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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Trading Range Continues But Lots Beneath the Surface

Stocks fared fairly well last week in the face of overbought conditions and a few tiny cracks in the pavement. As I continue to offer, I believe the bull market is alive and reasonably healthy, especially for one 9 years old. However, my shorter-term view is that stocks are in a trading range with perhaps a slightly upward bias for the time being. The stock market just doesn’t seem like it wants to launch a fresh leg towards my next target of Dow 23,000. On the flip side, while it’s long overdue for some kind of pullback, I do not believe it will be anything but shallow unless there is some kind of geopolitical event.

The four major sectors are behaving very differently. While semis have bounced back smartly from the June swoon, they are lagging tech and the NASDAQ 100 and really need to score a fresh high sooner than later. Discretionary is behaving much like semis and need a new high close as well. The transports have pulled back more than 2% and look very interesting from a bullish perspective. Only a close below last week’s low will change my opinion. Banks continue their 2017 trading range and do not appear to be ready for an upside thrust just yet. Finally, high yield bonds are quietly scoring new highs which has bullish intermediate-term implications.

 

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Stocks Tired. Energy and Transports of Interest

It’s been nothing short of amazing how many people keep calling for a bear market, correction or even single digit pullback. On top of that, we are now hearing calls that the VIX (volatility indicator) is either broken or no longer works. Lots of sour grapes out there! The bottom line is that the ingredients for a major decline are not present and have not been present for a long while. That’s going to change, but it will take some time to do so.

With all that said, stocks do look a little tired, but that doesn’t mean they have to go down. They could also move sideways to repair themselves. If we do get any weakness, it should be yet another in a long line of pullbacks to buy.

On the sector side, all is not well, but it’s good enough to keep this aging bull market going. I discussed energy a few weeks ago as being in a position to form a low and it has rallied nicely. However, it’s now at the point where the bears should make their stand if they are going to. If not, this will be a good sign that a more significant low may be forming. At the same time, transports have quietly pulled back 2%+ this week. The bull should attempt a stand sooner than later and this index could give us a clue as to the market’s next move.

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Bears Move to VIX as Indices All See New Highs

The bears tried to put up a little fight on Tuesday, but that only lasted a few hours and it wasn’t much of a battle. On Wednesday, the bulls came right back with the big guns and a headline close that saw all of the major stock market indices see fresh all-time highs along with high yield bonds. While I had been looking for the Dow, S&P 500, S&P 400 and Russell 2000 to see these levels, I did not expect the NASDAQ 100 to do so this quickly.

The chart below shows the path I was looking for with one more small decline in the index just below the May bottom. As the index began to rally and lead, I offered that I would like to see the other indices lead the market lower on the next pullback and then see the NASDAQ 100 soar again. There was no next pullback which is still okay.

At this point with all of the major stock market indices seeing blue skies, the bears are focused on the volatility index or VIX which is showing overwhelming complacency, or at least that’s their take. The VIX is a funny animal and its behavior has certainly morphed over the years as tradeable products have been introduced. I don’t have a strong opinion right now on the continued value of the VIX, other than to say that we should be able to discern something a few months from now.

In short, I remain in the trading range camp with a slightly upward tilt and do not think the across the board new highs are the beginning of the next leg to 23,000. I think we need some backing and filling over time or a pullback first. This is definitely not how bear markets begin!

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Bulls Don’t Want to Quit, But…

The bulls had another strong day on Friday with now the S&P 400 and Russell 2000 on the verge of fresh all-time highs. Semis continue to bounce back. Transports remain strong and discretionary and banks are behaving constructively. Materials and industrials are quietly in high gear and long depressed energy is ticking higher. High yield is also picking up again and you know my feelings on that along with the broad participation seen on the NYSE. Just keep in mind that this is not a young bull market so it’s behavior won’t be as rock solid as one in its early stages.

This week we have option expiration, but I do not believe it is going to play a big role in market direction. Earnings season picks up and that should make for some fun. Although volume has lagged for a long while, given that it’s summer, I would expect it to get even lighter barring an external market event.

Although I continue to paint what seems to be a rosy picture, my intermediate-term forecast remains the same. I believe stocks are in a trading range until proven otherwise with perhaps a slight upward tilt.

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Another Good Day for the Bulls

After a number of short-term victories for the bulls over the past week, the Dow Industrials and Dow Transports scored new all-time highs together, triggering a Dow Theory confirmation or buy signal on Wednesday. While the Dow Industrials were the lone major stock market index to see fresh highs so far, I expect the S&P 500 to follow suit shortly. The S&P 400 and Russell 2000 should not be far behind which would add even more credence to my forecast of limited downside. However, I still do not believe that stocks are ready just yet to blast off on another leg higher. As the NASDAQ 100 repairs itself, I think the stock market remains in a trading range which will eventually be fully resolved to the upside.

