Green Shoots for the Bulls After Fed Selloff

As expected by almost everyone, the Fed stood pat on Wednesday. I was shocked to hear some pundits predicted a rate hike. That’s one of the dumbest forecasts I have heard in an awfully long time as the Fed has become almost too transparent and too accommodating to the markets. A rate hike out of nowhere?!?! That made me laugh out loud. Stocks sold off after the announcement for the second straight Fed meeting, in direct contradiction to one of the Fed trends I write about. We’ll have to see going forward if that edge is being arbitraged away or just temporarily not working.

As I mentioned, stocks sold off yet again yesterday even though tech behemoth Apple saw very strong earnings. So much for the pundits’ smug comments about Apple leading stocks and record earnings insulating stocks from decline. The stock market continues to be under pressure, but there doesn’t seem like there is much urgency nor panic. That would be better for the intermediate-term. While I am starting to see some positive signs beneath the surface (green shoots???), I think it would be healthier for the bulls if the Dow could see a mini plunge towards 23,000.

Looking at risk/reward, it looks like Dow 23,000 on the downside with the reward being 27,000 over the next quarter or so. That favors the bulls, but it will certainly not feel so good if stocks fall to new 2018 lows first. None of the four key sectors are getting much love, especially semis. Neither are junk bonds. Leadership looks very narrow right now and really concentrated in commodities and energy. That doesn’t exactly warm the heart of the long-term bulls as this is classic late stage behavior and does warn that the next rally could be the last one in the 9 year old bull market. However, let’s not forget that the NYSE Advance/Decline Line recently made a new high, even if only by a whisker. That usually insulates stocks from a bear market for the next 3 to 21 months. In our case, I don’t think it will be the latter.

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Crosscurrents Abound in May but Fraught with Risk

The month of May begins today. It’s supposed to be spring although you wouldn’t know it in New England on Monday as folks had on hats, gloves and down jackets. The weather is finally looking up in CT as the forecast calls for 70s and 80s this week. I think the bulls are hoping their forecast heats up this week as it’s been cold for stocks of late.

As you know from my blog posts since April 18 I have been much more concerned that the February and April lows could give way to a quick elevator shaft decline towards or below 23,000 on the Dow. It’s a scenario I am watching closely. I would feel a whole lot better for the bulls if we saw some confirmation in the form of a day or two where at least 80% of the volume (shares traded) was in stocks advancing. 90% would be even better. This kind of conviction has been sorely missing since the rally began.

Turning to May which was really the point of this update, like January, there are a number of trends that fire off, both short and intermediate-term. Let’s review them and give proper attribution.

1 – Today is May 1 which has become one of the most seasonally strong days of the year, more so in magnitude than winning percentage. The odds favor the upside 70% of the time. It’s been very rare to see even a .75% down day. (Hat tip Rob Hanna of Quantifiable Edges)

2 – Today is the first day of the month in an ongoing bull market. The previous month closed poorly. 80% of the time, today is an up day with limited downside when the trend doesn’t work.

3 – May 1 begins the “Sell in May and go away” (SIMGA) trend that lasts until November 1. In other words, it’s the weakest 6 months of the year, averaging a gain of 1.5% versus 7% for the other 6 months. However, since the bull market began, only 2011 saw any weakness greater than 1% so that trend has been somewhat muted.

4 – I tweaked SIMGA to look at just those in midterm election years which has historically been a weak year. That worked tremendously well through 2002 with some real doozies on the downside including double digit declines in 2002, 1990 and 1974. Overall, stocks rallied just 1% since 1950.

5 – I further tweaked SIMGA to only examine the first term of a president’s midterm election year which have yielded the weakest of the weak results. 1974 drops off but so do some gains. Overall, it didn’t yield much. Stocks averaged a paltry 0.73% since 1950.

6 – Finally, as I was starting to research what happened when stocks were down through April and SIMGA began, Jason Goepfert from published the results so I will just copy his. I wish I could say “great minds think alike”, but I wouldn’t denigrate him by putting him in my category. When the year was down through April 30, SIMGA was also down by almost 3%.

Does all this even mean anything?

I draw two loose conclusions.

First, in the short-term, today is supposed to be up. If it’s not, regardless of what happens with the Fed tomorrow, I think stocks will continue lower and further open the scenario for a full breaks of the 2018 lows.

Second, there is enough of a seasonal tailwind through Halloween to suggest guarded optimism at best. In other words, when our models are not fully positive, it’s time to play defense and not be complacent. This is such a far cry from what I have written about 80% of the time since the bull market began 9 years ago.

Now is definitely not the time to be cavalier and and regard every decline as a buying opportunity with an easy recovery period. While I still absolutely do not believe the bull market is over and Dow 27,000 is coming, risk has increased dramatically this year and investors should be on guard.

As always, we will take it one day at a time and assess the evidence. If you have any questions or would like to schedule a meeting or call, please contact the office or click here for my calendar.

