Selling the News

On Friday, I wrote about the strong GDP report and given the market’s rally into the number, I wouldn’t be surprised to see sellers come into stocks but buyers into the bond market. While bonds jumped up at the open, they very slowly eroded some of those gains during the day in a quiet session. Stocks, on the other hand, opened up with some small gains before being swamped by sellers the rest of the morning, perfectly epitomizing “sell the news”. On an individual stock basis, look no further than everyone’s darling, Amazon, for a textbook case of selling some really good news. Couple that with Netflix’s and Facebook’s punishment on  bad news and you have the makings of a very tired tech sector.

With the exception of the Dow Industrials which I opined was slowly becoming the leading index, the S&P 500, S&P 400, Russell 2000 and NASDAQ 100 saw some real carnage, confirming the pullback has arrived. Repeating what I have said and what I will continue to say, the downside magnitude should be confined to mid single digits, worst case, and the opportunity to buy the dip, yet again, should be forthcoming.

So far, all four key sectors seem to be behaving fairly well into the weakness and high yield bonds are still moving higher.

On an individual stock basis, look no further than everyone’s darling, Amazon, for a textbook case of selling some really good news. Couple that with Netflix’s and Facebook’s punishment on  bad news and you have the makings of a very tired tech sector.

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Q2 GDP Surges, But, But, But

Preliminary Q2 GDP came in at +4.1% this morning, right in the middle of my range. While the majority “expected” this accelerating growth, that was only in recent history, meaning everyone ramped up their forecasts lately. As I saw the number print, I thought that there would be no way for the naysayers and negative media folks to spin this against the strength that it is. But yes, they surprised me again with a chorus of “yeah, but”.

I heard that corporations pulled forward their  buying because of tariffs. I heard that it was mostly because of soybeans. I heard that it was because the government spent much more money than expected. The bottom line is that 4% GDP growth is the highest in four years and fits in very nicely with my own bullish economic forecast for 2018 and into early 2019. It isn’t until mid-2019 to mid-2020 where I begin to have some concerns.

With the expected good news, I wouldn’t be surprised if bonds actually rallied where intuitively you would expect lower prices on economic strength. Bonds had been selling off over the past two weeks. Conversely, with stocks rallying nicely into the report, I would be surprised if we saw a big rally on Friday. In fact, the model of the day would be to use any early surge as a short-term selling opportunity.

Looking at the major indices, there are no changes. I continue to favor the Dow Industrials and NASDAQ 100 over the S&P 400 and Russell 2000. Semiconductors have really woken up while  banks and transports remain neutral. Discretionary is still the leader of the leaders. Junk bonds are continuing their quiet rally and the NYSE A/D Line forges ahead day after day to more all-time highs.

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Bears Have the Ball

For the past week or so, I have shared some minor stock market concerns, but also opined that it looked like the major stock market indices were going to make new highs for July before any downside was forthcoming. On Tuesday, all five major indices scored new highs for July right at the open ad then steadily eroded those gains throughout the day. All except for the Dow Industrials which continues to establish leadership. The S&P 400 and Russell 2000 exhibited the weakest performance during the day and have gone from leader to laggard in ugly, “key reversal” fashion.

Sector action wasn’t much better as all four key sectors open at their highs and closed near their lows. Only the much maligned high yield bond sector bucked the trend by opening higher and trending higher all day. The question now is if the bears can take advantage of what appears to be a slightly wounded bull. As I mentioned in the update last night, I think it’s time to play some short-term defense until the storm clouds pass.For those curious, it does not seem like Treasury bonds are going to provide much safe haven if stocks pullback. However,as I wrote about on Monday, gold and the mining stocks have really caught my eye and for more than just a trade.

I am on a train to New York right now so I won’t post the charts until the next update but I think you get the picture. Short-term concerns. All-time highs still in the cards.

 

 

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Bulls Should Push For One More High. Gold Becoming Interesting

About the only thing of significance from Friday’s action was the increase in volume in stocks going down. That’s a new short-term development. And while my short-term model is negative, stocks still do not have the appearance of anything major on the downside. Moreover, I would not be surprised if the bulls gather themselves and assault the highs one more time before a deeper pullback.

Banks and transports have been acting more constructively to take some of the burden off discretionary while semis remain frustrating. The NYSE A/D Line is healthy but it did not confirm the last high with the major stock market indices, certainly not a big deal at all, but something worth pointing out and keeping an eye on.

Gold has been beaten down in very ugly fashion of late and is approaching an area where I could say it’s so bad that it’s good. Some refer to that as the puke phase. This is one group I am paying very close attention to and it’s not just because we run two strategies in the precious metals area which has largely escaped gold’s collapse unscathed. We will see what this week brings, but I am very slowly becoming encouraged.

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Bulls Won’t Go Down Without a Fight

As I wrote the other day regarding the dramatic reversal in the NASDAQ 100, this bull market is not going to die easily nor without a fight. Even pullbacks and corrections have been and will be tough to come by. As I have seen a few small short-term concerns pop up, I still believe the bulls are going to fight hard to prevent any significant price damage.

As I am keenly watching for signs of even a short-term peak, the major indices still have the look of wanting at least one more high above this week’s high. The indices just don’t appear to be complete in their upside right here. Banks, semis and transports have stepped up a little this week as discretionary is finally showing signs of tiring. That’s okay. High yield bonds have rallied, but they are far from leading and I continue to believe the final peak has been made for this cycle.

With stocks lulling people into a sense (false or not) of security, the geopolitical backdrop is as toxic and loud as ever with the President constantly tweeting, counter punches by the democrats and even some from his own party and stream of comments from global leaders. In the end, as I have said since inauguration day, successful investors will be the ones who separate rhetoric from reality. Reality is that the economy has accelerated higher, consumer confidence and sentiment are at or near all-time highs and unemployment is near historic lows. The reasons and credit do not matter.

