Crushing the Doubters

I know I must sound like a broken record, but boy, have the bulls been tough to fight. Just when the bears think a deeper pullback has started, the bulls step up again and power stocks higher. After an unexpected turnaround on Monday from the early weakness after the lack of OPEC production cuts, stocks are pausing once again. Earnings season is in full swing and we have heard time and time again how this is the worst earnings since the financial crisis.

What does the stock market say? SO WHAT!!!

Just today, Intel missed expectations and is now up almost 1%. That’s been the pattern. Crush the naysayers! The major indices are all at 2016 highs. Breadth remains powerful. The disavowing and hating crowd is still loud. As I have said since late February, buying the dips is the correct strategy until proven otherwise.

For a long while I just didn’t know what to make of the banks and I am not sure I do now. However, the sector has really stepped up over the past two weeks and is leading the market. That’s definitely not a negative. Industrials, materials and energy are all following suit while some of the defensive groups take a break. Biotech is probably the most interesting here and has the prospect of breaking out to the upside.

All the while, both high yield and treasury bonds are rallying with commodities. Unusual behavior and indicates lots of money looking for a home.

If you’re not having fun in this market, I don’t know when you will!

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All-Time Highs On the Way, But…

After a 24 hour trip to Houston, I am happily back home.Thanks to the Houston MTA for hosting me and inviting me to speak at their chapter meeting. I really enjoyed my time there. It was also good to see clients, colleagues and friends, all in 24 hours!

When I look back over my posts since the bottom, there has been one common theme. The bulls are in control. Higher prices to follow. Expect brief and mild pullbacks. Continue to buy. Almost without pause, the masses, especially in the media, have hated and disavowed this new leg in the bull market. I keep seeing calls for a new bear market and recession and global meltdown. Well my friends in the bear camp, the stock market doesn’t believe so and certainly isn’t listening.

Stocks have had a nice two days with an enormous amount of breakouts on an individual and sector basis. Breadth has been strong and the new highs/news lows ratio has been powerful. You can almost get giddy about sector leadership as the banks and diversified financials finally played some catch up. It’s very hard to poke holes as the more aggressive beta sectors are forging ahead with the defensive groups ceding their leadership role. Even junk bonds are listening and moving higher once again.

Over the next 6 and 12 months as I have said over and over, stocks should be higher than they are today. In the very short-term, stocks are overbought and could use a rest. I wouldn’t be surprised to see a pullback over the coming few days or so, but one that should be bought until proven otherwise.

At the same time stocks may pause from their highest levels of the year, gold has now seen a lower high with “smart money” on the sell side. That should lead to lower gold prices over the short-term. Bonds have not seen the normal decline as stocks rallied. Many have opined that the bond market senses recession or slowing growth. Stocks indicate the opposite. I think bonds are holding up so well because competition around the world is essentially non-existent.

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Give the Bears a Break

Last Friday, I wrote about stocks looking a little sleepy, but that higher prices would eventually prevail. For the 6th time since the rally began on February 11th, the stock market is pulling back. It’s normal, healthy and expected. No need to panic. The bears should be out in force shortly with calls of another correction or resumption of the bear market. But let’s give them a break; they have had so little to celebrate for almost two months.

The chart below isn’t a new one, but one I have shown various time with more data added as time has gone on. I first published right at the bottom in February amid calls that I was naive and pollyanna’ish. My oh my how price has a way of changing sentiment and behavior. Stocks already achieved the target I set for Q2 so a little rest is certainly warranted. Whatever weakness we see will be yet another buying opportunity for higher prices over the coming 6 and 12 months. Keep in mind that I am not calling for a straight up move into 2017, just that on balance, prices should continue to move higher. I wouldn’t be surprised for a more significant bout of weakness to hit later in Q3 or early in Q4.

dow

If I had to point to one or two things that concern me in the short-term, they would be high yield bonds and the banks. The former peaked before the major stock market indices along with crude oil while the latter has lagged the whole rally since February 11th. It would be a huge shot in the arm for the bulls if junk bonds can make new highs for 2016 sooner than later. The banks have been frustrating for both bulls and bears. I am still not sure what to make of them, only that if they get moving to the upside, we could see some real upside fireworks. Conversely, if they break down, that would create a more serious headwind for stocks.

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Bye Bye March & Q1

Last day of the month. Last day of the quarter. What a ride it’s been although if you fell asleep on New Year’s Eve and woke up today, you might conclude it was a quiet three months with the Dow up a few hundred and points and the S&P up 1%. As we all know, it was anything but dull. March is on pace to return more than 6% after an historically weak start to the year. This kind of strength usually spills over early in the next month.

Yesterday, I left off with a look at the sectors. Two of the four key ones, semis and consumer discretionary, continue to march higher constructively. After a huge rally off the January bottom, the transports are looking a little tired and unable to score a fresh high this week. Banks continue to be a head scratcher, spending the month going sideways. They REALLY need to step up and breakout!

