Manafort, Cohen Guilty but Reality over Rhetoric

On Tuesday the S&P 400 and Russell 2000 hit fresh all-time highs although without strong conviction. The three indices are not far behind although the Dow may take a little longer. All is good on that front. Banks are perking up and as I mentioned the other day, the semis look to have bottomed. Discretionary hit an all time high as did the transports in somewhat of a quiet surprise. All is good on the sector front for the most part.

Junk bonds have really stepped up although few have noticed and the NYSE A/D Line is making all-time highs. Things are pretty good from purely a market perspective.

You wouldn’t think that by watching the headlines of the president’s former campaign manager being convicted and his former personal lawyer agreeing to a plea bargain with the government. For almost 20 months I have said to focus on reality over rhetoric. The markets simply do not care about the non-economic nonsense going on in DC. Unlike what was going on with Nixon, the country exudes confidence. End of story.

Oh yeah, the bull market is now the longest in history if you listen to the media today. What does that even mean? Does it really matter? Of course not. More on this topic in Street$marts.

Stocks are grinding higher but they still do not seem ready to blast off again. That day will come.

Gold is rallying but I still think there is one more decline coming before the real rally begins.

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Dollar Still King, Gold Garbage and Stocks Moving

What a change with the Dow Jones Industrials leading stocks higher. It felt like yesterday that Turkey was going down and about to take the whole world with her. Turkey remains an issue as does the emerging markets complex or at least those countries which have borrowed too much money denominated in dollars. With the dollar’s recent resurgence those debts are more expensive to pay when your own local currency declines. Anyway, that’s a big picture problem that’s only going to worsen over the coming years. The dollar may pause or pullback, but it’s not close to being done going down.

Speaking of the strong dollar, it has really caused a collapse in gold or maybe it’s coincidental. For weeks I have mentioned keenly watching gold for signs of the bottom and I didn’t expect gold to collapse this far to the point where it’s so bad, it becomes good. Smart money has been buying. Dumb money has been selling. Sentiment is at historic lows. One more trip to new lows could hammer in the bottom.

And while on the topic of the dollar, a long time client asked if I am standing by my forecast that the Euro goes to par (100) and then to all-time lows below 78 against the greenback. The short answer is yes. I am not wavering one bit.

Getting back to stocks, you have to give credit to the bulls; they have thwarted every attempt by the bears this month. Four of the five major indices (not dentists surveyed) are within a day of all-time and the laggard, the Dow, is now leading. Yet, I still do not believe stocks have begun the next 10% assault higher. They are quietly moving up but I think they will pullback before rocketing higher again.

For the next few days, besides gold, I am keenly watching to see if the semis can muster some strength and get back in line with the bulls. That would be an important short-term development.

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Turkey Burgers, US Dollar & Gold

Turkey this, Erdogan that. I would bet that the vast majority of Americans have absolutely no idea where Turkey is on a map. But, that country is in almost every financial story this week. Seeing the name so much subliminally made me order a turkey burger for lunch today!

While stocks are beginning the day much lower, I think the news about a Chinese economic slowdown may be more important. In any case, as we know, stocks can never just go down on their own. There always has to be some reason.

One my favorite myths in investing (I am about to begin an e-book on myths) is that stocks cannot go up in a rising dollar environment. Sure they can, have and will, sometimes. Here is a chart of the dollar over the past four months. Boy, does it look strong! That’s about a 9% rally which is huge in the currency markets.

If you take a longer-term look, the rally looks less and less impressive. In fact, over the past year, the dollar is essentially flat.

Most readers know that I turned very bullish on the dollar when Bear Sterns was about to go out of business in 2008. Over the long-term, I have never wavered on that optimism and still won’t today. On balance, I continue to believe the dollar is going much higher over the coming years. More on this later.

For stocks, volatility is certainly the theme of the week. I think the short-term risk is to where prices were just below their lows in late July. Emerging markets and commodities have been decimated and they need to stabilize before stocks can mount any kind of rally back near the old highs. Gold and silver are about as ugly as they ever get and I am still looking for the elusive bottom. Perhaps on Thursday.

And before you ask, no, I don’t believe the bull market is over. More new highs lay ahead!

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All Eyes on Turkey. LOL

The bulls had their wings clipped on Friday, making it three straight down days for stocks although the bears haven’t made much progress just yet. The macro concern right now is the collapse in the Turkish Lira. Similar to Greece and Cyprus, Turkey by itself has the economic output of Connecticut and the world really doesn’t care what some crazy dictator does to his country, per se.

