Two Favorite Canaries Looking Fine

The final two canaries are probably my favorites because I believe they are the most powerful and predictive. In every bull market of the modern investing era, both of these canaries gave 3 to 21 months notice that trouble was brewing. However, that doesn’t mean that every time these canaries warn, bear markets occur. It just means that they haven’t missed any.

The first chart is that of New York Stock Exchange’s Advance/Decline Line which simply measures participation in the stock market on a cumulative basis. What we want to see is this indicator making new highs along with the major stock market indices. When it stops making new highs and the indices continue to do so, that’s a warning sign. As you can see, the NYSE A/D Line last peaked in early March with the stock market.

A proxy for the high yield bond market is below and I use it the same way as I do the NYSE A/D Line. It gives the same kind of red flags. Right now, we see that its last high coincided with the rest of the stock market.

These last two canaries, while off their early March highs, are not flashing any warnings signs that the bull market is ending anytime soon.

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Short-Term Iffy But Long-Term Remains Strong

Following up from Friday’s post, stocks remain overbought and certainly stretched to the upside although the same can certainly be said all month. They are much in need of a break or at least a quick pause to refresh. However, sometimes strong momentum overpowers everything as we have seen from time to time. I closed last week by saying that the bull market is absolutely not over in my opinion. That prevented the usual emails.

Look no further than two of my favorite long-term indicators, the NYSE Advance/Decline Line and high yield bonds. The NYSE A/D Line just scored a fresh all-time high last week. I can’t tell you how many times people have questioned me on its value, yet it’s been one of the strongest advocates for the bull market since 2009. The rally from the pre-election low has been historic and the rising tide has lifted all ships. The bull market ain’t over.

Junk bonds are below and as you know, they are among my favorite canaries in the coal mine. Bull markets typically don’t end with high yield bonds making new highs as they have been and are right now.

I have said this for years and years, and I will say it again. While this is no longer the most hated and disavowed bull market of all-time, buying weakness remains the strategy until proven otherwise. Those waiting for the perfect pullback to buy will either freeze when it comes or it won’t be the pullback to buy.

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Dow Breaking Out & Q4 GDP Miss the Last

After hitting yet another one of my upside targets, 20,000, the Dow has yet to pause. Five straight closes above 20,000 will open up new upside targets before the bull market ends.  As you can see below, the Dow has been consolidating sideways since early December. That’s often referred to as a flat top or box. When prices finally exceed the flat top, they oftentimes see a spurt in the same direction.

Although momentum is on the side of the bulls there are a few short-term headwinds which will present themselves if the rally stalls and closes back in the box sooner than later. Should that occur, I would expect a quick pullback to 19,700.

The NASDAQ 100 has been the leading index since late December, yet it certainly looks a bit tired, the same comment I made earlier in the week. Semiconductors look even more in need of a rest and they typically lead the NASDAQ 100. Keep in mind that all I am saying is that stocks may pause to refresh. The bull market is alive and reasonably healthy. Weakness is a buying opportunity until proven otherwise.

Sector leadership remains strong. Semis, banks, discretionary and transports look powerful although they could use a rest. Industrials and materials are also kicking it into high gear. Healthcare and energy continue to lag, but I think they will have their day in the sun after this quarter.

New highs in high yield bonds and the NYSE A/D Line bode well for the bull market, regardless of the next 5-10% move.

Q4 GDP just printed at 1.9% which was below forecasts. I wouldn’t be surprised if that’s the low print Donald Trump sees for a while and the market just shrugs it off.

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Not the Fetal Position

Last week, my theme focused on a pullback in the stock market. More importantly, my strong opinion was that it wasn’t a bout of weakness where people should sell in to, but rather to use that opportunity to buy the dip or re-position a portfolio to where it should be over where it was.

Friday was an ugly day across the board. Overwhelmingly red. 96% of the volume on the NYSE was in stocks that were down. Besides stocks, bonds and commodities were hit very hard as well. If you came in owning positions, there was nowhere to hide. Few pundits I heard or read said to buy. The bulls and bears are debating whether this was just another scary short-term wonder or if this is the shot across the bow for much more downside. I think you know where I stand.

As of Friday’s close, stocks are down a grand total of 3%. Key sector leadership in transports, semis and especially banks remains strong. High yield is extended but still look good. There is broad participation. This is not the time to build a bunker, stock it with canned goods and water and get in the fetal position. The bull market isn’t over. The rally isn’t over.

