Junk Bonds Stepping Up. Everything Seems PERFECT!

Snowmageddon ’18 is here!

Let’s make it two straight days in the New Year and two straight all-time highs in the major stock market indices with Dow 25K up next which was my next target after 23,000. After five straight closes above 25K, 30K will likely be the next target. So far, stocks have done nothing wrong and I do not believe the rally is ending here. However, I do think that the market is going to form a short-term peak over the coming week and either pause or see a mild pullback before moving higher again.

Each successive rally is its own test and stocks haven’t failed a test in an awfully long time. If you want to find fault, you can point to the lagging banking sector or high yield bonds although the latter looks like its trying to kick it into high gear and lead now. Participation has been strong and excellent with the NYSE A/D Line seeing all-time high after all-time high.

Sentiment has certainly become greedy and giddy which is a negative. It seems like everyone is bullish on 2018 which concerns me, however, there is a scenario that I have mentioned before where the masses throw in the towel and stocks melt up to their final bull market high above Dow 30,000. For now, continue to enjoy the gains. Stocks are priced for perfection without much margin for error. I will try not to overthink it…

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Santa Arrives Late. Bulls Back in Control

Between my concerns about the last five days of the year and then the bullishness of the first day of the New Year, the market has been cooperating. Monday’s burst to new highs in essentially all of the major stock market indices puts the bulls firmly back in charge with the likelihood for some upside follow through on Wednesday. None of the major indices are doing anything wrong at the moment and they are all in sync to the upside. As such, unless the bears surprise today, the Santa Claus Rally will not fail to call and bears will not come to Broad and Wall, at least not in the near future.

While discretionary and transports both say all-time highs to begin the year, banks and semis did not. While neither of the laggards look worrisome, it’s something to keep in the back of your mind for later this quarter, especially if they start to decline when everything else rallies.

Sentiment is getting a little giddy as options traders are betting on a continuation of the advance. They don’t normally win. It looks like stocks should be building towards a short-term peak over the coming week or so before heading higher again later in January or early February to what could be a more meaningful high.

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Weak Close to 2017 Indicates Bounce to Begin 2018

Back to work. Lots going on. Many crosscurrents. I hope you had a safe and enjoyable New Year’s celebration. I am still thawing out from so many days in Vermont without seeing the thermometer get above 0. The stock market begins the new week, month, quarter and year with a rather disappointing close to 2017. It has been something on my radar screen for a few weeks as recent history has not been kind to the bulls over the last five days of the year. The S&P 500 needs to gain 11 points over the next two sessions to avoid triggering a failure in the Santa Claus Rally which I wrote about HERE.

Favoring the bulls on Tuesday is a trend which is active because the last day of the month closed lower, but the month was still higher. It has a high degree of accuracy. Additionally, the last week of the year was down in an otherwise up month and year which puts the market in a position to bounce to begin the New Year. During this bounce, the NASDAQ 100 is the odds on favorite index to lead higher.

Working against the bulls is that all five major stock market indices put in somewhat ugly reversal days, meaning they began the day at their highs in positive territory, but ended it at the lows in negative territory. All four key sectors followed suit to the negative.

High yield bonds bucked the trend to finish higher although they have been lagging and under pressure for the past two months. Crude oil, gold and other commodities also continued their uptrends and it will be interesting to see if they can hold ground. Finally, the Euro is at a crossroad and the currency may hold the key to what we see in equities over the coming few weeks.

Lots going on. More than any other time of the year.

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Where is Santa Claus?!?!

Last week, I wrote about the much heralded Santa Claus Rally and last five trading days of the year. If you weren’t able to read the piece, I think it’s a good unbiased analysis debunking the notion that this time of year is like shooting fish in a barrel. With 2012, 2014, 2015 and 2016 all limping in to close the year, the trend has really been quite the opposite. So far in 2017, Santa has barely been seen with but one day left in the year.

Now before you conclude that the bears have been in control lately, the Dow, S&P 500, S&P 400 and Russell 2000 have all basically gone sideways of late with the NASDAQ being the weakest index, down marginally. It still seems like the bulls should resolve this little range with an early 2018 upside breakout next week. Banks, transports and discretionary all look like they want to run higher into January while semis have really disappointed and have me questioning whether their leadership has ended for a while.

