Trump Tariff Tantrum Again

Stocks came back from some mild morning weakness on Friday but still look like they want to pause to refresh as the on again, off again continuation of the Trump Tariff Tantrum is front page now. In the very short-term, it’s pretty easy. Closing above last week’s highs gives the bulls energy to move higher. Closing below Friday’s low means stocks could see a mild 2-3% pullback before heading to all-time highs in Q3. The seasonal trends show some weakness ahead as it is the week after option expiration with stocks in an uptrend. I believe the hat tip goes to Rob Hanna of Quantifiable Edges but I am not 100% sure.

While banks have pulled back and need to stabilize, semis are still okay but really need new highs. I keep writing about transports as they look like the next major sector to take off and lead. That’s still the case as they seem poised to run to new highs.

Bonds on the other hand, look like they have a little life, especially if they close above Friday’s high. The more the masses have become aware that rates have gone up so dramatically in absolute terms, the more I have been positive on bonds. While I continue to believe that the 35-year bull market in bonds ended in July 2016, there will be plenty of opportunities on the long side over the coming years and decades. It’s just like with stocks. While they have gone up, up, up for more than 9 years, they have been plenty of times to position for a move in the other direction.

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Bears May Have Reason to Celebrate But It Will Be Short-Lived

On Wednesday with most of our tried and true Fed Day trends muted, I mentioned the possibility for a negative set up. With the S&P 500 down on statement day, that set up a shorting opportunity for yesterday, today and into next week. Nothing big, just some potential mild weakness after a very nice run into the Fed meeting.

If any weakness does materialize, it will be interesting to see if tech cedes leadership in favor of value. With the NASDAQ 100 it certainly doesn’t appear that way and my call for a change in leadership in favor of value does seem a premature and a bit foolish. Speaking of the NASDAQ 100, I am a littleĀ  bothered that semis remain below their highs. That needs to be watched closely for signs of a more serious divergence and warning. Investors have been more focused on software and internet which is okay in the short-term.

Looking at the other three key sectors, banks remain mired in a trading which I continue to believe will resolve itself to the upside next quarter. Transports have been strong and leading and should also see all-time highs next quarter. Consumer Discretionary has been the strongest leader over the past 6 weeks, but I would imagine the upside acceleration begins to slow sooner than later.

Finally, as I started to mention late last week, high yield bonds no longer stink. They have been kicking it up a notch of late, but still remain nowhere near their 2017 highs.

The bottom line. Any short-term weakness should be bought.

 

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Leadership A Changin’

Stocks appear to be shrugging off the reversal I wrote about last week, pretty much as expected. There is a lot of the news docket this week with the Fed meeting on Tuesday and Wednesday as well as the summit in Singapore with North Korea. While the latter will be all the focus, the former has a much better chance of moving the markets. You should expect another special Fed edition shortly.

Over the past week or so, index leadership in the stock market has been showing signs of changing. While the Dow has been lagging for most of the year, it is perking up in the short-term and it is now rated number one against the S&P 500, S&P 400, Russell 200 and NASDAQ 100. After that, the S&P 500 and S&P 400 are essentially tied with Russell 2000 and NASDAQ 100 bringing up the rear. This probably comes as a surprise since the last two ranked indices have been leading the rally and the Dow has performed the worst.

Getting a little more granular, value stocks seem to be finally attracting some interest over growth. It’s been a long, long time with large cap looking slightly better than mid cap. Could the FAANGs be losing a little luster?!?!

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ANOTHER Reversal

While stocks opened higher on Thursday, the bulls couldn’t hold on to those gains as the Trump Tariff & Trade Tantrum sprouted up again. With the G7 meeting this weekend, stocks are probably going to pause and let tensions cool off. As headlines and tweets crossed the wires, stocks gave up those early gains and for a few hours, selling was strong.

Below is a chart that has become all too familiar. It’s the Russell 2000 Index of small cap companies and it shows all of the “key” reversals this year which are marked by stocks rallying early and then selling off into the close. Technicians often fret over these as they are usually seen before corrections set in. However, they are also seen many, many other times without much downside follow through.

