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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Yahoo Finance Today & Quick Update

I am excited to join the good folks at Yahoo Finance for their live show today at noon. To watch, go to finance.yahoo.com and you should see the show streaming.

While so many people fretted over the election in Italy, the global financial markets don’t really seem to care this morning with the bulls in charge. Although December is a very positive time for U.S. stocks, it’s backloaded, meaning that the second half of the month is much more powerful historically than the first half of the month. In fact, the first two weeks of December tend to see lower prices.

With the Fed meeting next week and likely to raise interest rates for the first time in a year, I am keenly watching instruments which have been decimated in anticipation of that hike. Those securities, like many bond sectors, could reverse and rally on the announcement of higher rates, as counterintuitive as that sounds.

One area of increasing concern is the technology sector which has already given back all of its post-election celebration. In particular, the mega cap leadership of Facebook, Amazon, Apple, Netflix and Google is looking very tired and weak. While Netflix and Apple could still steady themselves and score fresh highs in Q1, the others look like they have further to go on the downside. Add in Thursday’s shellacking of the semiconductors and there is good reason to pay closer attention now.

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Semis & NASDAQ 100 at Odds

On Tuesday, the Semiconductor Index as well as its ETF counterparts hit new lows for 2015. This is important for two main reasons. First, historically, as go the semis, so goes the NASDAQ. And as goes the NASDAQ, so goes the broad stock market. It is an intermediate to long-term concern that the semis are more than just struggling. Bull moves typically do not continue without support from the semis.

sox

Below you can see the NASDAQ 100 which is anything but struggling right now. While it has pulled back to the top of the previous trading range from April through June, the index hasn’t done anything wrong technically to warrant specific concern. As you know, however, I have been concerned about the stock market in general for several months.

qqq

This divergence between the semis and the NASDAQ 100 is not likely to continue. The odds favor the NASDAQ 100 losing its grip, at least in the short-term, and following the semis lower.

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Short-Term Murkiness Continues

While I continue to be intermediate and long-term positive on the stock market, there remains a small cloud over the markets in the short-term. That usually means a pullback, which equals weakness to the tune of 3-7%. Market sentiment has become slightly less bullish, but not to the degree where I believe the next launch to all-time highs can begin.

Recent price action shows the S&P 500, S&P 400 and NASDAQ 100 poking to all-time highs and then being rejected by the bears. While that looks really ugly on a chart, historically, it usually just leads to some short-term weakness.

Additionally, the semiconductors have always been one of the better canaries in the coal mine for the tech sector and the overall stock market. Of late, we have seen all-time highs in the NASDAQ, finally eclipsing the Dotcom bubble nosebleed levels from 2000, but the semis are pinned roughly 100% away from the same level. That’s not troubling to me and won’t get repaired for years and years and years.

The short-term concern, which has been written about by data miners all over the Internet, is that the NASDAQ 100 has been rallying with the semis closing lower. Some days, we have seen the semis down more than 1% with the NASDAQ 100 higher and at yearly highs. Historically, that’s not healthy action and usually leads to a two to four week period of digestion or consolidation or sometimes outright weakness. However, I continue to believe that all dips and bouts of weakness are buying opportunities until proven otherwise. The climate for the bull market ending is simply not there.

This is the time to make a little market shopping list in case there is a small sale in May.

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Fox Business’ Markets Now

I am going to be on Fox Business’ Markets Now on Monday August 26 at 1:00pm.

The stock market began a small bounce last week and looks to continue that move this week. Yes, it’s the unofficial last week of summer although many schools have already started and many more begin on the 26th. Volume is typically light this week, but when a geopolitical event occurs like we saw in 2011, 2010, 2008 and 2007, volume will certainly spike. I always laugh when I hear that all of Wall Street is sunning and partying in The Hamptons and that the only people left are junior staffers. Gee, I guess that means they all helicoptered back when it hit the fan. What nonsense!

It’s relatively quiet now because earnings season ended and there are no major PLANNED events until the Fed meets next month to talk taper. Don’t think for a minute that just because August ends this week, volume and volatility will return. We have the Jewish holidays very early this year, just a few days after Labor Day.

While it looks like there is a temporary ceiling over stocks at the recent highs, we could still see a decent bounce on low volume.

Longer-term, the market is still trying to deal with junk bonds entering a bear market and the relative poor performance in the semiconductors.

I “hope” to have a full Street$marts out later this week.

Enjoy the final week of summer!

Paul

Dow 15,000, CNBC and more…

I am going to be on CNBC’s Closing Bell today, March 26, at 3pm discussing the S&P 500’s continued assault on all time highs as well as the latest nonsense out of Cyprus, a country with the economic output of Vermont!

As you know, we have been very bullish on stocks since mid November, especially through the overhyped fiscal cliff and sequester embarrassments. Sadly, looking at Washington’s fiscal calendar, we have many more “urgent” deadlines in 2013. Yippee! That means the media will force feed us with congressmen from both sides who just keep talking but say nothing, not to mention what comes out of the administration!!

In any case, we have greatly tempered our enthusiasm for the stock market since last week and believe it’s now appropriate to protect and/or hedge the nice profits. That certainly does not mean that stocks must go down right here or at all, but we do see the risk/reward ratio as no longer in our favor.

 Looking at the Dow, 15,100 seems like a good ceiling while 13,700 looks like a floor. I am concerned that Wall Street strategists are literally falling over themselves to be the most bullish, raising their price targets every week. The emerging markets complex (think China, Russia, Brazil, etc.) is down on the year and behaving poorly. The semiconductors, leaders in the tech sector, act heavy and want to drop more. High yield bonds have gone from leader to laggard. 

On the flip side, I still see some bright spots like the Fed printing $85B a month, banks trading very well and the number of stocks going up and down on the New York Stock Exchange continuing to hit all time highs. And that’s why I am not becoming more negative over the intermediate and long-term, at least not yet.

 Stocks are due for a rest between here, 14,600, and 15,100. Should it come, I will assess the pullback for any damage done and report back. This should not be the final nail in the bull market’s coffin. 

Happy Passover and Easter to those celebrating! 

Thank you Mother Nature for delivering another 2 feet of snow to Vermont last week! Some of us appreciate your fine work!!  

Over the next two weeks, I will be visiting the Boston area as well as the east coast of Florida. Please let me know if you would like to grab coffee or an adult beverage!

Separating the Election Nonsense from Reality

Here is the latest Street$marts:

http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20121015.pdf