Stay Long & Strong

Similar to August 2nd when coiled up stocks broke to the downside and wiped out more than two weeks of gains, the S&P 500 did essentially the same thing on Wednesday. While it was only a .50% decline, the media turned it into a big deal; it’s not.

Could stocks weaken more? Yes.

Should we be concerned? No.

I won’t be surprised if this pullback is the largest since the BREXIT bottom, but keep in mind that we haven’t even seen a 2% pullback yet. It’s certainly not time to panic and sell. Rather, I would use this opportunity to see which sectors hold up the best for clues of leadership on the next rally, which should take the Dow to 19,000.

Remember when the pundits left the small caps for dead only a few months ago? See what’s been leading? Small caps. Just this week, we saw new highs in small caps, mid caps, NASDAQ 100, semis, software, retail, homebuilders, banks, materials and industrials. While not great, it’s still pretty good. The NYSE Advance/Decline line just scored an all-time high. Bear markets and significant corrections don’t begin with this kind of strength even though the number of stocks making new highs has waned of late.

Stay long and strong. I am off for a day with the family.

This whole controversy with Mylan and the Epipen is fascinating. I plan on writing about it tomorrow. Profits or people first???

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Will the Island Top Kill the Bull???

It’s been a little longer in between updates as I was traveling in Florida for a board meeting as well as seeing some clients and visiting relatives. My 98 year old grandmother says “hello”. I feel like I need a break from eating after so many fantastic meals not to mention great conversation all around. Also, there really hasn’t been much to say. I like when the markets are calm and quiet when I am on the road. Makes life much easier.

For a a little over a week, I mentioned that a small pullback should be coming sooner than later. It wasn’t that I thought would be tradeable, meaning deep enough to take action, but stocks were a little tired. While not a common topic here, but one I wrote about once this year, a chart pattern called an island top appeared on the Dow and S&P 500 earlier this week. It did not appear on the other major indices. This pattern forms when stocks gap up one morning and gap down the next morning, leaving white spaces where price action did not occur.

Below is a familiar chart from when I was talking about the coil every day. That worked out fairly well. Some people who read charts are all hot and bothered that the Island Top just ended the rally. As you can imagine, I don’t agree.

island

What I think you can takeaway is perhaps that the Island Top paused the rally and a brief and shallow pullback is here. There isn’t much else to glean at this point. Semis continue to lead. Energy is really stepping up and most other sectors are behaving really well. Junk bonds, my favorite canary in the coal mine are scoring new highs again. This all bodes well over the intermediate-term. About the only bothersome indicator is that smart money is loaded up for volatility to increase substantially after Labor Day.

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