Change in Character. Opportunity for the Bears

Earlier in the week, I offered that very short-term, nimble traders could sell the rally as stocks were beginning to look a little tired. I stick by that and still believe that’s a good strategy. Since then, several of our models have started to turn negative which changed my tone to be more defensive and less “risk on”. I think that will likely be the case into Q3 although that’s purely a guess. Of course, I could be wrong and might have to chase stocks higher down the road.

When I do a quick sector review, most of them look very similar with the exception of the defensive ones. They look tired which can be corrected by sideways movement or an orderly pullback. Utilities, REITs and staples look much healthier unless they close below their lows of last week. High yield bonds are holding up really well and that is one sector worth keeping front and center. Without junk bonds rolling over, it will be difficult for the bears to make much noise in stocks.

On the horizon we have the Fed set to meet this month along with the G20 and the anticipated meeting between Trump and Xi. Either could be a positive or negative catalyst although I have a tough time believing that Powell & Co. will cut interest rates this month.

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Sell the Rally? Mexico, Mega Mergers and Meat

The markets start the new week with an absolute cornucopia of news. We have mega mergers, Mexico, meat and employment. Obviously, the most important news comes as no surprise to anyone; the deal with Mexico to avoid the first in a series of tariffs on Mexican goods in response to the border and immigration. Stocks rallied sharply last week with an expected deal with Mexico as a significant contributor. The weaker than expected employment report on Friday was greeted with cheers as the markets were now expecting the Fed to cut interest rates at least three times by the end of Q1 2020.

After the strong run last week and the big up opening expected today, the stock market certainly has the feel of an opportunity to sell the news for the very short-term, nimble trader. Just like stocks went down very far an very fast, they rebounded in similar fashion. There is nothing wrong with taking a few chips off the table for a few days or so. Let’s see which indices and sectors lead today and how they close. Utilities saw a big downside reversal on Friday. If other “risk off” sectors follow, that could see funds eventually flow into my four key sectors which are “risk on”.

I want to finish by offering a few comments about the hottest IPO of 2019, Beyond Meat. The stock has now surged from roughly $40 to more than $160 in about a month. While everyone was focused on Lyft and Uber, this teeny, tiny company with a sliver of revenue has gone absolutely parabolic, reminiscent of the Dotcom days. There is no way to justify this behavior. It’s pure speculation, greed and froth. I don’t care about its future prospects. Should we start to see other IPOs behave like this, we will have a much bigger problem on our hands. For now, I consider this  a one off.

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Stocks Bottom on Schedule Catching Most By Surprise

For the last two weeks, I have written about the bottom I saw coming and how I would favor stocks over bonds. I didn’t write about a 10%+ correction nor a bear market beginning. I was very clear that I thought the stock market was experiencing a routine, normal and healthy bull market pullback that began on May 1 after the last Fed meeting. On May 13 as many of our short-term indicators signaled that the vast majority of the weakness should be over, I was concerned that the decline did not seem complete. I thought we needed to see at least one more move to new lows where the major stock market indices did not close near their lows for the day. We saw that on May 29 and again on June 3 where the pullback appeared to be over.

As I write about all the time, bull markets typically end a certain way. At the peak on May 1, there was not a single indication that the bull market was ending. As the pullback gained steam, there was an ever-growing chorus of gurus calling for the end of the bull market for all of these far fetched reasons like tariffs and recession. The market said otherwise. I was surprised at how investors were reacting to a little ole 6% pullback.

Option traders in the bottom half of the chart below were positioning for much lower prices. As you know, en masse, they are usually wrong. Sentiment surveys were showing a spike in bearishness that is usually seen after at a 10% decline. I don’t what had people so amped up for lower prices, but they were quickly punished.

As stocks bottomed this week, the media scrambled to assign credit for the low. First it was Fed Chair, Jay Powell, who essentially said nothing new. Then it was some mildly weaker economic data followed by hopes that a deal with Mexico would be reached. Today, we hear that stocks are rallying because monthly jobs data was weak and would lead to a rate cut. I also saw the media say that stock are up because Chinese President Xi said he likes President Trump. You just can’t make this stuff up.

As stocks have been rallying, look at the lower chart below which represents the number of stocks making new 52 week highs on the New York Stock Exchange. There is real underlying strength here and clearly no sign of a bear market or major collapse.

Finally, among many things in the media which have been wrong, I found it so beyond “curious” that word leaked out that famed investor Stan Druckenmiller had sold all of his stocks and bought treasury bonds after Trump’s tweet regarding Mexico. What took so long? Why did it come out precisely as stocks had bottomed? The skeptic in me wonders whether the timing coincided with Druckenmiller trying to buy stocks again after they already left the starting line.

