Bulls Are Resilient

On May 8th, I first started discussing what I saw as a skewed risk/reward ratio with 500 possible points of upside and 1000 points possible on the downside. Over the years when there was a decent chance for stocks to decline, I often referred to it as a window of opportunity that stays open for a period of time before closing.

Three weeks after my comments, stocks have basically gone nowhere. We saw a brief dip when the “hysteria” over Russia and Jim Comey came out, but as I said at the time, it’s reality over rhetoric and the markets and economy don’t really care about all the nonsense. With high yield bonds and the NYSE A/D Line at fresh all-time highs, the window for a decline is quickly closing and may be closed.

The longer we go without another bout of weakness, the less likely it is to happen. The leaders keep on chugging and the laggards show no signs of stepping up. In short, stick with what’s been working until proven otherwise. Semis, tech, industrials and discretionary. At some point, energy is going to stop behaving so poorly, but I want them to prove it. With oil up from $44 to $51, the energy stocks have barely lifted their head. That’s just plain ugly and perhaps getting to the point where it’s so bad that it becomes good.

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Looking for Mr. Volatility

Greetings from 39,000 feet as I am on my way home from the west coast. A quick visit in Scottsdale followed by my annual industry trade association conference in San Diego and I cannot wait to get home! If all goes well, that was my last trip to CA this year. It’s just brutal getting there from Hartford these days and the NY airports are a mess and awful to get to.

The Fed concluded their two day meeting today and as expected, interest rates were left alone. Given the recent weak patch in the economic reports, Yellen & Co. would have had a tough time justifying a hike. That should come in June. Normally, one or two of models offer a strong edge today or in the days after a meeting. That was not the case today nor the rest of the week. Stocks behaved as they normally do with a maximum move of plus or minus .50% until 2 PM and then a bigger move. However, it was still very quiet the rest of the day and volatility has all but disappeared, especially in the Dow and S&P 500.

Just look at the last 7 days in the S&P 500 below. Stocks have not only gone nowhere but the daily range from low to high has been historically small.

There’s an old adage that says, volatility compression leads to volatility expansion. It doesn’t say in which direction, however. That means we should be on guard for a larger move in the S&P 500 sooner than later. While the odds favor a move in the same direction as the previous trend, that assumption can be dangerous to your portfolio. If the upside and the bulls are to win out, they will need the S&P 400 and Russell 2000 to get back in gear and at least equally perform. Both indices have been big laggards of late.

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The Bears Are Wrong

With the French elections going the way of the Euro bulls and corporate earnings continuing to exceed expectations and the high level details of Trump’s tax plan released, the stock market had itself a nice little run on Monday, Tuesday and half of Wednesday before getting a little tired. What a difference a week makes.

The bulls made some solid ground with NASDAQ 100 and Russell 2000 seeing all-time highs and the S&P 400 only a whisker away. The Dow and the S&P 500 need one more big up day to join their siblings. It’s very important that they do not fail here. For the past month, I have written much about the market pullback that is long in time but short in price. Last week, a host of short-term indicators were flashing oversold in bull market. That was yet another opportunity to follow what I have been saying almost every week since early 2016.

Pullbacks are a buying opportunity and weakness should be bought until proven otherwise. Yet at every juncture, the bears were louder in the media giving all sorts of reasons why you shouldn’t buy and why stocks were headed for doom. Eventually, they will have their day in the sun,  but not now and not soon. The bull market remains alive and well with perhaps another quick rest period coming, but not really actionable. Don’t get caught up in the rhetoric.

Leadership is solid with semis and discretionary at new highs and banks are really trying. Transports are starting to concern me a little, but that’s from a short-term perspective, at least so far. The rest of the sectors look pretty good, especially for so late in the bull market. High yield bonds are kicking back into high gear and the NYSE A/D Line is making new highs again. The bears are wrong.

Two areas I am closely watching now are gold and energy. The metals miners failed to make a new high this month and have no declined more than 12%. Even if they are headed another 5%+ lower, there may be a quick trade in there to the upside. Energy stocks on the other hand have been decimated all year and since December. I have looked for signs of a bottom, but they flamed out very quickly. Sooner than later, there will be a very good risk/reward opportunity to buy this group. Stay tuned…

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Reality over Rhetoric. Bulls are Large and in Charge

I have long said and continue to reiterate on a regular basis that it’s not so much what the news is, but rather how the markets react. Clearly, the markets celebrated the French election results as the two main political parties were cast aside. Independent, Emmanuel Macron and nationalist, Marine LePen will face each other in a runoff on May 7. It doesn’t matter if you love or hate either candidate nor what they stand for, much like we saw with Trump and Clinton. The markets like the result. With Macron leading by a wide margin in the polls, markets are pricing in his victory. LePen hopes to continue to ride the Trump train and prove the polls wrong.

