Bulls Running Like Pamplona

This is looking more and more the running of the bulls in Pamplona. They just stampede anyone and everyone in their way. After the two strongly positive seasonal trends ended after the first week of October, there was sufficient evidence that stocks were due for a pause to refresh or modest, single digit pullback. That’s what I was looking for. Nothing big. Nothing significant. Nothing really actionable. Just your garden variety reset.

Stocks came out of the gate to the upside on Friday after what I kiddingly referred to as a one day bear market on Thursday. All of the major stock market indices are at or essentially at all-time highs. Bears can’t argue with that. My four key sectors are also acting very well with semis and banks at new relative highs with transports and discretionary catching up. In recent weeks, I wrote about the poor behavior by the banks, but that is changing today.

High yields, while not leading and looking a little lifeless, are still just a day or two from all-time highs. The NYSE A/D Line is also just a whisker from new highs. On the other hand, defensive sectors, like utilities, telecom and staples are the worst sector performers. For the first time since Q1, bond yields look they could break out to the upside and see the 10-year note head above 2.6%. That would be a huge tailwind for banks and signal that the economy may be heating up.

Stocks should end the week on a high note. Interesting how GE reported awful earnings yet again and the stock opened sharply lower by more than 5%. As I type this, it’s trying mightily to turn green on massive volume. If that 4%+ dividend is safe…

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3 Reasons Stocks Will Peak Right Now

Good Monday Morning! Huge weekend if you are a sports fan although the decision making of my Yankees’ and Cowboys’ manager and coach likely just ended their seasons. At that level, the margin for blunders is razor thin and both Girardi (4 stupid decisions in 40 min) and Garrett (one giant brain freeze) cost their teams. While I have never been in their shoes, it’s the same thing I face each and every market day. Over the past 29 years, I have probably made every bad decision one can make, but hopefully, I learn from those as I move forward.

Stocks begin the week with all five major stock market indices at fresh new highs along with high yield bonds and the NYSE A/D Line. So are the banks, semis and transports among key sectors. As I have said over and over and over again since 2010, bullĀ  markets do not end with this type of behavior. Sorry to all of the bull markets haters and disavowers; you have been wrong, are wrong and will be wrong until the evidence changes. And when they are finally right, I am sure they will crow about how they knew it all along. Reality over rhetoric.

With all that said, the very short-term has an opportunity to change right here and now. If there is going to be the mild, modest pullback in October which I have written about lately, stocks should peak this week for three reasons.

1 – September ended at its highest close of the month for the S&P 500. That leads to another week of strength, roughly 1%, and then a give back of more than 1%.

2 – When October begins the month in an uptrend, the first five days tends to be higher. However, the next five and the five days after that and the final five days of the month all show mildly negative returns of roughly -0.25% each period.

3 – Stocks rallied hard into the beginning of Q3 earnings season, using up a lot of fuel. That usually means earnings are priced for perfection and rarely exceed expectations.

BONUS – The Economist and Barrons have run very bullish headlines this month about how the global markets and economies are hitting on all cylinders. Additionally, the term “melt up” is all over the place on blogs and Twitter. While this is nowhere even close to the true irrational exuberance of 1999 and early 2000, it does give bulls a little cause for short-term concern.

Finally, I am not going to rehash the piece I wrote about the negativity of Octobers in years ending in “7”, but you can reread it HERE.

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Three Big Short-Term Changes Today

Looking at the economic news of the day, jobs created in September actually declined for the first time since 2011. On the surface, that would be shockingly disappointing and brings in calls for recession. However, all of the drop from the expected 100,000 created will be attributed to the hurricanes. The unemployment rate surprisingly fell to 4.2% from the expected 4.4%. Until the economies in Texas and Florida get back to somewhat normal behavior, job numbers are going to be volatile and more difficult to assess.

Turning to the markets, as I wrote about earlier this week, all of the major stock market indices saw new highs this week. This was expected as we have strong seasonality from October beginning the month in an uptrend as well as September ending the month at its highest close. Both of those tailwinds end TODAY with the October seasonal trends turning negative for the next three weeks. Additionally, stocks have rallied very hard into the beginning of earnings season which is now. Put another way, stocks have exhausted a lot of energy as companies begin to report Q3 earnings. It’s going to be difficult to maintain the rate of ascent, not to mention that companies better not disappoint.