Volatility has certainly spiked. I expect that to remain elevated as the market digests Friday’s rout by the bears. Early indications point to a lower opening for stocks, but it’s unlikely we will see a repeat of Friday’s decline. Look for early weakness to subside and see if the bulls want to step in by lunch. The next few weeks should see a number of ups and downs, especially with the Fed meeting, but Dow 19,000 shouldn’t be that far off. Focus on the horizon and don’t let those loud and habitually wrong perma bears cloud your judgement.

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Pullback Remains But Transports…

The Dow and S&P 500 are still lagging the other major stock market indices in pullback mode, but contrary to what you may think, this remains a very healthy environment for stocks. In the strongest markets, the more “risk on” indices are the ones charging ahead. That’s the case now with the S&P 400, Russell 2000 and NASDAQ 100. The NYSE Advance/Decline Line which measures broad participation recently scored yet another all-time high and high yield bonds are hanging in well.

That’s not the landscape ever seen when a bull market ends or even a correction.

Stocks remain in pullback mode and I expect to hear some noise from the bears today and early next week. We should be on the lookout for talk from the “floor traders” that stocks are breaking down at key levels and that could mean the end of the post-BREXIT rally. That’s the same chatter we have heard since mid-July and I don’t give it much credibility. We haven’t even seen a 2% decline since BREXIT which I continue to say that it shows tremendous underlying strength. This little bout of weakness may become 2%, 3% or even a little more. And if so, I remain firm that it will be yet another good buying opportunity on the way to Dow 19,000, 20,000 and perhaps much higher.

On the sector side, think of how many pundits left the transports for dead earlier this year. They said the collapse called for an impending recession with a nasty bear market. Talk was renewed post-BREXIT; yet now, that group is leading the market and is close to breaking out. While all-time highs are almost 20% away and unlikely to be seen anytime soon, the transports recent surge is definitely a positive development for stocks.

Finally, the perma dollar bears seem to be waking up again as the end of the month approaches with calls of collapse, calamity and doom. More on this next week.

Have a great weekend!

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Still in a Pullback

Over the past few trading days, stocks gathered a little steam, but I still think the markets are in the midst of yet another pause or tiny pullback. It is amazing, however, that we have not seen a 1% in either direction since the post-BREXIT rally in early July. I have been saying nonstop that we saw historic strength coming out of the Y2K like BREXIT and that strength would not dissipate so quickly. Frankly, I thought we would have seen at least a 2-3% pullback by now and I have been the most ardent of bulls. The underlying power has been more than impressive.

On Tuesday, the NASDAQ scored a fresh all-time high. (Is that redundant?) Coupled with the S&P 400 at new highs, you may be questioning how that’s still a pullback. The other major indices are lagging a bit and there has been much power behind the recent little rally. Don’t get me wrong. I am very happy that the bears remain at bay. The longer stocks can stay up here, the more likely we will see an upside resolution.

Leadership remains strong and diverse with semis, software, internet, financials, industrials, materials and energy on top. As discretionary rests, the transports are really stepping up here. Defensive groups have moved to the back seat and high yield bonds continue to resist selling. It’s hard to argue with what’s going on although the vast majority of pundits continue to disavow and hate this bull market. That makes me comfortable over the intermediate-term as Dow 20,000 remains attainable later this year or early next. I don’t how these people who are paid to be in stocks and make money can be so wrong for so long. Remember, it’s okay to be wrong. It’s not okay to stay wrong.

The clown parade just continues to grow. Soros, Druckenmiller, Icahn, Zell, Trump, Fink, Gundlach, Gross, Faber, Auth, Faber, Yusko, Singer.

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What a Pullback Looks Like

Stocks have gone essentially nowhere for a month. Bulls, like myself, view this as a healthy period of digestion or consolidation before the next leg of the rally begins. Bears argue that stocks have peaked and they are headed much lower. As I have mentioned for months and months, I don’t think the bull is over or close to that point. There have been too many strong indications of more upside that typically do not occur as a bear market is about to begin.

Pullbacks come in various forms but are usually limited to either moving sideways for a period of time or seeing a shorter and sharper bout of weakness. The current pullback looks like a combination. The major stock market indices have been long overdue for at least a 2-3% pullback and this looks like it’s it. However, I wouldn’t be so aggressive to play this to the downside as it should be one that ends quickly and without much notice.

Leadership remains strong and healthy. The NYSE Advance/Decline Line as well as high yield bonds just saw new highs. More all-time highs for the major indices is ahead. Stocks may be a bit tired here and with the monthly employment report being released tomorrow, there are enough good excuses for the stock market to continue to pause. This is a good time to prune portfolios into the new leaders and prepare for the next leg higher.

