And Stocks Go Down AGAIN

More than a week ago, I started discussing the idea that a trading range was setting in with modestly lower and higher prices as the range. For a few session, stocks blew right past that idea. Before today, the stock market had very, very quietly pulled back for four sessions without much fanfare except for some weak internal readings.

That all changed as a solid employment report with finally some real wage growth further spooked the bond market, sending yields on the 10 year note to 2.85%. There is fear that 3% will be next and that will make bonds more attractive again and give stocks competition. I don’t buy that at all.

The issue is not that yields hit 2.85%, but rather that they are doing it in spike fashion. If yields had taken two steps and one step back on their way to 2.85% in orderly and boring fashion, I doubt the stock market would really care. It’s the same thing with oil. When oil either surges or plummets, the stock market usually follows suit. Markets are very good at adjusting and adapting to new levels as long as they get there slowly and orderly.

The long, long, long awaited stock market pullback is here. It should be a mid single digit affair and conclude by the end of the quarter. Because of how large the numbers are on the Dow, the point decline will make headlines. But remember, the Dow is down 4% right now and that’s over 1000 points. It’s not the end of the bull market and certainly not the end of the world.

Friday selloffs always concern people because they have snowballed in the past. Wherever stocks close on Friday, it is unlikely to mark the final bottom. Dow 25,000 is a logical target. The volatility Genie is out of the bottle and should be the rest of the year. Pullbacks are good to allow you to jettison investments that are lagging or you no longer like to rotate into better performing or higher quality ones.

Anyone still talking about the “melt up”???

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Fed Statement Day Disappoints. Defensive Groups Lead.

Fed statement day was certainly atypical and a volatile affair. Early strength was sold into which accelerated after the 2pm announcement. And Just when it looked like the bears would turn the day into a rout, the 3pm bell rung and the bulls came roaring back to life. What was most interesting was that while the Fed didn’t say much in their statement and actually was slightly more positive on the economy, it was the defensive groups, like REITs and utilities that acted the best on the day.

Two very reliably bullish short-term studies did not deliver on statement day which sets up a mildly negative trend for today and possibly longer. Keep in mind that the bull market remains intact as does this leg of the bull market. The rally is not over just yet. Leadership continues to be strong and only high yield bonds are offering any warning. It will be interesting to see if the defensive groups stay strong today, not to mention on Friday when we have the employment report. Unless it really lays an egg, the Fed will be raising rates 6 weeks from now.

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Stocks Can Go Down?!?!

On Monday we learned that stocks can actually decline in 2018. On Tuesday, we are about to find out that stocks can go down on back to back days and accelerate lower. People seem to have forgotten that!

With a trading range/pullback setting in, I am looking at Dow 25,800 as a logical downside target, but of course, we could go a bit lower. Semis, banks and discretionary are acting well and transports aren’t horrendous. There is news just out about Amazon, Berkshire and JP Morgan getting into healthcare on a non for profit basis so I would expect significant weakness in the healthcare sector today.

Tonight, we have the State of the Union and tomorrow the Fed will conclude their two day meeting without any action in rates. It will be interesting to see where stocks close versus where they open to get a feel for short-term mood. Any sign of the “melt up”?

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Don’t Confuse Brains with a Bull Market

On Wednesday at 9:20 am I will be with Laura Hutchinson on WTNH (ABC in CT) unveiling my top financial resolutions for 2018 with a special focus on those directly impacted by the tax reform bill passed last month.

It has been one heck of a start to 2018 in the stock market with some of the strongest momentum in history. As I have mentioned a number of times, animal spirits were released into the economy and markets a year ago and they seem to have been re-released late last year. Historically, those are not extinguished so quickly.

In short, all five major stock market indices are in sync to the upside. All four key sectors are leading and acting very powerfully. There is broad participation in the rally as measured by the New York Stock Exchange’s Advance/Decline Line. And high yield yield bonds are behaving at least okay.

While pundits have been calling the stock market a “bubble” for years, price behavior isn’t supportive of that just yet. My primary concern is that after an almost 20,000 point rally in Dow, the masses have finally embraced the bull market and are going “all in”. Sentiment surveys and individual investor behavior in the options market are showing euphoria. When the historic momentum begins to fade, the euphoric mood will matter, but that should not be right now or soon.