While all of this may sound negative, I want to be crystal clear that I absolutely do not believe the bull market ended or is close to ending. I only have some very short-term concerns which may translate into a modest low to mid single digit pullback in stocks. Nothing to worry about over the intermediate or long-term. Semis, banks and transports all made new highs and discretionary has ceased lagging significantly. Industrials, materials and all at or near new highs. Energy is rallying sharply. All this as defensive sectors like REITs, staples and utilities are lagging. The recipe for higher prices remains firmly intact into year-end and into 2018.

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Signs Point Higher this Week

After a solid end to September and Q3, stocks open the new day, week, month and quarter flirting with all-time highs. Of the major indices, only the NASDAQ 100 isn’t there, but I expect to see that achievement this week. When I think of October, Reggie Jackson’s three home run game in 1977 comes to mind along with Halloween, fall foliage and stock market crashes. As I already wrote about, while October is known for huge market swings, 2017 is on the atypical side with near record low volatility.

I updated my research regarding October and you can read about it HERE. Additionally, the always interesting Rob Hanna from Quantifiable Edges offered that when the S&P 500 closes the month at its highest close, the next 5 trading days are seasonally very strong with 21 wins and 7 losses since 1995. The average trade earned a stout 1%. This trend jibes very well with what I discovered about the first 5 days of October in an uptrend. I will be looking for a short-term peak next week.

On the sector side, strong leadership continues to support buying any dip with semis, transports and banks all stepping up big time. Discretionary is fine, but I am beginning to see the early stages of intermediate-term underperformance. High yield bonds are behaving well and there is just no evidence that the 8+ year bull market is ending. Sorry bears…

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Semis Strong, Shouldering the Burden. Other Sectors Stepping Up.

The stock market continues to quietly drift higher, at least on the surface. The Dow, S&P 500 and NASDAQ 100 have seen new highs this week while the S&P 400 and Russell 2000 look constructive but still well below their peaks. I do expect them to play catch up and see blue skies before any meaningful downside is seen.

I wrote about the banks earlier this week as being a concern. Discretionary is a bit stronger but also not firing on all cylinders. Transports have rallied strongly and seem poised for new highs. Semis, as I wrote about before, have shouldered most of the leadership burden and are just shy of new highs. That’s been an impressive run and I don’t think it’s over.

Outside the key sector group, I see some really encouraging behavior by healthcare, biotech, industrials, materials and energy. While some analysts question market participation, this behavior counters that argument. Furthermore, although the percentage of stocks above their long-term trend (200 day moving average remains in a downtrend as you can see in the first chart, the second one is a longtime favorite, the NYSE Advance/Decline Line. For me, the latter is a better representation of what’s going on beneath the surface.

Here’s the bottom line. While the stock market is not without short-term concerns and I am still looking for some weakness next month, the majority of the key indicators are in good shape. Bull markets do not end with behavior like we are currently seeing.

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Small Caps, Semis & Junk Leading. Banks Looking Sick

Stocks ended last week on firm footing as the bounce saw four nice days. With more North Korea tensions in the air, it will be interesting to see if the stock market finally cares or just uses this as an excuse to open mildly lower. Very quietly as I have mentioned before, the Russell 2000 has been leading the major indices. That does have bullish implications if it holds on.

Additionally, the semis which have been the only key sector leading, are one strong day from new highs.

One sector that has me particularly concerned is the banks. They look sick. While that isn’t likely to have a short-term impact, it’s something that must be watched over the intermediate and long-term.

Turning to my favorite canary in the coal mine, high yield bonds are behaving more like semis than banks, trading just one good day from new highs. It would make me feel a whole lot better if this key group can score new highs before rolling over again.

Once again, we have a number of crosscurrents. If stocks gather themselves and rally, I think there will be a good opportunity to sell at new highs. Should stocks rollover first, I will become more concerned about the downside. In either case, I do not think stocks are blasting off higher until next quarter.