However, any time there is a crisis in the emerging markets complex, two things spring up. Will there be contagion? And do the major global banks have exposure? The answer to the first question is probably not. The second questions is yes, and mostly in Europe where banks were all warm and fuzzy to the 20% interest rates being offered not long ago. Now, not so much!

All of the major stock market indices look like they want to trade a little lower before mounting a counter offensive. There is no clear cut leadership although the NASDAQ 100 is trying hard. Sector leadership remains unchanged with discretionary leading followed by transports. Banks are neutral and semis are on the defensive which seems odd with the tech-laden NASDAQ 100 trying to lead.

Let’s keep an eye on Tuesday as a possible day for a short-term rally to begin. I keep saying to watch gold for signs of the bottom and that remains a theme. It looks like the metal in the “puke” stage where it is being sold almost indiscriminately. A low should be forming sooner than later.

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Bull Markets Do NOT End Like This

Quick update as I am trying to get a full Street$marts out today or tomorrow. The theme remains the almost same. I thought a modest pullback would materialize and take the major indices below last week’s low. However, as I mentioned on Friday, the bulls put in a strong performance, like the Red Sox did over my Yankees, and took control from the bears on Thursday. That strength continues today with the S&P 400 and NASDAQ 100 leading with the Dow ceding leadership.

The rising tide is lifting most ships as the S&P 500, S&P 400, Russell 2000 and NASDAQ 100 are very close to all-time highs. The Dow will get there but it’s going to take some time. Sector leadership remains disappointing with the semis and banks being lifted by the market and not the other way around. Discretionary has been solid as a rock with transports coming on strong.

Junk bonds are continuing their resurgence and the NYSE A/D Line is making marginal all-time highs right now. BULL MARKETS DO NOT END WITH THIS KIND OF ACTION!

Don’t forget about gold and gold stocks. They are almost so bad, they are good. Almost…

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Bulls Cede Control But Lows Not In Yet

So much to discuss, too little space on the blog. I know. I know. I need to do a full Street$marts which I promise to bang out shortly. First, Fed statement day actually worked out okay as the market stayed in a tight range as forecast until 2pm and then rallied modestly into the close. Not a huge winner, but a win is a win and it kept the almost 80% accuracy rate going.

Apple is now a trillion dollar company. I am sure you couldn’t find that news anywhere! With all of the positive press, it’s getting to the point of being so good, it’s actually bad. That’s the exact opposite of gold which I have been discussing.

Stocks have been acting better than I thought this week, especially after a moderately down opening on Thursday. While the Dow Industrials didn’t set the world on fire, the NASDAQ 100 and Russell 2000 certainly did. The former rallied 2% from open to close, which is a huge move in low volatility environment. Apple, Facebook and Amazon had a lot to do with that.

Market-wise, the bulls made more progress than I thought and they have the ball for now although I still do  not believe we have seen the low point for the pullback. Unless all five indices close above their July peaks, I do think the lows for this week will be breached sooner than later.

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Turnaround Tuesday, Apple and Gold

When stocks are in decline, there is an historical trend after a down Monday for stocks to reverse on Tuesday. As the theory goes, sellers hit the market on Thursday, try to rally on Friday which ultimately fails and then spend the weekend reading negative press about the market. On Monday, there is more selling to get the last seller completed. From there, some kind of bounce or real rally begins on Tuesday. While the rationale is a bit shaky, the price behavior is not.

Adding to the idea of a bounce on Tuesday, the bulls could argue that the Dow Industrials have declined back in to the area from which they broke out from, namely the highs from June as you can see from the dark blue line below.

I would be hard pressed to call a three day decline a significant or real decline for a Turnaround Tuesday to get even be realistic. Additionally, the Dow is the only index which has declined to a previously important price area. The other four major stock market indices have not so far, and therefore there isn’t much support for the Dow.

Stocks have been under mild pressure, especially in the tech sector, but this is nothing more than a light bout of weakness so far. While we could see a bounce on Tuesday, I do not believe the selling is over. In the strongest rallies, a few days down is all the bears get to celebrate. Closing below Monday’s low will be an important sign that more weakness is forthcoming. Of course, if stocks run straight back to new highs and go, then I will be very wrong and adjust accordingly.

FYI, Apple reports earnings after the close and that is almost certainly going to move the NASDAQ 100 significantly overnight and tomorrow morning.

Keep an eye on gold. Keep an eye on gold.

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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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