Signs Point Higher this Week

After a solid end to September and Q3, stocks open the new day, week, month and quarter flirting with all-time highs. Of the major indices, only the NASDAQ 100 isn’t there, but I expect to see that achievement this week. When I think of October, Reggie Jackson’s three home run game in 1977 comes to mind along with Halloween, fall foliage and stock market crashes. As I already wrote about, while October is known for huge market swings, 2017 is on the atypical side with near record low volatility.

I updated my research regarding October and you can read about it HERE. Additionally, the always interesting Rob Hanna from Quantifiable Edges offered that when the S&P 500 closes the month at its highest close, the next 5 trading days are seasonally very strong with 21 wins and 7 losses since 1995. The average trade earned a stout 1%. This trend jibes very well with what I discovered about the first 5 days of October in an uptrend. I will be looking for a short-term peak next week.

On the sector side, strong leadership continues to support buying any dip with semis, transports and banks all stepping up big time. Discretionary is fine, but I am beginning to see the early stages of intermediate-term underperformance. High yield bonds are behaving well and there is just no evidence that the 8+ year bull market is ending. Sorry bears…

If you would like to be notified by email when a new post is made here, please sign up HERE

Stocks on Solid Footing Heading into Q4

Since late July, my overall theme has been one of pause to refresh with a mild pullback as the five major stock market indices were certainly not all in gear to the upside. Two months later, with the S&P 400 and Russell 2000 recently surging, they are all getting closer together. That behavior comes at the expense of the NASDAQ 100 peaking earlier this month and moving sideways for the others to catch up. I fully expect November and December to see all five major indices scoring all-time highs at the same time although I am still not ready to declare that stocks are ready to blast off to the upside.

I have written much about the semis and banks as a tale of two key sectors moving in opposite directions. While semis broke out to new highs, banks finally got off the rear end and surged 10%, close to new highs, a very positive sign. Transports behaved similarly, but even stronger. Discretionary, leaders in most years since the bear market low in 2009, look like they are peaking, at least over the intermediate-term which could spell some trouble for the consumer. Somewhat quietly as I have written about before, energy has become the single strongest sector after some horrific declines.

All in all, stocks are closing out the quarter on fairly solid footing and poised for higher highs into year-end.

If you would like to be notified by email when a new post is made here, please sign up HERE

Semis Breaking Out But Some Concern Out There

Stocks begin the new week on decent footing yet I remain of the belief that strength is a better selling opportunity than a buying one for now. While the underpinnings are not suggestive of recession, bear market nor 10%+ stock market correction, I continue to see evidence that a mid single digit pullback may be in the cards over the next 6 weeks. It’s also the single weakest of the year based on history. This one single week performs more poorly than any other according to data miner Rob Hanna of Quantifiable Edges, always a great read.

From a price standpoint, the Dow and Russell 2000 are the leading indices, but the others are not far behind. I do expect every major index to see new highs by year-end. The tech-laden NASDAQ 100 which is totally dominated by the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks had been the market’s big leader, but ceded way this quarter. On the right side of the chart, you can see the index trading between those light blue lines. In other words, it’s becoming coiled up for a big move. At this point, the direction of that move is not clear although more than 50% of the time, it’s in the same direction as the previous trend.

I have written much about the semis lately and how they have shouldered the leadership burden all quarter. Today, the group has broken out to new highs where the grouping of sell orders is more difficult. It will be very, very important to watch how this sector performs over the coming week. Giving much back in here will not bode well for stocks, especially tech.

If you would like to be notified by email when a new post is made here, please sign up HERE

Semis Strong, Shouldering the Burden. Other Sectors Stepping Up.

The stock market continues to quietly drift higher, at least on the surface. The Dow, S&P 500 and NASDAQ 100 have seen new highs this week while the S&P 400 and Russell 2000 look constructive but still well below their peaks. I do expect them to play catch up and see blue skies before any meaningful downside is seen.

