Growing Concerns

As the title suggests, I am more worried now than I have been in a while, however, it needs to be taken in context. I really haven’t worried at all lately and I absolutely do not believe the bull market is over or close to being over. I don’t even believe the stock market is starting a 10%+ correction. My theme of late has been that of a trading range environment, but I now think that it may morph into a 3-5% pullback. Stocks are long overdue for some weakness and it should be healthy.

Last week, I discussed the Dow Transport and semiconductors as two reasons to give pause here. Neither situation has been corrected although the former is testing its 200 day moving average or long-term trend. The latter continues to bother me. There are now more issues. Apple reported another blow out quarter of earnings and said all of the right things. On the surface, that should be celebrated, however, many times when stocks have rallied and a high profile company blows out, the stock market often suffers over the short-term.

The sentiment surveys and option traders are showing a little too much confidence and complacency right now. It’s rare that stocks just continue unabated. The Dow Industrials are scoring new high after new high, yet the S&P 400 and Russell 2000 are moving in the opposite direction.

Those are just a few concerns I have, not to mention the previous overwhelming fascination with Amazon although Bezos’ reign as the world’s richest man was certainly short-lived.

Again, I am not calling for anything spectacular on the downside and it may only manifest itself in the continuation of the trading range. But the evidence is growing that weakness is on the way.

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Q2 GDP Frustrates Bears. Bezos Still Rich?

The government released its first look at Q2 economic output and the economy grew by 2.6% at first glance. While I would have been happier with more, it’s the second straight quarter that seems to be falling in line with my forecast. Earlier this year, I offered that Q1 GDP would come weak and below expectations with Q2 much stronger. That’s certainly the case today. I am also looking at Q3 to be stronger than Q2 with a shot at eclipsing the 3% mark. That won’t be easy. My forecasts were based on widespread deregulation and tax reform. While the former has been happening quickly but quietly, the latter isn’t even being discussed yet, a huge mistake in my opinion. I still believe tax reform is more than a 90% certainty, but it likely won’t have a positive impact on our economy until 2018.

All week long, the media fell over themselves, gushing that Amazon CEO, Jeff Bezos, was now the richest man on earth. As is often the case when something becomes so widely accepted or loved, the opposite happens. Amazon quickly gave back all of this week’s gains on a less than stellar earnings report. Classic buy the rumor, sell the news.

The tech sector, mid caps and small caps all saw reversals to the downside this week as all of the major stock market indices poked to new highs at the top of the trading range I have been discussing for a while. It’s likely that a pullback has begun and some mild weakness will ensue.

The two things that concern me most are below. First, I mentioned that semis need to make all-time highs as their software and internet cousins have. Rolling over first will definitely bother me.

Second, the Dow Transports are very quietly down 5% from the July peak. This bellwether index has definitely marched to its own tune for several years,  but I would still rather see it behaving a whole lot better. Thankfully, junk bonds continue to act well and confirm the new highs.

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