I keep hearing from the remaining naysayers that “this is going to end badly”. Well, no kidding! All, and I mean every single bull market ends badly or they wouldn’t end. Not a single bull market in history ended quietly without ensuing pain. Those who are late to the party and do not have a plan to book gains, hedge or play defense will certainly see decimation in their portfolios, just as they have during every single bear market in history. That’s just the way investing goes. Just ask all those Bitcoin investors who thought it was a one way street to untold riches. The 50% decline happened in the blink of an eye.

While stocks will likely see a full-fledged correction later this year and an increase in volatility well before that, the landscape still favors the bulls as even the slightest signs of weakness are immediately bought by those who have been sitting on cash. As the saying goes, “don’t confuse brains with a bull market”.

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Permanently Higher Stock Prices

Last week I offered the idea that stocks may be settling into a little trading range before resuming the rally. Well that lasted all of one day as the bulls continue to press higher to begin the new week. Time and time again this market has punished any and all who dare to hold cash or, heaven forbid, short the market or hedge. As continue writing my year-end report to clients and I review commentary, I realized that for 20 months, the stock market has completely steamrolled almost all of the short-term negative studies as well as the seasonal (calendar) ones. That’s pretty incredible and something without precedent in my 100 year database.

So here we are with all five major stock market indices at all-time highs. There’s not much more to say. Semis, banks and discretionary at new highs. Transports not far behind. NYSE A/D Line at fresh highs. Only junk bonds are lagging, but they look like they could score new highs sooner than later.

2017 was relatively easy for the bulls. 2018 has started off even easier. I am concerned that few others are concerned and people are starting to believe in a new paradigm of permanently higher stock prices. That’s very dangerous. I hear pundits saying that all this won’t end well. While that’s true, no bull market in history has ever ended well or it wouldn’t have ended! Everyone should enjoy what’s going on in the stock market, but realize that this behavior is generational and won’t likely be repeated for a long, long time.

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Trading Range Quietly Sets In

Two days ago, I wrote about a vicious, nasty and wicked reversal across the stock market. While the pundits and naysayers concluded various bearish scenarios, history and facts didn’t back that up to any strong degree unless you wanted to cherry pick. More times than not, after a one day, ugly reversal, a short-term trading range sets in, which I see occurring right now.

Interestingly, the biggest reversals this week were seen in the S&P 400 and Russell 2000 and those are the two indices which seem to offer the best upside right now. Semis, software and homebuilders have already overrun their reversal days with a few more sectors getting closer.

It certainly wouldn’t be a bad thing to have stocks pause and digest here. Intermediate and long-term studies continue to suggest higher prices while short-term studies, which have been wrong for months, suggest otherwise.

The real story is in the bond market where the yield on the 10 year note is breaking out. More on this next week.

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Nasty, Wicked, Ugly Reversal

No sooner did the ink dry on yesterday’s blog than the markets saw a very ugly and wicked reversal which saw the Dow give up almost 400 points from high to low. The “feel” I wrote about turned out to be prescient pretty quickly as volatility spiked in a huge way on a relative basis. Check out the chart of the VIX below over the last two days.

When you look at any of the major indices, sector or stocks, you will see what looks like a horrid reversal on the candlestick charts with prices opening at the top of the candle and closing at the bottom, a tall, red candle. The S&P 500 and Russell 2000 are below.

Most of the sectors look very similar to the indices so I will pick on biotech as it gave back the most ground I could find.

While these reversals look absolutely terrifying on the surface, especially when we hear pundits invoking the peaks in 2007 and 2000, historically, their bark is worse than their bite. Some do lead to declines with some declines of major significance. However, most just lead to a short-term bout of weakness or a mild pullback. Several other warnings would need to be present before I would consider one of these reversals to be ominous.

Of note, high yield bonds finished higher on Tuesday along with consumer staples which is now on breakout alert. Utilities are the sector which has been decimated as bond yields have jumped. They are getting close to an area where regardless of where they are ultimately going, a rally should begin.