High yields bonds, which have rallied of late, are still well below their Q4 all-time high peak. That’s my biggest domestic concern heading into 2018. However, the NYSE A/D Line continues to make all-time highs which should forestall any bear market or full fledged correction for the foreseeable future.

Currencies have been unusually quiet for this time of year, but that’s one asset class where I see fireworks in 2018 as the massive capital flows into the US I have mentioned for years should finally come to fruition. At the same time, while commodities have rallied this quarter, I see that asset class as having much more upside potential with crude well on its way to my $100 target over the next few years.

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Debunking Santa & the Last 5 Days of the Year’s Bullishness

Here it is; the last five days of trading for 2017. So far, it’s been the least volatile year in history. And barring any truly unspeakable geopolitical event, it will end that way as well. The stock market hasn’t seen even a 5% decline, let alone any full fledged correction. Those most rewarded were the ones who did absolutely nothing all year, similar to 1995. I don’t think 2018 will be a repeat, but that’s a story for a different day.

You may be hearing about the Santa Claus Rally (SCR) now. People define it all different ways or they just leave it nebulous so they can spin the result to fit their thesis. Yale Hirsch of Stock Trader’s Almanac fame (and a perennial must own book now written by his son Jeff) coined the phrase, “If Santa Claus fails to call, bears may come to Broad & Wall”.

Research showed that if the last five trading days of the year and first two trading days of the New Year (Santa Claus rally) did not show a positive return, a bear market or significant correction was likely during the coming year. While that was certainly the case years ago, recent history since 2001 shows a significantly muted trend and I wonder if this trend has been fully diluted because of computerized trading, the proliferation of ETFs or even decimalization.

Bears love to point out that Santa did not call in 1999 nor 2007 when two devastating bear markets were about to unfold. However, Santa also did not call in 1990, 1992, 1993 and 2004, yet no bear market or major correction ensued the following year. Santa also did not come in 2014, but I am sure proponents of this trend would point to the 15% summer decline as evidence that it “worked”. In 2015, Santa was a no show and stocks were in in the midst of a 15% correction which bottomed on January 20, 2016. How would they score that?

Conversely, Santa called in 2010, but stocks saw a 20% decline in 2011. Santa came in 2000 and 2001, however 2001 and 2002 were awful bear market years. 1997 saw a big Santa Claus rally, yet 1998 had a 20% correction. The same can be said about 1989 and 1986.

As stocks enter the final 5 days of 2017, most pundits have been spewing that it’s a “lay up” or “easy money” for stocks to continue higher into year-end because it’s “always” happens. The data do not support that, especially of late with 2016, 2015, 2014 and 2012 all down fractionally on the S&P 500. And let’s face it, stocks do look a little tired. The S&P 500 hasn’t closed above its opening price for more than a week.

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Santa Came a Callin’ But Who Cares…

The Santa Claus Rally (SCR) has officially ended with the bulls winning by almost 1/2%. That’s supposed to portend positive things for the year ahead. However, as with most Wall Street adages and assumptions, it just stand up to scrutiny when doing the research. First, let’s remember that during most long-term periods, stocks rise at least 2 out of every 3 years, so a permanent kind of tailwind to support the bulls.

As I started to update the stats on the SCR, my friend, Tom McClellan (of Summation Index, Oscillator and newsletter fame), emailed me his findings which I will quote as he rarely makes mistakes. A positive SCR foretells an up year for stocks 68% of the time since 1928. Excluding the Great Depression decade, that figure rises to 74% versus 72% for any random year. Since 1980, an up SCR leads to higher year 80% of the time versus 75% for any random year since 1980.

On the flip side, for those curious, since 1928, the odds of any year being down are 34%, 28% since 1941 and 25% since 1980. A negative SCR has correctly predicted the full year being down, 42% since 1928, 33% since 1941 and 36% since 1980. While the negative SCR correctly called for 2008 to be down, it failed to forecast 2000, 2001 and 2002 being lower.

What seems so powerful on the surface is just barely better than random when looking into the details on the upside and downright poor in predicting a negative year.

