Two Favorite Canaries Looking Fine

The final two canaries are probably my favorites because I believe they are the most powerful and predictive. In every bull market of the modern investing era, both of these canaries gave 3 to 21 months notice that trouble was brewing. However, that doesn’t mean that every time these canaries warn, bear markets occur. It just means that they haven’t missed any.

The first chart is that of New York Stock Exchange’s Advance/Decline Line which simply measures participation in the stock market on a cumulative basis. What we want to see is this indicator making new highs along with the major stock market indices. When it stops making new highs and the indices continue to do so, that’s a warning sign. As you can see, the NYSE A/D Line last peaked in early March with the stock market.

A proxy for the high yield bond market is below and I use it the same way as I do the NYSE A/D Line. It gives the same kind of red flags. Right now, we see that its last high coincided with the rest of the stock market.

These last two canaries, while off their early March highs, are not flashing any warnings signs that the bull market is ending anytime soon.

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Little Tantrum Beginning

The bulls began Wednesday with high hopes (and higher prices). By lunch time, it looked as if the market was ready to test its early March, all-time highs although the NASDAQ was already at new highs. But a funny thing happened on the way to Dow 21,000; the Fed released their minutes from the last meeting and the market did not like what they had to say.

In essence, the Fed was preparing to test the markets on unwinding their massive $4.5 trillion balance sheet later this year. It’s already been leaked and talked about, but it still poked the market a bit. At this point, the Fed plans on raising rates one or two more times and then halting the hikes to test selling some assets. Frankly, I did not believe this would happen in 2017 or even 2018. I thought the Fed would complete their tightening cycle and let the assets roll off organically over the years after they stopped reinvesting the proceeds. Clearly, I was wrong and the markets are a little cranky.

As long as this little tantrum continues, I would expect the banks and dollar to be under pressure with gold, euro, yen and treasury bonds firming. Downside risk in the Dow looks to be roughly 20,300. Let’s see if high yield bonds can hang tough this week.

Before someone asks, no, the bull market isn’t over.

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Q2 Begins with Higher Expectations

Stocks closed the first quarter without much fanfare and they head into Q2 with a strong seasonal tailwind. The major stock market indices are still not all in gear to the upside, but I expect that to correct itself this quarter with new highs across the board. Semis and discretionary are still very strong and I expect transports and banks to reassert themselves. Junk bonds had a very strong close to the quarter and they will need to continue that run this quarter.

Earnings season begins next week and the comps from this time last year will be very easy to surpass. However, analysts have really increased their expectations so companies need to blow out to the upside or those stocks will suffer.

My theme remains unchanged. The bull market is alive and reasonably healthy. Dow 23,000 is my next target. Weakness should be bought.

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Bulls Put Up A Stand

Yesterday, I wrote about the pullback getting a little old and the opportunity for stocks to find a low and rally. I offered that Dow 20,200 to 20,400 could provide some cushion. The Dow hit 20,400 yesterday morning and rallied nicely into the close with some follow this morning.

Was that it? Pullback over?

I am not certain, but we did do some buying yesterday to take advantage of the biggest bout of weakness this year. And it wasn’t much. Stocks could rally for a few days and then rollover one more time or the rally could have already started. I am okay being a little early, just as long as we don’t see a full scale melt down below 19,800.

As I mentioned the other day, high yield bonds bottomed last Wednesday and are now leading stocks over the very short-term. That’s a good thing. Defensive sectors are lagging with my four key sectors, banks, transports, semis and discretionary stepping up again.

Finally, I am keeping an eye on the Japanese yen as it has rallied the most during the stock market’s pullback. If that comes under pressure, I will feel better that the little low is in and new highs are coming.

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Two Vital Canaries

After Tuesday’s “big” decline, there was some short-term damage done to most of the major indices. Rather than return immediately to new highs, I think we need a period to repair, which is not the worst thing in the world. A likely scenario is to see movement in both directions, perhaps into April, before the next leg higher begins.

On the key sector front, semis and discretionary escaped most of the damage and should be poised to lead again. Banks and transports are a bit more wounded, but by no means fatal. While software and homebuilders remain strong, telecom and retail are hurting. Industrials and materials are still okay. Interestingly, the defensive utilities and staples are quietly very solid. I am not going to guess on healthcare and biotech until we see how they react to the vote. Remember, it’s not the news but how they react to it.

Let’s turn to my favorite two canaries, high yield bonds and the New York Stock Exchange Advance/Decline Line along with the S&P 500 so you can see if we have any divergent behavior.

High yield (junk) bonds are below and you can see that they just recently peaked in early March and have been in a pullback all month, down roughly 2% since the highs.

The NYSE A/D Line is next and it has almost the exact same behavior as junk bonds with the early March peak and decline. The only difference is that the little bout of weakness this week has not been as noticeable. In other words, this indicator looks a little stronger.

Finally, the S&P 500 is below and just like the two canaries above, it peaked in early March and has been pulling back ever since. The index has seen its lowest point this week which creates a short-term positive indication with the canaries showing a little more internal strength.

The takeaway from this confirms what I have said, am saying, and will continue to say. As long as the two canaries peak coincidentally with the S&P 500 and the other major indices, the bull market will live on. If and when they begin to diverge, the clock will start on the potential end of the bull market, but there will absolutely need to be more several more canaries dying before the bull market does. It’s just not that easy to kill a bull.

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Short-Term Iffy But Long-Term Remains Strong

Following up from Friday’s post, stocks remain overbought and certainly stretched to the upside although the same can certainly be said all month. They are much in need of a break or at least a quick pause to refresh. However, sometimes strong momentum overpowers everything as we have seen from time to time. I closed last week by saying that the bull market is absolutely not over in my opinion. That prevented the usual emails.