I wrote about volatility picking up and that’s exactly what’s happening now. However, contrary to popular opinion, bull markets do not end with volatility just increasing from all-time or yearly lows. It’s months or more to work that higher before a bear even becomes possible. Breaking the back of a bull market is not a point in time. You can certainly expect the bulls to make a stand sooner than later.

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Volatility Index Acting Weird as Stocks Just Continue Higher

A new week begins and to no one’s surprise, stocks are set to open sharply higher. Even during the Dotcom bubble, stocks took a breather every now and then. In fact, they became very volatile during their melt up phase. That’s an element that has been lacking during this leg of the bull market.It’s not a great chart, but take a look at the volatility index below, also known as the VIX.

Essentially, since the year began, this index has gone up along with stocks, That is very unusual behavior as historically, stocks and the VIX move inversely, meaning they move in opposite directions. Behavior like this would typically lead to a pullback in stocks, but as we have seen time and time again, this is anything but a normal market environment. It’s something to keep an eye on.

I hate to use the word “feel” because as my golf coach would always lecture, “feel is not real”, but I do get the feeling that one of these sharply higher openings is going to be met with a nasty reversal to the downside. It may only last a day or even a week, but it should look a bit ugly. In this case, the VIX should likely spike higher than normal. Again, we’ll see.

Stocks continue to do nothing wrong to derail the bull market. The major indices are all in gear to the upside. Sector leadership is very strong. High yield bonds are participating. The NYSE A/D Line is making new highs. Nothing suggests an imminent end to theĀ  bull market, no matter how uncomfortable price action makes you.

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Small Caps Breaking Out. Certain Sectors like Dotcom/Bitcoin

After finally seeing a down day, the bulls came right back to work on Thursday with a blistering effort and very strong internals. That trend looks likely to continue into the holiday weekend. The real star of the day was the Russell 2000 index of small cap companies which had generally been consolidating nicely before bursting higher. You can see the blue line below which shows a ceiling where price has stopped three times before, also known as a flat top. Once price breaks out above the flat top and closes above it, it is typically a very positive sign. Unless small caps fail right here and close back below the blue line next week, they should continue to move higher and lead.

Looking like a Dotcom stock or Bitcoin, these two stodgy old sectors are in melt up phase. Both industrials and transports have been overpoweringly strong. I wrote about the bullish potential for transports near the bottom in November and they have exceeded my wildest upside projections so quickly.

Yes indeed. This is certainly a one of a kind bull market that won’t be repeated again anytime soon. I am just waiting to hear from folks that bear markets won’t happen again or stocks have a long way to go, although strategist Tom Lee did come out this morning and forecast another 300% to 500% left on the upside. SIGH…

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Small Caps Getting Ready to Lead While Worries about Trump Persist

Yesterday, I wrote about the major stock market indices and how the Russell 2000 was finally waking up. Below is an old chart which I first offered in early January. You can see that the small caps have been in a tight trading range all year and are now trying to break out to the upside. With so many studies pointing lower, this is one index which could counter some of the negativity and give the market a little push higher if it can close at all-time highs. That’s another 2% higher from here.

During the snow day, I spoke with several clients who were concerned about President Trump’s behavior. Between the tweeting and executive orders, people were worried about the markets. This is one area I have absolutely no worries at all. Talk is cheap. Actions speak louder than words and we do have checks and balances with the courts and Congress.

Trump is doing a masterful job of keeping Paul Ryan and the GOP-led Congress off the front pages and really out of the media spotlight as they craft very pro-growth legislation while removing unnecessary regulatory hurdles. Ryan and his team are flying under the radar unlike how President Obama’s Congress during his first 100 days.

The markets don’t really care what Trump has to say so far because the comments are not perceived as to adversely impact the economy or markets. Beyond the immigration executive order which has garnered all of the attention, the markets are very focused on lower corporate and individual taxes by Q3 of this year. Companies could potentially have trillions more to work with at home which translates into more jobs, higher earnings and a better landscape if it all can be pulled off.

“IF” is the operative word. As I keep saying, markets are somewhat priced for perfection and if Congress gets bogged down on Ryan’s agenda, that could make the markets frustrated and correct more significantly than the 2-5% pullback we should see sooner than later.

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