What Else is New? The Bears are Wrong!

Two whole days of consolidation. In modern terms, that sounds like a correction! Of course, I am kidding as pullbacks have been few and far between lately, not to mention shallow and brief. The Dow and the S&P 500 are digesting in textbook fashion with the S&P 400 and Russell 2000 still not behaving the way I would like. The former is starting to show very early signs of leading, but we have been down this road before. The NASDAQ 100 continues to march to its own beat and resemble 1999 more than anything else. But before you ask, the answer is NO. I do not believe we will see a similar outcome to the Dotcom bubble implosion.

Semis, software, discretionary, industrials, materials, healthcare, staples and utilities are all at or close to new highs and either leading or behaving very well. So much for the bearish pundits who opine that the rally is “narrow”. It is also great to see the transports moving higher and trying to to lead again. With high yield bonds and the NYSE A/D Line just short of all-time highs, it’s hard to see anything more than routine and healthy pullbacks.

Thursday is set up for a plethora of news with Comey’s testimony, the ECB meeting and the election in the UK. I am going to go out on a limb and say that whatever the news is, the markets won’t really care. The bull market isn’t over. This rally isn’t over. My next upside target of Dow 23,000 remains. Don’t overthink this.

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Mixed Messages to Start the New Week

A new week, more of the same geopolitical news. Terrorist attacks in London. Trump tweeting. Economic mixed messages. Fed to raise rates. Stocks see more new highs.

Friday’s market behavior was fine with the Dow, S&P 500 and NASDAQ 100 all adding to their recent new high run, however the S&P 400 and Russell 2000 seemed to run out of gas after lunch. Participation and leadership were solid.

Friday’s employment report was also a mixed bag with the economy creating fewer jobs than expected, but the unemployment rate fell yet again to new lows. That’s because less people were in the count. The actual number of new jobs was fine, but significantly higher than May 2016. As I continue to offer, our work suggests that economic output and job creation should see a sharp improvement right about now and be reflected in the rest of Q2 and all of Q3’s data.

The rest of the week sees lots of geopolitical news with the ECB meeting, election in the UK as well as James Comey’s testimony. If nothing else, it should be an interesting week.

For today, I am watching oil, S&P 400 and Russell 2000 for short-term signs.

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Love or Hate It, Markets Don’t Care about Trump

On Thursday, the Dow and S&P 500 broke to fresh all-time highs to join the NASDAQ 100. The major index trading range since early March appears to be ending in favor of the bulls. I say “appears” because although breakouts are beginning to occur, every now and then they are fake (like news) and immediately reverse and head in the opposite direction. Only the S&P 400 and Russell 2000 are lagging, but I would think they should both follow suit this month.

As I have continually written about for weeks, months, quarters and years, these next two indicators (canaries) are almost all you need to keep you on the straight and narrow. While the bears continue to claim the rally is “narrow”, the data say otherwise as the NYSE A/D Line makes new high after new high. That’s called a broad-based advance!

High yield bonds are below and it’s really the same story. More all-time highs on a total return basis. Liquidity is very strong and 10%+ declines usually don’t begin with the backdrop.

For the past month or so, I have offered that risk outweighed reward by 2:1. During that time, stocks saw a one day thrashing from more nonsensical news like impeachment. Since then, there has been lots of positive developments with the AD Line, junk bonds and sector leadership. At the same time, sentiment has not become too frothy.

Today, the employment report was short of expectations yet stocks continue to rally. Resilient. Reality over rhetoric! Do yourself a favor and stop watching the news to determine what the economy and stocks will do. The markets do not care what Trump says or does no matter how much you personally may love or hate him.

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Odd Day on Thursday Gives Warning

Thursday was an interesting day in the stock market. All of the major indices were up nicely in the morning. And while the S&P 500 and NASDAQ 100 continued making new highs into the afternoon, the S&P 400, Russell 200 and Dow Industrials did not with the first two seeing real weakness during the afternoon.