It’s amazing how quickly stocks turned on a dime and the news narrative has changed from all of the negative consequences concerning tariffs and the coming recession to the Fed about to begin a rate cutting cycle which would rescue the economy and markets. My tune has never wavered. The bull market remains alive and al-time highs should be seen in Q3.

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Volatility to Continue But Bull Market Remains Alive

Last Thursday night, I wrote a quick piece about the latest tariff tantrum from the President. Early indications were that the stock market was looking at a very ugly opening on Friday. Bears were hoping for an all-out rout, but I wasn’t sensing that. In the end, most of the major indices closed slightly lower than they opened, meaning that not much transpired during market hours.

As we start the new week, I would expect the bears to make some more noise sooner than later. Pre-market indications have stocks down again. Whether it’s today or tomorrow, the bulls should try and step up to stem the tide. If Monday is a big down day, I would froth at the mouth to buy a down opening on Tuesday. If Monday morning sees another wave or two of selling, I would use that as an opportunity to commit capital to stocks.

Stocks are down 6%+ from the May 1 high. Investors are acting like it’s down 10%+. Sentiment is very negative. Options traders are lining up with negative outcomes. The New York Stock Exchange Advance/Decline Line hit its all-time high last Monday as you can see below. 90% of the time, bull markets don’t end like this.

June should be a volatile month and the bears could push a little lower before all is said and done. However, at this point, investors need to be on guard for some out of the blue good news to reverse the trend. Yes, as much as it pains me to say, it could be a tweet.Gold is acting well as are emerging markets. Be careful with long-dated bonds. They have melted up and ripe for a downside reversal

The bull market is definitely not over and I am looking for all-time highs in Q3.

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Here We Go Again. A Fresh Tantrum

As you know I have been waiting for a better set up for the stock market to find a low. Specifically, as I mentioned the other day, I wanted to see more downside early in the day which led to a close that wasn’t in the bottom of the range. That would serve as a revisiting of the May 13 low. We saw that did happen on Wednesday and it should have at least stemmed the tide. However, as has been the case for the past month, markets remain on “Tweet Watch” from Donald Trump regarding his tariff tantrum. What a way for investors to manage money! At some point, however, stocks will begin to ignore this behavior although I do not think it will be on Friday with the latest attack on Mexico.

As Whitesnake wrote and sang beginning in 1987, Here We Go Again!

The important question is will stocks close at new lows for the week and at their lows for the month. Clearly, the bears are looking for an all out assault to force more selling after what looks to be another ugly down opening. At this point I can only say that it doesn’t have the feel of a rout, but I am just speculating. We shall see what comes after the open.

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Back in the Saddle. Bottom Getting Closer

Let me start by apologizing for going dark last week. I had a little accident with a tree and the tree won. I ended up in the hospital and just focused my work efforts on running our strategies and not doing any writing.

And after not publishing last week, not much has changed from where I left off in the markets. I was in the short-term pullback camp after the May 1 peak, but it looked like much of the damage was done into the May 13 low. I say “much” because the decline did not look complete on the 13th, even though a rally ensued. After Tuesday’s drubbing, the market is much closer and I am watching to see the major indices break to new lows, not close in the bottom 25% of their daily range and then stabilize.Risk on indices are leading on the downside so that will need to change as well.

Tomorrow, I will dive into sectors, high yields and some indicators worth watching down here.

 

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Tweet Watch Again

Although our models were flashing numerous green lights at the close on Monday, I wasn’t convinced that the final low was in. And nothing this week has made me feel any more comfortable. I am definitely not concerned about meaningful decline in the stock market, just that the 5% pullback doesn’t seem complete. Of course, you could push back and say that I am being too cute with such a relatively small decline and you would be right.

What bothers me is how the market bottomed, but that has been more the case of late during declines, mostly due to the machines doing so much of the trading today. The economic backdrop has been fairly strong with jobs, inflation and today’s 15 year high in consumer sentiment. Housing and auto remain weak, but they don’t seem to be spilling over into anything else yet. Don’t minimize the deal cut with Canada and Mexico today regarding the removal of tariffs.

Sector leadership has been good, but I certainly don’t like how weak semis have been over the past few weeks. The Dow Industrials and NASDAQ 100 are the unusual leadership couple in the major indices, but something will have to give there before month end.

I can’t believe I am going to finish with this, but I am sure many people will be on tweet alert this weekend. Just hard to believe…

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THE Bottom or A Bottom? Banks Looking Good

After Monday’s mauling by the bears the losses mounted to roughly 5% and was pretty much in straight line fashion since the May 1 FOMC meeting. In other words, for all the fire and brimstone by the bears, all we have see, so far, has been a normal, routine and what I will call “healthy” single digit, bull market pullback. Very little internal damage has been done.

