Little Tantrum Beginning

The bulls began Wednesday with high hopes (and higher prices). By lunch time, it looked as if the market was ready to test its early March, all-time highs although the NASDAQ was already at new highs. But a funny thing happened on the way to Dow 21,000; the Fed released their minutes from the last meeting and the market did not like what they had to say.

In essence, the Fed was preparing to test the markets on unwinding their massive $4.5 trillion balance sheet later this year. It’s already been leaked and talked about, but it still poked the market a bit. At this point, the Fed plans on raising rates one or two more times and then halting the hikes to test selling some assets. Frankly, I did not believe this would happen in 2017 or even 2018. I thought the Fed would complete their tightening cycle and let the assets roll off organically over the years after they stopped reinvesting the proceeds. Clearly, I was wrong and the markets are a little cranky.

As long as this little tantrum continues, I would expect the banks and dollar to be under pressure with gold, euro, yen and treasury bonds firming. Downside risk in the Dow looks to be roughly 20,300. Let’s see if high yield bonds can hang tough this week.

Before someone asks, no, the bull market isn’t over.

If you would like to be notified by email when a new post is made here, please sign up HERE

Q2 Begins with Higher Expectations

Stocks closed the first quarter without much fanfare and they head into Q2 with a strong seasonal tailwind. The major stock market indices are still not all in gear to the upside, but I expect that to correct itself this quarter with new highs across the board. Semis and discretionary are still very strong and I expect transports and banks to reassert themselves. Junk bonds had a very strong close to the quarter and they will need to continue that run this quarter.

Earnings season begins next week and the comps from this time last year will be very easy to surpass. However, analysts have really increased their expectations so companies need to blow out to the upside or those stocks will suffer.

My theme remains unchanged. The bull market is alive and reasonably healthy. Dow 23,000 is my next target. Weakness should be bought.

If you would like to be notified by email when a new post is made here, please sign up HERE

Bulls Put Up A Stand

Yesterday, I wrote about the pullback getting a little old and the opportunity for stocks to find a low and rally. I offered that Dow 20,200 to 20,400 could provide some cushion. The Dow hit 20,400 yesterday morning and rallied nicely into the close with some follow this morning.

Was that it? Pullback over?

I am not certain, but we did do some buying yesterday to take advantage of the biggest bout of weakness this year. And it wasn’t much. Stocks could rally for a few days and then rollover one more time or the rally could have already started. I am okay being a little early, just as long as we don’t see a full scale melt down below 19,800.

As I mentioned the other day, high yield bonds bottomed last Wednesday and are now leading stocks over the very short-term. That’s a good thing. Defensive sectors are lagging with my four key sectors, banks, transports, semis and discretionary stepping up again.

Finally, I am keeping an eye on the Japanese yen as it has rallied the most during the stock market’s pullback. If that comes under pressure, I will feel better that the little low is in and new highs are coming.

If you would like to be notified by email when a new post is made here, please sign up HERE

Two Vital Canaries

After Tuesday’s “big” decline, there was some short-term damage done to most of the major indices. Rather than return immediately to new highs, I think we need a period to repair, which is not the worst thing in the world. A likely scenario is to see movement in both directions, perhaps into April, before the next leg higher begins.

On the key sector front, semis and discretionary escaped most of the damage and should be poised to lead again. Banks and transports are a bit more wounded, but by no means fatal. While software and homebuilders remain strong, telecom and retail are hurting. Industrials and materials are still okay. Interestingly, the defensive utilities and staples are quietly very solid. I am not going to guess on healthcare and biotech until we see how they react to the vote. Remember, it’s not the news but how they react to it.

Let’s turn to my favorite two canaries, high yield bonds and the New York Stock Exchange Advance/Decline Line along with the S&P 500 so you can see if we have any divergent behavior.

High yield (junk) bonds are below and you can see that they just recently peaked in early March and have been in a pullback all month, down roughly 2% since the highs.

The NYSE A/D Line is next and it has almost the exact same behavior as junk bonds with the early March peak and decline. The only difference is that the little bout of weakness this week has not been as noticeable. In other words, this indicator looks a little stronger.