Additionally, even though the NYSE A/D Line and high yield bonds also scored new all-time highs as you can see below, the former went from +1400 net advances to +100 (second chart) even though gains were strong in the S&P 500.

While one day doesn’t mean a whole lot in the grand scheme of things, I did want to point this out as it’s very unusual behavior and may signify a market that’s a little tired over the short-term. It says absolutely nothing for the intermediate and long-term.

Any and all weakness remains a buying opportunity until proven otherwise. Dow 23,000 remains our next upside target for the Dow, possibly later this year. The bull market is intact.

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Canaries in the Coal Mine Part III – My Two Favorites

Updating the two, and perhaps, most important charts from last week, we can first see the New York Stock Exchange Advance/Decline Line which measures participation in rallies and declines. Before a bear market hits, you will almost always see this line peak well before price does. In other words, the troops were dying in a battle but the officers survived until the bitter end. In today’s case, this indicator still very powerfully supports the bulls.

Finally, high yield bonds are below where I am using the PIMCO High Yield Fund as a proxy for the sector. It just hit a fresh high. Just like the NYSE A/D Line, junk bonds almost always peak well before the major indices.

If I had to rely on just a few canaries, these two would be at the top of my list. Right now, both a very supportive of the bullish case and higher prices before the bull market finally ends. Keep in mind that while every bear market typically begins with these two canaries dying, they will sometimes give false warnings and then come back from the dead.

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Big Correction Coming?

Stocks continue to trade very heavy, but we should be on guard for a strong bounce at any time here. I think the top is in for a while so bounces are now selling opps and a better buy point should be seen after Labor Day. To reiterate what I have said for a while, this pullback should not be the beginning of a new bear market, just another healthy cleanse in an aging bull market.

Here is the segment I did on CNBC’s Squawk on the Street the other day sharing my thoughts.

http://video.cnbc.com/gallery/?video=3000191113&play=1

Short-term comment:

It’s been amazing how fast the NYSE Advance/Decline line has plummeted from its recent all time highs. Coupled with the spike in new 52 week lows, you can really see some widespread selling, especially in the interest rate sensitive issues. Even if rates rise for the next 30 years, it won’t be a straight line and there will be some powerful countertrend rallies. Bonds could be the story for the last four months of 2013, but not in the manner everyone thinks!

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Canaries Still Breathing Okay

I haven’t done a canaries in the coal mine update in a while, but with the major market indices hitting fresh highs last week, it’s time to check if any are dead. Remember, canaries in the coal mine are only useful at bull market peaks and bear market troughs. In other words, they are very helpful at spotting beginnings and endings of bull markets, but not much in between. They are so important because they usually give ample warning that a bull market is living on borrowed time as the canaries begin to die.

Let’s start with the major indices as they should all be in new high or fresh highs for 2013 territory. The Dow is first and you can see the all time from last week on the right side of the chart. 

dow

The S&P 500 (very large companies) is next and it, too, hit all time highs last week.

 s&p

The S&P 400 (medium size companies) is below and it is in line with the first two from above. The S&P 400 is usually the big leader during the mid stages of the bull market as many companies in this index experience their glory years or growth and financial stability.

mid 

The Russell 2000 (small companies) is next it saw all time highs last week. This has been the index leader since the June 24 low and pretty much entire bull market from 2009. There have been a few warning signs along the way, but they keep repairing themselves to health.

rut 

The technology laden NASDAQ 100 is the final major index and it has done a remarkable job at playing catch up, not only in the very short-term (since mid July) but also over the past year or so.

ndx 

In summary, all major stock market indices recently saw fresh highs indicating that the bull market is not close to ending. 

