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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Volatility Still Elevated. No All Clear Yet

So Paul, (yes, I am speaking in the annoying third person and I hate it too), it seems like every day there is a dizzying array of news and events. 500 points up, 400 points down, 300 up, 400 down. Employment report. Tariffs. New technology regulations. And earnings season is about to begin. Volatility remains elevated as has been the theme all year. Three times, Dow 23,500 has been visited and all three times buyers stepped in the thwart off the bears. I wouldn’t bet that the fourth time will be as successful, but let’s cross that bridge if and when we get there.

For now, the Dow (and rest of the stock market) has established some short-term markers to watch as you can see below with the blue horizontal lines. Closing outside of this range “should” lead to more movement in the same direction. I originally thought that the entire decline would wrap up by the end of the first quarter, but the market doesn’t seem ready for prime time just yet. Perhaps, that happens with a break to 23,000. Or it’s still possible that the bottom is in, but the rally hasn’t started in earnest yet.

A few other comments. Even if the Dow breaks lower one more time, I don’t think all of the major stock market indices will see new lows. Also, the volatility index (VIX), which peaked above 50 in February is just above 21 now with prices near the old lows. In other words, momentum isn’t nearly what it was in early February. I am also somewhat heartened by the weakness in the defensive sectors regardless of the rallies or declines.

The number of jobs created in March came in much weaker than expected. However, the much stronger than expected February number was revised higher. Put them together and you have two good months averaging roughly 200,000 this late in the economic cycle. But the real story continues to be tariffs and Trump’s protectionist tactics. As you know, I vehemently disagree with this plan and believe, if implemented, it will lead to recession. Remember, announcements are one thing, implementation is another. Contrary to popular belief, no tariffs have begun yet. It’s a process that will take weeks or even months. And I do expect some type of negotiation to occur with the Chinese. They’re not stupid people and have much more to lose than we do although no one wins in a trade war.

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Major Reversal Puts Ball in Bulls’ Court

Stocks saw a very large reversal on Wednesday from being down 500 points to closing up more than 200 points. That would have been absolutely textbook if the price lows were below the lowest level of the correction which occurred on Monday or February 9th, depending on which index you look at. Technically, the price behavior has satisfied all that is needed to end the correction and begin an intermediate-term rally. However, I am not 100% convinced just yet.

First, I do want to see a rally begin that’s powerful and doesn’t start and stop. Strong initiations of up legs typically do not let investors buy comfortably nor pullback early on. The first move off of a bottom is usually the strongest and straightest up. Second, we need “risk on” sectors to lead. Technology, banks, materials, discretionary, etc. We don’t want to see the defensive sectors like utilities, staples and REITs in charge. Third, high yield bonds need to step up, not just get dragged higher with everything else. And finally, we need to see broad participation in the rally. The rising tide should lift most ships early on.

I usually find it instructive to listen to the pundits on TV opine at key junctures in the market. This is one of those times. If the masses believe the correction is over, it probably isn’t. If they feel like there is more downside, the bulls should be good to go. However, with The Masters on, it’s one of those rare times where personal enjoyment takes precedence. And no, I am not a Tiger fan and do not believe nor want him to win!

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Trump Tariff Tantrum & 200 Day Moving Average

We woke up today with more of the Trump Tariff Tantrum. This time, China responded as everyone thought they would, but the markets reacted much worse with the Dow looking to be down 600 points at the open. I am much, much more concerned about where stocks close today rather than where they open. To wrap up this decline, I would either want to see a 1000 point down day or afternoon strength today. As I continue to write, tariffs and trade wars are just plain bad. I don’t care what the President tweets, no one wins. And then they spread. And prices go up. And job creation collapses. And recession ensues.

However, all we have so far is jawboning. The actual tariff process takes months before it is enacted. There will likely be negotiation. For our economy’s sake, let’s hope that the adults come to the table in good faith from all sides. If they fail, those tariffs will be one strong nail in the coffin of the economy and markets.

Turning to the markets, while I am still on the lookout for that elusive 1000+ point down day that takes the Dow under 23,000 to wrap up the decline, it may or may not occur. On Monday, all the talk was about the various stock market indices testing or visiting their long-term measure of trend, the 200 day moving average which is a just a fancy name for the average price of the last 200 days. Normally, I wouldn’t give this much thought, but when non-technical people and the media talk about market technicals and moving averages, it’s worth paying attention.

There is absolutely nothing magical about it or the number 200. It is very widely followed and people do make buy and sell decisions based on whether price is above or below it. Most people view the 200 day average as just a sign of trend. If prices are above it, the trend is said to be up. If prices are below it, the trend is down. In the computer based trading world, algorithms are set to flood the market with trades based on the price trading around this supposed “key” number. And these computer programs can actually force the hand of those investors who buy or sell based on this average.

