Banks Looking for a Bottom Amid General Market Strength

With earnings season in full swing and estimates ramped up by Wall Street, companies will really need to impress for stocks to get a boost. Banks are front and center right now. With the banking index down 10% since the early march peak, I am looking for a bottom in this sector and revisiting of the old highs later this quarter. However, the most important hurdle will be for this group to close above the 93 level, which will effectively negate the most negative scenarios.

With stocks continuing to trade in a small range, there has been strong selling beneath the surface as measured by a technical indicator called the TRIN. This indicator has been relatively high for the passed few weeks. However, the NYSE A/D Line which you can see below and I wrote about the other day, just hit a fresh all-time high this week. Bull markets have never ended with this kind of broad participation and strength. Normally, there is at least three months and as much as 21 months of weakening before the bull market ends.

 

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Another Gap. Trade & Fade?

After Thursday’s reversal, Friday’s early action looked promising as I left the office before lunch to celebrate my 15th wedding anniversary playing golf with some friends at Foxwoods before the wives met us for dinner and gambling. At least the dinner went well! However, as has been the case lately, opening gaps have often been the high or low point for the day as was seen on Friday as well as on Monday. This is certainly not a sign of great strength. One indication that the pullback is over will be when we get one or two days where stocks open higher and then continue to build momentum right into the close.

With Netflix beating earnings estimates by a wide margin and the financials continuing to beat, stocks look like they want to follow Europe and Asia at the open with another gap higher. On the Dow, S&P 500, S&P 400 and Russell 2000, all we are seeing is traders buying at the lower end of the range and selling in the middle of the range. The NASDAQ 100 remains stronger and the leader, but that too, is digesting.

On the sector front, it’s really more of the same although a touch weaker with semis and transports leading the leaders. The defensive groups, utilities, telecom, staples and REITs remain weak. Healthcare, which falls somewhere in between, has really taken it on the chin as Hillary Clinton’s ascension to the Oval Office has become much more likely lately. That’s also a reason why biotech has fallen more than 10% over the past month.

On the flip side, as I often mention, high yield bonds continue to scrape along just below new highs and the NYSE A/D Line scored an all-time high last month, indicating widespread and healthy participation in the rally.

Stocks remain in the same pullback mode I have written about for more than a month. While frustrating, it’s not necessarily a bad thing as the resolution should strongly to the upside above 19,000.

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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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Stocks Remain in Pullback Mode

With the major indices down 4-8% I am once again getting questions whether the bull market has ended and a multi-year decline is unfolding. I don’t think so.The New York Stock Exchange Cumulative Advance/Decline line recently scored an all time high. When bull markets end, we typically see this indicator peak months, quarters or even years before the Dow and S&P 500. The same can be said of the high yield bond sector. Bear markets are usually associated with restrictive monetary conditions and excessive valuations. It’s very hard to argue we are seeing those right now.

This decline continues to look like a pullback, meaning less than 10% in the Dow and S&P 500. It will end when the weaker bulls give up hope and thrown in the towel, something that has not happened yet. Sometimes that takes a few weeks while others it takes months or even quarters. Remember, my 2014 forecast called for a digestive type year like 1992, 2004 and 2007. That’s what we have seen so far.

Stocks are very oversold in the short-term and on their way to oversold in the intermediate-term. However, as we saw on the way up, overbought and oversold can get more overbought and oversold until a reversal takes hold. Just watching the volatility (fear) index, VIX, breach 20 should give us a hint that the decline is coming close to the end. We have already seen volume in inverse ETFs begin to spike which indicate that investors are running for downside protection.

What’s making headlines right now is the veracity of the decline in the former high flying market leaders like biotech and Internet. Those sectors led on the way down and I am keenly watching them for signs of stability and life. I am also watching them because we now own sizable positions in our sector program. It’s too early to tell if they have peaked for good, but once the market bounces, these should rally hard.

It doesn’t look like the stock market has hammered in a good bottom yet. The typical pattern would see a rally that lasts more than a day or two followed by another decline below the previous low. Today was only day one of a rally. Aggressive and nimble traders can look to sell a 1% rally and try to buy again at new lows, but that should only be contemplated for traders who can sit and watch and have a plan. Otherwise, there should be a better buying opportunity this quarter. Investors continue to hide in consumer staples, utilities and REITs on the equity side and my favorite investment that everyone hates, long-term treasury bonds which we happily have a big position in our global macro strategy.

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