Short-Term Tea Leaves Say Bulls About to Step Up

The stock market remains on the defensive as I have written about for some time, not that this is a repeat of 2008 or even 2011. It’s not even your garden variety 10%+ correction. Stocks remain in the range they have been in for most of 2015. From a bullish perspective, it’s a good intermediate-term sign that after the huge run up we have seen, the bears can’t even muster a 10% correction. From the bearish perspective, stocks have stalled and there has been internal damage done. As you know, I strongly side with the former.

Too much bullish sentiment has been one of my chief concerns over the past few months and while that has not totally abated, it’s not as bad as it once was. Behavior from the Dow Jones Transportation index has been poor since late last year and for the most part, that continues today. I do believe that when the market launches the next significant rally, the transports will be in a leadership position.

Bears keep pointing to the declining number of stocks participating in the rallies as a serious warning sign. If that number was much worse, I would be much more concerned. Remember, the New York Stock Exchange advance/decline line, saw all-time highs in April, a good sign, although it fell off when the Dow hit its most recent peak in May.

Sector leadership has been very bullish. No one can argue that point. If the economy was on the verge of recession, we would typically see defensive sectors like consumer staples, utilities and telecom leading. They are all lagging while banks, discretionary, semiconductors and biotech are in charge. Bad markets usually don’t begin with this kind of leadership. I will concede that I am concerned about the poor performance in high yield (junk) bonds as they are one of my favorite canaries in the coal mine.

In short, I believe we are in for more of the same for now. Stocks remain range bound where strength can be sold and weakness carefully bought. In the very short-term, there is enough to support a rally in stocks beginning today or tomorrow. I don’t think it will go very far, but for the nimble, it’s worth watching. Should stocks not be able to head higher by the end of day on Wednesday, I would take that as a sign of more weakness and a potential downside break of the smaller trading range. On the Dow, that’s 17,600.

Eventually, I continue to believe that the ultimate resolution of this multi-quarter period of sideways movement is higher on the way to Dow 20,000.

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Bears Pulling a Pete Carroll?

The bears began Monday’s trading with the ball, seemingly just needing to breach the lows to force a wave of technical selling. It shouldn’t have been that difficult. After multiple intra-day reversals by the bulls stocks ended sharply higher on decent internals. While that all looks very nice and neat on a chart, I would have still preferred to see a clear breach of all recent key lows by at least the majority of the major indices. All we saw on Monday were the Dow’s bottoms being cleaned out.  Interestingly or curiously, the S&P 500 essentially saw the exact same level as in December while the S&P 400, Russell 2000 and Nasdaq 100 weren’t even close.

All this together, the bulls have a little advantage here but must use it right away. If and when Monday’s lows are breached on a closing basis, that would likely set off a sharp “whoosh” lower of several percent across the board as I mentioned in Monday’s three scenario piece. For now, keep an eye which sectors are leading and lagging for signs of change. Eventually, the short-term “all clear” signal comes when the S&P 500 closes above 2064.

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One Door Closes Another Opens

On Wednesday, to no one’s surprise, Janet Yellen & Co. ended the Fed’s 5+ year experiment of purchasing assets in the treasury and mortgage backed securities market, also known as quantitative easing (QE) or money printing. I won’t rehash all of the reasons why I continue to believe this is a misguided strategy, but it is.

Before the ink was even dry on the statement, the Bank of Japan completely caught the markets off guard last night with another ramp up of their own QE, buying more bonds, extending maturities and really ramping up their purchase of stocks using ETFs and REITs. I have said this since Abenomics (Japan’s version of our QE but on steroids) was launched in Japan, this will go down as the greatest financial experiment in history. Japan is going to print until the world runs out of ink!

And the European Central Bank (ECB) isn’t far behind.

Many are left to wonder what our markets and economy are left with in a post QE America. In a vacuum, the end of QE is headwind, however, with Japan going on even more steroids and the Europe about to begin QE, I don’t view it as a negative just yet. That time will come down the road.

For now, my thesis remains the same. Markets gave us a golden opportunity to buy a few weeks ago and I hope people took advantage of that. It was easy in real time and I wrote about the bottoming forming as it took place. The bull market is old, wrinkly,  but still very much alive. Rallies should get more selective from hereon and it will be interesting to see where leadership comes from.

Markets really need to see the high yield sector step up and rally! Odds favor it will.

Happy Halloween! One of my favorite holidays. Can’t wait to take the kids out tonight and then come home for some adult beverages.

Enjoy the weekend and be safe…

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