Anyway, while I am not the biggest fan of news creating the start of a market rally, the bulls are clearly and definitely “bulled up” for a run to all-time highs. The NASDAQ is already there with the Russell 2000 and S&P 400 not far behind. Recall, they have been leading. The S&P 500 is a little bit further back with the bringing up the rear. That’s all positive over the intermediate-term. My only caveat is that the major stock market indices must all make all-time highs sooner than later or risk developing more serious concerns. Let’s cross that  bridge if and when.

On the sector front, semis and discretionary are leading the four key sectors. Banks and transports have a ways to go, but don’t rule them out of new highs. Software, homebuilders, industrials and materials have stepped up as well in this broad-based advance. Even utilities and staples from the defensive group are at or near new highs. High yield bonds are healthy and the New York Stock Exchange Advance/Decline Line is scoring yet another all-time high. This is not how bull markets end!

The bears keep talking about valuation and Trump as the biggest threats to the bull market. While valuation is important over the long-term, it’s a terrible timing tool and is usually early by quarter, if not years. Regarding Trump, rhetoric versus reality. Don’t get caught up in the headlines and tweets. Things are okay and improving. Dow 21,500 should be next with 23,000 after that.

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Sector Canaries Healthy with Some Small Wounds

Turning to the four key sectors I follow, we don’t have as strong a picture as the major indices, but they are still okay. Semis are first and they have been the strongest for some time, almost too strong, but that’s a topic for a different piece. While they have yet to eclipse their Dotcom bubble high from 2000, they continue to make new highs for this bull market.

Banks are next and after a dizzying pace following the election and prospects for reduced financial regulation, they leveled off and are now under pressure from the potential for less rate hikes. Banks should do better in a tightening cycle as rates move farther and farther from zero where their net interest margins improve dramatically. Their early March peak is in line with where it should be, worst case and this is not flashing warning signs just yet.

Consumer Discretionary is next and it looks somewhat similar to the semis with a series of new (and healthy) highs.

Finally, the Dow Transports are below. They peaked with the majority of the stock market in early March, but have since shown the most weakness of the four key sectors. This is the one I would most keep an eye on for future warning signs.

All in all, the sector canaries remain alive but a tiny bit wounded.

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Sector Leadership Immunizes Stock Market from Bear Market

On Friday, I wrote about the Russell 2000 and what a potential breakout could mean for the stock market. At the open today, this index hit a fresh all-time high. Before breaking out the balloons and party streamers, let’s see if it can close at new highs and not give back too much over the coming days. With the Dow closing above 20,000 for five straight days I will have a new target very shortly that looks to be several thousand points higher.

Turning to key sector leadership, it’s continues to be strong and constructive. Semis have paused of late, but continue to trade right up against new highs. While extended, the rally should still have legs.

Banks, which have traded in a tight range since early December, are trying to breakout to the upside right now. Only a failure here and break to the downside would cause me to temper my intermediate-term enthusiasm.

Like the banks, transports have also been in a trading range since early December and are trying to breakout higher  now. That is certainly bullish from an economic standpoint.

Finally, consumer discretionary, which I did not think would quickly reassert itself heading into 2017, has done just that. It now stands at all-time highs.

It’s really hard for the bears to argue that a bear market or even 10%+ correction is close at hand. The major stock market indices are back in gear to the upside as well as the four key sectors. Of course, this strength never, ever precludes a routine, normal and healthy 2-5% pullback. In this case, as I have said for many years, weakness is a buying opportunity.

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Bulls Win Big on Friday But Still Not Ready

Very nice day for the bulls on Friday as the monthly jobs report was really the Goldilocks scenario. Not too strong and not too weak. The U.S. saw decent growth with some mild revisions lower but almost no wage inflation which caused expectations for a March rate hike by the Fed to decline to roughly 20%.

I would not hang my hat on the Fed staying put in March. There are many data points between now and then and I think with the dollar under pressure, they will push to raise.

Except for the Russell 2000, the major stock market indices are now within one good rally from new highs. I still don’t think this is the rally that propels stocks higher on a new leg, but I also won’t be stubborn if the indicators look better. Right now, I see a little more upside and then back to pause mode. Stocks are really priced for perfection and have borrowed a significant amount from the future.

While semis and banks are leading strongly, discretionary and transports are in constructive ranges for now. I fully expect them to join the party, probably later than sooner. Energy may be the most intriguing sector right here as it pulled back to pre-OPEC levels and negativity has skyrocketed. Staples and utilities are also interesting as they are butting up against overhead supply. Should they get a little kick here, those two groups could run higher for a while.