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Technology Reversal. WOW!

After Monday’s close, highflying FAANG stock, Netflix, reported very disappointing subscriber growth. It was a shocker. The company’s stock plummeted after hours, over night, pre-market and as stocks opened Tuesday morning to the tune of 15%. 15%! That’s almost a crash. The tech-laden NASDAQ 100 followed suit and the selling spilled over into the broad market as you would expect.

Analyst after analyst and pundit after pundit uniformly poured ice cold water on the technology sector with the most positive person calling for a much needed pullback while the negative Nellies called for a bear market, crash and 50%+ decline. I don’t recall hearing a single person advise buying the dip. That was so interesting because buying the dip was the strategy that was immediately rewarded, almost to the minute.

Below you can see charts of Netflix and the NASDAQ 100 with each bar representing 5 minutes.

It was the single most dramatic turn of events in the NASDAQ 100’s history with the index closing at a new high according to my friend and data miner extraordinaire, Jason Goepfert of sentimentrader.com.

While I certainly don’t want to put too much weight on a single reaction to one earnings report, it does speak to the underlying strength in the tech sector and how difficult it will be to ultimately kill this bull market. Impressive behavior is an understatement.

With all that said and gushed, none of the recent short-term concerns in the rest of the stock market which I have discussed of late have been eliminated. Banks and semis are a little better. Discretionary continues to chug along. Junk bonds are hanging in.

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So Far So Good!

Just two ago, I wrote about the stock market “groping” for a bottom and laid out a scenario for that to begin on Wednesday. The beaten down Russell 2000 was the key as it very quietly had been outperforming the market for three days. That behavior is not what you typically see if a crash was unfolding. Our indicators and systems backed up my own thoughts and our equity strategies went to maximum exposure at the close on Wednesday.

When I woke up Thursday morning and saw the global stock markets in collapse, I thought it was going to be a truly interesting day. With so many things looking good a few hours earlier, I was either very wrong, which has happened before and will happen again, or this sharply lower open was an absolute gift to the bulls. At this point I am very glad I stayed the course and even took what I would classify as personal gambles at the open by buying oil and shorting the VIX.

After the lower open, stocks staged a very impressive comeback and the internals looked much better along with sector leadership. Our own flagship sector strategy has had a very tough month coming in to this week, but as with the Russell 2000, it bucked the market downtrend and closed higher on Tuesday, Wednesday and Thursday. For the past week or so, I have strongly suggested that clients add money right away as this correction was nearing an end. And I followed my own advice by making my kids’ college fund additions as well as my 2014 retirement plan contribution into the market weakness.

Time will tell if we just saw “THE” bottom or “A” bottom, but even if stocks don’t go right back to all time highs, the preponderance of evidence suggested a good rally was close at hand. There are two scenarios I am watching now and I will spell those out in the Street$marts edition I am currently writing.

Remember, the largest one day stock market rallies usually occur after a decline. In 2008, we saw 4-8% one day moves many times. The larger the decline, typically, the larger the snapback. If you hated certain stocks, ETFs or funds on the way down, use the strength to rebalance your portfolio the way you want.

I am keenly watching how the plain vanilla high yield (junk) bonds funds act now. They are very stretched to the downside and are supposed to rally smartly. It’s put up or shut up time for the short-term, intermediate-term and perhaps even long-term.

Finally, I mentioned watching Apple and Netflix for signs of leadership. Apple hung in really well and should see new highs this quarter. Netflix announced bad earnings and was bludgeoned. IF this is the final rally of the bull market, IF, I would expect the rally to leave many key stocks behind. In other words, it would be narrow. The rising tide would not lift all ships. Again, IF.

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Stock Market Groping for a Low

If you woke up this morning, turned on the computer or TV and saw another Texas healthcare worker with Ebola, European markets under siege yet again and our own stock market futures in collapse, you probably did not feel so great. Anxiety? Panic?

As the morning progressed and our stock market opened, your saw an immediate mini panic with the Dow down 370. At the same time, the 10 year treasury note’s yield absolutely and totally collapsed under 2%. That is capitulation in stocks and flight to quality or safety in bonds. Heading to the exits en mass. Throwing the baby out with the bathwater. Choose any cliche you want.

(Side note. Our Global Asset Allocation strategy has owned treasury bonds almost every day this year and today is the first time we are seeing a sell signal in that asset as its price has spiked to unsustainable levels.)

Is this “A” bottom or “THE” bottom or even a bottom. We should know more by the end of the day. If stocks rollover yet again during the afternoon and close below the lows of the morning, the panic is likely to follow through until we see another panic set up. If, however, stocks can hold the morning low and firm throughout the day, even to still close down, that would be a good sign that at least a bounce, if not full fledged rally is here.

The Russell 2000 index of small cap stocks, which has been bludgeoned since July has performed very well this week on a relative basis. And so far today with stocks taking it on the chin early, small caps fought back to unchanged. This is bullish behavior and not typically what we see if stocks were on the verge of additional collapse or even crash. It will be VERY telling to see how the Russell 2000 ends the day.

Besides the small cap stocks, Apple and Netflix have been pillars of relative strength of late. When stocks finally bottom and bounce, I would closely watch these two large caps for leadership.

On the sector front, none have been spared the carnage of the last month with energy being decimated the most, close to the point where they have performed so poorly, it’s actually good going forward. I remain positive on REITs, biotech, transports and semiconductors for now, but that should change with the heightened volatility from day to day and week to week.

I fully expect wild swings today and probably the rest of the week.

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