Consumer staples and utilities on the defensive side are at or very close to all-time highs. Telecom and REITs are making 6 month highs. These four groups are proxies for a low interest rate, slow growth environment. The rest of the sectors look “fine”, but not incredibly healthy.

Finally, one of my favorite canaries in the coal mine, high yield bonds, have been dynamite since mid-February, which certainly helped lead to that huge stock market rally in March. High yield has taken a little breather of late and they absolutely must see fresh highs in April to keep the stock market rally going.

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And the 5th Pullback since The Bottom Ends

On March 21, I penned a piece calling for the 5th pullback since the rally began. I used words like “brief” and “mild” to describe what I thought was coming before the next rally began. As with the previous four pullbacks, all we saw was essentially two days of slight weakness before the bulls roared back.

And roar back they did.

Right before Janet Yellen released her speech on Tuesday, I did an interview with CNBC India regarding the Fed raising rates as well as the market’s short-term prospects. I want to thank Chair Yellen for listening to me and the market when offering such dovish (benign) comments regarding the need to raise interest rates right now.

The stock market certainly loved what Yellen had to say as the fifth pullback abruptly ended in a hurry. By the time the closing bell rang, the Dow Industrials, S&P 500 & S&P 400 all were back to the levels seen before the 2016 began. Only the Russell 2000 and NASDAQ 100 are left to regain lost ground, which should happen sooner than later.

I keep referring back to the “dark days” of 2016 when I was essentially the only bull left out there. I remember at both the January and February lows how CNBC and Fox Business couldn’t find but a few people to offer even neutral views, let alone bullish ones. My Twitter feed was overwhelmed with calls for a new bear market and a crisis worst than 2008. I am just wondering what happened to those folks. I have seen a few people who disavowed the rally and recommended selling the whole way up suddenly say that they successfully bought the bottom, in hindsight of course.

Anyway, stocks are seeing some very nice upside breakouts, but for me, I don’t think this is the greatest time to add risk to a portfolio. If you weren’t smart enough to add at lower prices, I wouldn’t compound your mistake with potentially another. There will be another short-term pullback sooner than later when people with cash will have that opportunity. The problem will be that they won’t take action at that point because they’ll look for a much deeper decline. If you absolutely must invest, I would look at the laggards here and have a solid exit plan before buying.

That’s it for now as I am heading to NYC for the day. Tomorrow, I will look at the sectors, commodities and currencies as there are some really nice short-term opportunities now.

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The 5th Pullback Since The Bottom is Here

Repeating what I said on Friday, stocks now have a mild headwind post the Fed announcement which last through this week. Couple that with the fifth short-term overbought market since the rally began on February 11 and you have the ingredients for a small pullback or pause to refresh. The rally isn’t over.

Three of the four key sectors (except banks) are dominating and can still be bought on weakness. While all of the major indices remain strong, I am most focused on the NASDAQ 100 right here as it should play catch up, either by rallying more over the coming weeks or pulling back less.

I wish I knew what to make of the healthcare sector, but I just don’t have any opinion. More than anything else, it looks like a proxy for Hillary Clinton’s winning presidency. The weaker this sector, the more likely it is that she will win.

As with stocks, crude oil and high yield bonds are also very overbought in the short-term. Both should see some weakness sooner than later before heading higher again. While gold has also rallied dramatically this year, there may be more at play than just a quick pullback. Intra-day volatility has expanded and it’s starting to trade on the sloppy side. A more meaningful bout of weakness would not a shock.

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FOMC & Options Expiration the Themes for the Week

The Dow, S&P 500 and S&P 400 enter the new week at their highest levels of 2016. That surprised me when I did my weekend review. I would bet that most people think stocks are much lower than they actually are. Last week was another big victory for the bulls, much to my delight. Day in and day out since February 11, investors have disavowed and laughed at this rally. However, all we have seen in historic participation and strength since the rally began.

Four times since February 11th, stocks have become short-term overbought and all four times, the best the bears could muster was a two day, mild pullback. That in itself continues to be a sign of underlying power that typically doesn’t dissipate so quickly. The Dow and the S&P 500 are quickly approaching the opening gap created on January 4th when stocks fell sharply to begin the New Year. That’s 17,425 on the Dow and 2044 on the S&P 500. Those levels should create the landscape for another short-term pullback.

This week, we have options expiration and the Fed meeting to deal with. Historically, March expiration week has been nicely positive for stocks. That trend should continue into the Fed announcement on Wednesday. With stocks rallying so sharply into the Fed, the trend says they continue early this week and then pullback modestly on the other side of the meeting.

Three of my four key sectors are acting great with only the banks in question. Tomorrow, I will spell out three scenarios for the banks based on the Fed’s decision that should have some legs into next quarter.

High yield bonds continue to power higher and that behavior should not be underestimated. If junk bonds hold on to these gains, it will be very difficult for the stock market bears to make any meaningful headway.

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What do the Bears Say NOW?

Late last week, I wrote in Another 7% in the Cards that stocks were far from done going up. If you missed that post, it’s a good one to go back an peruse. That’s the same message I offered a day after the bottom in February and I have updated the S&P 500’s chart below.