Look no further than two of my favorite long-term indicators, the NYSE Advance/Decline Line and high yield bonds. The NYSE A/D Line just scored a fresh all-time high last week. I can’t tell you how many times people have questioned me on its value, yet it’s been one of the strongest advocates for the bull market since 2009. The rally from the pre-election low has been historic and the rising tide has lifted all ships. The bull market ain’t over.

Junk bonds are below and as you know, they are among my favorite canaries in the coal mine. Bull markets typically don’t end with high yield bonds making new highs as they have been and are right now.

I have said this for years and years, and I will say it again. While this is no longer the most hated and disavowed bull market of all-time, buying weakness remains the strategy until proven otherwise. Those waiting for the perfect pullback to buy will either freeze when it comes or it won’t be the pullback to buy.

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Dow Breaking Out & Q4 GDP Miss the Last

After hitting yet another one of my upside targets, 20,000, the Dow has yet to pause. Five straight closes above 20,000 will open up new upside targets before the bull market ends.  As you can see below, the Dow has been consolidating sideways since early December. That’s often referred to as a flat top or box. When prices finally exceed the flat top, they oftentimes see a spurt in the same direction.

Although momentum is on the side of the bulls there are a few short-term headwinds which will present themselves if the rally stalls and closes back in the box sooner than later. Should that occur, I would expect a quick pullback to 19,700.

The NASDAQ 100 has been the leading index since late December, yet it certainly looks a bit tired, the same comment I made earlier in the week. Semiconductors look even more in need of a rest and they typically lead the NASDAQ 100. Keep in mind that all I am saying is that stocks may pause to refresh. The bull market is alive and reasonably healthy. Weakness is a buying opportunity until proven otherwise.

Sector leadership remains strong. Semis, banks, discretionary and transports look powerful although they could use a rest. Industrials and materials are also kicking it into high gear. Healthcare and energy continue to lag, but I think they will have their day in the sun after this quarter.

New highs in high yield bonds and the NYSE A/D Line bode well for the bull market, regardless of the next 5-10% move.

Q4 GDP just printed at 1.9% which was below forecasts. I wouldn’t be surprised if that’s the low print Donald Trump sees for a while and the market just shrugs it off.

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Key Sectors Holding Up Otherwise Weak Market

Last week, I voiced a little more concern about the stock market as the S&P 400 and Russell 2000 broke to the downside from their trading ranges. So far, they haven’t been able to regain previous levels. Now, we have the S&P 500 and NASDAQ 100 trading at the lower end of their ranges and it looks like stocks have further to go on thew downside before finding more solid footing.

As I have said for months, based on market history, the challenging party needs a lower stock market to have a chance to win. For this election, the number has been 18,000 although the lower the better for Donald Trump. At the same time, I have been using the biotech sector as a bellwether for Clinton’s chances of victory. Interestingly, biotech has been falling sharply since late September which runs counter to the polls and latest email scandal. Of course, fundamentals in the group could be overpowering political models.

On the key sector leadership front, semis, banks and transports have been strong and really holding up the market. Only consumer discretionary hasn’t been cooperating. While utilities have bounced back nicely, staples, REITs and telecom remain laggards which should be good stocks over the intermediate-term.

High yield bonds, which have held up very well are now under modest pressure, another small concern. Although stocks have struggled, treasury bonds are not providing the expected safe haven, even though commodities have also been hit. Adding it all up, you have a bit of a liquidity problem in the markets as it appears investors are building cash positions for now.

The Fed begins a two-day meeting today and it would be a complete shock if they raised rates tomorrow. However, given the political landscape and events of the past few days, nothing can be rules out!

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A Little More Concern Creeps In

At least we had one day where stocks closed firmly! As has been the case for more than a week, but really over the past month, sellers continue to snuff rallies that begin the morning. The bears say that this is a market on the verge of collapsing under its own weight. The bulls counter that with all the selling into rallies, stocks remain just a few percent off their recent highs.

What I am seeing is my pullback theme continue to play out during the beginning of what is usually a very strong time of year seasonally. You also have a tale of different indices with the Dow and S&P 500 mired in a two month range with the NASDAQ 100 just making a new high this week. Somewhat concerning is the action in the S&P 400 and Russell 2000, former leaders, which are now breaking down from their trading ranges.

On the encouraging side, we still have strong leadership from three of the four key sectors. Semis and transports are just off their recent highs while banks and making new highs now. Discretionary looks crummy. High yield bonds scored new highs this week and the NYSE A/D Line is digesting constructively.

While stocks often delay the beginning of the typical Q4 rally during an election year, I wouldn’t be surprised if the S&P 500 has a sharp, but temporary breakdown below 2120 just before election day. That would be a another dip to buy.

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Canaries in the Coal Mine Part III – My Two Favorites

Updating the two, and perhaps, most important charts from last week, we can first see the New York Stock Exchange Advance/Decline Line which measures participation in rallies and declines. Before a bear market hits, you will almost always see this line peak well before price does. In other words, the troops were dying in a battle but the officers survived until the bitter end. In today’s case, this indicator still very powerfully supports the bulls.

Finally, high yield bonds are below where I am using the PIMCO High Yield Fund as a proxy for the sector. It just hit a fresh high. Just like the NYSE A/D Line, junk bonds almost always peak well before the major indices.

If I had to rely on just a few canaries, these two would be at the top of my list. Right now, both a very supportive of the bullish case and higher prices before the bull market finally ends. Keep in mind that while every bear market typically begins with these two canaries dying, they will sometimes give false warnings and then come back from the dead.

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