Finally, the S&P 500 is below and just like the two canaries above, it peaked in early March and has been pulling back ever since. The index has seen its lowest point this week which creates a short-term positive indication with the canaries showing a little more internal strength.

The takeaway from this confirms what I have said, am saying, and will continue to say. As long as the two canaries peak coincidentally with the S&P 500 and the other major indices, the bull market will live on. If and when they begin to diverge, the clock will start on the potential end of the bull market, but there will absolutely need to be more several more canaries dying before the bull market does. It’s just not that easy to kill a bull.

If you would like to be notified by email when a new post is made here, please sign up HERE

Key Sectors Holding Up Otherwise Weak Market

Last week, I voiced a little more concern about the stock market as the S&P 400 and Russell 2000 broke to the downside from their trading ranges. So far, they haven’t been able to regain previous levels. Now, we have the S&P 500 and NASDAQ 100 trading at the lower end of their ranges and it looks like stocks have further to go on thew downside before finding more solid footing.

As I have said for months, based on market history, the challenging party needs a lower stock market to have a chance to win. For this election, the number has been 18,000 although the lower the better for Donald Trump. At the same time, I have been using the biotech sector as a bellwether for Clinton’s chances of victory. Interestingly, biotech has been falling sharply since late September which runs counter to the polls and latest email scandal. Of course, fundamentals in the group could be overpowering political models.

On the key sector leadership front, semis, banks and transports have been strong and really holding up the market. Only consumer discretionary hasn’t been cooperating. While utilities have bounced back nicely, staples, REITs and telecom remain laggards which should be good stocks over the intermediate-term.

High yield bonds, which have held up very well are now under modest pressure, another small concern. Although stocks have struggled, treasury bonds are not providing the expected safe haven, even though commodities have also been hit. Adding it all up, you have a bit of a liquidity problem in the markets as it appears investors are building cash positions for now.

The Fed begins a two-day meeting today and it would be a complete shock if they raised rates tomorrow. However, given the political landscape and events of the past few days, nothing can be rules out!

If you would like to be notified by email when a new post is made here, please sign up HERE.

A Little More Concern Creeps In

At least we had one day where stocks closed firmly! As has been the case for more than a week, but really over the past month, sellers continue to snuff rallies that begin the morning. The bears say that this is a market on the verge of collapsing under its own weight. The bulls counter that with all the selling into rallies, stocks remain just a few percent off their recent highs.

What I am seeing is my pullback theme continue to play out during the beginning of what is usually a very strong time of year seasonally. You also have a tale of different indices with the Dow and S&P 500 mired in a two month range with the NASDAQ 100 just making a new high this week. Somewhat concerning is the action in the S&P 400 and Russell 2000, former leaders, which are now breaking down from their trading ranges.

On the encouraging side, we still have strong leadership from three of the four key sectors. Semis and transports are just off their recent highs while banks and making new highs now. Discretionary looks crummy. High yield bonds scored new highs this week and the NYSE A/D Line is digesting constructively.

While stocks often delay the beginning of the typical Q4 rally during an election year, I wouldn’t be surprised if the S&P 500 has a sharp, but temporary breakdown below 2120 just before election day. That would be a another dip to buy.

If you would like to be notified by email when a new post is made here, please sign up HERE.

Canaries in the Coal Mine Part III – My Two Favorites

Updating the two, and perhaps, most important charts from last week, we can first see the New York Stock Exchange Advance/Decline Line which measures participation in rallies and declines. Before a bear market hits, you will almost always see this line peak well before price does. In other words, the troops were dying in a battle but the officers survived until the bitter end. In today’s case, this indicator still very powerfully supports the bulls.

Finally, high yield bonds are below where I am using the PIMCO High Yield Fund as a proxy for the sector. It just hit a fresh high. Just like the NYSE A/D Line, junk bonds almost always peak well before the major indices.

If I had to rely on just a few canaries, these two would be at the top of my list. Right now, both a very supportive of the bullish case and higher prices before the bull market finally ends. Keep in mind that while every bear market typically begins with these two canaries dying, they will sometimes give false warnings and then come back from the dead.