FYI. Until the Dow closes above 20,000 for five straight days, I won’t have any more upside projections.

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Dow Breaking Out & Q4 GDP Miss the Last

After hitting yet another one of my upside targets, 20,000, the Dow has yet to pause. Five straight closes above 20,000 will open up new upside targets before the bull market ends.  As you can see below, the Dow has been consolidating sideways since early December. That’s often referred to as a flat top or box. When prices finally exceed the flat top, they oftentimes see a spurt in the same direction.

Although momentum is on the side of the bulls there are a few short-term headwinds which will present themselves if the rally stalls and closes back in the box sooner than later. Should that occur, I would expect a quick pullback to 19,700.

The NASDAQ 100 has been the leading index since late December, yet it certainly looks a bit tired, the same comment I made earlier in the week. Semiconductors look even more in need of a rest and they typically lead the NASDAQ 100. Keep in mind that all I am saying is that stocks may pause to refresh. The bull market is alive and reasonably healthy. Weakness is a buying opportunity until proven otherwise.

Sector leadership remains strong. Semis, banks, discretionary and transports look powerful although they could use a rest. Industrials and materials are also kicking it into high gear. Healthcare and energy continue to lag, but I think they will have their day in the sun after this quarter.

New highs in high yield bonds and the NYSE A/D Line bode well for the bull market, regardless of the next 5-10% move.

Q4 GDP just printed at 1.9% which was below forecasts. I wouldn’t be surprised if that’s the low print Donald Trump sees for a while and the market just shrugs it off.

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Window for Decline Almost Closed

For the past three weeks, our models have been defensive regarding the stock market after the first week’s post-election surge. I often say that when certain conditions are present, a “window of opportunity” opens for a stock market decline. The longer time passes without a decline, the more likely the window will close. Today, the window is starting to close and I imagine that by two weeks from today, it will be fully closed, modest decline or not.

The  Dow, S&P 500, S&P 400 and Russell 2000 are all in gear to the upside and look strong, although definitely overbought. The NASDAQ 100, on the other hand, has given back all of its post-election hoopla and just doesn’t behave well. While that bellwether index is dominated by Apple, Amazon, Facebook, Microsoft and Google, which have been under strong downside pressure, it would be careless to dismiss this as just a few bad apples (no pun intended). It remains a red flag for now.

Looking at my four key sectors, banks, discretionary and transports are all acting very well and indicating good things for the bull market. Only semiconductors are questionable, however, they really haven’t done anything terribly wrong except see an outsized down day last Thursday. Further supporting excellent leadership is the performance of the materials, industrials and energy. With the defensive staples, utilities and REITs continuing to lag the rally, that adds further credence to the longevity of the bull market. I do think, however, that a short-term trading opportunity may exist as the Fed raises rates next  Wednesday and the most beaten down sectors begin to rally on that news.

High yield bonds are finally starting to kick it into high gear after breaking out to the upside on Tuesday. Even the NYSE Advance/Decline Line is ever so slowly inching back toward an all-time high. Unless something dramatically changes over the coming week, weakness is a must buy into January.

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Stock Market Yawning at Recount

After a small gain on Wednesday, the seasonality bulls got their work done on Friday as the strong trend held to form. Without any weakness leading into that trend, it made it too tough for me to play it. However, I did tweet on Friday that taking a small short position at the close for seasonal weakness on Monday seemed like a better risk/reward play.

Heading into the new week, we have to be on the lookout for the typical post-Thanksgiving hangover early in the week and then the jobs report on Friday which is the final major data point before the Fed raises rates on the 14th. Stocks remain extended and overbought as I mentioned last week, but it doesn’t mean they have to go down right now. They can become even more overbought and extended or they can simply pause and go sideways.

As everyone has been quoting everywhere, the Russell 2000 has been up for 15 straight days, a feat I would never, ever have predicted at any time. At some point, the streak will end. At some point the index will close below the previous day’s low. I am way too chicken to buy that without a meaningful pause or pullback.

The rally continues to look fine and my window for a decline is quickly approaching. Leadership is strong and the internals have improved. High yield bonds are stepping up as well. The stock market doesn’t seem to care about the recount about to take place in several states. Should that Hail Mary gain any steam and possibly reverse the election, that would make the Bush/Gore fight look like a walk in the park compared to a full-fledged constitutional crisis unfolding. Stocks would crater. That scenario is not something I think will happen. It is interesting, however, that Jill Stein has raised more than $5 million that she doesn’t have to give back if it’s unspent or more than needed.

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