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Santa Came a Callin’ & Dow 20K Up Next

While the point totals so far have been more impressive on Tuesday, the market action on Wednesday is more constructive and healthier. We had a quieter opening without emotion. The Russell 2000 and S& P 400 are leading, which runs counter to the trend I pointed out yesterday. The NYSE Advance/Decline Line is much stronger today. Commodities are bouncing back. I was hard pressed to find any sector that behaved well on Tuesday, but the vast majority are today. I said I wasn’t going to discuss leadership and I didn’t!

With the Santa Claus Rally period ending shortly, it looks like Santa definitely did call to Broad & Wall, fending off bears as the adage goes, although I don’t think that really holds water anymore. We have the first five days of January system ending next Monday and an up period supposedly bodes well for the rest of January which would bode well for the entire year. However, I will never believe that people make portfolio decisions based on five random days of the year.

So far in 2017, the bulls have been resilient. I am impressed. Dow 20,000 looks like a hit before the weekend. I still think there is a deeper pullback this month, but it’s hard to fight the strength here.

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Bulls Rockin’ to Start 2017

It looks like the bulls are refreshed and ready to go into 2017 with the bears perhaps still nursing a hangover. Early indications show the Dow Industrials up roughly 150 points this morning which would put them within striking distance of 20,000 this week. I have seen a number of very short-term studies over the weekend which all point to higher prices today and possibly tomorrow based off the weak close to 2017 within the context of a higher December.

HOWEVER, equally as interesting, I also saw what happens when the bulls fail to follow through. That would mean a quick trip below last week’s low en route to the bottom of this little pullback, probably next week or so.

While there are lots and lots of crosscurrents during the first few trading days of the new year, I try not to put too much emphasis on leadership. Rather, I look for historical trends to play out. This year, one strong trend is for small and mid caps to underperform the NASDAQ 100 and S&P 500. Yes, you read that right and it’s exactly the opposite of what is being bandied around the media and internet.

Stocks are supposed to be higher today and likely tomorrow. If the bulls can’t hold on, volatility should expand and the largest pullback since the election will continue. No big deal and the highs are not in yet.

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Well, Well, Well Mr. Bear

Wednesday was definitely an interesting day as opening strength was immediately sold and built upon throughout the day. That behavior is not only out of character for the post-election rally, it certainly is as well for the final few days with prices so extended. Market internals were pretty much as expected for a day like that and the Dow held up much better than the other major indices. Except for gold, sector weakness was across the board. Treasuries got a bid and I am sure somewhere, people will say that it was a flight to quality. I doubt it.

The big question now is, was this a one day wonder and chance for the bulls to buy the dip for a rally into the new Year or has something changed. I don’t have strong conviction on that just yet. I would like to see how stocks close on Thursday. If all is well, the bulls should rock and roll during the afternoon, especially into the close. However, if anticipated early strength is sold and the bears make some noise during the last hour, stocks will likely see their largest pullback since election day, which really isn’t saying very much. One thing I feel strongly about is that stocks should not fall apart from here. Although bears do, bulls don’t die easily.

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Dancing Sugar Plums & Dow 20K

Two days into the Santa Claus Rally and the Dow is up a whopping 26 points. While that doesn’t seem like anything, it’s fairly typical of the final five trading days of the year which often see a mild drift higher before sellers sometimes come in on the final day. Tuesday saw the bulls come right back to work early in the day with thoughts of sugar plums and Dow 20,000 dancing in the heads.

Stock market internals were certainly supportive as advancers overwhelmed decliners by 1400 in the morning and sector leadership was nicely ordered with semis on top. However, by the end of the day, the major indices gave up a good portion of their gains and the NYSE A/D line was up almost 700, half of what it was earlier. If this wasn’t the last week of the year or if we saw Dow 20K, I would be a little more concerned about short-term market fatigue and perhaps I should be. Remember, with capital gains taxes likely to be cut in 2017, I imagine many sellers are holding on to their winners to sell in early January. That’s what I am focused on now.

Over the intermediate-term, almost every sentiment gauge is flashing warning signs that froth is present. That doesn’t mean that stocks are about to fully correct 10%+, but it could mean a multi-month pause in the rally.

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