. For the first time since Q1, bond yields look they could break out to the upside and see the 10-year note head above 2.6%. That would be a huge tailwind for banks and signal that the economy may be heating up.

Stocks should end the week on a high note. Interesting how GE reported awful earnings yet again and the stock opened sharply lower by more than 5%. As I type this, it’s trying mightily to turn green on massive volume. If that 4%+ dividend is safe…

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3 Reasons Stocks Will Peak Right Now

Good Monday Morning! Huge weekend if you are a sports fan although the decision making of my Yankees’ and Cowboys’ manager and coach likely just ended their seasons. At that level, the margin for blunders is razor thin and both Girardi (4 stupid decisions in 40 min) and Garrett (one giant brain freeze) cost their teams. While I have never been in their shoes, it’s the same thing I face each and every market day. Over the past 29 years, I have probably made every bad decision one can make, but hopefully, I learn from those as I move forward.

Stocks begin the week with all five major stock market indices at fresh new highs along with high yield bonds and the NYSE A/D Line. So are the banks, semis and transports among key sectors. As I have said over and over and over again since 2010, bull  markets do not end with this type of behavior. Sorry to all of the bull markets haters and disavowers; you have been wrong, are wrong and will be wrong until the evidence changes. And when they are finally right, I am sure they will crow about how they knew it all along. Reality over rhetoric.

With all that said, the very short-term has an opportunity to change right here and now. If there is going to be the mild, modest pullback in October which I have written about lately, stocks should peak this week for three reasons.

1 – September ended at its highest close of the month for the S&P 500. That leads to another week of strength, roughly 1%, and then a give back of more than 1%.

2 – When October begins the month in an uptrend, the first five days tends to be higher. However, the next five and the five days after that and the final five days of the month all show mildly negative returns of roughly -0.25% each period.

3 – Stocks rallied hard into the beginning of Q3 earnings season, using up a lot of fuel. That usually means earnings are priced for perfection and rarely exceed expectations.

BONUS – The Economist and Barrons have run very bullish headlines this month about how the global markets and economies are hitting on all cylinders. Additionally, the term “melt up” is all over the place on blogs and Twitter. While this is nowhere even close to the true irrational exuberance of 1999 and early 2000, it does give bulls a little cause for short-term concern.

Finally, I am not going to rehash the piece I wrote about the negativity of Octobers in years ending in “7”, but you can reread it HERE.

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Three Big Short-Term Changes Today

Looking at the economic news of the day, jobs created in September actually declined for the first time since 2011. On the surface, that would be shockingly disappointing and brings in calls for recession. However, all of the drop from the expected 100,000 created will be attributed to the hurricanes. The unemployment rate surprisingly fell to 4.2% from the expected 4.4%. Until the economies in Texas and Florida get back to somewhat normal behavior, job numbers are going to be volatile and more difficult to assess.

Turning to the markets, as I wrote about earlier this week, all of the major stock market indices saw new highs this week. This was expected as we have strong seasonality from October beginning the month in an uptrend as well as September ending the month at its highest close. Both of those tailwinds end TODAY with the October seasonal trends turning negative for the next three weeks. Additionally, stocks have rallied very hard into the beginning of earnings season which is now. Put another way, stocks have exhausted a lot of energy as companies begin to report Q3 earnings. It’s going to be difficult to maintain the rate of ascent, not to mention that companies better not disappoint.

While all of this may sound negative, I want to be crystal clear that I absolutely do not believe the bull market ended or is close to ending. I only have some very short-term concerns which may translate into a modest low to mid single digit pullback in stocks. Nothing to worry about over the intermediate or long-term. Semis, banks and transports all made new highs and discretionary has ceased lagging significantly. Industrials, materials and all at or near new highs. Energy is rallying sharply. All this as defensive sectors like REITs, staples and utilities are lagging. The recipe for higher prices remains firmly intact into year-end and into 2018.

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Signs Point Higher this Week

After a solid end to September and Q3, stocks open the new day, week, month and quarter flirting with all-time highs. Of the major indices, only the NASDAQ 100 isn’t there, but I expect to see that achievement this week. When I think of October, Reggie Jackson’s three home run game in 1977 comes to mind along with Halloween, fall foliage and stock market crashes. As I already wrote about, while October is known for huge market swings, 2017 is on the atypical side with near record low volatility.

I updated my research regarding October and you can read about it HERE. Additionally, the always interesting Rob Hanna from Quantifiable Edges offered that when the S&P 500 closes the month at its highest close, the next 5 trading days are seasonally very strong with 21 wins and 7 losses since 1995. The average trade earned a stout 1%. This trend jibes very well with what I discovered about the first 5 days of October in an uptrend. I will be looking for a short-term peak next week.

On the sector side, strong leadership continues to support buying any dip with semis, transports and banks all stepping up big time. Discretionary is fine, but I am beginning to see the early stages of intermediate-term underperformance. High yield bonds are behaving well and there is just no evidence that the 8+ year bull market is ending. Sorry bears…

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Stocks on Solid Footing Heading into Q4

Since late July, my overall theme has been one of pause to refresh with a mild pullback as the five major stock market indices were certainly not all in gear to the upside. Two months later, with the S&P 400 and Russell 2000 recently surging, they are all getting closer together. That behavior comes at the expense of the NASDAQ 100 peaking earlier this month and moving sideways for the others to catch up. I fully expect November and December to see all five major indices scoring all-time highs at the same time although I am still not ready to declare that stocks are ready to blast off to the upside.

I have written much about the semis and banks as a tale of two key sectors moving in opposite directions. While semis broke out to new highs, banks finally got off the rear end and surged 10%, close to new highs, a very positive sign. Transports behaved similarly, but even stronger. Discretionary, leaders in most years since the bear market low in 2009, look like they are peaking, at least over the intermediate-term which could spell some trouble for the consumer. Somewhat quietly as I have written about before, energy has become the single strongest sector after some horrific declines.

All in all, stocks are closing out the quarter on fairly solid footing and poised for higher highs into year-end.

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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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Sell Signal Closed Out. New Leadership Emerged

Today is the last day of the month as well as the last day of the quarter. The S&P 500 closed down -0.12% in August and is on track to close down in September unless the bulls can mount a major offensive, which I am not ruling out, and close above 2071. That means a down August and September for the S&P in a presidential election year, something not seen since 1956. You can put that in the category of useless info.

Last Thursday, I wrote about a somewhat rare trend that forecast weakness from last Thursday’s close through yesterday. http://investfortomorrowblog.com/archives/2403

As you can see below, it was a pretty good five day trade of more than 1%.

fomc

While stocks sold off hard on Thursday with German banking behemoth, Deutsche Bank, collapsing even further, this is absolutely not a Lehman moment. Unlike Lehman which had no asset base to keep them afloat when the institutions made a run on the bank, DB has a huge retail network. I also do not believe Chancellor Angela Merkel will risk DB becoming insolvent with the election coming in 2017.

Anyway, stocks remain in pullback mode which I have been writing about for several weeks. Remember, pullbacks can some in two forms. One is for prices to decline quickly and somewhat sharply, while the other is to see less price weakness and more lateral movement over a longer period of time. I think we are seeing the latter right now.

I  keep talking about leadership changing and look what has been doing well during this pullback. Semis, transports and energy. These are new and bullish leaders for the bull market as the defensive group has now transitioned from neutral to outright weak. And, high yield bonds continue to hang in very well right near their old highs.

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