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Huge Week Ahead. May 1st VERY Bullish

Stocks begin the new week with the bulls on the optimistic side. Yes, the tariff deadline looms, but we also have the Fed on Wednesday, employment report on Friday and earnings scattered throughout the week. Lots going. Lots of ammunition for the bulls, or so they say.

I am not as encouraged for the same reasons I discussed last week and the week before. Lower before higher although I am sure I will feel squeezed if stocks break out to the upside with repairing any of the existing damage. Semis, junk bonds, lack of upside confirmation are all weighing on stocks not to mention the “ominous” 3% yield on the 10 year note which I don’t find to be so dangerous at all.

Today is the end of April and one of the strongest seasonal days of the year is tomorrow. 21 of the last 31 May 1’s have been higher. That’s pretty good. Another opportunity for the bulls to scream. I would become even more concerned if stocks opened higher today and then closed towards the bottom of the range followed by more selling on Tuesday. Let’s see what happens.

Lots going on this week.

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Don’t Let the Bulls Fool You; Bears are in Control

Turnaround Tuesday didn’t work out so well for the bulls,  but they did muster up some strength to rally on Wednesday and Thursday. Still, we don’t have a single day where 90% of the volume was in stocks going up. That’s sorely lacking to give the bulls some comfort. Lots of folks were crowing on Thursday about the NASDAQ 100’s regaining leadership with Microsoft, Facebook and Amazon blowing out earnings to the upside. However, let’s not forget that the market has not rewarded big earnings beats this quarter for more than a few hours.

I remain concerned.

Discretionary, healthcare and energy are the new leaders. That’s okay, but not what we typically see during the strongest markets. And don’t forget, energy is almost always a leader at the end of a bull market. High yield bonds are hanging in, but only by a thread and they certainly are not leading. The 10 year treasury note finally hit 3% as I wrote about in February. Now, just maybe it can peak.

I continue to see lower before higher, but new highs remain in my forecast above 27,000. I guess there is a chance that stocks run higher without doing all the things I want to see first. However, that would likely spell the end of the bull market later in 2018.

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Turnaround Tuesday, Semis & 3%

Just a quick comment regarding the short-term state of the market. With the current pullback lasting through Monday, there is a possibility for a rally beginning on Tuesday, also known as Turnaround Tuesday. This scenario is usually more important and prominent when stocks are in the throes of a more significant decline and momentum is strong. We do not have that now.

I bring up Turnaround Tuesday not so much because I think stocks are at important bottom, but because of the potential for more downside if some kind of rally does not materialize. And taking that one step further, if the major stock market indices close below Monday’s lowest levels, that should lead to an acceleration lower.

As I wrote about on Monday, semiconductors continue to be a concern along with junk bonds. Semis have now exceeded the April lows and appear to be headed to say hello to their average price of the last 200 days. After that, the group is headed to the February lows. Along with high yield bonds, semis need to be watched closely here.

Finally, don’t forget about the 10 year treasury note yield. The “all-important” 3% ceiling should be kissed this week. Stocks shouldn’t like that. However, I think the first run through 3% will likely be rejected sooner than later. That COULD lead to a stock market low.

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Bears in Charge as Bond Yields Rise Again

The bears certainly won the day on Friday to end the week. While stocks did close off the lows with the typical late day buying into the bell, stocks fell back into the equilibrium level we have seen of late. The bears have the upper hand to a small degree. While the transports, banks and discretionary are hanging in nicely for now, semis continue to be under severe pressure. They are now at risk of breaking the April, testing their average price of the last 200 days and possibly heading down to the February lows. This group is vital to market leadership and one we must watch closely.

The other area of concern is high yield bonds, an investment I often write about.They are just not acting well. While that doesn’t have significant impact in the short-term, it does keep me on my toes given how old the bull market is as well as how strong a warning junk usually gives.

In late February, I wrote about bond yields, something I watch all of the time, but rarely write about. At that time, I said bond yields were not peaking. Two months later, we have bond yields rallying once again. Look for the media to have BREAKING NEWS once the yield on the 10 year treasury note hits 3%. Once that happens, yields should be close to topping out as the masses realize they are rising.

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Bears Starting to Throw In the Towel

Over the past week or so, I have written about some price levels I wanted to see exceeded to turn the picture a little more bullish. Since then, all five major stock market indices have closed above those levels. After that I wrote about the “key” reversal last Friday that had some analysts calling for the end of the bull market. The market immediately rejected that rejection. Then the bears hung their hopes on the “magical” 50 day moving average. On Tuesday, every major index closed firmly above their average price of the last 50 days. The bears cried about the lack of volume. Stock market volume just surged.

I think the bears have started to throw in the towel. And that now makes me a tad nervous.

During Tuesday’s rally, banks closed lower and are reacting negatively to good earnings. High yield (junk) bonds, while rallying nicely, closed near their lows of the day on Tuesday. Stock market participation in the rally is decent, but from resounding and we still do not have a single day where 90% of the volume has been in advancing stocks. That’s not the type of action that leads to a strong and sustainable move higher. It’s what you sometimes see before a rally ends.

