Bulls Fail Again

My continued theme of a stock market pullback continues. The weakness is unfolding as expected. Small and mid cap indices have been hit the worst, but now the NASDAQ 100 is joining in. The rotation into the Dow and S&P 500 remains, but they are also down as well. Semis, discretionary and transports have rolled over and now the banks are in jeopardy of following suit. Energy, industrials and healthcare are sectors where investors are trying to hide and that may last a little while longer until the final leg down in the pullback. During that stage, I expect the leaders to get hit hard over a short period of time.

After Thursday’s weakness, the bulls were supposed to step up on Friday or at least not allow much downside. That didn’t work out so well as early strength was rejected pretty quickly and the bears went back to work. With overseas markets sharply lower, I would expect a lower open today with the bull pushing back on this semi-holiday trading day. We are supposed to see a rally into lunch. Once again, it will be incumbent upon the bulls to thwart any selling waves this afternoon.

I noticed more than a few indicators over the weekend which said that the risk in stocks has increased dramatically. While I continue to see much higher prices ahead, I am starting to wonder if this is the first nail in the coffin of the bull market.

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The Bulls Better Step Up, and Fast!

For most of Thursday, the bears growled loudly with the largest losses being seen since the Q1 correction. But rallies and bull moves do not die easily. The bull fight and fight and fight until they finally throw in the towel and the market sees what I termed the “gap of recognition”. It is a sharply lower opening that continues lower throughout the day. The bull never recover the gap until after the decline ends and the next rally begins. That’s what I am waiting for now.

Beginning at 2:30pm, we often see the bulls step up when mutual funds begin to balance their buy and sell orders. During initial bouts of weakness from a peak, bulls are usually frothing at the mouth to buy. And right on schedule on Thursday at 2:30pm, the bulls came in to buy as you can see below.

With that predictable move, today presents and interesting day for the bulls. They are supposed to come back and stocks should be up. If we see early strength met by more selling in the afternoon, I think the odds would increase for my gap of recognition next week.

We know from this week that being long is wrong and the S&P 400 and Russell 2000 continue to lag or lead on the way down, whichever you prefer. Now, the NASDAQ 100 is joining the party and threatening to break the uptrend.

Transports and discretionary have gone from leaders to laggards while semis try to hang in. Banks, on the other hand, are seeing some buying pressure after being hit hard. That’s primarily because bond yields have spiked higher, giving banks a better opportunity to make money.

Junk bonds have now seen back to back tough days.

I have been warning for weeks about a potential mid to upper single digit decline in stocks. I stand by that. I think it’s here. There should be a super buying opp in a few weeks.

LET’S GO YANKEES!

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Haves & Have Nots

As you know my theme over the past month has been about this “split” market developing and persisting. By “split”, I am referring to the number of stocks making new highs as well as new lows. The numbers keep climbing. Price hasn’t wavered although recently, the masses and media caught on to the fact that the Russell 2000 has been under pressure while the Dow Industrials have soared higher. That’s unhealthy behavior.

What you see above is pretty egregious. Almost anyone can now spot that. As such, I would expect that trend to move in the other direction sooner than later to punish the late adopters. And even if that happens, it is unlikely to change the internal weakness in the stock market.

The Dow is leading. The S&P 500 and NASDAQ 100 are close behind. The S&P 400 and Russell 2000 look awful. And now, my four key sectors are starting to show some wear.

While the window of opportunity for a pullback remains open for at least another few weeks, there remains that scenario where I will be wrong. If that’s the case I would expect no change in the weak underlying structure but price in the “haves” would somewhat melt up like we saw in late 1999 and early 2000.

For those wondering about gold, it remains in bottoming formation with the evidence still pointing higher. While crude oil has really been strong, I don’t think it peaks just yet, but I also don’t think the rally lasts a whole lot longer.

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Q4 is Here But Market Still Biding Time

I cannot believe Q4 begins today. That’s just crazy. My grandmother continues to be right when she told me years ago that the older you get, the quicker time flies by. That woman who has always been my favorite family member never gave me bad advice and always listened to me. Even the night before she passed in her sleep at the young age of 98, she told me to only buy investments that go up. I should leave the ones that go down to other people.

Stocks closed Q3 on a quiet note, but it looks like Monday is going to see some upside fireworks to begin the day as news of a new NAFTA deal with Canada has been finalized over the weekend. While that’s a long-term positive economically, it doesn’t change my outlook for weakness ahead in the stock market. The window is open for at least a few weeks.

What if I am wrong?

That’s the question I get a lot. Well folks, it won’t be the first time and it won’t be the last. I play the odds. And the odds favor a cessation of the rally before heading to Dow 27K and higher. If I am wrong, we should see market internals or the market’s foundation strengthen over the coming weeks instead of continuing to deteriorate. Sector leadership should improve and the number of stocks making new lows should decline significantly.

We’ll see.

For now, let’s look to Wednesday night and American League Wild Card game between my Yankees and the As. The game is a toss up, but even if my team wins, I think the Red Sox will make short of them in the next series.

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Bears Taking the Ball

Monday saw the not so unusual weakness we have seen lately. However, Tuesday did not see what has become the typical bounce back since the stock market last bottomed in Q1. While I don’t want to assign too much emphasis on one single trading day, especially when it’s in my best interest, perhaps the market’s character is beginning to change. I continue to look for a bull market pullback in the mid to upper single digits.