The Dow Jones Transportation Index is below and this serves two purposes. First, it’s a minor index after we look at the major ones. Second, old school Dow Theory offers that the Dow Industrials and Transports should be in sync during major rallies and declines to confirm the long-term trend. At bull market peaks like 2007 and 2000, we usually see one index fail to confirm the other’s price move. In other words, if this bull market were ending, we would either see the Industrials or Transports fail to make their final price peaks together. At this point, that’s not the case.

tran 

Turning to the bellwether sectors, the banks continue to lead and see new highs on each successive push higher in the stock market. This is healthy action. On a separate note as I mentioned on CNBC’s Closing Bell last week, the banks remain one of the most unloved sectors in the market in spite of their huge price gains and leadership role. I am not a fundamental researcher,  but if investors can look past the major players like J.P. Morgan, Citi and Wells Fargo where new government regulation may present some head winds, the regional banks and small banks may present some good opportunities, especially if a mergers and acquisitions wave begins.

banks 

With overall sentiment towards the banks negative, this group should continue its leadership role and be a good buy candidate after market declines.

The semiconductors present a much different picture. They are so vitally important because of their leadership in the technology sector and technology’s leadership in the overall stock market. The semis not only are a long-term canary, but also have some good predictive power for intermediate-term moves, something that would make a good article for the next issue.

 semis

I have to admit that this group can be a bit frustrating at times because it gives more warnings than any other canary and the only warning that really matters for the end of a bull market is the final one. As you can see below, the semis did NOT see fresh highs last week and their price is already creeping back into the range we saw during May and June. This is not good behavior and bears watching closely.

The New Stock Exchange cumulative advance/decline line is next. For newer readers, this simply represents the number of stocks that go up and down each day totaled over time. I have found it to be an excellent barometer of liquidity and overall market health even though its warnings can range from a few months to almost two years as we saw in the spring of 1998. Detractors will point to the number of non operating companies that litter the NYSE, but that’s exactly why I find this indicator so useful. Those non common stocks are typically closed end bond funds (CEFs) that are acutely sensitive to interest rates. The combination of common stocks and CEFs has proven to be a valuable long-term indicator when the major stock market indices march higher without the NYSE A/D line.

From the chart below, we see twin peaks in May and July, a very mild warning with price going much higher, but nothing that indicates impending doom. This is another canary that should be closely watched now.

NYAD2

Finally, let’s take a peak at high yield (junk) bonds as depicted by the PIMCO High Yield Fund. You can use any of the major funds or the ETFs. I just choose PIMCO because it is a very large fund with a long track record. Junk bonds are so important because they are acutely sensitive to ripples in the liquidity stream as well as the economy. They are at the bottom of the credit hierarchy and money typically flows out of the sector at the first sign of economic trouble or decrease in liquidity.

PHYDX 

You can see how the fund made its high in May and sold off dramatically into June. What is unusual is that this decline occurred without stocks cratering. In fact, high yield bonds saw more carnage than stocks. And as stocks vaulted higher in July and August, the high yield sector could barely muster a rally to get back half of what it lost. This canary appears to be dead for this cycle. If junk bonds rollover again and we the PIMCO fund in the mid 9.40s, I think that will spell at least some short-term trouble for stocks. 

In summary, the canaries are generally healthy with only one dead (high yield) and maybe two on heightened observation (semiconductors and NYSE A/D line). Before this bull market ends, I expect to see many more canaries on the dead list.

 If you would like to discuss how your portfolio is acting now or could behave if more canaries bit the dust, please contact me directly by hitting REPLY or calling the office at 203.389.3553.

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With Trepidation, Onwards and Upwards

Here is the segment from this morning’s (May 8) Squawk Box with a really good discussion on the stock market, economy, employment numbers and the Fed. http://video.cnbc.com/gallery/?video=3000166972&play=1

Many of the small cracks I saw in the markets a month ago have repaired themselves with sideways action instead an outright correction. The canaries of liquidity, high yield bonds, small cap stocks and the New York Stock Exchange advance/decline line are all seeing all time highs. The Dow Jones Transportation Index has played catch up with the Dow Jones Industrials and both are now in gear to the upside at all time highs. We have seen some positive sector rotation since last Friday that has fueled this recent rally. And even gold is popping higher.

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