With Tuesday’s huge rally to open the month of March, the S&P 500 has moved meaningfully away from the bullish line in the sand. That does two things. First, it puts the S&P 500 closer to my target and second, it makes that bullish line in the sand all the more important on the way back down.

line in sand5

Speaking of Tuesday’s rally, it was very powerful price-wise. Additionally, we saw very strong breadth numbers which is the net number of stocks advancing and declining on Tuesday. Sector leadership was more than just constructive. High yield (junk) bonds which I forecast would see a major low this year have suddenly surged from their open coffin. Don’t underestimate that driver if this rally is for real! Only volume was a question mark, but long time readers know that I do not consider volume to be a primary indicator. And the data back that up. It was a good day for the bulls across the board.

Once again, stocks have become overbought in the short-term, just like they have twice before since the bottom. Overbought conditions usually bring on some type of pause to fresh or pullback. In bear markets, these conditions lead to an immediate resumption of the downtrend. In bull markets, stocks keep powering ahead.

As I have mentioned many times before, when stocks hit a short-term extreme in either direction, the next few sessions to week are often very telling for the next few weeks or month. If stocks can hold on to their gains or make more headway, it will add more credence to my 7% more forecast. If the bears can take the major indices below that bullish line in the sand, the rally is likely over. As you know, I remain in the bullish camp and believe the resolution will be to the upside.

Not to be lost in the shuffle is the fact that China is no longer the tail wagging the dog. I wrote about this last week when our market shrugged off an enormous sell off in China and rallied. It’s healthy and good that a decoupling is taking place.

On the energy front, while oil has been the primary and overwhelming driving force for many months (No, it’s not the Fed, Iran, China, earnings or economic data), it was also good to see stocks surge higher without needing oil to lead the way. Oil did rally, but stocks did not move tick by tick with oil. One could even argue that stocks pushed oil higher on Monday.

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Internal Bottom Confirmed but Volatility FAR from Over

Last week I wrote about the internal or momentum low being put in on Wednesday. Thursday’s action was essentially a stand off between the bulls and bears although the bulls had to be pleased that stocks stopped going down. Friday was the big point gainer for the bulls, but there wasn’t much upside after the big gap opening.

Assuming I remain correct in my assessment of the bottom, stocks usually see a day or two of red before exceeding Friday’s high this week. From there, we are supposed to see more upside lasting at least a few weeks or more into a trading peak in February before another decline sets in. The beginnings of these rallies are littered with the most beaten down names running the hardest as short covering initially causes the move. Real leadership takes some time to develop so don’t prematurely hop on the former losers as new leaders.

Stocks are going to stay volatile for another 4-6 weeks. Buying weakness and selling strength is the strategy I most want to follow until the markets settle down. Stay nimble and don’t be stubborn. I am not loving the action in the financials, industrials and materials, while healthcare,  biotech, staples and  REITs behave better. The next few weeks are also going to be an important period for high yield (junk) bonds to make a stand. I continue to believe that this key canary in the coal mine sees a major bottom in 2016.

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Third Avenue Travesty

After peaking way back in 2014 and declining ever since, the high yield (junk) bond market has finally made national news over the past week with the very high profile blow up of the Third Avenue Focused Credit Fund (TAFCF). This was not some fly by night little fund or fund family. It’s a small, mainstream mutual fund family and the fund itself had more than $3 billion in assets in 2014. Last week, after massive withdrawals, the fund announced it was closing and that shareholders could not redeem their shares for cash anytime soon. Third Avenue was going to conduct an “orderly” liquidation. Good luck with that!

Over the past 20 years, my peers and I have often discussed this is exact scenario. What happens when there is a mass exodus in an illiquid asset class like junk bonds? If Third Avenue was a closed end fund (CEF) or exchange traded fund (ETF), sellers would simply drive the price lower and lower until sufficient buyers came in, presumably when the share price of the CEF or ETF was significantly below the value of the underlying assets in the fund. In other words, the CEF or ETF would trade at a discount to the net asset value of the fund.

In Third Avenue’s case, it is an open ended fund that issues more and more shares to meet investor demand. When redemptions swell, the manager chooses what to sell and when. And it’s unlikely that securities are sold on a pro rata basis. As TAFCF’s assets collapsed, my sense is that the fund manager sold most or all of the bonds that were easier to sell, i.e., liquid, hoping that he could stem the tide and high yield bonds would stabilize or even bounce. When the liquidations never ceased, the fund was probably left with the true crap of crap instead of the well diversified portfolio it had weeks, months or quarters earlier. In other words, at the detriment of the shareholders who stuck by the fund, they were left with illiquid garbage.

This raises a whole series of questions regarding the fund manager’s and fund company’s fiduciary responsibility to its shareholders. Clearly, they had absolutely no plan for a mass exodus, like disaster planning for many firms in my space. How could they allow the fund manager to sell the better quality bonds and turn the fund into a heap of crap? How could they penalize investors like this? While I am sure they will hide behind the nonsensical legalese of the prospectus, this is a travesty!

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