So far, price, the final arbiter, has done nothing wrong in most of the major indices although I would argue that the S&P 400 and Russell 2000 have started rolling over. While semis continue to move sideways, banks have broken down from their range and hard. On the flip side, high yield bonds have had an awakening and are now at all-time highs. That’s one of the reasons I don’t think the decline could become a full fledged 10% correction. Liquidity remains strong.

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Can the Bears Make Any Move?

While the Dow declined almost 200 points on Monday the other indices were down much less with the NASDAQ 100 closing higher, a good sign for the bulls. Overall participation was poor and the defensive sectors were hit the hardest which was little bit of a head scratcher. As I mentioned yesterday, this week is the weakest week of the year on a seasonal basis. It is also another down Monday with an opportunity for an up Tuesday. I mention this because since the market’s Q1 bottom almost every down Monday has been followed by an up Tuesday. If the bears finally make a stand and repel what looks to be early morning strength, that would be a tiny clue that the market’s character is changing, I remain in the pullback camp for the next few weeks as the window of opportunity is now open for some short-term weakness.

There are many short-term opportunities right now in gold, bonds and the euro. And all with the Fed beginning a two day meeting. Rates are going up 1/4% tomorrow.

That’s it for today. I am on the train to NYC to join CNBC’s Squawk Box at 8am followed by a full hour with the good folks at Yahoo Finance on their Midday Movers show.

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Junk Hanging In While Pullback Begins

This post is going to be short as I am planning on writing my special Fed piece as well as a full Street$marts before I head to New York City tomorrow. Nothing new to report. I remain negative for the next few weeks or so as the window of opportunity for a mid to upper single digit pullback has opened.

I have written about the split market and small warning from the NYSE A/D Line, however high yield bonds are hanging in nicely, at least for now, as you can see below. Sector leadership has been downgraded to neutral across the board.

Nothing new on the gold bottom. The metal saw its low in August while the stocks saw theirs this month. The longer gold doesn’t breach the August bottom, the more likely it holds.

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And FINALLY, the Dow Rings the Bell

Well folks, with the Dow Industrials finally scoring fresh all-time highs, we have every major stock market index plus all four key sectors seeing new highs since the bottom of the Q1 correction. My forecast is now complete. I can’t count how many times people told me that a new bear market started or this time I was going to fall flat on my face. Don’t get me wrong. I fall on my face plenty times. I just keep getting up.

As the Dow has raced higher this week, the market’s foundation has continued to weaken. There’s nothing new on that front, only that the split market with so many stocks making new highs and new lows has worsened. It’s not healthy. That doesn’t mean the bull market is over because I don’t think that’s the case. I do think stocks are in for a pullback.

If we do see a pullback, the most telling thing may be how the defensive sectors behave. Right now, utilities, staples and REITs could go either way. High yield bonds have been quietly strong but no stronger than many floating rate or levered loan funds. The rest of the bond market has struggled. While the NYSE A/D Line has been powerful all year, it’s been lagging on a short-term basis all month.

Finally, and most importantly, price has yet to trigger any indication of impending weakness. That’s what I will be looking for over the coming week or so to take action.

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Buy Yom Kippur But Participation is Waning

As the Jewish holiday of Yom Kippur is here, so ends the seasonal trend of selling Rosh Hashanah and buying Yom Kippur. It worked out very well this year, if you did the exact opposite! Rosh Hashanah was the most recent little low and stocks quietly rallied right through to Yom Kippur.

The Dow Industrials and the S&P 500 have reasserted themselves while the Russell 2000 and NASDAQ 100 have lagged, not exactly the healthiest backdrop. In sector land, banks continue to be weak and tiny bit concerning, especially when bond yields have rallied which is usually a tailwind.

High yield bonds have behaved reasonably well but the NYSE A/D Line has finally started to show some signs of deterioration and weakness. This condition can persist and not matter for three months or 23 months. It’s not a timely indicator, but it is very important.

Even though stocks have rallied of late, the internals have not kept pace, let alone lead. The short-term concern I have been writing about remains in place.

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Hindenburg, Titanic, OH MY!

As I did my usual weekend research and overview I am even more convinced that there is valid reason to have some short-term concern. By short-term, I am looking at the next three to five weeks and nothing more than a single digit pullback, worst case. Lots of little things have ans continue to pop up to go along with the negative seasonal headwind this time of year. However, the real and nasty bearishness of September has been muted by the bull market as I wrote here.

While price action in the major indices continues to be strong and price is the final arbiter, there are a number of secondary things that warrant attention. You have heard or read about the “dreaded” Hindenburg Omen or Titanic Syndrome. Those are two stupid names for a market condition that’s not as deadly as the name suggests. In essence, they are triggered when there is a split market, meaning lots of stocks making new highs and new lows along with a few other rules. Analysts look for clusters of these signals to signal weakness in stocks. While their track record is a little above average people love to cherry pick and highlight triggers at the bull market peaks of 2000 and 2007.

Given what I wrote, I still remain very confident that the bull market remains alive and reasonable healthy. More all-time highs should be in order next quarter and into 2019.

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