I guess what I am trying to say is that after not worrying too much about the short-term for a while, I am now growing more concerned. Before the emails come in, I still believe the bull market is intact and Dow 27,000 remains on tap. I am just not sure that stocks are going straight to new highs from here. Let’s see what the coming few days bring…

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“KEY” Reversal and the 50 Day Moving Average Boogeyman

On Friday, the major stock market indices saw yet another “dramatic” reversal as strong early gains were not only given back but also turned into losses during the afternoon before closing off the lows. People who look at charts usually forecast further weakness ahead with some even using the one day pattern to call for the end of the bull market. I think you have to take these kinds of days in context. One day doesn’t end a bull market or cause a selling stampede. And if/when the reversal day is closed above, it becomes moot anyway.

Besides the reversal day which you can see on the right side of the S&P 500 chart above, you can also see the light blue lines which have defined the range stocks have been in since late January. In other words volatility has gone from extreme to more moderate as the lines continue tighten and will eventually converge over the summer.

Additionally, there seems to be a fascination now with the dark blue line which is the average price of the last 50 days, also known as the 50 day moving average. Pundits are saying that stocks are struggling to regain this line, especially since the line is descending. IF all of the major indices were in the same position, the conclusion may have merit. However, with the S&P 400 and Russell 2000 above their own 50 day averages, I dismiss the conclusion as nonsense. In fact, I wouldn’t be at all surprised if all five major indices closed above their 50 day averages and then we saw another pullback in stocks to trap those people.

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Bulls Looking Up. The Absurdity of Exact Price Levels.

Yesterday, I wrote about some “key” price levels to watch. I put quotes around it and chuckle because there is some level of absurdity with getting too cute about a given exact price. That’s one of the many flaws of analysis. S&P 500 2675 is “vital” but not 2674 or 2676? Technicians get way too caught up in exact numbers rather than small ranges which makes a whole lot more sense. And remember, the market will always do its best to confound the masses, especially when everyone is focused on a certain price.

The most important thing about this week and Thursday was that the NASDAQ 100 and Russell 2000 are now leading. Many would call that “risk on” which is what you want to see during a rally, especially off of a bottom. That needs to and really should persist for a while.

Semiconductors have done very well, not only holding well above the February lows during the last decline, but they are also leading. That’s a very good sign for the intermediate-term. Banks on the other hand are not leading but are also not breaking down. I do think this group will lead again and likely see new highs sooner than later. Almost the same thing can be said about consumer discretionary although they are a drop weaker than banks. While I am at it, let’s put transports in the same category as discretionary.

The weaker looking sectors are mostly defensive, utilities, staples, REITs and telecom. That’s exactly what I wanted to see coming out of the bottom. Materials, healthcare and biotech are all on the weaker side which does not concern me at all.

After being left for dead so many times, energy is FINALLY showing some real leadership and outperformance which goes along with my commodity theme for 2018. Energy is typically a late stage bull market leadership group and this fits in nicely with theme of the bull market being in final inning or two.

Things continue to look up for stocks although I don’t think the full all-clear has been sounded. I continue to favor buying weakness and adding risk into weakness. I also want to ignore the laggards and not anticipate when they start to lead. There should be plenty of time.

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All Time Highs on Tap. A Few Key Prices to Watch

Let me begin by answering a few emails after my last couple of updates. Yes! I continue to believe that fresh all-time highs are ahead for stocks with the Dow hitting at least 27,000 in spite of the increase in pundits calling for the end of the bull market. Stocks seem to be in the second half of the bottoming process, regardless of whether we see Dow 23,000 or a move above 24,700.

The major stock indices continue to thrash around without making much progress up or down. While this is not typical of the bottoming process, large day to day swings can often frustrate bulls and bears and lead to a reversal. In this case, that would be higher.

A quick look at the five major indices yields the following price levels that I want to see closed above for a little more comfort.

Dow 24,700

S&P 500 2675

S&P 400 1900

Russell 2000 – already higher

NASDAQ 100 6800

All of these levels are only one strong day away. Additionally, since we have seen three days where 90% of the volume (number of shares traded) has been in stocks going down, I also want to see at least three days with 80% of the volume coming in stocks going up. 90% would be even better, but I am not holding my breath.

One other piece of outside the box data comes from the media requesting my comment or appearance. It’s hardly scientific and I don’t have all of the data points in a tidy spreadsheet. However, whenever I get a cluster of requests, stocks have traditionally been very, very close to a low or high. The more requests, the stronger the low. I kind of view it as volatile markets lead to more coverage and when they run out of their usual smart folks and the others, they get to me. Two weeks ago at Dow 24,000 I had 6 requests in a short amount of time. Hmmmmm…

Tomorrow, I will move on to sectors and junk bonds where the evidence isn’t as compelling as in the major stock market indices.

It feels like spring today, for the first time. Upper 50s and sun. I see the driving range in my plans. Tomorrow and Saturday, they say 70s. And then back to the 40s. You know what Mark Twain said about weather in New England? “just wait a few minutes”…

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