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.

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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!

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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.

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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.

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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.

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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.

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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.

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Is Pullback Mode Finally Over???

With yesterday downside break of the very obvious trading range in the Dow, S&P 500 and S&P 400, the pundits were all over this in the media. Just like I did yesterday, I often warn to be careful of a trap. Very apparent breaks of trading range will many times result in a quick and sharp snap back as I offered. In the short-term, that is exactly what occurred on Thursday as the bears got trapped in the first hour and the bulls pushed from there and into Friday.

While it looks pretty on a chart and all may now be fine again, I am a little hesitant to call for 19,000 on this move. I want to see more over the coming week. Yesterday’s close was a nice spot to add to longs or commit some cash.

Semis, while red on the day, finished at their highs and are following through this morning. The other three key sectors, transports, banks and discretionary, still have some work to do over the coming days. High yield remains very solid.

Have a great weekend!

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Stocks & Treasuries Looking to Diverge

With indications of morning weakness, the Dow, S&P 500 and S&P 400 will be breaking down from their six-week digestion patterns. Amazingly, for the past six weeks these indices have basically traded from high to low inside the range they saw on September 9 & 12.

spy

This action does not change my thinking about a continuing pullback and not some large scale collapse. The first thing I want to see is whether this potential breakdown is held for more than a few days. Many times, indices break up or down from a widely followed range, only to see that reversed quickly and sharply in the days ahead which traps a large group of traders.

I also want to see how powerful today’s action is to the downside and if any sectors buck the trend. The defensive utilities, staples, REITs and telecom are the most likely candidates.

As I mentioned the other day, treasury bonds have been hit with the ugly stick and are trying to bounce back from the 200 day moving average which is just the average price of the last 200 days and a popular measure of the long-term trend. If the declines in treasuries is so strong, I would only expect a short-term bounce here as sentiment is now at a bearish extreme.

tlt

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Pullback Mode Remains the Short-Term Theme

My general theme of pullback mode for stocks continues in all of the major indices except for the NASDAQ 100. Gold and silver have been a more exciting story, but they, too, have paused since I wrote about them last week. Sector leadership remains very strong with semis, banks, transports and energy near their highs at the same time the defensive group has been weak.

I wrote about consumer staples looking especially troubled a few weeks ago and nothing has changed. They had been dynamite all year and became very expensive on a fundamental basis during the first half of 2016. Since then, their price behavior has been poor as it looks like big money has been quietly selling the rallies.

On the bond side, treasuries have been hit with the ugly stick and they are approaching an area where they are “supposed” to at least bounce. If they cannot, I would begin to argue that much lower prices are ahead and into 2017. High yield, on the other hand, just scored yet another new high last week. This continues to give me comfort that a bear market scenario remains off the table for a while.

With Yom Kippur beginning at sundown today and lasting through sundown tomorrow, I would expect liquidity to dry up later today as well as tomorrow. That could make for a quick exaggerated move. Finally, the old adage of Sell Rosh Hashanah and buy Yom Kippur ends tomorrow. Stocks are now about to begin the most favorable time of the year.

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