Participation in the rally remains very, very broad and strong no matter what you hear differently from the pundits. These are the same pundits who were negative after BREXIT and the election last year and continue to scream about a major decline or bear market starting. The chart below says it all. The NYSE A/D Line is once again at all-time highs. While it’s not 100% perfect, this indicator rarely looks so strong as a bull market is ending. When I say “rarely”, I believe it has only failed once in the modern era. In any case, with high yield bonds stepping up again and the other evidence I continue to point out, buying weakness is the correct strategy until proven otherwise.

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Dow Theory Says to BUY

After staving off early morning selling on Tuesday, the bulls followed through with a nice little day on Wednesday. As I have discussed, the NASDAQ 100 continues to bounce back and resume leadership. That’s an intermediate-term positive, especially if the index does not lead on the downside during the next pullback.

While the Dow was the only major index to score an all-time high on Wednesday, the Dow Theory crowd will point to the transports also hitting an all-time high. That’s considered a Dow Theory confirmation and portends higher prices ahead. In that regard, the bull market is alive and well.

Besides the good sector leadership, high yield bonds also seem to have ended their pullback. While they are not yet at new highs, their behavior is constructive.

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NASDAQ 100 Right on Schedule. Gold and Energy Opportunity

For the past month or so, I have focused much of my commentary on the NASDAQ 100 as it had been the far and away market leader before getting hit with the ugly stick from late May to early July. Late last week, things began to change and I saw the NASDAQ 100 looking a little better in the short-term. On Friday, the bulls, especially in tech and the NASDAQ 100 did step up with the anticipated bounce beginning. That’s continuing today and a good sign overall, even though there could be some more weakness ahead.

While I still do not see a full scale correction of 10% or anything close just yet, I do think stocks have settled or are settling into a trading range until at least later this quarter. For the nimble, rallies to the upper end of the range can be sold while declines to the lower end can be bought. As this is taking place, it will be important to watch which sectors lead and lag each tradeable move.

I have long mentioned energy finding a bottom at some point, but I wasn’t going to be brazen enough to pick it just yet. There is some evidence that the sector is hammering out at least a short-term low right here and now. That’s lining up with the gold stocks as well. And all that is without any large currency moves. Hmmmm…

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Slow Change in the Tide

As you know, the NASDAQ 100 and tech have been downright ugly overt the past 6 weeks. From leader and media darling, this huge sector, including the much vaunted FAANG stocks have been hit very hard although there hasn’t been significant technical damage done. I posted a few charts over the weeks showing a very defined trading range where a close outside the range would give the bulls or the bears the clear edge. Otherwise, a neutral stance was the easiest. I also forecast that a move below the May low would be the first sign to get me watching again for signs of leadership.

As you can see from an updated chart above, the NASDAQ 100 did a nice job of following the projected path I offered in light blue. However, it has yet to trade below the May low. Things continue to unfold without surprise and I still don’t believe the decline is over. One ray of sunshine in the very short-term has been the outperformance of the NASDAQ 100 and semis over the past few days. It’s not much for the bulls to latch on to, but it is a change in character, even if only for a few days.

Next week, I will be watching which index leads any bout of weakness. In a perfect world, I would want to see the NASDAQ 100 breach its May low but not lead the market lower. That would be very constructive.

As I wrap up this post, the June employment data just came out and exceeded expectations. For a while, I have believed that Q2 would look a lot better than Q1 and Q3 would be good as well. Not only did the economy create more than 200,000 new jobs, but there were significant upward revisions of the past few months. The only note of caution is that the U6 or “real” unemployment rate ticked up by .2%. I am not going to worry about a single data point, but it does bear watching over the coming months.

Remember, reality over rhetoric!

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Market Remains Uneven But No Big Decline Coming

I hope everyone had a festive July 4th holiday with family, friends, food and libations! Thanks to all those who have served to fight for and protect our freedom as the greatest nation on earth.

We pick up mid-week no different than on the holiday shortened Monday or last week. It’s a tale of two markets, the NASDAQ 100 and the rest of the major indices. On Monday, where I felt like one of the few who worked, the Dow scored an all-time high but was rejected into the close. None of the other major indices were that strong. The NASDAQ 100, however, was hit with the ugly stick once again, and the decline and period of underperformance continues. Apple in particular looks especially vulnerable to another wave of selling which could take it to visit the average price of the last 200 days near $130. Until better action is seen, selling rallies in this stock, sector and index are probably the best strategy.

Overall, stocks look like they are unevenly digesting and consolidating, biding their time for the next leg higher. I don’t think that happens right here, but I also do not see any decline of significance in front of us. While transports and banks have resumed leadership as I have mentioned several times, semis and discretionary are struggling, for now. I do not believe they have seen their bull market peaks yet, no matter how hard the bearish pundits scream otherwise. High yield bonds are settling into a trading range as well which also lends credence to my overall pause mode for the stock market. Participation remains strong.

Of note to close on, energy blasted higher on Monday, which should force some hands today as investors come back to work. At some point, the energy stocks will bottom and begin a huge rally. I just don’t think it’s right here. At the same time, defensive sectors like staples and utilities have been hit hard on prospects for additional rate hikes and a better economic climate.

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