Bulls Cede Control from Bears

Friday was a very good day for the bulls on the heels of a little reversal on Thursday that pierced the recent lows on the Dow, S&P 400 and Russell 2000. While I would have preferred the S&P 500 and NASDAQ 100 to have joined that party to run the weak money out of the market, it’s not the end of the world.

You can see what I am talking about below in the lower right side of the chart of the Dow.

With the bulls having fended off the bears for now, the next key price area will be around 26,450. The Dow and its index cousins all need to close above their recent rally highs to really confirm the worst is behind us and all-time highs are up next. At this point, the bulls have the ball, but I don’t have very high conviction that stocks will scream to new highs. As I said last week, even though the decline did not look complete (it did after Thursday), in this case, I was okay being a little early than late given the relative shallowness of the decline.

Now, I am looking for leadership. Semis have and continue to step up which I love. The other key sectors have a lot more work to do. Defensive groups continue to trade at or near all-time highs, which has really been the case all year as the economy has weakened. Let’s see what high yield bonds do the rest of the month.

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Bear Clowns Wrong, AGAIN – Dow 28,000 on the Way

The news backdrop certainly isn’t good. Trump adds tariffs. China threatens retaliation. Hong Kong protests. China readying to “invade”. Germany and Italy in recession. Yield curve inverts in U.S. Recession fears explode higher. All of this sounds so bad. Like there is no hope, just darkness.

Yet stocks are merely 6.5% from an all-time high. 6.5%!

I will go one step further. News like I mentioned more often occurs as the stock market gropes for a bottom than puts in a meaningful peak. News like this creates fear, not greed and fear is the emotion that happens during market lows, not near highs.

The S&P 500 has pulled back 6% on a closing basis since its last all-time high on July 26, just like it has done more than 30 times since 1950 (5-9.9% pullback). Yet, the vast majority of what I am watching, hearing and reading is making people feel a whole lot worse and believe that stocks are down more than 10%. As usual, the data do not support the conclusions of the masses.

Additionally, short, sharp declines from all-time highs are not how bear markets usually begin and that’s not what we saw in 2007 and 2000. Short, sharp declines from all-time highs are typically recovered from in less than two months.

With all that said, as I type this, I do not believe the final low is in just yet for stocks. However, as I said on multiple TV programs this and last week, I didn’t think it paid to be too cute here. In this case I wanted to be positioned a little early than a little late. Most or much of the price damage has already been seen, but the decline does not look perfectly complete right now. While that could change very quickly, Dow 25,000 or even 24,500 wouldn’t not be a shock as I have written about for the past few weeks.

Lots and lots of people watch the average price of the last 200 days as a gauge of the market’s overall trend. Some say it’s a self-fulfilling prophesy when price gets close as humans and the computers push it to the finish line. Below you can see the Dow and S&P 500 with the pink line representing the 200 day moving average.

Over the past 19 months we have seen a number of times, especially on the left side of each chart where price came down to kiss the pink line and then rally. However, we also saw last fall where that long-term gauge of trend did not hold. On the right side of each chart, you can see the Dow saying hello to the pink line right now, while the S&P 500 remains a bit above it.

The bottom line is that in the strongest markets, price normally holds at or around the pink line. Conversely, in the weakest markets, rallies are capped at or near the pink line on the way back up.

When looking for opportunities today, a barbell approach, usually reserved for bonds, is one that makes sense to me. By barbell, I am looking for some less volatile sectors on the left side and some more volatile sectors on the right side. Staples, REITs and utilities would fill the left while semiconductors would fill the right. Right now, I am not all that interested in things like industrials, materials, energy (although it should see a big bounce soon), biotech, retail and banks (although diversified financials look much better).

Finally, and the answer to the question everyone keeps asking over and over again, the bull market remains intact and will need to see at least another fresh, all-time high before the possibility of a bear market enters my thinking. There are too many positives and not enough serious warning signs in the financial markets to build the foundation for a bear market, no matter how many people are hoping and praying for one for some moronic reason.

The bear clowns are alive and well in the media and on Twitter, still beating their chests for the 10th straight year. Their wildly negative, gloom and doom forecasts sell well during interviews and scare the masses, but have done nothing to help investors make money. This bull market remains the most hated and disavowed in history and until the retail public returns to invest, stocks will move higher on balance.

