Irrational Exuberance

This past weekend was the first official ski weekend for my youngest son and me. And boy was it cold in Vermont! But with mid-winter conditions, it was hard not to overdo it. I overdid it and now I am in a world of pain. Neck, back, quads, calves, fingers.

Anyway, as you can imagine, I am usually a chatty one on the lift. Since we typically ride the quad or 6 pack, we are usually with strangers. When people find out what I do for a living, they rarely ask questions except for the occasional “what’s the hottest stock right now”.

This weekend was very different.

Not only was I offered unsolicited advice on chairlift rides about investing, but I was also told that no one really needs a financial advisor. Everyone can do it themselves. I loved the guy who told me everyone should just use the robos to invest and call it a day. After all, they are super cheap and it’s all about cost. They didn’t like my analogy about driving a Yugo or finding the cheapest doctor or plumber.

If I could quantify the level of exuberance, I would say it was approaching irrational. Nothing like I experienced in late 1999 and early 2000, but that was once in a lifetime. The public is coming back to the stock market and higher highs await us. The problem is that the public tends to arrive late to the party and never leaves when they should. If someone told me 3, 4, 5, 6, 7 years ago that mom and pop wouldn’t start investing again on balance until Dow 19,000, I would have laughed in their face. But they are right.

This doesn’t mean much for the immediate future. The window I starting writing about for a decline exactly one month ago has essentially closed. Sure, we can and should see a 2-3% pullback. If everyone is looking for that, it won’t come right away. However, all of the warning signs I have written about for a larger decline have dissipated. Buying weakness is the strategy until proven otherwise.

Keep an eye on buying the most battered into the Fed meeting on Wednesday.

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Bulls Continue to Trample Ahead

On Wednesday, I gave a higher level overview of how the stock market is behaving along with the leadership and some key indicators. Nothing has really changed. Almost everything is severely overbought, but they can still become even more overbought. Pullbacks through year-end should be shallow and no more than 2-3%, lasting just a few days.

Another piece of good news for the longevity of the bull market came this week. The NYSE Advance/Decline Line scored an all-time high. That effectively insulates the bull market from ending for at least several months if not longer. Broad participation is there and weakness has to be bought until proven otherwise.

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Additionally, high yield (junk) bonds are a whisker away from new highs as well. As you know, they are one of my favorite canaries in the coal mine. Bull markets typically don’t end with junk trading so well. That adds further insulation for the bull to live on well into 2017 if not longer.

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Without any pullback, those looking for investment should find laggards, instruments that haven’t kept pace with the advance. Healthcare, biotech, staples, REITs, utilities and preferred stocks are a few to research.

Have a great weekend! My nose smells snow in Vermont and it’s time to makes some turns…

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The Streak Has Been Broken – Gold Teetering

After four straight afternoon fades in the stock market and one neutral day, the bulls FINALLY were able to overcome a gap down open and closed near the highs for the day on Friday. However, one day doesn’t change the pullback theme of the last six weeks.

Today, stocks are going to open higher with help from several deals announced along with Europe on firmer footing. AT&T buying Time Warner for $85 billion certainly is an eye opener, so much that no one is really talking about TD Ameritrade buying Scottrade and Rockwell buying B/E Aerospace. Mergers and acquisitions activity can definitely be a catalyst for the next leg higher in stocks, especially since no one has really been focused on this of late.

Back to the stock market’s behavior, I want to see multiple days of stocks closing in the upper 25% of their daily range along with at least solid internal to go along with the already good leadership in technology, transports and financials. Gold has been bouncing as I started discussing here.  However, all that’s really been happening is a clinging to the rising 200 day moving average as you can see below in pink. At the recent lows, both the 200 day moving average and an old trendline in blue seemed to contain the decline, but should gold rollover sooner than later, I don’t think we will see the same outcome.

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It’s already a busy week with M&A activity, but more than 150 S&P 500 companies will report earnings not to mention that the election is just two weeks from tomorrow. With the Dow still well above 18,000 and biotech pummeled, the market isn’t giving Donald Trump much of a chance.

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Make It Four Straight

For the fourth day in a row, stocks lost steam later in the day. While the internals continue to improve, price is always the final arbiter and the 6 week pullback continues for now. At the same time, gold is popping a little and crude oil just scored a one year high, both against a strong dollar which is unusual.

Both semis and software are bouncing from their first bout of weakness off the high while banks exploded higher on Wednesday. Energy was also a leader and transports are treading water just below their recent highs. The concern here is that the rest of the sectors don’t look so hot. They will definitely need to repair themselves before the next leg higher begins for stocks.

Regarding the debate last night, there was absolutely nothing said to impact the markets. Hillary looks like a 75-80% winner at this stage. All you need to do is look at the biotech sector as an inverse proxy for her victory. Trump still needs the Dow below 18,000 to have a shot.

For now, patience remains the operative word. Buy on weakness and prune into strength until proven otherwise. We need to see  few days where stocks close near their highs.

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Another Gap. Trade & Fade?

After Thursday’s reversal, Friday’s early action looked promising as I left the office before lunch to celebrate my 15th wedding anniversary playing golf with some friends at Foxwoods before the wives met us for dinner and gambling. At least the dinner went well! However, as has been the case lately, opening gaps have often been the high or low point for the day as was seen on Friday as well as on Monday. This is certainly not a sign of great strength. One indication that the pullback is over will be when we get one or two days where stocks open higher and then continue to build momentum right into the close.

With Netflix beating earnings estimates by a wide margin and the financials continuing to beat, stocks look like they want to follow Europe and Asia at the open with another gap higher. On the Dow, S&P 500, S&P 400 and Russell 2000, all we are seeing is traders buying at the lower end of the range and selling in the middle of the range. The NASDAQ 100 remains stronger and the leader, but that too, is digesting.

On the sector front, it’s really more of the same although a touch weaker with semis and transports leading the leaders. The defensive groups, utilities, telecom, staples and REITs remain weak. Healthcare, which falls somewhere in between, has really taken it on the chin as Hillary Clinton’s ascension to the Oval Office has become much more likely lately. That’s also a reason why biotech has fallen more than 10% over the past month.

On the flip side, as I often mention, high yield bonds continue to scrape along just below new highs and the NYSE A/D Line scored an all-time high last month, indicating widespread and healthy participation in the rally.

Stocks remain in the same pullback mode I have written about for more than a month. While frustrating, it’s not necessarily a bad thing as the resolution should strongly to the upside above 19,000.

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