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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Q2 GDP Baby. Stocks Like It!

This morning, the government reported that the “second look” at Q2 GDP grew by 3%, higher than the original 2.6% first reported. 3% is even higher than any of my most bullish models and it continues to show that the US economy is re-accelerating higher this year.I would love to hear from all those people who challenged my bullish view of the economy or called me out Twitter. They kept telling me that 3% was a pipe dream.

My theme all year has been reality over rhetoric and this epitomizes it. You can call it coincidence. You can credit Trump or Congress or the global central banks. I would say it’s probably all of the above. The fact is that the economy is doing better than at any time over the past three years and should continue to improve with some slight adjustments and volatility from Hurricane Harvey.

Stocks opened sharply lower on Wednesday after North Korea fired a missile over Japan. However, by the end of the day, the bulls stepped up and regained all that was lost and then some. While I still believe stocks are in an intermediate-term trading range, short-term action is certainly strong and the rally that began at the open on Wednesday should continue. With banks, transports and discretionary still not leading, the rally may very well rest its hopes on the semis. Let’s see if they can score a new high for this quarter and possibly challenge their 2017 highs. That’s a stretch, but don’t count them out.

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Q2 GDP Frustrates Bears. Bezos Still Rich?

The government released its first look at Q2 economic output and the economy grew by 2.6% at first glance. While I would have been happier with more, it’s the second straight quarter that seems to be falling in line with my forecast. Earlier this year, I offered that Q1 GDP would come weak and below expectations with Q2 much stronger. That’s certainly the case today. I am also looking at Q3 to be stronger than Q2 with a shot at eclipsing the 3% mark. That won’t be easy. My forecasts were based on widespread deregulation and tax reform. While the former has been happening quickly but quietly, the latter isn’t even being discussed yet, a huge mistake in my opinion. I still believe tax reform is more than a 90% certainty, but it likely won’t have a positive impact on our economy until 2018.

All week long, the media fell over themselves, gushing that Amazon CEO, Jeff Bezos, was now the richest man on earth. As is often the case when something becomes so widely accepted or loved, the opposite happens. Amazon quickly gave back all of this week’s gains on a less than stellar earnings report. Classic buy the rumor, sell the news.

The tech sector, mid caps and small caps all saw reversals to the downside this week as all of the major stock market indices poked to new highs at the top of the trading range I have been discussing for a while. It’s likely that a pullback has begun and some mild weakness will ensue.

The two things that concern me most are below. First, I mentioned that semis need to make all-time highs as their software and internet cousins have. Rolling over first will definitely bother me.

Second, the Dow Transports are very quietly down 5% from the July peak. This bellwether index has definitely marched to its own tune for several years,  but I would still rather see it behaving a whole lot better. Thankfully, junk bonds continue to act well and confirm the new highs.

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