Stocks have had a nice run. Any small pullback or pause would probably be healthy. The bull market isn’t over and Dow 27,000 is in sight for Q3. Remember, the S&P 400, Russell 2000 and NASDAQ 100 have all made new highs. Just the Dow and S&P 500 are remaining. The market is quietly strong and there has been little fanfare, especially from the media. I expect that to change when the two lagging indexes make new highs.

And even junk bonds are perking up a little…

Have a fun and safe weekend! Little League playoffs tonight. Practice tomorrow assuming we win. High school softball state championship on Saturday. Baseball double header on Sunday plus the usual errands.

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Bulls in Charge. Oil Corrects

With the elevator pattern broken, stocks have enjoyed a nice rally since Friday. The Dow Industrials are FINALLY getting off their rear end and seem poised to visit 25,100. All of the other major indices are well above that comparable level with the Russell 2000 and NASDAQ 100 at new highs. The S&P 500 and S&P 400 are gearing up for new highs. Markets are much healthier with the Dow lagging than leading.

Sector leadership is strong and improving. The NYSE A/D Line continues its new highs ways. Even stinky junk bonds are participating a little bit. If I had to pour some cold water on the rally, I could say that we saw one single day where option traders were on the euphoric side, but that’s really it.

Crude oil is now down more than 10% in two weeks, but no one seems to be noticing, certainly not the transports. One of the great market myths is that energy and transports move in opposite directions. Yet another myth that data don’t support.

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Follow Through???

Stocks ended last week with a solid up day, completing four days of down, up, down, up. The elevator ride may try to end today as stocks are poised to rise at the open. We will have to see if we get a run throughout the day or if they fade and end up in the red. With earnings season over and the biggest economic report of the month already in the books, only the inflation data are left before the Fed meets to hike rates next week.

Taking a peak at the major stock market indices, the Dow Industrials remain the weakest. They need to close above 25,100 to set the stage for a run towards the old highs. The S&P 500 looks charged up for at least another few percent rally, if not a full run towards the old highs. The S&P 400 and NASDAQ 100 are but one good day from new highs while the Russell 2000 continues its run in blue skies territory. In short, stocks have paused, regrouped and want to move higher. That doesn’t reconcile some of my short-term models being negative, but price is always the final arbiter.

On the sector front, all key sectors except banks are behaving very well and should rally towards their old highs next quarter with semis leading the way. Energy should also follow suit. I am not liking the action in materials, industrials and healthcare, but it is very late in the bull market and I won’t be surprised if some sectors have already peaked. Before stocks finally peak, I do expect to see much better behavior from the defensive groups, staples and utilities.

In case you’re wondering, the NYSE A/D Line continues to score fresh all-time highs. Remember, I may be a broken record (remember vinyls???), but 90% of bull markets do NOT end with strong participation like this!

And finally, yes, junk bonds still stink. I am concerned that this vital sector has seen its bull market peak.

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Trump’s Foot in Tweet. Strong Jobs Report & Fed

If it’s the first Friday of the month, it’s the “all-important” jobs report. I opened Twitter to find the president tweeting about the still embargoed report and that was “looking forward to it”. Trump has many communication and information faux pas in his short tenure, but this one may be his biggest blunder. The President of the United States hinting at the content of market moving confidential information scheduled to be released is certainly precedent setting and idiotic.

Anyway, as Trump hinted, the May employment report was strong, much to the chagrin of his detractors. 223,000 new jobs, well beyond expectations. Revisions over the last two months added another 15,000 jobs. Unemployment rate down to 3.8%, the lowest since 2000. Wage growth up .3%. Unemployment for African Americans plummeted to 5.9%, the lowest on record which began in 1972. Only the labor force participation rate mildly disappointed, falling another .1%.

Hard to argue with anything in this report.

And as I have said all year, I am looking for 3.5 rate hikes from the Fed with the risk to the upside with the next rate increase on June 13. Every time there is an event which takes the odds down below 50%, I laugh at the pundits who opine that perhaps only one more hike is coming this year. Now, that’s nonsense.

The elevator looks to continue today with a big up opening. Down, up, down, up. As I mentioned earlier in the week, the NASDAQ 100 and tech have resumed leading. Thank you semis and internet. Transports and discretionary following as well. I am keeping an eye on biotech as a possible risk on catch up play.

Yes. Junk bonds still stink. Very disappointing.

