Time to Be Careful

Before I dive in, let me be very clear, I remain bullish over most time frames. Nothing has changed. Five straight closes above 18,000 as I spelled out on CNBC last week and many times over the past six months may create a slingshot to 20,000 this year. The bull market is old and wrinkly but not dead. Same old lines from me.

The headline about being “careful” is more about the short-term and because stocks just broke out to all-time highs where risk usually increases. The major indices had been in a trading range for three months and just hit fresh highs over the past few days. Historically, this can lead to a quick surge higher as bears scramble to cover losses and bulls pile in. However, it can sometimes lead to a fast and sharp downside reversal which usually happens sooner than later.

At this point, I am not concerned yet that a double digit correction is here, just a little warning not to be complacent. The window of opportunity for the bears to make a stand is now, meaning over the next week. The longer stocks remain at new highs, the less likely a sharp reversal can take hold.

I will talk about sector leadership rotation tomorrow, but suffice it to say that it’s very encouraging! My position in the long dated treasury is not.

REMINDER: I will be on Fox Business’ Making Money with Charles Payne tonight from 6 pm – 7 pm. Tune in for a fast paced hour we talk markets, economy and a random group of topics.

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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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Just Call Me “No One”

FYI, I have the privilege of co-hosting Fox Business’ Opening Bell this Monday from 10:00am – 11:00am. Maria Bartiromo is on vacation so I finally get to meet Liz Claman after being interviewed by her for years and years. I am a HUGE fan!

All Time Highs… Bull Market Alive

Earlier last week, I wrote an article called All Time Highs on Tap where the Dow and S&P 500 would see all time highs unaccompanied by the other major indices. There has been an ongoing divergence or non confirmation with the Dow and S&P 500 that has some calling for the bull market to end here. I could not disagree more.

While some of the ingredients may be in place when bull markets end, many of the key ones, like the NYSE advance/decline line, are not. Much of 2012 and all of 2013 saw a very powerful bull rally, perhaps even borrowing some of this year’s return. In January, I forecast a digestive type year and remain in that camp. There are going to be times to make money and times to preserve money, but most of the time it will be a year to sit in a trading range.

Sector Rotation Vicious

Sector leadership rotation has been fierce this year and I don’t think that’s about to end until we see a full fledged 10%+ stock market correction. This action is causing some short-term frustration in our sector program, but that’s one of the consequences that this type of investing sometimes brings.

Strength in REITs, utilities and consumer staples along with the incredible rally in the treasury bond complex are all forecasting something on the dark side this year. Whether that’s a single event or big picture issue, it should not be ignored.

Something Dark Out There

As an aside, the 10 year note yield is almost at my 2.50% downside target. For the time being, I am just going to sit back, watch, and enjoy the large position we have in our global macro strategy. Last week, I saw an interview with Brian Belski on CNBC’s Squawk Box where he said that “no one saw this treasury bond rally coming”. That just seemed like an excuse for Brian getting it wrong or he gave me the new nickname, No One.

European stocks continue to do very well and I am glad our global macro strategy has had a position here for a long while. One of my strongest trades of 2014 was in the emerging markets after they were left for dead to begin the year. EM hasn’t been kind to investors, present company included, for several years and I am glad they are reemerging as leaders, excluding China and Russia. Some are explaining this rally away as simply a play on the rally in bonds, but that’s a dangerous path to go down as both stocks and bonds in the US have both rallied since early February, breaking the expected inverse correlation.

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All-Time Highs in Sight

This is it.

Put up or shut up time for the Dow and S&P 500.

Both are positioned constructively to power to all-time highs over the next week. And I think they will. With sentiment mixed, it’s hard to believe that there will be any mass celebration of new highs, especially with the index problems I discussed here. In fact, I think there is very little chance that the three other major indices will confirm the Dow and S&P 500 at new highs. This is all part of the stock market transitioning to the final stage of the bull market which could last months, quarters or even a year or two.

Leadership has changed as I discussed on Yahoo Finance, yet few are embracing it. Energy, consumer staples, utilities and REITs are now heading the charge. Previous leaders have gone from buying the dip to selling the rally, which is forcing me to opportunistically rebalance portfolios.

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5 Straight Down Days

The Dow Jones is now down 5 straight days and it’s in a bull market. Without diving into the research, this has to be one of the mellowest 5 straight down days in history! I haven’t heard a single person express concern that this is the beginning of anything more significant on the downside. That’s worrisome in itself, especially if the calendar did not say December.

As I have mentioned before here and in Street$marts, while market sentiment remains at rally killing levels, the calendar is not very supportive to the bears’ argument. In all likelihood, stocks should remain firm at least into the final day of two of the year, if not into January. With 5 straight down days that have not any damage to the market, I would expect the bulls to step up over the coming day or two and try to push stocks back to the highs.

We still have a strong tendency (trend) to see a tradable low this month and that low is usually somewhat close to option expiration on the 20th. However, there have been plenty of years where the low comes earlier or later. You just have to be on your toes and look for signs. We saw one of those signs on Wednesday where the major indices pulled back to their rising average of the last 20 days (20 day  moving average). That’s where we did some buying of the major indices as well as some sectors and dividend paying ETFs. If the market closed below the low from Wednesday, we will either add some hedges or do some short-term pruning.

In short, 5 straight down days in a bull market, albeit small, and it’s time for the bulls to step up!

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