Anyway, I thought it would educational to run through the various indices and point out where they have touched their 200 day moving averages or long-term trends of late. The Dow Industrials are first and you can see the purple arrow from Monday. If and when the Dow closes a day below Monday’s lowest price level, there will likely be some quick and sharp selling with the computers taking over.

The S&P 500 is next and you can see three arrows where price visited its long-term trend. The one in early February, as I wrote then, seemed a bit too contrived for me and I was not convinced that the decline was over. With two more touches lately, it certainly seems like there should be a little more downside coming before the bottom is in.

The S&P 400 is next and at the low in February you saw multiple touches of the 200 day. That was one reason why I thought this group could lead coming out of that low.

The Russell 2000 is below and it behaves similarly to the S&P 400. I thought this small cap index would lead coming out of the bottom and it performed really well into mid-March. As with the S&P 400, so far, it has remained well above the price levels seen in early February, a good sign for the intermediate-term once short-term stability returns.

Finally, the NASDAQ 100 is last and to most people’s surprise, this tech-laden index has yet to test its 200 day trend although you certainly wouldn’t know it based on the commentary from the pundits and media with the Facebook controversy. It seems like every day all we hear about is the tech collapse and tech bubble being burst and the end of tech. Reality over rhetoric says that not only has the technology sector not touched its long-term trend yet, but it is also holding above the price levels seen in early February.

I am going to stop right here with the charts and the 200 day moving average. I think you get the picture. It’s always helpful to know where that line stands so you understand that “curious” behavior can occur around those price levels. If prices stayed below their long-term trend and the long-term trend was declining, well, that would be a bear market.

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Stocks are “Supposed” to Bounce

This is going to be a short update as my car has a safety recall and I am late to drop it off. While I was on the look out for a 1000 down day to get the market to the end of the decline and middle of the bottoming process, the bulls jumped when the Dow was down 700+ on Monday and thwarted that attempt. I really wanted to see a full WOOSH lower that ended the day really poorly with perhaps one of CNBC’s SPECIAL Markets In Turmoil evening programming. We didn’t get that, but CNBC did extend market coverage for several additional hours.

Monday’s action was good enough to create a rally, but the jury is far from conclusive if we have enough to support the run to new highs I keep writing about. With so many “key” price levels being breached and closed back above, stocks are “supposed” to rally for a few days into the monthly employment report on Friday. I doubt that rally, if it happens, will say anything important about the bottoming process. The most beaten down sectors and stocks should bounce the most. I would become very concerned if the defensive areas like utilities, staples, REITs and telecom were the leaders.

While I still think Dow 23,000 should be kissed before the real rally begins, I am not dumb enough or arrogant enough to believe that it absolutely has to happen. We’ll see. For now, stocks need to keep the bears at bay and resist closing below Monday’s low. IF that should happen, the market would likely see some trap door selling and that big WOOSH lower.

Finally, there have all kinds of chatter about the “all-important” 200 day moving average being tested on Monday. Ignore it. I will create a slew of charts and post my comments about this indicator of long-term trend either later today or tomorrow.

Gotta run…

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Bottoming Process Continues with Decreasing Momentum

Last week, I wrote about stocks entering the bottoming process. After a decline of 1100 points in the Dow, there was a possibility that the correction which began on January 26 was ending. The only thing I did not want to see was a large up opening with stocks rallying all day. Well, that’s exactly what happened last Monday. It just prolongs the inevitable.

I still believe that there is a good chance of seeing a 1000 point down day, possibly this week or later in April to flush out the remaining sellers and establish a bottom. Dow 23,000 should be coming sooner than later and I would fully expect the pundits and media to focus their talk on the bull market ending and a new bear market beginning. As I continue to mention, that talk should be premature as stocks should not be done making all-time highs just yet.

As the major stock market indices grope for their final lows, I do not think all five will eclipse their February lows. In particular, the S&P 400 and Russell 2000 appear to be sufficiently strong enough to withstand another bout of selling.

On the sector front, although semiconductors are really taking it on the chin of late and especially since the Facebook revelation, there is a chance that they could stay above their February bottom. The same cannot be said of the banks, discretionary and transports which all seem poised for new lows this month.

Turning to my favorite canary in the coal mine, high yield bonds, you can see below that junk bonds are hanging in, but by no means are offering any reassuring clues just yet. Let’s see if they can resist this next round of selling in stocks.

Let’s now take a look at the NYSE Advance/Decline Line which measures participation in the market. With the February lows significantly lower, this indicator is showing less participation as stocks head lower, a positive sign of decreased downside momentum. But just decreased momentum won’t turn the tide.