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Like an Elevator

Down big. Up big. It’s like riding the elevator at the Empire State Building. Italy’s banking system goes from being on the verge of collapse to all is hunky dory in 36 hours. The past few days looked a little bit like BREXIT almost two years ago. While I did not believe BREXIT was going to be a huge event at the time, I still think that Italy has the potential to be that sub prime mortgage canary in the coal mine for the next global crisis. We should not stop focusing there.

The bottom line is that stocks remain in the trading range established from the January all-time high peak to the February bottom in the Dow Industrials, S&P 500 and S&P 400. The Russell 2000 and NASDAQ 100 have already exceeded their January highs and I fully expect the others to follow next quarter.

The short-term remains murky. Our shorter-term models are negative. Semis, transports and discretionary behave well. Junk bonds act like something is brewing on the horizon. Both may be right.

The government revised Q1 GDP growth to +2.2%, slightly lower than expected. For the past decade, the first quarter of the year has been weaker, even after adjusting for seasonal tendencies. It’s been somewhat of a head scratcher for economists. However, that weakness does not change my own forecast for much stronger growth in Q2 and Q3. As you know, I am looking for recession beginning between mid-2019 and mid-202, but it should from higher levels of output by the economy. I do not think it’s beginning right here.

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Italy Definitely Matters. Canary in the Coal Mine?

Stocks were “supposed” to rally on Friday ahead of the long weekend. While they did put in a good performance, they still ended in the red. That adds further weight on the short-term negativity of some of our models when stocks don’t behave as the odds say they should.

This morning we woke up to more troubles in Italy. Anyone surprised by this hasn’t been paying attention. In my year-end report to clients as well as in my Fearless Forecast, I listed Italian and Spanish banks as things that will keep me up at night in 2018. Too big to fail, too big to save. I think this remains on the tip of the iceberg. Investors should worry a whole lot more about European banks than anything Trump is going to tweet and saber rattle.

Although I do not think this is anything like the financial crisis and 2007-2009, I do think these banks may be a canary in the coal mine. Remember sub prime loans in early 2007? How about those two Bear Stearns mortgage hedge funds that blew up in July 2007?

Early in the year, you were hard pressed to find many pundits who didn’t think Europe offered better risk/reward than the U.S. And most believed that European banks had much more upside than U.S. banks. While I couldn’t argue with their fundamental conclusions, I also couldn’t join the overwhelming majority in these trades.

Anyway, stocks look to open almost one percent lower, taking their cue from European markets. I wouldn’t read so much into it until we get past the first hour. We have upside and downside reversals still in play. Let’s see if which gets closed above or below first. The NASDAQ 100 and technology are poised to resume leadership as I mentioned last week.

Semis and internet look like they want to break out higher. The same with transports and discretionary. We will have to see about the banks. Energy stocks are oversold in the short-term. They are “supposed” to find a low this week. Junk bonds still stink.

Bonds continue to quietly rally which means lower rates. What happened to all of the bond armageddon pundits who drew all of those absolute and fancy lines in the sand?!?!

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Double Reversal of the Reversal

On Tuesday, Wednesday and Thursday we saw three separate reversals in the major stock market indices. First, there was a “key” downside reversal after a nice little rally, followed by back to back days of stock selling off early and closing strong. Long time market analyst, Walter Deemer, very aptly replied to one of my tweets that it’s not so much the reversal itself, but the action after those wilder, more emotional days.

People love to cherry pick and and point out reversals at major market tops and bottoms because they worked so perfectly. However, there are many others which see no follow through and the market quickly resumes its trend. My point is that when you see a reversal, it’s time to pay a little closer attention and look for other indicators that support that position.

Stocks are basically chopping sideways with the NASDAQ 100 looking to have the best opportunity for an upside move. The Friday before a long weekend typically has an upward bias so I am watching to see if that fails to materialize and what Tuesday holds. Semis and discretionary are already breaking out and transports are close. Oil looks tired after an epic run but I don’t think the rally is over. After the pullback, energy should see new highs. The energy stocks are a different story. Most bonds are very quietly rallying nicely although junk bonds continue to look like garbage. You already know about my concerns there.

Wishing you a safe and enjoyable long weekend full of family, food and fun.

Thank you to all those who have served our country so courageously, especially those who gave their lives for our freedom.

Paul

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