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Nope. Not a Bear Market

As I continue to write about, while much or most of the price damage should be over, day to day volatility is not. Worries have shifted from tariffs and a trade war to civil unrest in Hong Kong which is also associated with China. Remember, regardless of the situation, there is always, always, always “major” news surrounding a market’s attempt to bottom. That’s just how it is.

It seems like every single time stocks pullback at least 5%, I get hit with questions and proclamations about the bull market being over. The bears start pounding their chests and telling me how wrong I am while the bulls get anxious and worry about the downside. Then the bottom comes. I haven’t wavered once in 10 years that I thought higher prices would result from whatever decline was unfolding and I am not changing that tune here.

The data do not support a bear market beginning.

However, that doesn’t mean that one is impossible, just very unlikely. I will be doing my canaries in the coal mine issue of Street$marts shortly to review the various markers for a bear market to begin. For now, as I mentioned on Making Money with Charles Payne last week, I think last week’s lows represent much or most of the price damage for this pullback although I would not rule out a quick breach of those levels later this month.

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Stocks Thrashing Around for a Bottom But Other Markets Hold Clues

Volatility happens in both directions. That has been the theme all week. Anyone who has bought strength or sold weakness has been left holding the bag. And I don’t think volatility is over, but much or most of the price damage should be. Worst case, as I have written, Dow 25,000 or so could be seen. The reward is a move to 28,000.

With stocks thrashing around trying to find a low, I often look at other markets for signs of confirmation. The bond market has been the primary beneficiary of the stock market pullback. It certainly looks like bonds saw an emotional peak on Wednesday morning. Gold also saw some type of peak on Wednesday although it may not be as consequential.

Crude oil has completely fallen out of bed and that may be a more important canary than anything else right now for global economic growth. While the commodity is very volatile and prone to external factors influencing price, I am always concerned when I see it fall hard. However, it probably provides more false warnings than real ones.

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Hold on to Your Hats

As you know, volatility rarely builds slowly. It typically happens all at once. I went to bed last night and saw overnight trading indicating a lower open by 100 Dow points. When I woke up, that had shifted to up 100 Dow points. I showered, got dressed and ate breakfast. The Dow was then indicated to open lower by 300 points as global bond yields collapsed.

Why do we care about this?

Lower bond yields are mostly indicative of weakness in the economy, however contrary to what you may hear or read in the media, this is not an absolute. The modern generation low took place in July 2016 when the economy was nowhere near teetering on recession. It’s really the outsized moves we are seeing today that is causing angst and volatility as these moves lead to dislocations and forced movement by big money.

Stocks bounced back decently on Turnaround Tuesday to stem the tide. I still think, as I wrote last week, that Dow 25,000 or so is the downside risk. When this pullback is cleaned up, my forecast remains for another run to all-time highs. Perhaps that run will yield cracks in the pavement and a crumbling foundation to lead to more significant downside, but it’s not worth anticipating. This has been the single most hated and disavowed bull market of all-time and we continue to see the masses turn negative during every single decline.

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Here We Go Again

It’s been a tough three days for the bulls that is about to get worse as China retaliated for Trump’s tariffs with a series of their own. Their currency, the yuan, also fell below what analysts have deemed “critical” levels. It has long been argued that by weakening their currency, China has been able to partially offset the impact of the tariffs.

I won’t get into another diatribe about how I detest and hate using tariffs as part of economic policy. It’s flawed and failed thinking where they are only losers. No one wins a trade war. The Chinese have patience on their side as they can just wait for the 2020 election and hope they negotiate with another administration. They already know the worst case scenario.

Trump on the other hand will have a tough time over the next 14 months as the economy will weaken. However, he will very artfully pander to his base and blame the Fed for not lowering interest rates quick enough. One thing is for sure, it won’t be quiet.

Last week, I wrote about two price levels on the Dow that were key, 26,400 and 25,000. The former was breached and held on Friday, but given the weakness overseas, our markets are looking more than 1% lower this morning. As you know, it’s more important where they close than where they open, but today is setting up to be an ugly one for the bulls.

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Economic Reports Overshadowed by Trump & Powell

It’s been quite a week! Lost in the Fed and tariffs headlines has been three important economic reports that lead to a conclusion as clear as mud. The Chicago Purchasing Managers Index cratered to under 45, signaling trouble in the manufacturing sector. However, this number does have the importance it once did as the economy is only about 12% manufacturing these days.

