THE Weakest Seasonality of the Year is Here

Stocks are looking a little tired. That’s my take today. The bulls have tried twice to score new highs, but the bears have put up a little resistance over the past two weeks. While I do not believe the market is on the verge of a bear market or even a 10% decline, risk/reward is no longer tilted strongly towards the bulls. And that’s okay. FYI, next week is the weakest week of the year on an historical basis for the stock market.

Stocks have run fairly hard since the August lows without much in the way of leadership deterioration. In fact, leadership has only gotten stronger with semis and discretionary pulling up transports and banks. Junk bonds are only slightly off all-time highs. There is lots of upside room left in this bull market.

I heard an interview with the head of a midwest state pension fund yesterday. I am not 100% sure, but I thought it was Wisconsin. Maybe not. But that’s what my 53 year old brain remembers. Anyway, I was absolutely floored with what I heard. First, this guy said he expects to earn 6% a year over the next 5 years which led me to think they had a very high allocation to anything but bonds. Then he said the fund is 45% allocated to bonds. And then he proclaims that his peers will only earn 5% a year over the next 5. His confidence lies in the fact they own a lot of private investments in private equity, private real estate and private debt and they know how to find only the best managers.

I was shocked at his arrogance and flat out ignorance. Someone should have told him that pension money is usually viewed as “dumb money” by analysts. To think he could outearn what he forecast for his peers by 20% is laughable. If that was a way to short his fund and buy someone else’s, I would love to do it.

When asked about why active investing was about to have its renaissance over passive, something I do believe will begin in the early 2020s, this joker boldly states that it’s because a few huge stocks are dominating the indices while the rest of the market is not doing well. HELLO! ANYBODY HOME?

This is where a seasoned, market informed interviewer would strongly push back on a thesis not supported by facts. Look at one of my favorite canaries below, the New York Stock Exchange Advance/Decline Line which measures participation in the stock market.

Where is it and has it been sitting?

ALL-TIME HIGHS

That means that the rally is broad -based with lots of of stocks participating and going up. I can’t believe a manager charged with tens of billions in assets can seriously be this clueless. I mean, if you don’t know, why make statements that can so easily be refuted with facts? I will be shocked if this fund will outperform its peers over the next 5 years with a leader not in touch with reality.

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Stocks Were Looking for an Excuse to Pull Back

While stocks had another nice run last week, they didn’t exactly close Friday with much strength. That’s not surprising given how most of the major stock market indices were pushing up against all-time highs. So many times, we will a see security come back up and say hello to a previous important peak, only to watch it pause or mildly pullback first. The weekend news about Iran or Yemen conducting drone attacks on Saudi refining facilities was just what the market needed to pause. The key will be how stocks react over the course of the day. I suspect Monday will not become a day of celebration by the bears. The truly important price level is down at 26,400 on the Dow.

Last week, semiconductors scored a fresh, all-time high. As you know, this is a group I have been very positive on all year and especially over the past few months as it began to outperform with each passing tariff tantrum tweet. In other words, semis began to behave better and ignore what seemed to be bad news on the trade front. At the same time, consumer discretionary is right back to the July highs. Banks and transports are threatening to break out. That would make all four key sectors in gear together. What a change from the summer concerns.

At the same time, the New York Stock Exchange Advance/Decline Line is enjoying its time looking at blue skies above. I read over the weekend that some utter clown was using the NYSE A/D Line as reason to believe a large decline was unfolding. He concluded that the A/D Line was not making new highs, but rather going down as the stock market was rallying. As you can see below, he could not be any farther from reality.

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Bears Continue to Laugh & Scoff and Be Embarrassingly Wrong

When listening to the pundits and reading my Twitter feed over the past month or so, it has been fairly negative which it has basically been for the majority of the bull market with few key exceptions like January 2018. Whenever I prepare for a media segment, I usually start by saying that no one has been more bullish than I have on balance for the entire bull market. Most of my quantitative, upside price targets for the Dow were initially dismissed by most, then scoffed at and ridiculed and then given the chance of playing out before they were widely accepted as “everyone knew that”.

After the bear market ended, I remember being laughed at for calling for Dow 10,000, 15,000, 18,000 and then the preposterous 20,000. When the Dow first closed above 20,000 for five straight days, it opened the door for Dow 30,000 before the bull market finally ended. Currently, Dow 28,000 is up next, followed by 30,000. I really do love when people so easily dismiss these targets as the negativity has fueled so much of the bull market.

Not one single time did I forecast a bear market beginning unless and until certain criteria were met. Every now and then I randomly watch an old interview and with few exceptions, I am the bull and the bear is using all these scare tactics which have absolutely no historical significance and no current data to support the claim.

Anyway, after an August that “felt” a whole lot worse than it actually was, stocks began the new month with a selloff. Keep in mind that August ended with the Dow briefly poking above the trading range it had been in for most of the month as you can see on the chart below.