I wrote about the banks earlier this week as being a concern. Discretionary is a bit stronger but also not firing on all cylinders. Transports have rallied strongly and seem poised for new highs. Semis, as I wrote about before, have shouldered most of the leadership burden and are just shy of new highs. That’s been an impressive run and I don’t think it’s over.

Outside the key sector group, I see some really encouraging behavior by healthcare, biotech, industrials, materials and energy. While some analysts question market participation, this behavior counters that argument. Furthermore, although the percentage of stocks above their long-term trend (200 day moving average remains in a downtrend as you can see in the first chart, the second one is a longtime favorite, the NYSE Advance/Decline Line. For me, the latter is a better representation of what’s going on beneath the surface.

Here’s the bottom line. While the stock market is not without short-term concerns and I am still looking for some weakness next month, the majority of the key indicators are in good shape. Bull markets do not end with behavior like we are currently seeing.

If you would like to be notified by email when a new post is made here, please sign up HERE

Small Caps, Semis & Junk Leading. Banks Looking Sick

Stocks ended last week on firm footing as the bounce saw four nice days. With more North Korea tensions in the air, it will be interesting to see if the stock market finally cares or just uses this as an excuse to open mildly lower. Very quietly as I have mentioned before, the Russell 2000 has been leading the major indices. That does have bullish implications if it holds on.

Additionally, the semis which have been the only key sector leading, are one strong day from new highs.

One sector that has me particularly concerned is the banks. They look sick. While that isn’t likely to have a short-term impact, it’s something that must be watched over the intermediate and long-term.

Turning to my favorite canary in the coal mine, high yield bonds are behaving more like semis than banks, trading just one good day from new highs. It would make me feel a whole lot better if this key group can score new highs before rolling over again.

Once again, we have a number of crosscurrents. If stocks gather themselves and rally, I think there will be a good opportunity to sell at new highs. Should stocks rollover first, I will become more concerned about the downside. In either case, I do not think stocks are blasting off higher until next quarter.

If you would like to be notified by email when a new post is made here, please sign up HERE

Crosscurrents Abound. Enough for Bulls & Bears

Stocks continue the bounce they began two weeks ago and the same one I have been discussing. Tuesday was the day where the acceleration started. That could be slowing today. The NASDAQ 100 sits an all-time high but it’s lonely up there. The Dow and S&P 500 are within striking distance but the ever improving S&P 400 and Russell 2000 are not close. With the monthly jobs report out this morning, any strength will create a little short-term headwind for stocks into next week.

Speaking of the employment report, it was a little weaker than expected and last month was revised down a bit. This data will be very important to watch for signs of a possible peak. Topping out this year could put us on recession watch sometime in 2018 if the Fed doesn’t pull back their tightening cycle.

I have been writing about the importance of the semis to put the market on its back and lead as it’s the only key sector that is strong right now. This group is now within a good day or so of new highs, chalking one up for the bulls. On the flip side, discretionary, banks and transports are nowhere near that strong, creating a vacuum of good leadership. Healthcare and biotech are cranking at new highs, but those are not usually the sectors that can lead a new leg in an old bull market.

On the flip side of the flip side, high yield bonds have quietly been strong for two weeks and doing their best to recoup Q2 damage and remove themselves from being a concern. Basically, we have lots of crosscurrents right now. Let’s see if the NYSE Advance/Decline Line can make a new high.

If you missed my segment on ABC in CT yesterday regarding market reaction to Harvey, here it is.

Analyzing stock market behavior after disasters

If you would like to be notified by email when a new post is made here, please sign up HERE

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.

If you would like to be notified by email when a new post is made here, please sign up HERE

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.

If you would like to be notified by email when a new post is made here, please sign up HERE

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.

If you would like to be notified by email when a new post is made here, please sign up HERE

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…

If you would like to be notified by email when a new post is made here, please sign up HERE