We also saw Consumer Confidence soar in July to just shy of an all-time high. That’s a little bit of a surprise to me, especially with the Fed cutting rates. This morning, the government released the July employment report which came in as expected. Wage growth was slightly better than expected,  but the average number of hours worked each week softened. 370,000 new workers came into the workforce, a good sign.

In my view, the economy is softening, but not on the verge of recession just yet. I continue to absolutely hate what President Trump is doing with tariffs and tweets and I do think it will impact the economy, just not to the degree of China’s. No one wins a trade war. No one wins a trade war. No one wins a trade war. Was that clear enough? And I think Xi and the Chinese have more staying power.

As the calendar turned and it’s now August, stocks have not performed well in strong and weak markets this month. Between the Fed and Trump’s new tariffs, the bulls are definitely on the heels to begin the month. The first stop should be Dow 26,400 and then below 25,000 if the bears gain total control. For now, you have to expect the bulls to mount a rally next week.



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Big Week Ahead

Boy, it only took a single day of weakness, Thursday, for bulls to get right back to work. Friday made quick work of the bears and the bulls look like they are not quite done yet. Of course, the Fed will have a lot to say about that when they conclude their two day meeting on Wednesday with an almost certainty for fireworks. More on that in another update.

The government released Q2 GDP and it can be interpreted two ways. First, it came in at 2.1%. That is not a strong number in a vacuum. However, analysts were expecting something just shy of 2% so the number beat expectations. I was looking for a number that began with “2” so it was right on from my seat. The President was all up in arms that had not been for Jay Powell and the Fed, GDP would have printed a “3” number. While that all sounds quaint, there is no way to prove or disprove that notion. Trump has been doing a great job of antagonizing the Fed and turning them into villains. You know my read. They are not competent enough to be a villain.

Friday’s nice rally in all major indices but the Dow had little to do with the GDP report. Tech was solid but semis took a breather. Banks were strong yet again. Discretionary and transports were average. Junk bonds have been digesting for almost two months and they seem to be percolating for another move higher. The NYSE A/D Line just keeps plowing higher to more fresh all-time highs.

The headwinds I discussed last week in Lots of Ammo for the Bears remain in place. And if you only read the headline which some people apparently did, you totally missed the theme of the post. I was absolutely not taking the bearish case. Quite the contrary.

With earnings and the Fed, this week should be a high profile one with some volatility.

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Lots of Sideways Action – Could Lead to Another Leg Higher

With tech earnings season in peak mode, we are seeing huge moves in the prominent companies like Amazon, Google and Facebook, but overall, the indices have been relatively calm. The Dow and S&P 500 have been range bound and the longer this sideways action continues, the more likely the ultimate resolution will be to the upside.

Bears have been pointing to the poor action in the S&P 400 and Russell 2000. The problem is that they have been behaving poorly for some time and their laggard state is not a good timing tool for when it might matter. Additionally, we saw both mid and small caps jump sharply relative to the other indices on Wednesday. Perhaps this is nothing more than a blip, but if it becomes sustainable, that would give a nice boost to the stock market.

As I keep writing about, semis have really turned from goat to hero over the past 6 weeks, but really this month. They are very, very stretched and extended at this point. Some pullback is expected. The longer they can go without giving too much of the gains back, the more likely another leg higher is coming. Banks have woken up to follow their diversified financials cousin and while I don’t think they will become market leader anytime soon, they could certainly give the overall market a boost if they got going to the upside, something that hasn’t happened in a long time.

Finally, junk bonds have been consolidating for most of July and they keep percolating. This is yet another group where time is wearing off the overbought condition and could lead to another leg higher later this quarter if all goes right.

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Lots of Ammo for the Bears

Lots of focus on technology this week as some of the behemoths report earnings. One thing is certain; there will be movement. All of the major stock market indices ended last week on the defensive as the bears put the plow down with a very heavy selling wave last Friday afternoon. That resulted in hundreds of stocks closing lower from all-time or recent highs which a yet another sign of a tired market. Coupled with overly confident options traders and very bullish sentiment surveys, the consolidation/pullback continues. The longer the bulls can keep prices from declining, the more likely the ultimate resolution will be strongly to the upside.

I find it really interesting here that there are certainly enough things to warrant a deep pullback but price, the final arbiter, has held up remarkably well. Momentum has been that strong, so far. And let’s not forget that the calendar isn’t exactly a pillar of strength for another few months. The bears have a good deal of ammunition and if they can’t get going sooner than later, we may just get that melt up to Dow 30,000 as I have been discussing longer than any analyst, pundit or clown.

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