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Crosscurrents Abound. Enough for Bulls & Bears

Stocks continue the bounce they began two weeks ago and the same one I have been discussing. Tuesday was the day where the acceleration started. That could be slowing today. The NASDAQ 100 sits an all-time high but it’s lonely up there. The Dow and S&P 500 are within striking distance but the ever improving S&P 400 and Russell 2000 are not close. With the monthly jobs report out this morning, any strength will create a little short-term headwind for stocks into next week.

Speaking of the employment report, it was a little weaker than expected and last month was revised down a bit. This data will be very important to watch for signs of a possible peak. Topping out this year could put us on recession watch sometime in 2018 if the Fed doesn’t pull back their tightening cycle.

I have been writing about the importance of the semis to put the market on its back and lead as it’s the only key sector that is strong right now. This group is now within a good day or so of new highs, chalking one up for the bulls. On the flip side, discretionary, banks and transports are nowhere near that strong, creating a vacuum of good leadership. Healthcare and biotech are cranking at new highs, but those are not usually the sectors that can lead a new leg in an old bull market.

On the flip side of the flip side, high yield bonds have quietly been strong for two weeks and doing their best to recoup Q2 damage and remove themselves from being a concern. Basically, we have lots of crosscurrents right now. Let’s see if the NYSE Advance/Decline Line can make a new high.

If you missed my segment on ABC in CT yesterday regarding market reaction to Harvey, here it is.

Analyzing stock market behavior after disasters

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As Expected, Pullback Continues

All month I have been writing about a short-term pullback for stocks. Nothing huge. Just your garden variety 3-5% bout of weakness which could overshoot. This coming from someone who has been bullish all year on stocks. I won’t reanalyze what I have already written several times, but here are a few reasons. The Dow Industrials were off on their own island of strength while the mid and small caps were in decline. Dow Transports were even weaker. Sentiment surveys and option data had become too greedy, too complacent and too positive. The list of stocks making new 52 week lows expanded and then surpassed those making 52 week highs, all while the major indices were so close to all-time highs. Key sector leadership fell off.

The stock market was just looking for a catalyst or an excuse to pull back.

First it was North Korea and then it was Charlottesville and now it’s Barcelona and Gary Cohn. The common thread in each case is President Trump. Since the post-election rally, dubbed the “Trump Rally”, “Trump Jump” and “Trump Bump”, I have remained firm that while the president always gets credit and blame, the rally was really based on the GOP’s election sweep and perceived ability to govern and pass legislation as they saw fit. That agenda is now being questioned and you will likely start hearing the media and pundits refer to the pullback as the “Trump Slump” or “Trump Dump”.

You don’t read this blog to hear my social views so I am not going to a rant about what’s going on in the country today. Suffice it to say that for as long as I can remember back to my childhood, I have always fought and stood against racism, bigotry, intolerance, discrimination, hatred and evil. They have no place in this country or on earth. There are no exceptions to this. At the same time, free speech is one of those inalienable rights which we often take for granted. However, it’s not really 100% free speech as you can’t scream “fire” in a crowded theater. There are limitations. Those a lot smarter than me will likely be struggling with this over the coming years if the 9-year escalation of racism, bigotry, hatred, white supremacy & neo-nazism continues.

That was more than I wanted to write, but it wasn’t quite a rant. Anyway, back to the markets and what’s at hand. The pullback is continuing as planned with Thursday being the first across the board rout where basically everything went down. For those looking for a silver lining, the defensive groups like staples, utilities and REITs were hit along with the others. That typically confirms the decline and indicates more downside before a low, but it’s getting there. It’s a necessary piece towards an eventual market bottom.

On the positive side, while high yield bonds have declined, their weakness has been small although I sense more downside is coming. The semis which I wrote negatively about here have been the quiet winners during the pullback and are the lone holdout from making new lows. It will be very interesting and telling to see if they can hold up.

With all of the major indices in gear to the downside, it’s unlikely that the current action is just a re-test of the North Korea decline from last year. Momentum is making a fresh low now so we are likely to see at least a low, a rally and a new low before the whole decline wraps up. I had written about a rocky period into mid-September and I am not ready to change that opinion just yet. Let’s see what shakes here. Don’t forget that the Fed has their annual retreat next week in Jackson Hole WY. With Janet Yellen and Mario Draghi (ECB) both in attendance, we should expect to hear more about their respective balance sheets.