 If you would like to be notified by email when a new post is made here, please sign up HERE.

The Streak Has Been Broken – Gold Teetering

After four straight afternoon fades in the stock market and one neutral day, the bulls FINALLY were able to overcome a gap down open and closed near the highs for the day on Friday. However, one day doesn’t change the pullback theme of the last six weeks.

Today, stocks are going to open higher with help from several deals announced along with Europe on firmer footing. AT&T buying Time Warner for $85 billion certainly is an eye opener, so much that no one is really talking about TD Ameritrade buying Scottrade and Rockwell buying B/E Aerospace. Mergers and acquisitions activity can definitely be a catalyst for the next leg higher in stocks, especially since no one has really been focused on this of late.

Back to the stock market’s behavior, I want to see multiple days of stocks closing in the upper 25% of their daily range along with at least solid internal to go along with the already good leadership in technology, transports and financials. Gold has been bouncing as I started discussing here.  However, all that’s really been happening is a clinging to the rising 200 day moving average as you can see below in pink. At the recent lows, both the 200 day moving average and an old trendline in blue seemed to contain the decline, but should gold rollover sooner than later, I don’t think we will see the same outcome.

gdx1

It’s already a busy week with M&A activity, but more than 150 S&P 500 companies will report earnings not to mention that the election is just two weeks from tomorrow. With the Dow still well above 18,000 and biotech pummeled, the market isn’t giving Donald Trump much of a chance.

If you would like to be notified by email when a new post is made here, please sign up HERE.

Make It Four Straight

For the fourth day in a row, stocks lost steam later in the day. While the internals continue to improve, price is always the final arbiter and the 6 week pullback continues for now. At the same time, gold is popping a little and crude oil just scored a one year high, both against a strong dollar which is unusual.

Both semis and software are bouncing from their first bout of weakness off the high while banks exploded higher on Wednesday. Energy was also a leader and transports are treading water just below their recent highs. The concern here is that the rest of the sectors don’t look so hot. They will definitely need to repair themselves before the next leg higher begins for stocks.

Regarding the debate last night, there was absolutely nothing said to impact the markets. Hillary looks like a 75-80% winner at this stage. All you need to do is look at the biotech sector as an inverse proxy for her victory. Trump still needs the Dow below 18,000 to have a shot.

For now, patience remains the operative word. Buy on weakness and prune into strength until proven otherwise. We need to see  few days where stocks close near their highs.

If you would like to be notified by email when a new post is made here, please sign up HERE.

Another Gap. Trade & Fade?

After Thursday’s reversal, Friday’s early action looked promising as I left the office before lunch to celebrate my 15th wedding anniversary playing golf with some friends at Foxwoods before the wives met us for dinner and gambling. At least the dinner went well! However, as has been the case lately, opening gaps have often been the high or low point for the day as was seen on Friday as well as on Monday. This is certainly not a sign of great strength. One indication that the pullback is over will be when we get one or two days where stocks open higher and then continue to build momentum right into the close.

With Netflix beating earnings estimates by a wide margin and the financials continuing to beat, stocks look like they want to follow Europe and Asia at the open with another gap higher. On the Dow, S&P 500, S&P 400 and Russell 2000, all we are seeing is traders buying at the lower end of the range and selling in the middle of the range. The NASDAQ 100 remains stronger and the leader, but that too, is digesting.

On the sector front, it’s really more of the same although a touch weaker with semis and transports leading the leaders. The defensive groups, utilities, telecom, staples and REITs remain weak. Healthcare, which falls somewhere in between, has really taken it on the chin as Hillary Clinton’s ascension to the Oval Office has become much more likely lately. That’s also a reason why biotech has fallen more than 10% over the past month.

On the flip side, as I often mention, high yield bonds continue to scrape along just below new highs and the NYSE A/D Line scored an all-time high last month, indicating widespread and healthy participation in the rally.

Stocks remain in the same pullback mode I have written about for more than a month. While frustrating, it’s not necessarily a bad thing as the resolution should strongly to the upside above 19,000.

If you would like to be notified by email when a new post is made here, please sign up HERE.