Semis Strong, Shouldering the Burden. Other Sectors Stepping Up.

The stock market continues to quietly drift higher, at least on the surface. The Dow, S&P 500 and NASDAQ 100 have seen new highs this week while the S&P 400 and Russell 2000 look constructive but still well below their peaks. I do expect them to play catch up and see blue skies before any meaningful downside is seen.

I wrote about the banks earlier this week as being a concern. Discretionary is a bit stronger but also not firing on all cylinders. Transports have rallied strongly and seem poised for new highs. Semis, as I wrote about before, have shouldered most of the leadership burden and are just shy of new highs. That’s been an impressive run and I don’t think it’s over.

Outside the key sector group, I see some really encouraging behavior by healthcare, biotech, industrials, materials and energy. While some analysts question market participation, this behavior counters that argument. Furthermore, although the percentage of stocks above their long-term trend (200 day moving average remains in a downtrend as you can see in the first chart, the second one is a longtime favorite, the NYSE Advance/Decline Line. For me, the latter is a better representation of what’s going on beneath the surface.

Here’s the bottom line. While the stock market is not without short-term concerns and I am still looking for some weakness next month, the majority of the key indicators are in good shape. Bull markets do not end with behavior like we are currently seeing.

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Small Caps, Semis & Junk Leading. Banks Looking Sick

Stocks ended last week on firm footing as the bounce saw four nice days. With more North Korea tensions in the air, it will be interesting to see if the stock market finally cares or just uses this as an excuse to open mildly lower. Very quietly as I have mentioned before, the Russell 2000 has been leading the major indices. That does have bullish implications if it holds on.

Additionally, the semis which have been the only key sector leading, are one strong day from new highs.

One sector that has me particularly concerned is the banks. They look sick. While that isn’t likely to have a short-term impact, it’s something that must be watched over the intermediate and long-term.

Turning to my favorite canary in the coal mine, high yield bonds are behaving more like semis than banks, trading just one good day from new highs. It would make me feel a whole lot better if this key group can score new highs before rolling over again.

Once again, we have a number of crosscurrents. If stocks gather themselves and rally, I think there will be a good opportunity to sell at new highs. Should stocks rollover first, I will become more concerned about the downside. In either case, I do not think stocks are blasting off higher until next quarter.

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Crosscurrents Abound. Enough for Bulls & Bears

Stocks continue the bounce they began two weeks ago and the same one I have been discussing. Tuesday was the day where the acceleration started. That could be slowing today. The NASDAQ 100 sits an all-time high but it’s lonely up there. The Dow and S&P 500 are within striking distance but the ever improving S&P 400 and Russell 2000 are not close. With the monthly jobs report out this morning, any strength will create a little short-term headwind for stocks into next week.

Speaking of the employment report, it was a little weaker than expected and last month was revised down a bit. This data will be very important to watch for signs of a possible peak. Topping out this year could put us on recession watch sometime in 2018 if the Fed doesn’t pull back their tightening cycle.

I have been writing about the importance of the semis to put the market on its back and lead as it’s the only key sector that is strong right now. This group is now within a good day or so of new highs, chalking one up for the bulls. On the flip side, discretionary, banks and transports are nowhere near that strong, creating a vacuum of good leadership. Healthcare and biotech are cranking at new highs, but those are not usually the sectors that can lead a new leg in an old bull market.

On the flip side of the flip side, high yield bonds have quietly been strong for two weeks and doing their best to recoup Q2 damage and remove themselves from being a concern. Basically, we have lots of crosscurrents right now. Let’s see if the NYSE Advance/Decline Line can make a new high.

If you missed my segment on ABC in CT yesterday regarding market reaction to Harvey, here it is.

Analyzing stock market behavior after disasters

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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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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.

nyad

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.

jnk

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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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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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.

gdx1

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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