Many times, the first time through a range is met with resistance as late comers hop on the train, only to be immediately disappointed by larger investors who believe the move won’t hold. In this case, we saw a decline from that point into the first day of September which is the last red bar on the right side of the chart. It also resulted in what I labeled as a “bear trap” which means that the bears got too excited in their negativity and were trapped in losing positions as stocks immediately and powerfully reversed course the very next day on September 4th.

On September 5th, we can see that stocks opened sharply higher, leaving a blank space or “gap” on the chart which led to further pain for the bears. To make matters worse, this week had more confirmation that the selling we saw in August was over. Many analysts watch the amount of shares traded in stocks going up versus stocks going down for signs of extreme behavior. The most usual representation is a ratio or up versus down volume.

August saw a number of days where 90% of the volume was on the downside. So close to all-time highs, that’s unusual behavior and signals very little patience among investors and the desire to sell first and ask questions later. In other words, it creates the negativity needed for a market low much sooner than later.

This week we have seen a reversal where up volume has been swamping down volume to the tune of two days with at least 80%. And depending on the data source you use, there was a 90% day. Coming on the heels of a market pullback, this surge in volume in advancing stocks confirms the rally.

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Bears Getting Impaled

The bulls have been relentless of late, which should certainly not surprise anyone who reads this blog. I have been emphatically bullish, especially on semis and defensives, and looking for Dow 28,000. I can’t find many or really any others who have been as uniquely bullish as I have been. I don’t count anyone who believes that you should always be positive on the stock market because it will reward you over the very long-term. That’s a cop out. But let me be clear; although I have said that new highs are on the way with more upside coming, I have no problem turning on a dime, ringing the register and playing some defense. I also have no issue with making a call and having it backfire ending up with egg on my face. 32 years doing this, I should have bought a chicken farm for all the egg I have consumed.

Today, stocks are a stones throw from all-time highs, at least on the Dow Industrials, S&P 500 and NASDAQ 100. Reversing lower before hitting a fresh high would certainly cause me to become concerned about a deeper pullback. While semis have really been strong lately, other areas of tech have struggled a bit. Discretionary, yet again, has regrouped and is poised for new highs. I can’t even count the number of times people have written off the American consumer, only to be proven wrong. Banks and transports have really stepped up over the last week as one of the most vicious rotations in 10 years has seen buyers stampede into the laggard sectors.

At the same time, high yield bonds have quietly kicked it up a notch when many left the key canary for dead. The NYSE A/D Line has hit another all-time high, much to the bears consternation. Bull markets simply do not end with this type of strong behavior. Sorry bears.

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The Myth of September’s Gloom

As the calendar turned to September, the media was in their usual tizzy because historically, the month has the worst performance of any during the year. The problem with making very general statements is that context is ignored. It wasn’t long ago when all the headlines were about how strong the month of December was and everyone was all bulled up because stocks had corrected 10% in October and November. Then stocks collapsed in December like hadn’t been seen since the Great Depression.

As September 2019 began the stock market as measured by the S&P 500 was in an uptrend. By uptrend, I mean that the S&P 500 was above its average price of the last 200 days. Nothing secret or special, just an arbitrary way to determine the trend. September stock market performance is very different depending on whether stocks are in an up or downtrend.


The bottom line is that since 1950, the S&P 500 averages a +0.40% return in September when beginning in an uptrend versus -2.70% when starting in a downtrend. That is significantly different and well worth noting where the month is beginning. (Hat tip to one of my favorite research reads, Ari Wald from Oppenheimer)

Some of you will push back that I am permanently bullish and only look for data to support my case. That statement would be patently false as there have been plenty of times to be negative, but not so for more than a trade in over a decade.

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Bulls Look to Maul Bears as Semis Remain Strong

At the end of last week I wrote about the bulls’ inability to sustain a breakout above the recent range as prices briefly popped above the highs but reversed to close lower. Given my continued bullish outlook, I wasn’t worried and I am still not concerned. This morning, pre-market indications look for the bulls to attempt a full-fledged assault higher and break through the month long trading range as you can see below using the S&P 500 futures.

For more than a month I have been discussing my “barbell” approach to equities, favoring semis along with staples, utes and REITs, which has been working out very well. One of the reasons behind my love of semis was that I couldn’t find anyone who was really positive on them. It seemed like the masses either were worried about the tariff tantrum or slowing growth or idiosyncratic issues.

What turned me was how semis stopped selling off more than the market on bad days and started gaining more on good days. And at the most recent low, there were among the strongest sectors. I fully expect semis to break out today and them run to say hello to the all-time highs last seen in July. That’s where the important test will come. At the same time, I expect the more defensive part of the barbell to slow its recent growth as all three sectors scored all-time highs.

 

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Bulls Poke Above Range Without Follow Through

The final day of the week and the month and I think all those investors supposedly in The Hamptons can get back to lounging on the beach or partaking in the nightlife. Not I. It’s been a month full of physical therapy, acupuncture and lots of walking and throwing with the kids when I wasn’t in the office.

And to the disappointment of many, the bull market didn’t end in August and the economy didn’t recess.