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Stocks to Bounce But Pullback Not Over

In part II of the piece I started last Friday, I turn to the market evidence supporting the 3-5% pullback I have been discussing all month. While tensions with North Korea have quieted down over the weekend and global stocks are sharply higher, I do not believe the pullback is over. Now, if the five major indices scream right back to new highs and sector leadership is strong, I will clearly be wrong in this call, but I am willing to give it some time. Let’s see if the bulls can first retrace what they lost last Thursday.

One of the many reasons I started looking for a pullback can be seen in the charts below. Just take a cursory glance and you will see that the Dow Industrials are leading the parade with the S&P 500 just behind. The S&P 400 and Russell 2000 are lagging significantly. The NASDAQ 100 is just a tad better.

Leadership by the Dow does not equate to healthy and strong leadership. It’s exact opposite. Investors are looking to hide in the “safer” and more liquid areas. If this was one of my regular Canaries in the Coal Mine update, I would offer that none have died or are close to dying, but a few are coughing.

Stock market sentiment began to get a little too happy, complacent, greedy or whatever other adjective you want to use. We saw it in the surveys, the options data as well as the Rydex fund flows. While sentiment ebbs and flows at a good pace, weakness is likely needed to restore at least a small wall of worry.

The semiconductors are one of my favorite sector canaries and concern over the past few weeks has been that with the NASDAQ 100, software and internet sectors all scoring fresh new highs, the semis have been unable to. If they started to rollover, they would likely bring down the rest of the tech sector with them.

The Dow Transports are another sector which had been under pressure long before North Korea became a recent issue. You can see below its decline was more than just a few day event and warrants attention.

Until earlier this week, I was holding out hope for the bulls by the continued strength in the high yield bond sector, my favorite canary in the coal mine. However, the past three days have seen relentless selling in this sector. Something has changed in the character of the market.

I could add to my list of short-term concerns including the infamous Hinderburg warning which really just says the market is very split with an equal number of stocks doing well as poorly. The number of stocks making new highs and new lows has shifted significantly to the negative over the past week adding credence to the Hinderburg.

HOWEVER (isn’t there always), the New York Stock Exchange Advance/Decline Line, which measures market participation just hit an all-time high earlier this month. Historically, that pretty much insulates stocks from a serious decline or bear market as it shows good health and lots of liquidity.

Finally, the much talked about VIX which is a broken measure of anticipated volatility spiked by almost 50% this week and almost 100% from its recent low. That has been a strong indication of future gains several months out.

In short, the next few weeks to month or so could be rocky, but not cataclysmic. Besides North Korea, we have the single biggest geopolitical since 9/11 on September 24th with the German election. Stocks are wounded and need some time to heal, but more new highs are in store later this year and into 2018. If you are nimble enough, selling short-term strength is the right strategy until proven otherwise.

As hard as it may be, investors would be best served by not being glued to the news channels 24/7. Focus on the long-term. The economy’s growth is accelerating. More jobs are being created. Record earnings. Heed my theme of 2017. Reality over rhetoric!

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Short-Term Pullback in Motion

Over the past week or so, I have gone from a trading range view with perhaps a slightly upward bias to a mild pullback of 3-5%. That’s where I stand today. Stocks sold off very hard on a relative basis from noon to the close on Tuesday as the saber rattling between the U.S. and North Korea continued. President Trump kicked it up a notch.

Regardless of the news, the markets were already in a position to pullback as I outlined in the past few posts. This should not be a huge deal, but it’s one where I am going to be a bit more vigilant than at any time this year. Perhaps a little pruning, hedging or even some sales as multi-year highs were rejected in the Dow and S&P with the mids and smalls doing even worse. Even high yield bonds had their worst day since early July. At the same time, defensive sectors like utilities and consumer staples behaved very well.

Again, I am not looking for anything substantial, especially since we are not seeing the internals collapse or across the board selling. This just looks like your plain vanilla bull market pullback.

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