Another measure of downside participation can be seen below. That’s the number of stocks on the New York Stock Exchange making 52 week lows. In other words, how many stocks are at their lowest price level in a year. You can see a big spike in early February to just under 600 stocks. Today, it’s only 59, another positive sign.

As has been the case all year, the volatility Genie is out of her bottle and she normally doesn’t go back in so quickly. Higher volatility was my theme for 2018 and that will continue to play out. I remain steadfast that the bull market is not over and fresh all-time highs are around the corner. It will be that anticipated rally where the opportunity to end the bull market will be.

This morning, China responded to the Trump administration’s tariffs with their own. As I continue to write, no one wins a trade war and this has the potential to end badly economically, especially as the Fed forges ahead with their unprecedented experiment of hiking interest rates and selling assets. Until recently, I haven’t written about recession in many years. Now, it’s on my radar screen for 2019 or 2020.

 

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In the Throes of the Bottoming Process

1100 point decline to end the week certainly makes people pay attention. It still feels like yesterday (or late January) when all the talk was about a year long stock market melt up.Tax reform, 700+ regulations killed, GDP accelerating. All paths led higher. Almost every day, Donald Trump celebrated fresh all-time highs and used the stock market as his report card. Oh, the good ole days!

As I wrote about last week, I don’t believe it’s about Facebook or Trump’s revolving door White House or Stormy Whoever. Given that we saw red almost across the entire board, this was a liquidation of assets leaving equities. While Treasury bonds fared fine, it wasn’t the old fashioned flight to quality everyone has become used to seeing over the past 35 years. Crude oil rallied. Gold did too. Agriculture commodities look to be primed to be move higher. In my 2018 Fearless Forecast, I wrote about the very long-term view of commodities and I think they could have a decade-long runway ahead.

Anyway, the Dow was under significant pressure last week and is only a one day decline from my original downside target of 23,000. Interestingly, in a somewhat more complex path than I originally laid out, stocks are back to behaving most like scenario #1 again as shown below. We had the mini-crash followed by the snapback rally that went further than I thought and now a longer than usual revisiting of the mini-crash lows. The final step in the bottoming process is here, assuming my bullish outlook is the correct one, and it could take a few days or longer to solidify.

As such, the major stock market indices are supposed to hammer out a bottom this holiday-shortened week. And it’s really supposed to be on Tuesday or Wednesday if you want to get greedy. It’s as simple as that. With one more SWOOSH lower all of the requisite items would be in place for the low that leads to all-time highs again. And it looks like the Dow and S&P 500 are the most likely candidates to see the final selloff below the February lows while the S&P 400 and Russell 2000 should remain comfortably above those levels. The jury is still out on the NASDAQ 100.

Now, if it were only all that easy!

What is “supposed” to happen and what actually happens sometimes diverge. And comes some counter intuitive analysis. After two bloody days last Thursday and Friday, the best path if you are a bull is for a large down opening on Monday that makes headlines and creates fear. If stocks don’t find buyers after lunch, then a down 1000 would be in the cards. If stocks found buyers after lunch, then a bottom could be cemented by the close. If not, Tuesday would shape up to be the pivotal day.

If stocks up sharply higher, that just prolongs the bottoming process. While it may feel good to see a bounce that would push out the ultimate low until the rally fizzled out and a breach of Friday’s lowest level was seen. In this case, there could be a failing multi-day snapback where all of the talk in the financial media centered around the successful retest of the February lows.

With overnight action in the green so far, it preliminarily appears as though the latter scenario could be unfolding. That’s the more difficult of the two.

Over the past week, I have received an unusually high number of emails regarding my bullish and still positive outlook for stocks over the coming quarter or so. Almost all have been on the negative or opposite side of my view. First, please keep the email and tweets coming! Everyone wins when there is debate. I certainly don’t hold the patent on offering market forecasts and I am always one to listen to other views. My good friends in the industry will attest that when I offer my forecasts to them, I usually ask them how I am going to be wrong. What am I missing.

The other night my son and I had dinner with some ski friends in Vermont who are also industry peers. As usual, my friend Rich and I spent a good deal of time discussing Trump, the economy and of course, the stock market. Sometimes we are in full agreement while other times we are on opposite sides. Never a voice raised or name called unless it’s from our wives. The thing about Rich and me is that it’s not important who ends up being right or wrong. If either one of us can help the other to consider a different scenario or uncover new information we both win. And we both agree that we would happily be wrong forever in our opinions as long as we make money in the markets.

That’s the glaring difference between people who offer market commentary without any consequences and those of us who manage money with the proof being our daily, weekly, monthly, quarterly and annual performance. Commentators, strategists and analysts can dig their heels in and call for a massive decline year after year after year. Eventually, they will be proven correct. If you ran a portfolio like that, the likely scenario would be losing most of your clients’ money and/or being terminated.

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