The trading range continued this week and as you can see below in the Dow Industrials first and the S&P 500 next, price said hello to the blue lines which represent the upper end of the ranges. The majority of the time, the first time attempting to break through a range will result in sellers coming in right away as we saw on Friday. I wouldn’t read too much into this small failure. As I keep writing, I feel strongly that the ultimate resolution is going to be to the upside in a big way with Dow 28,000 up next.

Let’s see if the bears can make any headway next week, but I would be surprised if it’s a lot. Buying weakness is the favored strategy, even if you hear all about the goblins of September upon us.

Have a great and safe Labor Day weekend! My life has been somewhat boring since the accident and this weekend, while busy, isn’t exactly glamorous. A quick visit to the chiro. Walks around the track. Lots of PT. My daughter has softball practice and a double header. I will hold very optional and low key baseball practices for the little guy and his team. A traditional Labor Day weekend BBQ on Sunday with smoked brisket, ribs, burnt ends and my famous maple, brown sugar, pepper grilled bacon.

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Where’s the Worry About Inverted Yield Curve and 10 Year Plunge?

While the past few days did nothing to clear up the four-week trading range, I still give the nod to the bulls as I have been saying for weeks. That’s regardless of whether stocks first poke through the bottom of the range or not. I do find it funny that yields on the 10 year bond hit fresh lows on Wednesday and stocks did not collapse as some media analysts have been selling as a tried and truism lately. One thing you can almost bank on is that when the media become forecasters instead of reporters, whatever trend they think they spotted is about to end.

Guess what else the market didn’t care about? The yield curve inverted even more this week which I discussed the other day on Fox Business’ Making Money.

Here’s the bottom line. The markets are a terrific discounting mechanism and they hate being shocked by outsized moves. The second or third time around with the same worry, markets usually absorb the information much better and behave in the realm of normalcy.

You may also hear about the huge move in bonds this month relative to stocks and how pension funds’ asset allocation may have gotten away from their targets. In turn, this would mean selling bonds and buying stocks. This is pure nonsense and something we only hear when bonds have the big move. I rarely ever hear it when stocks have the big move. The theory also doesn’t stand up to scrutiny when testing with the S&P 500 and Barclays Aggregate Bond Index. Subsequent moves fall squarely in the normal distribution of returns. In other words, those pundits have no basis for the conclusion.

As I finish this up stocks are indicated to open higher by about 1%. If there is any follow through during the day, that could test the upper end of the recent range. Ultimately, as I keep mentioning, I believe we will see the bulls resolve the market to all-time highs and Dow 28,000 by year-end. For now, we want to see where leadership unfolds.

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I Didn’t See That Coming!

Last Friday, I wrote about not expecting  much or really anything new from Jay Powell when he spoke at the Fed’s annual retreat in Jackson Hole. While I was spot on about that, I absolutely did not see the tweetstorm from the President, basically threatening economic martial law, let alone questioning if his appointed Fed Chair was an “enemy”. A bit of a head scratcher. All of that led to the markets becoming unglued the rest of the day, except for the last 10 minutes where a vicious little short covering hit into the close.

Friday’s damage left the Dow, S&P 500 and NASDAQ 100 revisiting the same levels seen in early and mid-August where the bulls last made a stand. Additionally, the odds do not favor the bears being done just yet, but the jury is still out. At the previous low, I said I was okay being a little early instead of risking being late. This decline will certainly test my thesis.

Semis and discretionary continue to act well, but I am disappointed that other sectors have not joined the party just yet. Very importantly, high yield bonds are closer to fresh highs than revisiting their early August lows. It is so unlikely that the bull market ends or even sees a very large decline with the credit market not being under significant pressure.

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Powell’s Much Ado About Nothing While High Beta Percolates

Markets were on pause mode on Thursday as everyone awaited Fed Chair Jay Powell’s speech from Jackson Hole on Friday morning. Most of the stories I have read and media interviews I have seen had a very binary outcome from Powell’s speech. It was “all or none”. I don’t agree. I think he is going to straddle the line as much as possible and say very little in the way of new or market moving information.The key will be not what the news is, but rather how the market responds to it.

Stocks continue to behave fairly well in the face of seeing alternating triple digits moves in the Dow. Nothing has changed in my thinking that the ultimate resolution for the Q3 trading range will be higher with Dow 28,000 up next. Of note lately, I am starting to see the early signs of the riskier stocks (high beta) percolate for a leadership role over the less volatile ones. You can watch this in ETFs like SPHB and SPLV, high and low beta. I also really like DWAS is a small cap momentum ETF. I know. I know. Small caps have stunk. However, this fund has bucked the trend.

On the sector side, I want to see the semis close above this week’s highs to give stocks some nice juice. Software is already there and leading. Banks and transports continue to lag and that needs to change sooner than later. Homebuilders trade very well on the heels of much lower mortgage rates, but they cannot lead stocks. Still, the defensive groups are rock solid and threatening to score all-time highs again. My barbell approach.

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