Finally, as I have discussed before, the real elections that matter for the markets are next year in France and Germany. Our own election should not have a significant impact on our markets. Current odds favor Clinton 70-30 over Trump.

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Beneath the Surface

Listening to the media, you would think that absolutely nothing has gone on in the stock market this month. While it’s true that the Dow, S&P 500 and NASDAQ 100 have gone nowhere, the other two major indices, S&P 400 and Russell 2000 have seen some gains. Nothing to write home about, but the bulls should take it!

Additionally, and very quietly, high yield (junk) bonds, perhaps my favorite canary in the coal mine broke out again on Monday, further solidifying the bulls’ power, if they really even need to do so. The NYSE Advance/Decline Line scored yet another all-time high, showing just how broad the advance still is after six months.

Leadership has been the real story. I have long mentioned that the defensive sectors, telecom, utilities, staples and REITs were going to cede to more economically sensitive groups and that would be a rejuvenation for the bulls. That’s exactly what has been happening since the BREXIT bottom where almost every pundit screamed from the rooftops that either the bull was over or a major decline was unfolding. Now, they are either silent or somehow revised history and have “always been bullish”.

Technology has been a monster with one of the four horsemen, semis, leading the charge. The “left for dead” banks are also steaming higher for the first time in many years, leaving the naysayers scratching their heads as this has been one of the easy shorts against longs. The other two horsemen, transports and discretionary, while not leading, are certainly right there in the middle of the pack, more bullish support. Don’t forget about energy, industrials and materials as well. They are in the second group of leaders and look poised for more upside.

Yes, it’s quiet on the surface and stocks can pullback a few percent at any time. That’s normal and healthy. Be careful getting negative. The bull ain’t over!

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Stay Long & Strong

Similar to August 2nd when coiled up stocks broke to the downside and wiped out more than two weeks of gains, the S&P 500 did essentially the same thing on Wednesday. While it was only a .50% decline, the media turned it into a big deal; it’s not.

Could stocks weaken more? Yes.

Should we be concerned? No.

I won’t be surprised if this pullback is the largest since the BREXIT bottom, but keep in mind that we haven’t even seen a 2% pullback yet. It’s certainly not time to panic and sell. Rather, I would use this opportunity to see which sectors hold up the best for clues of leadership on the next rally, which should take the Dow to 19,000.

Remember when the pundits left the small caps for dead only a few months ago? See what’s been leading? Small caps. Just this week, we saw new highs in small caps, mid caps, NASDAQ 100, semis, software, retail, homebuilders, banks, materials and industrials. While not great, it’s still pretty good. The NYSE Advance/Decline line just scored an all-time high. Bear markets and significant corrections don’t begin with this kind of strength even though the number of stocks making new highs has waned of late.

Stay long and strong. I am off for a day with the family.

This whole controversy with Mylan and the Epipen is fascinating. I plan on writing about it tomorrow. Profits or people first???

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Will the Island Top Kill the Bull???

It’s been a little longer in between updates as I was traveling in Florida for a board meeting as well as seeing some clients and visiting relatives. My 98 year old grandmother says “hello”. I feel like I need a break from eating after so many fantastic meals not to mention great conversation all around. Also, there really hasn’t been much to say. I like when the markets are calm and quiet when I am on the road. Makes life much easier.

For a a little over a week, I mentioned that a small pullback should be coming sooner than later. It wasn’t that I thought would be tradeable, meaning deep enough to take action, but stocks were a little tired. While not a common topic here, but one I wrote about once this year, a chart pattern called an island top appeared on the Dow and S&P 500 earlier this week. It did not appear on the other major indices. This pattern forms when stocks gap up one morning and gap down the next morning, leaving white spaces where price action did not occur.

Below is a familiar chart from when I was talking about the coil every day. That worked out fairly well. Some people who read charts are all hot and bothered that the Island Top just ended the rally. As you can imagine, I don’t agree.

island

What I think you can takeaway is perhaps that the Island Top paused the rally and a brief and shallow pullback is here. There isn’t much else to glean at this point. Semis continue to lead. Energy is really stepping up and most other sectors are behaving really well. Junk bonds, my favorite canary in the coal mine are scoring new highs again. This all bodes well over the intermediate-term. About the only bothersome indicator is that smart money is loaded up for volatility to increase substantially after Labor Day.

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