The Dow Industrials said hello to its long-term trend, the average price of the last 200 days, but no other index has made that trip. You can see that line below in the pink. I am not viewing it as all that important.

At Monday’s close a whole of our models and indicators flashed green, meaning very favorable conditions ahead to own stocks. Since we take any defensive action ahead of the decline, we really didn’t have much dry powder to use on that new green signal.

One thing that bothers me is that stocks closed near their lows on Monday and jumped higher out of the gate on Tuesday. That’s a very atypical fashion to put in a bottom. I would rather have seen some more short-term weakness. As such, I am keeping that scenario open, where we may see another decline below Monday’s lows. Regardless of which scenario stocks follow, I remain firm that this is not going to be a full-fledged 10%+ correction and that the bull market is not over. Furthermore, all-time highs should be seen in Q3.

Sector-wise, although I still really like technology, I would rather buy it at lower levels with new money. The banks interest me right here and right now. Sentiment is poor on the sector and I don’t hear anyone talking them up. That’s the kind of trade I like. Additionally, it’s hard to argue with the behavior in the defensive area, specifically staples, REITs and utilities. They are certainly signaling slower economic growth and a thirst for yields.

I think I need to do a bigger update outside of the blog. Maybe tomorrow.

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Tariff Tantrum Continues

The markets’ tariff tiff/tantrum is now a full blown tantrum. “I don’t want tariffs! I don’t want tariffs! I don’t want tariffs!” The truth is, as I wrote about before, the markets were setting up to pause, digest or even pullback modestly after the Fed meeting on May 1. They were just looking for that excuse which came in a big way over the past week or so.

After another big down opening, stocks are continuing to slide lower, the sign of a heavy trading day; one that is unlikely to reverse. Technology is leading the way on the downside. I saw one of those clown floor traders talk about lower prices coming. He was the same guy who talked about a rally on Friday. I will never understand why the networks interview these order takers who don’t manage money, don’t do any research and just execute someone else’s opinions. They seem to be uniformly wrong at every turn.

Anyway, this pullback looks like your typical single digit bout of weakness that comes along every year in a bull market. It started from an all-high and the decline has been sharp. That’s not how bear markets begin. In just a few short weeks we have indices revisiting their average price of the last 200 days while others are seeing multi-month lows. Very typical of bull market pullbacks.

Assuming there isn’t a dramatic reversal late today, we have to be on the lookout for a turnaround on Tuesday. What we don’t want is a large gap higher on Tuesday that runs straight up into the close. That would cause me to look for another decline. Rather, the best thing for the bulls would be a moderate down open that reverses during the morning and traps the bears.

Finally, Uber came public on Friday and I had the same opinion regarding buying the stock as I did with Lyft. Stay away. I did a Special Report on hot IPOs in March and it still holds true for Uber and the rest. I’m just not interested in joining the parade of suckers buying from the smart people selling.

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Pullback Continues? All Eyes on Twitter. REALLY???

Lots of intra-day movement this week after stocks peaked on May 1 when the Fed concluded their two-day meeting. After 30 years in the business, I keep saying that few things surprise me anymore, but I have to say that watching traders and market participants glued to Twitter for any sign of tariff walk back by the president is certainly a first for me. I can’t imagine what the great investors of yesteryear are thinking as they down on us from up above. Are the masses really hanging on every tweet from the leader of the free world? Apparently so.

At this point, we have now seen the largest pullback since the epic Christmas low and it’s not even 4% yet. I am already seeing some preliminary signs of a low although they would be much better if stocks had a few more down days. You already know my conclusion. This is a normal, healthy and routine pullback that should be bought. The bull market isn’t over and it certainly is not a bear market as bond guru Jeff Gundlach continues to espouse. I like Jeff’s work and respect his track record of success in bonds, but he is way out of his lane regarding stocks as he usually is.

From here, I am going to offer two scenarios which I imagine your response to be “Well, DUH.”

1 – Stocks bottomed this morning and should begin a rally towards the old highs.

2 – Stocks have another few days to a week lower before bottoming.

I think those are the most likely paths to the end of June. The next rally should see tech, financials and transports lead which are all “risk on” sectors. The rally in high yield bonds shouldn’t be over either. Things still look pretty good, regardless of what may or may not be tweeted while I sleep. Friday should be a volatile day as we will either see Trump postpone the new tariffs and cause an early rally or forge ahead and then see some early weakness. I will continue to buy weakness.

In closing, I find the timing of the new tariff tiff oddly curious, coming on the heels of the Fed not accommodating Trump’s dovish wishes. As stocks pulled back, the odds of an interest rate cut towards the end of 2019 to early 2020 roe to 75%.

 

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